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 December 31, 2005

                                       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                           (Zip Code)
          executive offices)

                                 (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 February 20, 2006, there were 20,054,623  shares of common stock,  $.01
par value per share, outstanding.


                                       1
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                               Index to Form 10-Q
                     For the Quarter Ended December 31, 2005

                                                                        PAGE NO.
                                                                        --------

PART I. FINANCIAL INFORMATION

   Item 1. Financial Statements

      Balance Sheets                                                        3
      Statements of Operations                                              4
      Statement of Stockholders' Equity (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                             18

   Item 3. Quantitative and Qualitative Disclosures About Market Risk      33

   Item 4. Controls and Procedures                                         34

PART II. OTHER INFORMATION

   Item 1A. Risk Factors                                                   35

   Item 4. Submission of Matters to a Vote of Security Holders             37

   Item 6. Exhibits                                                        39

SIGNATURES                                                                 43


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,     MARCH 31,
                                                                          Notes       2005            2005
                                                                          -----   ------------    ------------
                                                                                  (Unaudited)
<S>                                                                       <C>     <C>             <C>
                                  ASSETS
CURRENT ASSETS:
  Cash                                                                            $    378,954    $    561,782
  Trade receivables, net                                                             5,432,736       4,644,364
  Inventories                                                                          565,673       3,811,470
  Prepaid expenses and other                                                           634,856         219,592
                                                                                  ------------    ------------

         Total current assets                                                        7,012,219       9,237,208

PROPERTY AND EQUIPMENT, NET                                                  6         283,167      18,246,445
ASSETS HELD FOR SALE                                                         6          90,000              --
OTHER ASSETS                                                                           247,334         286,013
                                                                                  ------------    ------------

         TOTAL                                                                    $  7,632,720    $ 27,769,666
                                                                                  ============    ============


              LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Line of credit                                                             2    $  2,238,722    $  5,458,479
  Accounts payable                                                                   3,545,015       3,057,266
  Accrued disposal costs                                                     7         602,762              --
  Accrued and other current liabilities                                      3         700,550       2,130,206
  Current portion of accrued employment contracts                           10         491,147         586,523
  Current portion of term notes payable                                      2       2,120,645       1,320,000
  Current portion of obligations under capital leases                                   31,464         194,042
                                                                                  ------------    ------------

         Total current liabilities                                                   9,730,305      12,746,516

ACCRUED EMPLOYMENT CONTRACTS, less current portion                          10         655,020         993,305
TERM NOTES PAYABLE, less current portion                                     2              --       6,921,985
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                                  53,487          85,337
                                                                                  ------------    ------------

         Total liabilities                                                          10,438,812      20,747,143
                                                                                  ------------    ------------

COMMITMENTS AND CONTINGENCIES                                                               --              --

TEMPORARY EQUITY:
  Common stock, subject to registration                                      3              --       2,220,590

STOCKHOLDERS' EQUITY (DEFICIT):
  Common stock                                                                         200,513         164,115
  Additional paid-in capital                                                        71,379,694      65,838,227
  Accumulated deficit                                                              (70,622,981)    (48,307,748)
                                                                                  ------------    ------------

                                                                                       957,226      17,694,594
  Less: Note receivable arising from the exercise of stock options, net     10      (3,642,857)    (12,772,200)
        Treasury stock                                                                (120,461)       (120,461)
                                                                                  ------------    ------------

        Total stockholders' equity (deficit)                                        (2,806,092)      4,801,933
                                                                                  ------------    ------------

        TOTAL                                                                     $  7,632,720    $ 27,769,666
                                                                                  ============    ============
</TABLE>

                 See accompanying notes to financial statements


                                        3
<PAGE>

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

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                DECEMBER 31,                   DECEMBER 31,
                                                       ----------------------------    ----------------------------
                                               Notes       2005            2004            2005            2004
                                               -----   ------------    ------------    ------------    ------------
                                                   4                     RESTATED                        RESTATED
<S>                                            <C>     <C>             <C>             <C>             <C>
NET SALES                                              $  9,072,097    $ 10,632,877    $ 29,361,475    $ 33,725,108

COST OF GOODS SOLD                                        7,182,502       8,289,551      22,582,708      25,860,850
                                                       ------------    ------------    ------------    ------------
  Gross margin                                            1,889,595       2,343,326       6,778,767       7,864,258
                                                       ------------    ------------    ------------    ------------

OPERATING EXPENSES:
Selling                                                   1,161,751       1,213,549       3,655,543       4,246,419
Delivery                                                    544,665         549,379       1,886,214       1,757,962
Employment contract expense - general
  and administrative                              10             --              --              --         444,883
General and administrative, including
  $52,676, $176,186, $923,513 and
  $217,388 non-cash compensation
  related to stock based transactions              5      1,394,599         771,382       3,999,362       2,011,894
Research and development                                     75,961          74,861         256,055         226,479
Reserve on stockholder note receivable            10      9,129,343              --       9,129,343              --
Cost of disposal activities                        7        668,936              --       1,342,204              --
Impairment of property and equipment               6             --              --       7,896,554              --
Loss on sale of assets                             6         65,360              --          70,966              --
                                                       ------------    ------------    ------------    ------------
  Total operating expenses                               13,040,615       2,609,171      28,236,241       8,687,637
                                                       ------------    ------------    ------------    ------------

LOSS FROM OPERATIONS                                    (11,151,020)       (265,845)    (21,457,474)       (823,379)
                                                       ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE):
Interest expense                                           (595,692)       (288,556)     (1,246,490)       (812,380)
Derivative income (expense)                        4             --        (258,658)             --          62,829
Gain/(loss) on fair value of warrants            2,4         (8,269)       (202,414)        388,731         258,937
                                                       ------------    ------------    ------------    ------------
  Total other income (expense)                             (603,961)       (749,628)       (857,759)       (490,614)
                                                       ------------    ------------    ------------    ------------

NET LOSS                                               $(11,754,981)   $ (1,015,473)   $(22,315,233)   $ (1,313,993)

Less:
Preferred stock dividends                          4             --           2,174              --          82,572
Preferred stock accretion to
  redemption value                                 4             --          44,160              --         319,500
                                                       ------------    ------------    ------------    ------------

NET LOSS TO COMMON STOCKHOLDERS                        $(11,754,981)   $ (1,061,807)   $(22,315,233)   $ (1,716,065)
                                                       ============    ============    ============    ============

BASIC AND DILUTED NET LOSS PER COMMON SHARE        8   $      (0.59)   $      (0.06)   $      (1.14)   $      (0.10)
                                                       ============    ============    ============    ============
</TABLE>

                 See accompanying notes to financial statements.


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                             Common Stock                                                   Note
                        ----------------------                                           Receivable
                                                   Additional         Accumulated        for Common       Treasury
                          Shares     Par Value   Paid-In Capital        Deficit            Stock           Stock          Total
                        ----------   ---------   ---------------    ---------------    --------------    ----------    ------------
<S>                     <C>          <C>         <C>                <C>                <C>               <C>           <C>
Balance at March 31,
  2005                  16,411,474   $ 164,115   $    65,838,227    $   (48,307,748)   $  (12,772,200)   $ (120,461)   $  4,801,933
Exercise of warrants     1,130,000      11,300         1,257,700                 --                --            --       1,269,000
Exercise of options          2,250          22             2,858                 --                --            --           2,880
Issuance of common
  stock under
  employee stock
  purchase plan              7,603          76            11,785                 --                --            --          11,861
Transfer of common
  stock from
  temporary equity       2,500,000      25,000         2,618,347                                                          2,643,347
Fair value of
  stock-based
  transactions                  --          --         1,843,333                 --                --            --       1,843,333
Non-cash compensation
  related to variable
  securities                    --          --          (192,556)                --                --            --        (192,556)
Reserve on
  stockholder note
  receivable                    --          --                --                 --         9,129,343            --       9,129,343
Net loss                        --          --                --        (22,315,233)               --            --     (22,315,233)
                        ----------   ---------   ---------------    ---------------    --------------    ----------    ------------

Balance at December
  31, 2005              20,051,327   $ 200,513   $    71,379,694    $   (70,622,981)   $   (3,642,857)   $ (120,461)   $ (2,806,092)
                        ==========   =========   ===============    ===============    ==============    ==========    ============
</TABLE>

                 See accompanying notes to financial statements.


                                       5
<PAGE>

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

<TABLE>
<CAPTION>
Nine Months Ended December 31,                                    Notes       2005            2004
                                                                  -----   ------------    -----------
<S>                                                               <C>     <C>             <C>
                                                                                           RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Loss                                                                $(22,315,233)   $(1,313,993)
  Adjustments to reconcile net loss to net cash from (used in)
    operating activities:
      Depreciation and amortization                                          1,463,036      1,633,256
      Amortization of debt discount and financing costs                        424,016         65,881
      Provision for promotional deductions and losses on trade
        receivables                                                          1,543,025        109,000
      Provision for loss on stockholder note receivable              10      9,129,343             --
      Impairment and loss on sale of property and equipment           6      7,967,520             --
      Change in fair value of derivative instrument                   4             --        (62,829)
      (Gain) Loss on fair value of warrants                         2,4       (388,731)      (258,937)
      Non-cash compensation related to stock-based transactions     1,5        923,513        217,388
      (Increase) decrease in:
        Trade receivables                                                   (2,331,397)    (1,398,623)
        Inventories                                                          3,245,797       (370,817)
        Prepaid expenses and other                                            (415,264)        51,759
      Increase (decrease) in:
        Accounts payable                                                       487,749      1,026,304
        Accrued and other liabilities                                         (520,555)       120,973
                                                                          ------------    -----------

  NET CASH FROM (USED IN) OPERATING ACTIVITIES                                (787,181)      (180,638)
                                                                          ------------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                          (304,353)       (77,207)
  Proceeds from sale of equipment                                     6      8,747,075         34,482
                                                                          ------------    -----------

  NET CASH FROM (USED IN) INVESTING ACTIVITIES                               8,442,722        (42,725)
                                                                          ------------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:                                 9
  Net borrowings (payments) on line of credit                               (3,219,757)       941,426
  Borrowing on term notes payable                                     2      2,400,000             --
  Repayments on term notes payable                                    2     (8,241,985)      (810,000)
  Principal payments on capital lease obligations                             (194,428)      (190,282)
  Financing costs for long term debt                                          (288,697)            --
  Redemption of preferred stock                                                     --     (2,279,688)
  Proceeds from issuance of common stock, net of costs                              --      2,211,366
  Proceeds from issuance of common stock under employee stock
    purchase plan                                                               11,861         12,480
  Proceeds from exercise of common stock options                                 2,879             --
  Proceeds from exercise of common stock warrants, net of costs       4      1,691,758             --
                                                                          ------------    -----------

  NET CASH FROM (USED IN) FINANCING ACTIVITIES                              (7,838,369)      (114,698)
                                                                          ------------    -----------

NET INCREASE (DECREASE) IN CASH                                               (182,828)      (338,061)

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

CASH, END OF PERIOD                                                       $    378,954    $   111,618
                                                                          ============    ===========
</TABLE>

                 See accompanying notes to financial statements.


                                       6
<PAGE>

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

(1)   Summary of Significant Accounting Policies

      The  unaudited   financial   statements   have  been  prepared  by  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,  2005  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/A for the
      fiscal year ended March 31, 2005.  Interim  results of operations  for the
      nine-month   period  ended  December  31,  2005  may  not  necessarily  be
      indicative of the results to be expected for the full year.

      Impairment of Long-Lived Assets

      In accordance with Statement of Financial Accounting Standard ("SFAS") No.
      144, "Accounting for the Impairment of Disposal of Long-Lived Assets," the
      Company   evaluates  the  carrying   value  of   long-lived   assets  when
      circumstances indicate the carrying value of those assets may not be fully
      recoverable.  The Company  evaluates  recoverability  of long-lived assets
      held for use by comparing the net carrying  value of an asset group to the
      estimated   undiscounted  cash  flows  (excluding   interest)  during  the
      remaining  life of the asset group.  If such an evaluation  indicates that
      the future  undiscounted cash flows of certain long-lived asset groups are
      not  sufficient to recover the carrying  value of such asset  groups,  the
      assets are then  adjusted to their fair  values.  The Company  recorded an
      impairment  of property and  equipment in the first quarter of fiscal 2006
      as discussed more fully in Note 6.

      Disposal Costs

      The Company has recorded significant 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

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

      Effective  April 1, 2003, the Company  adopted the fair value  recognition
      provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and
      applies  SFAS  No.  148,   "Accounting  for  Stock-Based   Compensation  -
      Transition and  Disclosure,"  prospectively to all employee awards granted
      on or after April 1, 2003. These standards  require the Company to provide
      pro-forma  information regarding net income (loss) and earnings (loss) per
      share amounts as if compensation  cost for all the Company's  employee and
      director  stock-based  awards had been  determined in accordance  with the
      fair value method  prescribed  in SFAS No. 123.  Awards from the Company's
      plans vest over periods  ranging from immediate to five years.  Therefore,
      the cost related to stock-based compensation included in the determination
      of net  income for the  periods  is less than that  which  would have been
      recognized  if the fair value based  method had been applied to all awards
      since the original effective date of SFAS No. 123.


                                       7
<PAGE>

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

      Nine Months Ended:                             December 31,   December 31,
                                                         2005           2004
                                                     ------------   ------------
      Dividend Yield                                     None           None
      Volatility                                     24.9%-46.0%    44.0%-59.0%
      Risk Free Interest Rate                        3.35%-4.30%    1.46%-4.14%
      Expected Lives in Months                          1-120          1-120

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

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED              NINE MONTHS ENDED
                                                       DECEMBER 31,                   DECEMBER 31,
                                              ----------------------------    ---------------------------
                                                  2005            2004           2005             2004
                                              ------------    ------------    ------------    -----------
<S>                                           <C>             <C>             <C>             <C>
                                                               RESTATED                        RESTATED
Net loss to common stockholders as reported   $(11,754,981)   $ (1,061,807)   $(22,315,233)   $(1,716,065)
  Add: Stock-based compensation
    expense included in reported net
    income (loss)                                   52,676         176,186         923,513        217,388
  Deduct: Stock-based compensation
    expense determined under fair value
    based method for all awards                    (62,568)       (203,064)       (953,814)      (304,381)
                                              ------------    ------------    ------------    -----------
  Pro forma net loss to common
    stockholders                              $(11,764,873)   $ (1,088,685)   $(22,345,534)   $(1,803,058)
                                              ============    ============    ============    ===========

Net loss per common share:
  Basic & Diluted - as reported               $      (0.59)   $      (0.06)   $      (1.14)   $     (0.10)
                                              ============    ============    ============    ===========
  Basic & Diluted - pro forma                 $      (0.59)   $      (0.06)   $      (1.14)   $     (0.11)
                                              ============    ============    ============    ===========
</TABLE>

      Net Income (Loss) per Common Share

      Net income  (loss) per common  share is computed by dividing net income or
      loss by the weighted average shares outstanding. Diluted income (loss) per
      common  share  is  computed  on  the  basis  of  weighted  average  shares
      outstanding  plus  potential  common  shares  which  would  arise from the
      exercise of stock options and warrants.

      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.

      Segment Information

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

      Recent Accounting Pronouncements

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


                                       8
<PAGE>

      In  December  2004,   the  FASB  issued  SFAS  No.  123  (revised   2004),
      "Share-Based  Payment"  ("SFAS No. 123R"),  which addresses the accounting
      for share-based payment  transactions in which a company receives employee
      services  in  exchange  for (a) equity  instruments  of the company or (b)
      liabilities  that  are  based on the fair  value of the  company's  equity
      instruments or that may be settled by the issuance of equity  instruments.
      SFAS No.  123R  supercedes  APB  Opinion  No. 25 and  amends  SFAS No. 95,
      "Statement of Cash Flows." Under SFAS No. 123R,  companies are required to
      record compensation expense for all share-based payment award transactions
      measured  at fair  value  as  determined  by an  option  valuation  model.
      Currently,  the Company uses the Black-Scholes  pricing model to calculate
      the  fair  value  of  its  share-based  transactions.  This  statement  is
      effective  for  fiscal  years  beginning  after June 15,  2005.  Since the
      Company  currently  recognizes  compensation  expense  at fair  value  for
      share-based  transactions  in  accordance  with SFAS No.  123, it does not
      anticipate adoption of this standard will have a significant impact on its
      financial position, results of operations, or cash flows.

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

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

(2)   Line of Credit,  Notes  Payable  and Going  Concern On May 27,  2003,  the
      Company  obtained  from  Textron  Financial

      Corporation  ("Textron") a revolving  credit facility (the "Textron Loan")
      with a maximum  principal  amount of $7,500,000  pursuant to the terms and
      conditions  of a Loan and  Security  Agreement  dated  May 27,  2003  (the
      "Textron  Loan  Agreement").  The Textron Loan is secured by the Company's
      inventory, accounts receivable and all other assets. Generally, subject to
      the maximum  principal amount which can be borrowed under the Textron Loan
      and  certain  reserves  that  must be  maintained  during  the term of the
      Textron Loan, the amount available under the Textron Loan for borrowing by
      the  Company  from  time to time is equal to the sum of (i) 85% of the net
      amount of its eligible  accounts  receivable  plus (ii) until December 31,
      2005, 60% of the Company's  eligible  inventory not to exceed  $3,500,000.
      After  December  31, 2005,  there is no  borrowing  available on inventory
      since  it is not  produced  or held by the  Company.  Advances  under  the
      Textron Loan bear interest at a variable rate, adjusted on the first (1st)
      day of each  month,  equal to the prime rate plus 1.75% per annum (9.0% at
      December  31, 2005)  calculated  on the average  cash  borrowings  for the
      preceding  month.  The initial  term of the  Textron  loan ends on May 26,
      2006. As of December 31, 2005, the  outstanding  principal  balance on the
      Textron Loan was $2,238,722.

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

      On June 16,  2005,  the Company  used a portion of the  proceeds  from the
      warrant exercises described in Note 4 to satisfy the $750,000 over-advance
      with Textron. In connection with the satisfaction of the over-advance, the
      Company agreed to immediately terminate Textron's obligation to permit any
      over-advances  under the Textron Loan,  which  obligation was to expire on
      July 31, 2005.  With the  termination of the  over-advance  facility,  the
      interest  rate on the  Textron  Loan  returned to its prior level of Prime
      plus 1.75%.


                                       9
<PAGE>

      Due to the cost of disposal  activities  and  impairment  of property  and
      equipment  (as  discussed  in Notes 6 and 7), the  Company  fell below the
      requirements in the fixed charge coverage ratio and the adjusted  tangible
      net worth  calculation  from June 30, 2005  through  September  30,  2005.
      Effective  October 1, 2005, the Company  executed a fifth amendment to the
      Textron  Loan  Agreement  that  provided a waiver for the  defaults in the
      fixed  charge   coverage  ratio  and  the  adjusted   tangible  net  worth
      requirements,  in addition to certain  over-advances  on the Textron Loan,
      during  the  periods  from June 2005  through  September  2005.  The fifth
      amendment  amends  and  replaces  several  financial   covenants,   allows
      eligibility  for  borrowing  on  inventory  until  December  31,  2005 and
      provides  that the Textron Loan will expire at the end of the initial term
      on May  26,  2006.  Additionally,  Textron  consented  to the  sale of the
      Company's  manufacturing  equipment to Schreiber and the terminated  their
      liens on those  assets.  In exchange  for the waiver and  amendments,  the
      Company paid a fee of $50,000, and has agreed to pay an administration fee
      in the following  installments  if the Textron Loan has not then been paid
      in full: $5,000 on February 1, 2006,  $10,000 on March 1, 2006, $15,000 on
      April 1, 2006 and $20,000 May 1, 2006.  The  Company  anticipates  that it
      will  be  in   compliance   with  the  amended   covenants  and  reporting
      requirements  through the end of the term of the  Textron  Loan on May 26,
      2006.

      Simultaneous  with the closing of the Textron  Loan in May 2003,  Wachovia
      Bank, N.A.  successor by merger to SouthTrust Bank  ("Wachovia")  extended
      the Company a new term loan in the principal  amount of  $2,000,000.  This
      term loan was  consolidated  with the Company's  March 2000 term loan with
      Wachovia, which had a then outstanding principal balance of $8,131,985 for
      a total term loan amount of $10,131,985. This term loan was secured by all
      of the Company's equipment and certain related assets.  Additionally,  the
      term loan bore interest at Wachovia's Base Rate plus 1%.

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

      In September  2005,  Wachovia  assigned this term loan to Beltway  Capital
      Partners LLC. This loan was paid in full upon the sale of the equipment to
      Schreiber on December 8, 2005.  Beltway received proceeds of $7,374,299 of
      which  $7,361,985  was for  principal  and  $12,314 was for  interest  and
      associated closing costs.

      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 is $2,400,000.  The
      loans are  evidenced by unsecured  promissory  notes (the "Notes") held by
      the above  referenced  parties  (the "Note  Holders").  The Notes  require
      monthly interest-only payments at 3% above the bank prime rate of interest
      per the Federal Reserve Bank and mature on June 15, 2006. In consideration
      for the  Notes  and in  accordance  with an  exemption  from  registration
      provided by Section 4(2) of the  Securities  Act of 1933, as amended,  the
      Company  issued  to Mr.  DeLuca,  Conversion  Capital  Master,  Ltd.,  SRB
      Greenway  Capital  (Q.P.),  L.P.,  SRB  Greenway  Capital,  L.P.,  and SRB
      Greenway Offshore Operating Fund, L.P., warrants to purchase up to 300,000
      shares,  150,000 shares, 121,300 shares, 17,400 shares, and 11,300 shares,
      respectively,  of the Company's common stock at an exercise price equal to
      $1.53 (95% of the lowest  closing price of the  Company's  common stock in
      the sixty  calendar days  immediately  preceding  October 17,  2005).  The
      warrants  fully  vested on October  17,  2005 and can be  exercised  on or
      before the expiration date of October 17, 2008. Also in consideration  for
      the Notes, the Company granted the Note Holders "piggy back"  registration
      rights with respect to the shares  underlying  the warrants.  These shares
      were registered on December 30, 2005.

      In accordance with the accounting  provisions of SFAS No. 123, the Company
      recorded  the  $444,731  initial  fair value of the  warrants,  upon their
      issuance,  as a discount to debt.  This discount is being  amortized  from
      September  2005  through  June 2006.  The Company  amortized  $152,376 and
      $165,376  in  the  three  and  nine  months   ended   December  31,  2005,
      respectively.  As of December 31, 2005, the outstanding  principal balance
      of $2,400,000 on the Notes less the remaining debt discount is $2,120,645.


                                       10
<PAGE>

      Since the exercise  price for the warrants was not fixed until October 17,
      2005, the Company revalued the warrants on October 17, 2005 and calculated
      a fair value of  $396,000.  The  $48,731  difference  between  the initial
      $444,731  value of the  warrants  and the value of the warrants on October
      17, 205 was recorded as a gain on fair value of warrants in the  Statement
      of Operations.

      If the Company is unable to generate  enough cash from  operations and the
      sale of its  remaining  assets  that are held for sale and it is unable to
      refinance or renew the Company's  existing credit  facilities with Textron
      and the Note Holders, or if additional financing is not available on terms
      acceptable to us, the Company will be unable to satisfy such facilities by
      their maturity dates in May 2006 and June 2006,  respectively.  In such an
      event, Textron and the Note Holders could exercise their respective rights
      under their loan  documents,  which  could  include,  among other  things,
      declaring  defaults  under  the  loans  and  pursuing  foreclosure  on the
      Company's assets that are pledged as collateral for such loans. If such an
      event  occurred,  it  would  be  substantially  more  difficult  for us to
      effectively  continue the operation of the Company's  business,  and it is
      unlikely that the Company would be able to continue as a going concern.

(3)   Accrued and Other Current Liabilities

      Accrued and other current liabilities are summarized as follows:

                                         December 31, 2005   March 31, 2005
                                         -----------------   --------------
      Tangible personal property taxes   $              --   $    1,049,841
      Warrant liability                                 --          740,000
      Registration rights penalty                  285,104               --
      Other                                        415,446          340,365
                                         -----------------   --------------
      Total                              $         700,550   $    2,130,206
                                         =================   ==============


      In accordance with a registration  rights agreement dated October 6, 2004,
      the Company  agreed that within 180 days it would file with the Securities
      and Exchange Commission ("SEC") and obtain effectiveness of a registration
      statement that included 2,000,000 shares issued in a private placement and
      500,000 shares related to a stock purchase  warrant.  Per the terms of the
      agreement,  if a registration  statement was not filed,  or did not become
      effective  within  180 days,  then in  addition  to any other  rights  the
      investor may have, the Company would be required to pay certain liquidated
      damages.  The Company filed a registration  statement on Form S-3 on March
      14, 2005.  However,  the  registration  was not declared  effective  until
      December 30, 2005.  The investor  granted an extension of time to have the
      registration  statement  declared  effective  by the  SEC and  waived  all
      damages  and  remedies  for  failure  to  have an  effective  registration
      statement until September 1, 2005. From September 2, 2005 through December
      29, 2005, the Company accrued  liquidated  damages of $285,104 (2.5% times
      the product of 2,500,000  registerable shares and the share price of $1.15
      per share every thirty days).

      In  accordance  with  Emerging  Issues  Task Force  ("EITF")  Issue  00-19
      "Accounting  for  Derivative   Financial   Instruments   Indexed  To,  and
      Potentially  Settled  in the  Company's  Own  Stock,"  and EITF 05-04 "The
      Effect  of  a  Liquidated  Damages  Clause  on  a  Freestanding  Financial
      Instrument   Subject  to  EITF  00-19,"  because  the  maximum   potential
      liquidated  damages as described  above may be greater than the difference
      in fair values between  registered and unregistered  shares,  the value of
      the common  stock  subject to  registration  was  classified  as temporary
      equity. In December 2005, the Company reclassified the $2,680,590 value of
      common  stock  that  was   registered   less  an  additional   $37,243  in
      registration costs into permanent equity.

(4)   Capital Stock

      Common Stock Issuances

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

      In  accordance  with EITF  00-19 and the  terms of the above  warrant  for
      500,000  shares  of  common  stock,  the  fair  value of the  warrant  was
      accounted for as a liability, with an offsetting reduction to the carrying
      value of the  common  stock.  On March  31,  2005,  the fair  value of the
      warrant was estimated using the Black-Scholes pricing model to be $740,000
      and on June 16, 2005,  the fair value was  estimated  to be $400,000.  The
      $340,000 change in fair value was reflected as a gain on the fair value of
      warrants line item in the Statement of Operations  during the three months
      ended June 30, 2005.  The warrant  liability  was moved to equity upon the
      exercise of the warrant.


                                       11
<PAGE>

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

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

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

      Preferred Stock Issuances and Restatement

      On April 6, 2001, the Company received from BH Capital Investments, LP and
      Excalibur Limited  Partnership (the "Series A Preferred Holders") proceeds
      of  approximately  $3,082,000  less costs of $181,041  for the issuance of
      72,646 shares of the Company's Series A convertible preferred stock with a
      face value of $3,500,000 and warrants to purchase  shares of the Company's
      common stock. The shares were subject to certain designations, preferences
      and rights  including  the right to convert  such  shares  into  shares of
      common stock at any time. The per share  conversion price was equal to the
      quotient of $48.18,  plus all accrued and unpaid  dividends for each share
      of the Series A convertible  preferred stock, divided by the lesser of (x)
      $1.75 or (y) 95% of the  average of the two lowest  closing  bid prices of
      the Company's common stock on the American Stock Exchange  ("AMEX") out of
      the fifteen trading days immediately prior to conversion.

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

      In connection with a Stock Repurchase Agreement dated October 6, 2004, the
      Company  redeemed the  remaining  30,316  Series A  convertible  preferred
      shares  held by the  Series  A  Preferred  Holders  for a total  price  of
      $2,279,688.  All previously outstanding shares of the Series A convertible
      preferred stock of the Company have now been cancelled.

      The Company  originally  concluded  under EITF 00-19,  that the conversion
      feature  was  conventional  and that  there  was no need to  separate  the
      conversion  right  during the period  the Series A  convertible  preferred
      shares were  outstanding.  Subsequent  to the  redemption of the remaining
      preferred  shares,  it has been  determined  that certain  features of the
      conversion  option resulted in treatment  different from that historically
      reflected.

      The preferred  stock was a  fixed-income  security  with no  participating
      rights  and the  dividend  was 10% per annum in the first  year and 8% per
      annum in the second,  third and fourth years.  Therefore,  consistent with
      paragraph 61(l) of SFAS No. 133,  "Accounting  for Derivative  Instruments
      and Hedging  Activities,"  the Company has concluded  that the  conversion
      option  was not  clearly  and  closely  related  to the  host  instrument.
      Ordinarily,  an issuer does not need to separate a conversion right from a
      convertible  instrument.  However,  in accordance with paragraph 4 of EITF
      00-19,  the Company has determined that, due to the fact that the embedded
      conversion  option  contained  a provision  that could have  resulted in a
      conversion into an indeterminable  number of common shares, the conversion
      feature was in fact "unconventional".  Further, since the conversion right
      embedded in the  preferred  stock has been  considered a  derivative,  the
      related dividends are also considered derivative instruments. As a result,
      the embedded  derivative was a liability that was required to be separated
      from the  preferred  stock and this  liability  should have been marked to
      market  during  reporting  periods.  The  fair  value  of  the  derivative
      instruments was determined using the Black-Scholes pricing model. Based on
      this  determination,  the Company  adjusted  its results for the three and
      nine months  ended  December  31, 2004 to reflect a  derivative  (expense)
      income of ($258,658) and $62,829,  respectively,  related to the change in
      the  fair  value  of the  embedded  derivative  instruments.  There  is no
      derivative  liability  as of  December  31,  2004  because  the  Series  A
      convertible  preferred  stock was  partially  converted  and the remaining
      shares redeemed on October 6, 2004.


                                       12
<PAGE>

      Additionally,  since the conversion of the Series A convertible  preferred
      stock could have resulted in a conversion into an indeterminable number of
      common  shares,  the Company  has  determined  that under the  guidance in
      paragraph 24 of EITF 00-19,  it was prohibited from concluding that it had
      sufficient authorized and unissued shares to net-share settle any warrants
      or  options   issued  to   non-employees.   Therefore,   the  Company  has
      reclassified  to a liability  the fair value of all  warrants  and options
      issued to non-employees  that were outstanding  during the period that the
      Series A convertible  preferred stock was  outstanding  from April 2001 to
      October  2004.  The fair value of the  warrants was  determined  using the
      Black-Scholes  pricing  model.  Any  changes  in  the  fair  value  of the
      securities  after the  initial  valuation  in April 2001  should have been
      marked to  market  during  reporting  periods.  During  the three and nine
      months ended  December 31, 2004,  the Company  reclassified  an expense of
      $185,000  related  to the  revaluation  of  warrants  out of  general  and
      administrative and into the fair value of warrants. For the three and nine
      months  ended  December  31,  2004,  the Company has  restated to record a
      (loss)  gain on the fair value of  warrants of  ($202,414)  and  $258,937,
      respectively.

      The following table  summarizes the changes in the Statement of Operations
      for the three months ended December 31, 2004:

<TABLE>
<CAPTION>
                                              As Previously
                                                Reported       Adjustment    As Restated
                                              -------------    ----------    -----------
<S>                                           <C>              <C>           <C>
Income (Loss) From Operations                 $    (450,845)   $  185,000    $  (265,845)
  Interest Expense                                 (288,556)           --       (288,556)
  Derivative Income (Expense)                            --      (258,658)      (258,658)
  Gain (loss) on Fair Value of Warrants                  --      (202,414)      (202,414)
                                              -------------    ----------    -----------
Net Income (Loss)                                  (739,401)     (276,072)    (1,015,473)
  Less:
  Preferred Stock Dividends                              --         2,174          2,174
  Preferred Stock Accretion to
    Redemption Value                                     --        44,160         44,160
                                              -------------    ----------    -----------
Net Income (Loss) to Common Stockholders      $    (739,401)   $ (322,406)   $(1,061,807)
                                              =============    ==========    ===========
Basic and Diluted Net Loss per Common Share   $       (0.04)   $    (0.02)   $     (0.06)
                                              =============    ==========    ===========
</TABLE>


      The following table  summarizes the changes in the Statement of Operations
      for the nine months ended December 31, 2004:

<TABLE>
<CAPTION>
                                              As Previously
                                                Reported       Adjustment   As Restated
                                              -------------    ----------   -----------
<S>                                           <C>              <C>          <C>
Income (Loss) From Operations                 $  (1,008,379)   $  185,000   $  (823,379)
  Interest Expense                                 (812,380)           --      (812,380)
  Derivative Income (Expense)                            --        62,829        62,829
  Gain (loss) on Fair Value of Warrants                  --       258,937       258,937
                                              -------------    ----------   -----------
Net Income (Loss)                                (1,820,759)      506,766    (1,313,993)
  Less:
  Preferred Stock Dividends                          82,572            --        82,572
  Preferred Stock Accretion to
    Redemption Value                                203,605       115,895       319,500
                                              -------------    ----------   -----------
Net Income (Loss) to Common Stockholders      $  (2,106,936)   $  390,871   $(1,716,065)
                                              =============    ==========   ===========
Basic and Diluted Net Loss per Common Share   $       (0.13)   $     0.03   $     (0.10)
                                              =============    ==========   ===========
</TABLE>


      The Series A Preferred Holders had the right to receive on any outstanding
      share of Series A  convertible  preferred  stock a ten  percent  dividend,
      payable one year after the issuance of such preferred  stock, and an eight
      percent  dividend for the subsequent  three years  thereafter,  payable in
      either cash or shares of  preferred  stock.  For the three and nine months
      ended  December  31, 2004,  the Company  recorded  preferred  dividends of
      $2,174 and $82,572,  respectively, on the outstanding shares of the Series
      A convertible preferred stock.


                                       13
<PAGE>

      On April 6, 2001, the Company  recorded the initial  carrying value of the
      preferred  stock as  $521,848.  Each  quarter  the Company  calculated  an
      estimated  redemption  value of the  remaining  preferred  stock  and then
      calculated  the  difference  between the initial  carrying  value and this
      estimated  redemption  value.  The  difference  was then accreted over the
      redemption period (48 months beginning April 2001) using the straight-line
      method,  which  approximates the effective  interest method. For the three
      and nine months ended December 31, 2004, the Company  recorded $44,160 and
      $319,500,  respectively,  related to the accretion of the redemption value
      of preferred stock.

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

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

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

      a. Stock-Based Award Issuances and Modifications under SFAS No. 123

      During the three  months  ended  December  31, 2005 and 2004,  the Company
      recorded  $52,676 and  $176,186,  respectively,  in non-cash  compensation
      expense related to stock-based transactions that were issued to and vested
      by employees, officers, directors and consultants.  During the nine months
      ended  December 31, 2005 and 2004,  the Company  recorded  $1,116,069  and
      $217,388,  respectively,  in  non-cash  compensation  expense  related  to
      stock-based  transactions  that were  issued to and  vested by  employees,
      officers, directors and consultants.

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

      On October 11, 2002, the Company repriced all outstanding  options granted
      to employees prior to October 11, 2002 (4,284,108  shares at former prices
      ranging  from $2.84 to  $10.28)  to the  market  price of $2.05 per share.
      Prior to the repricing  modification,  the options were accounted for as a
      fixed award under APB No. 25. In accordance  with FIN 44, the repricing of
      the employee stock options requires additional  compensation expense to be
      recognized and adjusted in subsequent  periods for changes in the price of
      the Company's  common stock that are in excess of the $2.05 stock price on
      the  date of  modification  (additional  intrinsic  value).  If there is a
      decrease in the market price of the Company's common stock compared to the
      prior reporting period,  the reduction is recorded as compensation  income
      to reverse all or a portion of the expense  recognized  in prior  periods.
      Compensation  income is limited to the original base  exercise  price (the
      intrinsic value) of the options.  This variable  accounting  treatment for
      these  modified  stock options  began with the quarter ended  December 31,
      2002 and such  variable  accounting  treatment  will  continue  until  the
      related  options  have been  cancelled,  expired or  exercised.  There are
      3,498,163  outstanding modified stock options remaining as of December 31,
      2005. The Company recorded  non-cash  compensation  income of $192,556 for
      the nine months ended  December  31, 2005 related to the modified  options
      described  above. The Company did not record any income or expense related
      to these variable  options during the three months ended December 31, 2005
      and 2004 and during the nine months ended  December 31, 2004, as the stock
      price was below $2.05 at the beginning and end of the periods.

(6)   Impairment of Property and Equipment

      In light of the asset sale and supply  arrangements  discussed  in Note 7,
      the Company  determined that it is more likely than not that a majority of
      its fixed assets related to production activities will be sold or disposed
      prior to the end of their useful life.  In  accordance  with SFAS No. 144,
      "Accounting  for the  Impairment  of Disposal of  Long-Term  Assets,"  the
      Company wrote down the value of its assets to their  estimated fair values
      in June 2005. The Company estimated the fair value based on the $8,700,000
      sales price discussed below 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 on December 8, 2005.
      Based on this estimate, the Company recorded an impairment of property and
      equipment  of  $7,896,554  in order  to  reflect  a net fair  value of its
      equipment in June 2005.


                                       14
<PAGE>

      All  assets  continued  to be used  and  depreciated  under  Property  and
      Equipment until the sale of substantially all of the Company's  production
      machinery  and  equipment  on December 8, 2005.  For the nine months ended
      December  31,  2005,  the Company  recorded a $70,966  loss on the sale of
      assets  related to the remaining  value of assets sold or abandoned  after
      production ceased in December 2005.

      The Company has  reclassified  its remaining  assets available for sale as
      Assets Held for Sale in the Balance  Sheet and expects  this process to be
      completed by June 2006.  The Company has estimated the fair value of these
      assets to be $90,000.  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.

(7)   Disposal Activities

      On June 30, 2005,  the Company  entered into a definitive  agreement  (the
      "Asset  Purchase  Agreement")  for 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.

      Schreiber is a privately held cheese  manufacturing  company whose primary
      business is contract  manufacturing  cheese,  cheese alternative and other
      dairy products for many well-known companies and brands.

      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 the Supply  Agreement,  Schreiber  has become the
      Company's sole source of supply for substantially all of its products.  As
      of November 14, 2005, Schreiber began to deliver such products directly to
      the  Company's  customers.  The prices for such products are based on cost
      conversions  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.

      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.

      On December 8, 2005, the Company  completed the sale of substantially  all
      of its manufacturing and production equipment to Schreiber.  This sale was
      approved  by the  Company's  stockholders  at a  Special  Meeting  held on
      December 5, 2005.  The  $8,700,000 in proceeds was used to pay  $1,319,583
      for tangible  personal property taxes due primarily on the sold assets and
      $7,374,299  to Beltway  Capital  Partners LLC  (successor by assignment of
      Wachovia Bank,  N.A.) for the  termination of the Company's term loan. The
      remaining  proceeds  balance of $6,118  was used to reduce  the  Company's
      asset-based line of credit from Textron Financial Corporation.

      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 are planned and
      controlled by  management  and  materially  change the manner in which the
      Company's  business  will be conducted.  In accordance  with SFAS No. 146,
      costs  associated  with  disposal  activities  should  be  reported  as  a
      reduction  of  income  from  operations.   The  above   transactions  were
      communicated  to the  Company's  employees on July 6, 2005. As of December
      31, 2005, 97 employee  positions had been  eliminated  with the final five
      employee  positions to be eliminated by February 28, 2006. The majority of
      the remaining  employee  termination  costs are expected to be paid in the
      fourth quarter of fiscal 2006. 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. If the
      Company does not sublease  these  facilities,  the actual loss will exceed
      this   estimate.   Other  exit  costs  consist   primarily  of  legal  and
      professional fees related to the disposal activities.


                                       15
<PAGE>

      As of December 31, 2005,  the Company has accrued the following  quarterly
      costs associated with the above transactions:

<TABLE>
<CAPTION>
                                       Employee                      Other
                                      Termination      Excess        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
                                      ===========    ===========   =========    =========
</TABLE>


      For the three  and nine  months  ended  December  31,  2005,  the  Company
      incurred  and  reported  $668,936  and  $1,342,204  as Costs  of  Disposal
      Activities in the Statement of Operations. A summary of the disposal costs
      recognized for the nine months ended December 31, 2005 is as follows:

<TABLE>
<CAPTION>
                            Employee                       Other
                          Termination       Excess          Exit
                             Costs        Facilities       Costs           Total
                          ------------   ------------   ------------   -------------
<S>                       <C>            <C>            <C>            <C>
Disposal Costs Incurred   $    411,412   $    396,197   $    534,595   $   1,342,204
                          ============   ============   ============   =============
</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.  The Company may be
      required to adjust its accrual and estimated  expense  related to employee
      termination  costs if the actual timing of the  terminations  changes from
      original estimates.

(8)   Earnings Per Share

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

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED               NINE MONTHS ENDED
                                                 DECEMBER 31,                    DECEMBER 31,
                                        ----------------------------    ----------------------------
                                             2005            2004           2005            2004
                                        -------------    -----------    ------------    ------------
                                                          RESTATED                        RESTATED
<S>                                     <C>              <C>            <C>             <C>
Net loss to common stockholders         $ (11,754,981)   $(1,061,807)   $(22,315,233)   $ (1,716,065)
                                        =============    ===========    ============    ============

Weighted average shares outstanding -
  basic and diluted                        20,051,278     18,218,651      19,590,263      16,554,208
                                        =============    ===========    ============    ============

Basic and diluted net loss per
  common share                          $       (0.59)   $     (0.06)   $      (1.14)   $      (0.10)
                                        =============    ===========    ============    ============
</TABLE>


      Options for 5,057,775  shares and warrants for  1,166,713  shares have not
      been included in the  computation of diluted net loss per common share for
      the three and nine months ended  December 31, 2005,  as their effect would
      be  antidilutive.  Options for 5,075,702 shares and warrants for 2,285,356
      shares have not been included in the  computation  of diluted net loss per
      common share for the nine months ended  December 31, 2004, 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.


                                       16
<PAGE>

Nine months ended December 31,                    2005       2004
---------------------------------------------   --------   --------

Non-cash financing and investing activities:

Accrued preferred stock dividends               $     --   $ 82,572
Accretion of discount on preferred stock              --    319,500
Purchase of equipment through a capital lease         --     82,583

Cash paid for:
Interest                                         852,267    701,121


(10)  Related Party Transactions

      Angelo S. Morini

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

      Because  Mr.  Morini  is no longer  performing  ongoing  services  for the
      Company,  the Company  accrued and  expensed  the  five-year  cost of this
      agreement in October 2003. The total  estimated  costs expensed under this
      agreement were $1,830,329 of which $1,021,325  remained unpaid but accrued
      ($366,305 as short-term liabilities and $655,020 as long-term liabilities)
      as of December 31, 2005. The long-term  portion will be paid out in nearly
      equal monthly installments ending in October 2008.

      In June 1999,  in  connection  with an  amended  and  restated  employment
      agreement for Mr. Morini, the Company consolidated two full recourse notes
      receivable  ($1,200,000  from November 1994 and  $11,572,200  from October
      1995) related to the exercise of 2,914,286  shares of the Company's common
      stock into a single note  receivable in the amount of $12,772,200  that is
      due on June  15,  2006.  This  single  consolidated  note is  non-interest
      bearing and non-recourse and is secured by the 2,914,286 underlying shares
      of the Company's  common stock.  Per the terms of the June 1999 Employment
      Agreement that was amended and restated by the October 2003 Second Amended
      and Restated Employment Agreement between the Company and Mr. Morini, this
      loan may be forgiven upon the  occurrence of any of the following  events:
      1) Mr. Morini is terminated  without cause;  2) there is a material breach
      in the terms of Mr. Morini's employment agreement; or 3) there is a change
      in control of the Company  for which Mr.  Morini did not vote "FOR" in his
      capacity as a director or a stockholder.

      In the event that the  $12,772,200  loan is  forgiven,  the Company  would
      reflect  this  amount  as a  forgiveness  of  debt  in  the  Statement  of
      Operations.  In the event  that Mr.  Morini is unable to pay the loan when
      due and the Company  forecloses on the shares, the Company would reflect a
      loss  on  collection  for the  amount  that  the  value  of the  2,914,286
      underlying  collateral shares are below the value of the note. In December
      2005,  the Company  reserved  $9,129,343  against  this  stockholder  note
      receivable  under  the  assumption  that  it will  not be able to  collect
      proceeds in excess of the $3,642,857  value of the  underlying  collateral
      shares.  The value of the underlying  collateral shares was computed using
      the market  price of the  Company's  common  stock on December 31, 2005 of
      $1.25 multiplied by the 2,914,286  shares.  Although this reserve resulted
      in a  material  loss to the  Company's  operations,  it does  not have any
      affect on the balance sheet since the $12,772,200  loan amount was already
      shown as a reduction to Stockholders' Equity (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  will be paid out in nearly  equal
      installments  over two years  payable  on the  Company's  regular  payroll
      dates.  As of December 31, 2005, the remaining  unpaid but accrued balance
      reflected in short-term liabilities was $124,842.

(11)  Economic Dependence

      The Company had one customer that accounted for  approximately 15% and 13%
      of sales in the three and nine months ended December 31, 2004. There is no
      one  customer  that  comprises  greater than 10% of sales in the three and
      nine months ended December 31, 2005.


                                       17
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

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

INFORMATION IN THIS MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND  RESULTS  OF   OPERATIONS   ("MD&A")  IS  INTENDED  TO  ENHANCE  A  READER'S
UNDERSTANDING  OF THE FINANCIAL  CONDITION,  CHANGES IN FINANCIAL  CONDITION AND
RESULTS OF OPERATIONS OF OUR COMPANY. THIS MD&A IS A SUPPLEMENT TO AND SHOULD BE
READ IN CONJUNCTION  WITH OUR FINANCIAL  STATEMENTS AND NOTES THERETO  APPEARING
ELSEWHERE  IN  THIS  REPORT.   THE   FOLLOWING   DISCUSSION   CONTAINS   CERTAIN
FORWARD-LOOKING  STATEMENTS,  WITHIN THE MEANING OF THE "SAFE-HARBOR" PROVISIONS
OF THE PRIVATE  SECURITIES  REFORM ACT OF 1995, THE ATTAINMENT OF WHICH INVOLVES
VARIOUS RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR
FUTURE FINANCIAL PERFORMANCE.  THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT OUR INDUSTRY, MANAGEMENT'S
BELIEFS AND CERTAIN ASSUMPTIONS MADE BY OUR COMPANY. WORDS SUCH AS "ANTICIPATE,"
"EXPECT,"  "INTEND," "PLAN," "BELIEVE,"  "SEEK,"  "PROJECT,"  "ESTIMATE," "MAY,"
"WILL," AND  VARIATIONS  OF THESE WORDS OR SIMILAR  EXPRESSIONS  ARE INTENDED TO
IDENTIFY  FORWARD-LOOKING  STATEMENTS.  THESE  STATEMENTS  ARE NOT GUARANTEES OF
FUTURE  PERFORMANCE  AND  ARE  SUBJECT  TO  CERTAIN  RISKS,   UNCERTAINTIES  AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT.  THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM OUR HISTORICAL  RESULTS AND THOSE EXPRESSED OR FORECASTED IN ANY
FORWARD-LOOKING  STATEMENTS  AS A RESULT OF A VARIETY OF FACTORS,  INCLUDING BUT
NOT  LIMITED  TO,  COMPETITION  IN THE MARKET FOR OUR  PRODUCTS,  DEPENDENCE  ON
SUPPLIERS,  OUR MANUFACTURING  EXPERIENCE,  PRODUCTION DELAYS OR INEFFICIENCIES,
AND  CHANGES IN  ACCOUNTING  STANDARDS.  PLEASE  SEE THE  SECTION  TITLED  "RISK
FACTORS" IN OUR ANNUAL  REPORT ON FORM 10-K FOR THE YEAR ENDED  MARCH 31,  2005,
AND ITEM 1A CONTAINED HEREIN,  FOR FURTHER DISCUSSION OF THESE AND OTHER FACTORS
THAT COULD AFFECT FUTURE RESULTS.  WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE
OR REVISE ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION
BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.

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

This MD&A contains the following sections:
      o     Restatement
      o     Business Environment
      o     Critical Accounting Policies
      o     Recent Accounting Pronouncements
      o     Results of Operations
      o     Liquidity and Capital Resources

Restatement

This Form 10-Q and the restated fiscal 2005 financial statements included herein
reflect a correction of our accounting and disclosure  primarily  related to the
warrants  that were  outstanding  during  the term of our  Series A  convertible
preferred  stock,  from April 2001 through  October  2004.  The issue relates to
accounting  for  securities  that are  reflected  as income or  expense  through
earnings as non-cash charges. These non-cash charges do not affect our revenues,
cash flows from past or future  operations,  or our  liquidity.  As discussed in
Note 4 of the financial statements, for the three and nine months ended December
31, 2004,  we have  restated our  financial  statements to reflect a net loss of
$1,061,807  and  $1,716,065,  which  reflects  an  additional  (loss)  income of
($322,406) and $390,871,  respectively,  from what was  previously  reported for
these periods in the Form 10-Q for the quarterly period ended December 31, 2004.

Business Environment

General

Galaxy  Nutritional  Foods,  Inc.  (our  "Company")  is  principally  engaged in
developing and 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 food service 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.


                                       18
<PAGE>

Our  Company  is  currently   in  a  transition   period  with  respect  to  our
manufacturing  operations.  We determined  that our  manufacturing  capacity was
significantly in excess of our  requirements,  and that it would be advantageous
for us to outsource our  manufacturing,  packaging and delivery  operations.  On
June 30, 2005, our Company 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. As
of November 14, 2005,  Schreiber began to deliver such products  directly to our
customers. The prices for such products are based on cost conversions determined
by the parties from time to time.  The actual cost savings from the  elimination
of the fixed plant  overhead are  expected to be  evidenced  more clearly in the
fourth quarter of fiscal 2006.

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 customers shifting
to cheese  alternatives from natural cheese.  Rather than focusing  primarily on
consumers with a preference or medical condition  predisposing them to non-dairy
cheese and comparing our products to other cheese alternative  brands, we intend
to focus on  educating  cheese  consumers  on the healthy  attributes  of cheese
alternatives versus traditional cheese.

We use several internal and external reports to monitor sales by brand, segment,
form and channel of sale to determine  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 the second  quarter of fiscal 2006,  we launched a consumer  marketing  sales
campaign.  We are  rolling  out the second  wave of this  campaign in the fourth
quarter of fiscal 2006.  This campaign is focused on the following three primary
strategies:

      o     Consumer focused advertising. We are increasing consumer advertising
            (in TV, magazine,  and event  sponsorship)  and consumer  promotions
            (for  example,  on-pack  "cents off"  coupons,  "cents off"  coupons
            delivered via  newspapers,  secondary  placement and product benefit
            communication  at the point of  purchase/shelf)  that  highlight and
            communicate the benefits of our products to meet the consumer demand
            for low fat, no cholesterol and high calcium products.

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

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

We  began  the  consumer  television  advertising  campaign  the  first  week in
September 2005 for the West Coast,  InterMountain  and Minneapolis  markets.  In
support of that  advertising,  we distributed  coupons through the newspapers in
all those  markets as well.  Initial  sales data from these  markets in the four
weeks following the promotions, indicate that sales increased more than 10% from
sales in the four weeks prior to the promotions.  At this time, we are unable to
determine if we will experience  continued positive effects from the advertising
campaigns.  Thus,  sales  improvements  in these four weeks are not  necessarily
indications  of future  results.  We will begin our second  wave of  advertising
campaigns in January and February 2006. We have also secured distribution of our
new  product  snack  dips and  chipotle-  flavored  chunks  with over 70% of our
current customers.  These new products have not had enough market time to impact
sales,  but we are hopeful that by the end fiscal 2006,  they will contribute to
increased sales and improved margins.


                                       19
<PAGE>

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

Recent Material Developments

      Material Losses

Our  Statement  of  Operations  is  showing an  increase  in  operating  loss of
approximately  $11,000,000  and  $21,000,000  in the three and nine months ended
December 31, 2005 compared to the three and nine months ended December 31, 2004.
This increase in loss is primarily due to a $9,129,343  reserve on a stockholder
note receivable,  an impairment on fixed assets of $7,896,554 and disposal costs
of  $1,342,204  related  to our asset  sale and  outsourcing  arrangements  with
Schreiber Foods,  Inc., and a decline in gross margin of $1,085,491 as discussed
in further detail under Results of Operations.

      Schreiber Transactions

On June 30, 2005, we entered into a definitive  agreement  (the "Asset  Purchase
Agreement")  for  the  sale  of  substantially  all  of  our  manufacturing  and
production   equipment  to  Schreiber  Foods,  Inc.,  a  Wisconsin   corporation
("Schreiber"), for $8,700,000 in cash.

Schreiber  is a  privately  held  cheese  manufacturing  company  whose  primary
business is contract  manufacturing  cheese,  cheese alternative and other dairy
products for many well-known companies and brands.

In connection with the Asset Purchase  Agreement,  we also entered into a Supply
Agreement with Schreiber (the "Supply  Agreement") on June 30, 2005. Pursuant to
the  Supply  Agreement,  Schreiber  has  become  our sole  source of supply  for
substantially all of our products.  As of November 14, 2005,  Schreiber began to
deliver such products  directly to our  customers.  The prices for such products
are based on cost conversions 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 our  option for up to two  additional  five-year  periods  (for a
            total term of up to fifteen years).  If we do not exercise our first
            option  to  extend  the  term,  then  we will  be  obligated  to pay
            Schreiber $1,500,000.  If we exercise our first option to extend the
            term, but do not exercise our second option to extend the term, then
            we will be obligated to pay Schreiber $750,000.

      o     The Supply Agreement  provides for a contingent  short-fall  payment
            obligation by our 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.

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

      o     We may not manufacture any products governed by the Supply Agreement
            during the term of the Supply Agreement.

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

On  December  8,  2005,  we  completed  the  sale  of  substantially  all of our
manufacturing and production  equipment to Schreiber.  This sale was approved by
our  stockholders  at a Special Meeting held on December 5, 2005. The $8,700,000
in proceeds was used to pay $1,319,583 for tangible  personal property taxes due
primarily  on the sold assets and  $7,374,299  to Beltway  Capital  Partners LLC
(successor by assignment of Wachovia Bank, N.A.) for the termination of our term
loan.  The  remaining  proceeds  balance  of  $6,118  was  used  to  reduce  our
asset-based line of credit from Textron Financial Corporation.


                                       20
<PAGE>

Prior to December 31, 2005, we sold all of our usable raw material  inventory to
Schreiber  at  our  cost  and   transferred  our  finished  goods  inventory  to
Schreiber's facility.  Our inventory balance as of December 31, 2005 consists of
the finished goods items that Schreiber had not yet begun to manufacture.  Prior
to the sale of our assets to  Schreiber,  we  manufactured  additional  finished
goods  inventory  to  fill  the  estimated  customer  orders  in the  period  of
manufacturing downtime when the manufacturing equipment was transferred from our
location to Schreiber. We retain title to this finished goods inventory that was
transferred  to  Schreiber's  facility  until it is sold and shipped with future
customer orders.

      Transaction Effect

We believe that the long-term  benefits in the transition  from a  manufacturing
company to a branded marketing company will far outweigh the short-term 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
substantially  greater amount of time and resources on the sale of our products.
Additionally,  we plan to enhance our marketing efforts in order to increase our
consumer base and sales volume.

Some of the effects of the transaction are as follows:

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

      o     We have  two  facilities  that we  lease  in  Orlando,  Florida  - a
            manufacturing  and   administrative   facility  and  a  distribution
            facility.  In December 2005, we abandoned the distribution  facility
            that has a lease termination date of July 31, 2009. We are currently
            working  with the  landlord to  terminate  the lease or sublease the
            facility. If the lease is not terminated or subleased,  future lease
            payments  due on this  facility  are  approximately  $1,254,000.  We
            ceased to use the manufacturing portion of our second facility where
            our  administrative  offices  are  located  and plan to stay in this
            location through the end of our lease in November 2006. If the lease
            is not  terminated or subleased,  future lease  payments due on this
            facility   are   approximately   $368,000.   We  may   sublease  the
            manufacturing  portion of this  facility  if an  opportunity  arises
            prior to the lease termination.

      o     We have eliminated 102 employee positions and created 2 new employee
            positions.  Our  anticipated  total  number of  permanent  full-time
            employees after December 31, 2005 is 30.

      o     We used the proceeds from the sale of our manufacturing equipment to
            reduce a substantial portion of our outstanding debt and liabilities
            as detailed  above.  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.

      Debt Maturity and Going Concern Issues

We have  incurred  substantial  debt in  connection  with the  financing  of our
business. The aggregate principal amount outstanding under our credit facilities
is  approximately  $4,638,722  as of December 31, 2005.  This amount  includes a
revolving line of credit from Textron Financial  Corporation  ("Textron") in the
amount of  $2,238,722,  and several  notes  payable to certain  Note Holders (as
described under Debt Financing) totaling  $2,400,000.  We will need to refinance
or raise  proceeds to pay the Textron  line of credit on or before its  maturity
date of May 26,  2006 and the notes  payable  to the Note  Holders  on or before
their maturity date of June 15, 2006.

If we cannot  generate enough cash from operations and the sale of our remaining
assets  that are held for sale by these  maturity  dates,  and we are  unable to
refinance or renew these loans,  or if additional  financing is not available on
terms  acceptable  to us, we will be unable to satisfy such  facilities by their
maturity  dates.  In such an event,  Textron and the Note Holders could exercise
their respective rights under their loan documents,  which could include,  among
other things, declaring defaults under the loans and pursuing foreclosure on our
assets that are pledged as collateral for such loans. If such an event occurred,
it would be  substantially  more  difficult for us to  effectively  continue the
operation of our business,  and it is unlikely that we would be able to continue
as a going concern.

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


                                       21
<PAGE>

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

      o     Liquidity

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial  statements and reported  amounts of income and expense during the
reporting periods presented. Our significant estimates include the allowance for
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.

The critical  accounting  policies used by management  and the  methodology  for
estimates and assumptions are as follows:

Valuation of Accounts Receivable and Chargebacks

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

Based on the age of the receivable, cash collection history and past dilution in
the  receivables,  we make an estimate of our anticipated bad debt,  anticipated
future  authorized  deductions  due to current period  activity and  anticipated
collections on non-authorized  amounts that customers have currently deducted on
past invoices.  Based on this analysis,  we reserved $1,673,000 and $742,000 for
known and anticipated  future credits and doubtful accounts at December 31, 2005
and 2004, respectively. The reserve is higher at December 31, 2005 primarily due
to additional promotions that we initiated in fiscal 2006 which we are expecting
to be deducted by the  customers.  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 have evaluated the collection of the non-recourse  $12,772,200 loan to Angelo
S. Morini, our Founder and member of our Board of Directors, that is due on June
15, 2006. This note 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 loan is due to be paid.  Due to the  uncertainty  that the  value of
these shares  would  exceed the loan value  within the next six months,  we have
reserved for the $9,129,343  difference  between the $3,642,857  share value and
the  $12,772,200  loan  value.  The value of the shares was  computed  using the
market price of our common stock on December 31, 2005 of $1.25 multiplied by the
2,914,286  shares.  A $0.01  increase or decrease in our common stock price will
result in a reduction or increase in the reserve on stockholder note receivable,
respectively,  of  approximately  $29,000.  Due to the  volatility of the market
price of our common stock,  we are incapable of predicting  whether this reserve
will increase or decrease in the future.

Inventory

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

Deferred Taxes

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

Valuation of Non-Cash Compensation


                                       22
<PAGE>

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

Effective  April 1, 2003,  we adopted the fair value  recognition  provisions of
Statement of Financial  Accounting  Standard  ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation," and apply SFAS No. 148,  "Accounting for Stock-Based
Compensation - Transition and Disclosure,"  prospectively to all employee awards
granted on or after  April 1,  2003.  Awards  from our plans  vest over  periods
ranging from immediate to five years. Therefore, the cost related to stock-based
compensation included in the determination of net income for the periods is less
than that which would have been  recognized  if the fair value based  method had
been applied to all awards since the  original  effective  date of SFAS No. 123.
The  fair  value  of the  stock-based  award  (including,  but not  limited  to,
restricted  stock  awards,  stock  option  grants,  and  warrant  issuances)  is
determined  on the date of grant using the  Black-Scholes  pricing  model and is
expensed over the vesting  period of the related award.  The difference  between
the proforma  and reported net loss per common share  related to the issuance of
employee  stock options during the three and nine months ended December 31, 2005
and 2004 ranged from nearly zero to $0.01.

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

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

                                                     December 31,   December 31,
Nine Months Ended:                                       2005           2004
                                                     ------------   ------------
Dividend Yield                                           None           None
Volatility                                           24.9%-46.0%    44.0%-59.0%
Risk Free Interest Rate                              3.35%-4.30%    1.46%-4.14%
Expected Lives in Months                                1-120          1-120


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

FIN 44  states  that  when an  option  is  repriced  or  there  are  items  that
effectively  reduce the price of an option,  it is treated as a variable  option
that is marked to market each quarter.  Accordingly,  any increase in the market
price of our common  stock over the  exercise  price of the option  that was not
previously  recorded  is  recorded  as  compensation  expense at each  reporting
period.  If there is a decrease in the market price of our common stock compared
to the prior reporting period, the reduction is recorded as compensation  income
to  reverse  all or a  portion  of the  expense  recognized  in  prior  periods.
Compensation  income  is  limited  to the  original  base  exercise  price  (the
intrinsic value) of the options. Each period we may record non-cash compensation
expense or income  related to our analysis on  approximately  3.5 million option
shares.  Assuming that the stock price  exceeds the  intrinsic  value on all the
variable  option shares,  a $0.01 increase or decrease in our common stock price
results in an expense or income, respectively,  of approximately $35,000. Due to
the  volatility  of the market price of our common  stock,  we are  incapable of
predicting whether this expense will increase or decrease in the future.

Disposal Costs

We have  recorded  significant  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.  Should  the  timing of
employee  terminations  change and if we do not  sublease  our  facilities,  our
estimate of restructuring expenses will increase.


                                       23
<PAGE>

Recent Accounting Pronouncements

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

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment"  ("SFAS No. 123R"),  which  addresses the  accounting  for  share-based
payment  transactions in which a company receives  employee services in exchange
for (a) equity  instruments of the company or (b) liabilities  that are based on
the fair value of the company's equity instruments or that may be settled by the
issuance of equity instruments.  SFAS No. 123R supercedes APB Opinion No. 25 and
amends SFAS No. 95,  "Statement of Cash Flows."  Under SFAS No. 123R,  companies
are required to record  compensation  expense for all share-based  payment award
transactions  measured at fair value as determined by an option valuation model.
Currently, we use the Black-Scholes pricing model to calculate the fair value of
our  share-based  transactions.  This  statement is  effective  for fiscal years
beginning after June 15, 2005. Since we currently recognize compensation expense
at fair value for  share-based  transactions in accordance with SFAS No. 123, we
do not  anticipate  adoption of this standard will have a significant  impact on
our financial position, results of operations, or cash flows.

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

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections - a replacement  of APB Opinion No. 20 and SFAS No. 3." SFAS No. 154
changes the  requirements  for the  accounting  for and reporting of a change in
accounting  principle and a change required by an accounting  pronouncement when
the pronouncement does not include specific transition provisions.  SFAS No. 154
requires retrospective application of changes as if the new accounting principle
had always been used. SFAS No. 154 is effective for fiscal years beginning after
December 15, 2005. We believe that the adoption of this standard will not have a
significant  impact on our  financial  position,  results of  operations or cash
flows.

Results of Operations

<TABLE>
<CAPTION>
                            3-Months Ended December 31, 2005                  9-Months Ended December 31, 2005
                     ----------------------------------------------   -----------------------------------------------
                                                    $          %                                      $          %
                        2005         2004         Change     Change      2005          2004         Change     Change
-------------------------------------------------------------------   -----------------------------------------------
<S>                  <C>          <C>           <C>          <C>      <C>           <C>           <C>          <C>

Net Sales            9,072,097    10,632,877    (1,560,780)  -14.7%   29,361,475    33,725,108    (4,363,633)  -12.9%
Cost of Goods Sold   7,182,502     8,289,551    (1,107,049)  -13.4%   22,582,708    25,860,850    (3,278,142)  -12.7%
                     ----------------------------------------------   -----------------------------------------------

Gross Margin         1,889,595     2,343,326      (453,731)  -19.4%    6,778,767     7,864,258    (1,085,491)  -13.8%
                     ==============================================   ===============================================

Gross Profit %            20.8%         22.0%                               23.1%         23.3%
                     =======================                          ========================
</TABLE>


                                       24
<PAGE>

Net Sales

Net sales in the three and nine months ended December 31, 2005 decreased 15% and
13% from net sales in such periods in the prior year  primarily due to a decline
in  private  label  sales  volume  to  Wal-Mart.  During  fiscal  2005,  we sold
indirectly to Wal-Mart  through Del  Sunshine,  a private  label  customer,  but
beginning in April 2005, we began selling  direct to Wal-Mart.  During the three
and  nine  months  ended   December  31,  2004,   Del  Sunshine   accounted  for
approximately  15% and 13% of net sales.  During the three and nine months ended
December 31, 2005,  private  label sales volume to Wal-Mart  accounted  for less
than 5% of net sales. Sales also decreased due to overall consumer resistance to
the multiple price  increases we have taken in late fiscal 2005 and early fiscal
2006 to offset our rising production  costs. We statistically  linked 84% of the
variance in our Veggie  Slices to average unit price and recently  implemented a
reduced-price  market test with a major retailer.  If the market test results in
an  increase  in unit  sales,  pricing  will be  adjusted  across all markets to
optimize sales and profitability of Veggie Slices.

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

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

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

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

      o     Continued emphasis and resource allocation of our marketing strategy
            to increase sales through consumer advertising (in TV, magazine, and
            event  sponsorship)  and consumer  promotions (for example,  on-pack
            "cents off" coupons,  "cents off" coupons  delivered via newspapers,
            secondary placement,  product benefit  communication at the point of
            purchase/shelf).

In January and February 2006 we are launching the second wave of an  advertising
campaign  that  began  in  September  2005.  While  initial  response  from  the
advertising  campaign in September 2005 in the limited markets are positive,  we
are unable to determine if we will experience  continued  positive  effects from
the advertising campaigns.

Due to the  reduction  of lower  margin  sales to  Wal-Mart in fiscal  2006,  we
anticipate  a  decline  of 10% to 15% in net sales in fiscal  2006  compared  to
fiscal 2005,  but we expect to show  improved  margins in the fourth  quarter of
fiscal 2006 due to the outsourcing  arrangement  with Schreiber  Foods,  Inc. as
discussed under Recent Material Developments.

Cost of Goods Sold

Cost of goods sold was approximately 77% of net sales for each of the first nine
months of fiscal 2006 and 2005. However, we noted a 1% percentage point increase
in cost of goods sold to 79% of net sales in the third  quarter  of fiscal  2006
compared  to 78%  of net  sales  in the  third  quarter  of  fiscal  2005.  This
percentage  point  increase in cost of goods sold was primarily due to inventory
disposals and  additional  overhead costs during the  outsourcing  transition in
third quarter of fiscal 2006.  During fiscal 2006 prior to full  outsourcing  in
mid-December, we experienced lower costs in direct labor and overhead costs as a
result of improved  production  efficiencies  and changes in the  allocation  of
certain  overhead costs to various  departments.  Certain  allocation  costs are
allocated based on a square footage method.  As a result of lower square footage
in our production areas in fiscal 2006 compared to prior fiscal years,  there is
a  higher  percentage  of  overhead  allocated  to  non-production   departments
beginning  in April 2005.  We  anticipate  that the cost of goods sold will also
decrease as a result of the outsourcing  arrangement  with  Schreiber.  However,
actual results could differ from our expectations.

Gross Margin

Despite the  decline in sales,  gross  margin has  remained at 23% for the first
nine months of fiscal 2006 due to the  elimination of the private label sales to
Wal-Mart.  Private label and imitation sales consist  primarily of products that
generate high sales volumes but lower gross margins.  Gross margins  declined in
the third quarter of fiscal 2006 as a result of the  additional  overhead  costs
during the transition of manufacturing  operations to Schreiber in this quarter.
However,  gross margins are expected to improve in the fourth  quarter of fiscal
2006 now that our  manufacturing  activities  have ceased and excess  production
overhead has been eliminated.


                                       25
<PAGE>

EBITDA

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

EBITDA, (a non-GAAP measure):
<TABLE>
<CAPTION>
                                             3-Months Ended December 31, 2005
                                   ----------------------------------------------------
                                       2005          2004        $ Change      % Change
---------------------------------------------------------------------------------------
<S>                                <C>            <C>           <C>            <C>
Gross Margin                         1,889,595     2,343,326       (453,731)      -19.4%
                                   ----------------------------------------------------

Selling                              1,161,751     1,213,549        (51,798)       -4.3%
Delivery                               544,665       549,379         (4,714)       -0.9%
Employment contract expense(2)              --            --             --         0.0%
General and administrative,
  including $52,676, $176,186,
  $923,513 and $217,388 in
  non-cash stock compensation(1)     1,394,599       771,382        623,217        80.8%
Research and development                75,961        74,861          1,100         1.5%
Reserve on stockholder note
  receivable(2)                      9,129,343            --      9,129,343       100.0%
Cost of disposal activities(2)         668,936            --        668,936       100.0%
Impairment of fixed assets(2)               --            --             --         0.0%
Loss on sale of assets                  65,360            --         65,360       100.0%
                                   ----------------------------------------------------
Total operating expenses            13,040,615     2,609,171     10,431,444       399.8%
                                   ----------------------------------------------------
Loss from Operations(3)            (11,151,020)     (265,845)   (10,885,175)     4094.6%

Other Income (Expense), Net
Interest expense                      (595,692)     (288,556)      (307,136)      106.4%
Derivative income (expense)                 --      (258,658)       258,658      -100.0%
Gain/(loss) on FV of warrants           (8,269)     (202,414)       194,145       -95.9%
                                   ----------------------------------------------------
Total                                 (603,961)     (749,628)       145,667       -19.4%
                                   ----------------------------------------------------

NET LOSS                           (11,754,981)   (1,015,473)   (10,739,508)     1057.6%

Interest expense                       595,692       288,556        307,136       106.4%
Depreciation                           387,184       541,170       (153,986)      -28.5%
                                   ----------------------------------------------------
EBITDA, (a non-GAAP measure)       (10,772,105)     (185,747)   (10,586,358)     5699.3%
                                   ====================================================

As a Percentage of Net Sales            -118.7%         -1.7%
                                   =========================
<CAPTION>
                                             9-Months Ended December 31, 2005
                                   -----------------------------------------------------
                                       2005          2004         $ Change      % Change
----------------------------------------------------------------------------------------
<S>                                <C>            <C>            <C>            <C>
Gross Margin                         6,778,767     7,864,258      (1,085,491)      -13.8%
                                   -----------------------------------------------------

Selling                              3,655,543     4,246,419        (590,876)      -13.9%
Delivery                             1,886,214     1,757,962         128,252         7.3%
Employment contract expense(2)              --       444,883        (444,883)     -100.0%
General and administrative,
  including $52,676, $176,186,
  $923,513 and $217,388 in
  non-cash stock compensation(1)     3,999,362     2,011,894       1,987,468        98.8%
Research and development               256,055       226,479          29,576        13.1%
Reserve on stockholder note
  receivable(2)                      9,129,343            --       9,129,343       100.0%
Cost of disposal activities(2)       1,342,204            --       1,342,204       100.0%
Impairment of fixed assets(2)        7,896,554            --       7,896,554       100.0%
Loss on sale of assets                  70,966            --          70,966       100.0%
                                   -----------------------------------------------------
Total operating expenses            28,236,241     8,687,637      19,548,604       225.0%
                                   -----------------------------------------------------
Loss from Operations(3)            (21,457,474)     (823,379)    (20,634,095)     2506.0%

Other Income (Expense), Net
Interest expense                    (1,246,490)     (812,380)       (434,110)       53.4%
Derivative income (expense)                 --        62,829         (62,829)     -100.0%
Gain/(loss) on FV of warrants          388,731       258,937         129,794        50.1%
                                   -----------------------------------------------------
Total                                 (857,759)     (490,614)       (367,145)       74.8%
                                   -----------------------------------------------------

NET LOSS                           (22,315,233)   (1,313,993)    (21,001,240)     1598.3%

Interest expense                     1,246,490       812,380         434,110        53.4%
Depreciation                         1,463,036     1,633,256        (170,220)      -10.4%
                                   -----------------------------------------------------
EBITDA, (a non-GAAP measure)       (19,605,707)    1,131,643     (20,737,350)    -1832.5%
                                   =====================================================

As a Percentage of Net Sales             -66.8%          3.4%
                                   =========================
</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 price of our  common  shares as traded on AMEX is  outside  our
      control and typically does not reflect our current operations.

(2)   In our  calculation of key financial  measures,  we exclude the employment
      contract  expenses related to Angelo S. Morini and Christopher J. New, the
      reserve on stockholder note receivable, and fixed asset impairment charges
      and  disposal  costs  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.


                                       26
<PAGE>

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

Selling

Selling  expense is partly a function of sales  through  variable  costs such as
brokerage  commissions and  promotional  costs.  Our selling  expense  typically
averages  between 12% and 13% of net sales.  In each of the first nine months of
fiscal 2006 and 2005 selling  expense  averaged 13% of net sales. In addition to
the variable  costs,  selling  expense  consists of certain  fixed costs such as
advertising, employee salaries and benefits, travel and administrative overhead.
The  consistency  as a  percentage  of sales  often  relates  to the  timing  of
advertising  and promotional  spending.  We expect to spend $400,000 to $500,000
more on  advertising  in fiscal 2006 than in fiscal 2005, but the second wave of
advertising  will occur in the  fourth  quarter of fiscal  2006  resulting  in a
higher  percentage  of selling  expense  for the fourth  quarter of fiscal  2006
compared to fiscal 2005,  but still  consistent on an annual basis.  We sell our
products through our internal sales force and an independent broker network.

Delivery

Delivery expense is primarily a function of sales. In the past, delivery expense
remained consistent at approximately 5% of net sales. However, this increased to
6% of net sales in the third  quarter  and the first nine  months of fiscal 2006
due  to  higher  fuel  prices  and  surcharges  charged  by  the  transportation
companies.

Since  we  transferred  all  production  and  distribution  responsibilities  to
Schreiber by the end of the third quarter of fiscal 2006, we expect our delivery
expenses to decrease  significantly as a result of an agreed upon delivery price
per pound of product with Schreiber that is lower than our current delivery cost
per pound of product.

General and administrative

General and  administrative  expenses  increased  approximately  $623,000 in the
third  quarter of fiscal  2006  compared  to the third  quarter  of fiscal  2005
primarily  due to increases of  approximately  $300,000 in  additional  bad debt
costs  primarily  related to the  transition  from  indirect to direct  sales to
Wal-mart as  discussed  above under Net Sales,  $213,000 in  liquidated  damages
accrued in related to a registration  rights  agreement as discussed below under
Equity Financing, $33,000 additional insurance costs due to higher coverages and
increased premiums effective in April 2005,  $109,000 in consulting fees for our
outsourcing and sale arrangements,  and $109,000 in additional professional fees
for legal and audit services due to additional review of strategic  alternatives
and SEC filings  during the third quarter of fiscal 2006.  These  increases were
reduced  by  a  decrease  in  non-cash   compensation   related  to  stock-based
transactions of approximately $124,000, as detailed below.

General and administrative  expenses increased  approximately  $1,987,000 in the
first nine  months of fiscal  2006  compared  to the first nine months of fiscal
2005 primarily due to increases of approximately $706,000 in additional non-cash
compensation related to stock-based transactions, as detailed below, $567,000 in
additional bad debt costs  primarily  related to the transition from indirect to
direct  sales to  Wal-mart  as  discussed  above  under Net Sales,  $285,000  in
liquidated  damages  accrued in related to a  registration  rights  agreement as
discussed below under Equity Financing,  $98,000 additional  insurance costs due
to higher coverages and increased premiums effective in April 2005,  $109,000 in
consulting  fees for our  outsourcing  and sale  arrangements,  and  $326,000 in
additional  professional  fees for legal and audit  services  due to  additional
review of strategic alternatives and SEC filings during the first nine months of
fiscal  2006.  These  increases  were  reduced by $150,000 of income we received
pursuant to a Termination,  Settlement and Release  Agreement signed on July 22,
2005 with Fromageries Bel S.A.

Excluding  the  effects  of  non-cash   compensation   related  to   stock-based
transactions,  which  cannot  be  predicted,  we  anticipate  that  general  and
administrative   expenses  in  the  fourth   quarter  of  fiscal  2006  will  be
significantly  reduced due to the non-recurrence of the $1.6 million in bad debt
expense that occurred in the fourth quarter of fiscal 2005.

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


                                       27
<PAGE>

<TABLE>
<CAPTION>
                                    3-Months Ended December 31, 2005           9-Months Ended December 31, 2005
                                 -------------------------------------   -------------------------------------------
                                                       $          %                                 $           %
                                  2005      2004     Change     Change      2005         2004     Change     Change
----------------------------------------------------------------------   -------------------------------------------
<S>                              <C>      <C>       <C>         <C>      <C>           <C>       <C>         <C>
Stock-based award compensation
  under SFAS No. 123             52,676   176,186   (123,510)    -70.1%   1,116,069    217,388    898,681      413.4%
Option modifications under
  APB 25 awards                      --        --         --       0.0%    (192,556)        --   (192,556)    -100.0%
                                 -------------------------------------   -------------------------------------------
Non-cash compensation related
  to stock based transactions    52,676   176,186   (123,510)    -70.1%     923,513    217,388    706,125      324.8%
                                 =====================================   ===========================================
</TABLE>


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

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

      a. Stock-Based Award Issuances and Modification under SFAS No. 123

      During the three  months  ended  December  31, 2005 and 2004,  we recorded
      $52,676  and  $176,186,  respectively,  in non-cash  compensation  expense
      related  to  stock-based  transactions  that were  issued to and vested by
      employees,  officers,  directors and  consultants.  During the nine months
      ended  December 31, 2005 and 2004,  we recorded  $1,116,069  and $217,388,
      respectively,  in non-cash  compensation  expense  related to  stock-based
      transactions  that were  issued  to and  vested  by  employees,  officers,
      directors and consultants.

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

      On October  11,  2002,  we repriced  all  outstanding  options  granted to
      employees  prior to October 11, 2002  (4,284,108  shares at former  prices
      ranging  from $2.84 to  $10.28)  to the  market  price of $2.05 per share.
      Prior to the repricing  modification,  the options were accounted for as a
      fixed award under APB No. 25. In accordance  with FIN 44, the repricing of
      the employee stock options requires additional  compensation expense to be
      recognized and adjusted in subsequent  periods for changes in the price of
      our common  stock that are in excess of the $2.05  stock price on the date
      of modification  (additional  intrinsic  value). If there is a decrease in
      the  market  price of our common  stock  compared  to the prior  reporting
      period, the reduction is recorded as compensation income to reverse all or
      a portion of the expense recognized in prior periods.  Compensation income
      is limited to the original base exercise  price (the  intrinsic  value) of
      the options.  This variable accounting  treatment for these modified stock
      options began with the quarter  ended  December 31, 2002 and such variable
      accounting  treatment  will continue  until the related  options have been
      cancelled,  expired or exercised. There are 3,498,163 outstanding modified
      stock  options  remaining as of December 31,  2005.  We recorded  non-cash
      compensation  income of $192,556  for the nine months  ended  December 31,
      2005 related to the modified  options  described  above. We did not record
      any income or expense  related to these variable  options during the three
      months  ended  December 31, 2005 and 2004 and during the nine months ended
      December 31, 2004, as the stock price was below $2.05 at the beginning and
      end of the periods.

Reserve on stockholder note receivable

In June 1999, in connection  with an amended and restated  employment  agreement
for Angelo S.  Morini,,  our  Founder and 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 the exercise of 2,914,286  shares
of our common stock into a single note  receivable in the amount of  $12,772,200
that is due on June 15,  2006.  This single  consolidated  note is  non-interest
bearing and  non-recourse and is secured by the 2,914,286  underlying  shares of
our common stock.  Per the terms of the June 1999 Employment  Agreement that was
amended and restated by the October 2003 Second Amended and Restated  Employment
Agreement between our Company and Mr. Morini, this loan may be forgiven upon the
occurrence of any of the following events:  1) Mr. Morini is terminated  without
cause;  2) there is a material  breach in the terms of Mr.  Morini's  employment
agreement;  or 3) there is a change  in  control  of the  Company  for which Mr.
Morini did not vote "FOR" in his capacity as a director or a stockholder.


                                       28
<PAGE>

In the event that the $12,772,200 loan is forgiven, we would reflect this amount
as a forgiveness of debt in the Statement of  Operations.  In the event that Mr.
Morini is unable to pay the loan when due and we  foreclose  on the  shares,  we
would  reflect  a loss on  collection  for the  amount  that  the  value  of the
2,914,286  underlying  collateral  shares  are below  the value of the note.  In
December 2005, we reserved  $9,129,343  against this stockholder note receivable
under the assumption  that we will not be able to collect  proceeds in excess of
the  $3,642,857  value of the  underlying  collateral  shares.  The value of the
underlying  collateral  shares was computed using the market price of our common
stock on December 31, 2005 of $1.25 multiplied by the 2,914,286 shares. Although
this reserve resulted in a material loss to our operations, it does not have any
affect on the balance sheet since the $12,772,200  loan amount was already shown
as a reduction to Stockholders' Equity (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  are 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.  For the
three and nine months ended December 31, 2005, we incurred and reported $668,936
and  $1,342,204 as Costs of Disposal  Activities in the Statement of Operations.
As of December 31, 2005,  97 employee  positions  had been  eliminated  with the
final five  employee  positions  to be  eliminated  by February  28,  2006.  The
majority of the remaining employee  termination costs are expected to be paid in
the  fourth  quarter  of  fiscal  2006.  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.  If we do  not  sublease  these
facilities,  the actual loss will exceed this estimate. Other exit costs consist
primarily of legal and professional fees related to the disposal activities.

A summary of the disposal  costs  recognized  for the nine months ended December
31, 2005 is as follows:

                              Employee
                             Termination     Excess     Other Exit
                                Costs      Facilities      Costs        Total
                          --------------   ----------   ----------   ----------
Disposal Costs Incurred   $      411,412   $  396,197   $  534,595   $1,342,204
                          ==============   ==========   ==========   ==========


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.  We may be  required  to adjust our  accrual  and
estimated expense related to employee  termination costs if the actual timing of
the terminations changes from original estimates.

Impairment of property and equipment and loss on sale of assets

In light of the Schreiber  transactions  discussed  above under Recent  Material
Developments,  in the second  quarter of fiscal 2006, we  determined  that it is
more likely than not that a majority of our fixed assets  related to  production
activities  will be sold or disposed  prior to the end of their useful life.  In
accordance  with SFAS No. 144,  "Accounting  for the  Impairment  of 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 on December 8, 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.

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 nine months ended  December  31, 2005,  we recorded a
$70,966 loss on the sale of assets related to the remaining value of assets sold
or abandoned after production ceased in December 2005.

Other income and expense

Interest expense increased  approximately $307,000 and $434,000 in the three and
nine months ended December 31, 2005, respectively.  The increases were primarily
the result of increased  amortization  related to loan costs and debt discounts.
The  amortization  of loan costs increased by $150,000 and $193,000 in the three
and nine months ended December 31, 2005,  respectively,  due to additional  loan
fees  charged by our lenders  and due to the  acceleration  of the  amortization
related to loan fees on the Beltway loan that was paid in full in December 2005,
as further  described  under Debt Financing.  Additionally,  pursuant to several
Note and Warrant Purchase Agreements, as further described under Debt Financing,
we issued  warrants  to purchase up to 600,000  shares of our common  stock.  In
accordance  with the  accounting  provisions  of SFAS No. 123,  we recorded  the
$444,731 initial fair value of the warrants as a discount to debt. This non-cash
discount  is being  amortized  from  September  2005  through  June  2006 and is
included in interest  expense.  We amortized  $152,376 and $165,376 in the three
and nine months ended  December 31, 2005.  We are incurring  increased  interest
expense due to higher  prime  rates in fiscal  2006  compared to fiscal 2005 (on
average 2.0% higher), which is the basis for the floating interest rates used by
our lenders. However, due to lower debt balances in the fourth quarter of fiscal
2006 as compared to the fourth quarter of fiscal 2005 we expect actual cash paid
for interest to decrease by  approximately  $150,000.  Total interest expense in
the  fourth  quarter  of fiscal  2006  should  approximate  or exceed the fourth
quarter of fiscal 2005 due to the  amortization  of the non-cash  debt  discount
until June 2006 as discussed above.


                                       29
<PAGE>

Derivative  income/expense  represents the adjustment for the change in the fair
value of the embedded  derivative in our Series A convertible  preferred  stock,
which met the criteria for  bifurcation and separate  accounting  under SFAS No.
133. The fair value of the  embedded  derivative  was computed  based on several
factors  including the  underlying  value of our common stock at the end of each
quarter.  For the three and nine months ended  December 31, 2004,  we recorded a
derivative (expense) income of ($258,658) and $62,829, respectively,  related to
the change in the fair value of the embedded derivative  instruments.  There was
no income or expense in these  comparative  periods in fiscal  2006  because the
Series A convertible  preferred stock was partially  converted and the remaining
shares redeemed in the third quarter of fiscal 2005.

Since the  conversion  of our Series A  convertible  preferred  stock could have
resulted in a conversion  into an  indeterminable  number of common  shares,  we
determined  that under the guidance in  paragraph 24 of EITF 00-19,  "Accounting
for Derivative Financial  Instruments Indexed To, and Potentially Settled in the
Company's Own Stock," we were  prohibited from concluding that we had sufficient
authorized  and  unissued  shares to  net-share  settle any  warrants or options
issued to  non-employees.  Therefore,  we  reclassified  to a liability the fair
value of all warrants and options issued to non-employees  that were outstanding
during the period that the Series A convertible  preferred stock was outstanding
from April 2001 to October 2004. Additionally, in accordance with EITF 00-19, if
a contract requires  settlement in registered shares, then it may be required to
record the value of the securities as a liability and/or temporary  equity.  Any
changes in the fair value of the securities based on the  Black-Scholes  pricing
model after the initial valuation are marked to market during reporting periods.
During the three and nine months ended  December  31,  2005,  we recorded a gain
(loss) of ($8,269) and $388,731, respectively, related to the change in the fair
values of the  warrants.  During the three and nine months  ended  December  31,
2004,  we  recorded a gain  (loss) of  ($202,414)  and  $258,937,  respectively,
related to the change in the fair values of the warrants.

Liquidity And Capital Resources

<TABLE>
<CAPTION>
                                                           9-Months Ended
                                           -------------------------------------------------
December 31,                                                             $             %
                                              2005         2004        Change       Change
--------------------------------------------------------------------------------------------
<S>                                        <C>           <C>         <C>           <C>
Cash from (used in) operating activities     (787,181)   (180,638)     (606,543)       335.8%
Cash from (used in) investing activities    8,442,722     (42,725)    8,485,447     -19860.6%
Cash from (used in) financing activities   (7,838,369)   (114,698)   (7,723,671)      6733.9%
                                           -------------------------------------------------

Net increase (decrease) in cash              (182,828)   (338,061)      155,233        -45.9%
                                           =================================================
</TABLE>


Operating and Investing Activities

On  December  8,  2005,  we  completed  the  sale  of  substantially  all of our
manufacturing and production  equipment to Schreiber.  This sale was approved by
our  stockholders  at a Special Meeting held on December 5, 2005. The $8,700,000
in proceeds was used to pay $1,319,583 for tangible  personal property taxes due
primarily  on the sold assets and  $7,374,299  to Beltway  Capital  Partners LLC
(successor by assignment of Wachovia Bank, N.A.) for the termination of our term
loan.  The  remaining  proceeds  balance  of  $6,118  was  used  to  reduce  our
asset-based line of credit from Textron Financial Corporation.

Cash from operating  activities  declined during the first nine months of fiscal
2006 due to higher operating  expenses and the disposal costs as described under
Results of Operations.  Additionally,  accounts receivable is increasing back to
its normal levels similar to those as of December 2004. The accounts  receivable
balance as of March 31, 2005 was lower than  average for the sales volume due to
a large  reserve of nearly $1.6  million that was recorded as of March 31, 2005.
We are  continually  reviewing  our  collection  practices  and payment terms to
vendors in order to maximize cash flow from operations.


                                       30
<PAGE>

As part of the outsourcing transition,  we expect to see a decrease in cash from
operations due to the additional  disposal costs remaining to be paid.  However,
upon complete  implementation in the fourth quarter of fiscal 2006, we expect to
improve cash flows from  operations due to the  elimination  of excess  overhead
costs and inventory costs.

Financing Activities

<TABLE>
<CAPTION>
                                                        9-Months Ended
                                        --------------------------------------------------
December 31,                                                            $            %
                                           2005             2004      Change       Change
------------------------------------------------------------------------------------------
<S>                                     <C>              <C>        <C>              <C>
Net borrowings (payments) on line of
  credit and bank overdrafts            (3,219,757)      941,426    (4,161,183)     -442.0%
Net borrowings (payments) of debt and
  capital leases & associated costs     (6,325,110)   (1,000,282)   (5,324,828)      532.3%
Issuances of stock & associated costs    1,706,498     2,223,846      (517,348)      -23.3%
Redemption of preferred stock                   --    (2,279,688)    2,279,688     -100.00%
                                        --------------------------------------------------
Cash from (used in) financing
  activities                            (7,838,369)     (114,698)   (7,723,671)     6733.9%
                                        ==================================================
</TABLE>


   Debt Financing

On May 27, 2003, we obtained from Textron  Financial  Corporation  ("Textron") a
revolving  credit facility (the "Textron Loan") with a maximum  principal amount
of  $7,500,000  pursuant  to the terms  and  conditions  of a Loan and  Security
Agreement dated May 27, 2003 (the "Textron Loan Agreement"). The Textron Loan is
secured by our inventory,  accounts receivable and all other assets.  Generally,
subject to the maximum  principal amount which can be borrowed under the Textron
Loan and certain reserves that must be maintained during the term of the Textron
Loan, the amount  available  under the Textron Loan for borrowing by our Company
from  time to  time is  equal  to the  sum of (i) 85% of the net  amount  of our
eligible  accounts  receivable  plus (ii) until  December 31,  2005,  60% of our
eligible inventory not to exceed  $3,500,000.  After December 31, 2005, there is
no  borrowing  available  on  inventory  since it is not produced or held by us.
Advances  under the Textron Loan bear interest at a variable  rate,  adjusted on
the first (1st) day of each month,  equal to the prime rate plus 1.75% per annum
(9.0% at December 31, 2005)  calculated on the average cash  borrowings  for the
preceding  month.  The initial term of the Textron Loan ends on May 26, 2006. As
of December 31, 2005, the outstanding  principal balance on the Textron Loan was
$2,238,722.

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

On June 16, 2005, we used a portion of the proceeds  from the warrant  exercises
described below under Equity Financing to satisfy the $750,000 over-advance with
Textron.  In connection with the satisfaction of the over-advance,  we agreed to
immediately terminate Textron's obligation to permit any over-advances under the
Textron  Loan,  which  obligation  was to  expire  on July  31,  2005.  With the
termination of the over-advance  facility, the interest rate on the Textron Loan
returned to its prior level of Prime plus 1.75%.

Due to the cost of disposal activities and impairment of property and equipment,
we fell  below the  requirements  in the  fixed  charge  coverage  ratio and the
adjusted tangible net worth calculation from June 30, 2005 through September 30,
2005.  Effective  October 1, 2005, we executed a fifth  amendment to the Textron
Loan  Agreement  that  provided a waiver for the  defaults  in the fixed  charge
coverage ratio and the adjusted tangible net worth requirements,  in addition to
certain  over-advances  on the Textron  Loan,  during the periods from June 2005
through  September  2005.  The  fifth  amendment  amends  and  replaces  several
financial  covenants,  allows  eligibility  for  borrowing  on  inventory  until
December 31, 2005 and  provides  that the Textron Loan will expire at the end of
the initial term on May 26, 2006. Additionally, Textron consented to the sale of
our  manufacturing  equipment to Schreiber and  terminated  their liens on those
assets. In exchange for the waiver and amendments, we paid a fee of $50,000, and
has agreed to pay an  administration  fee in the following  installments  if the
Textron Loan has not then been paid in full: $5,000 on February 1, 2006, $10,000
on  March 1,  2006,  $15,000  on April 1,  2006  and  $20,000  May 1,  2006.  We
anticipate  that  we  will be in  compliance  with  the  amended  covenants  and
reporting  requirements  through the end of the term of the Textron  Loan on May
26, 2006.


                                       31
<PAGE>

Simultaneous  with the closing of the Textron Loan in May 2003,  Wachovia  Bank,
N.A. successor by merger to SouthTrust Bank ("Wachovia")  extended our Company a
new  term  loan in the  principal  amount  of  $2,000,000.  This  term  loan was
consolidated  with our March  2000 term  loan  with  Wachovia,  which had a then
outstanding  principal  balance of  $8,131,985  for a total term loan  amount of
$10,131,985.  This term loan was  secured by all of our  equipment  and  certain
related  assets.  Additionally,  the term loan bore interest at Wachovia's  Base
Rate plus 1%.

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

In September 2005,  Wachovia assigned this term loan to Beltway Capital Partners
LLC.  As  discussed   under  the  Schreiber   Transactions  in  Recent  Material
Developments above, this loan was paid in full upon the sale of the equipment to
Schreiber on December 8, 2005.  Beltway received proceeds of $7,374,299 of which
$7,361,985 was for principal and $12,314 was for interest and associated closing
costs.

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 is
$2,400,000.  The loans are evidenced by unsecured promissory notes (the "Notes")
held by the above  referenced  parties (the "Note  Holders").  The Notes require
monthly  interest-only  payments at 3% above the bank prime rate of interest per
the Federal Reserve Bank and mature on June 15, 2006. In  consideration  for the
Notes and in accordance with an exemption from registration  provided by Section
4(2) of the  Securities  Act of 1933,  as  amended,  we  issued  to Mr.  DeLuca,
Conversion Capital Master, Ltd., SRB Greenway Capital (Q.P.), L.P., SRB Greenway
Capital,  L.P., and SRB Greenway  Offshore  Operating  Fund,  L.P.,  warrants to
purchase up to 300,000 shares,  150,000 shares,  121,300 shares,  17,400 shares,
and 11,300 shares, respectively,  of our common stock at an exercise price equal
to $1.53  (95% of the  lowest  closing  price of our  common  stock in the sixty
calendar days immediately preceding October 17, 2005). The warrants fully vested
on October 17, 2005 and can be  exercised  on or before the  expiration  date of
October  17,  2008.  Also in  consideration  for the Notes,  we granted the Note
Holders "piggy back"  registration  rights with respect to the shares underlying
the warrants. These shares were registered on December 30, 2005.

In accordance  with the  accounting  provisions of SFAS No. 123, we recorded the
$444,731 initial fair value of the warrants,  upon their issuance, as a discount
to debt. This discount is being amortized from September 2005 through June 2006.
We amortized  $152,376 and $165,376 in the three and nine months ended  December
31,  2005,  respectively.  As of December 31, 2005,  the  outstanding  principal
balance  of  $2,400,000  on the  Notes  less  the  remaining  debt  discount  is
$2,120,645.

Since the exercise  price for the warrants was not fixed until October 17, 2005,
we revalued  the  warrants on October  17, 2005 and  calculated  a fair value of
$396,000.  The $48,731  difference  between the  initial  $444,731  value of the
warrants and the value of the warrants on October 17, 205 was recorded as a gain
on fair value of warrants in the Statement of Operations.

   Equity Financing

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

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


                                       32
<PAGE>

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

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

In accordance  with a registration  rights  agreement dated October 6, 2004 with
Mr.  Frederick  DeLuca,  we agreed  that  within 180 days we would file with the
Securities  and  Exchange  Commission  ("SEC")  and  obtain  effectiveness  of a
registration  statement  that  included  2,000,000  shares  issued  in a private
placement and 500,000 shares related to a stock purchase warrant.  Per the terms
of the agreement,  if a registration  statement was not filed, or did not become
effective  within 180 days,  then in addition to any other rights the Mr. DeLuca
may have,  we would be required to pay certain  liquidated  damages.  We filed a
registration  statement on Form S-3 on March 14, 2005. However, the registration
was not  declared  effective  until  December 30, 2005.  Mr.  DeLuca  granted an
extension of time to have the registration  statement  declared effective by the
SEC and  waived all  damages  and  remedies  for  failure  to have an  effective
registration  statement  until September 1, 2005. From September 2, 2005 through
December 29, 2005,  we accrued  liquidated  damages of $285,104  (2.5% times the
product of 2,500,000  registerable shares and the share price of $1.15 per share
every thirty days).

Summary

As we  continue  with the  sale of the  remaining  assets  held for sale and the
outsourcing  transition,  we anticipate that we will see additional gains and/or
losses from the sale of various assets and  non-recurring  expenses for disposal
costs. However, with the reduction in overall debt and property taxes, we expect
to see annual interest savings in excess of $800,000.

We believe that with the above debt service savings and  anticipated  reductions
in our costs of goods sold  beginning in January  2006, we will have enough cash
to meet our needs for general operations through December 31, 2006.  However, it
is uncertain at this time if we will have enough cash from  operations  to repay
the Textron Loan that matures in May 2006 and the  aggregate  of  $2,400,000  in
loans from the Note  Holders  that mature in June 2006 as  discussed  under Debt
Financing. If we cannot generate enough cash from operations and the sale of our
remaining  assets  that are held for sale by these  maturity  dates,  and we are
unable to  refinance  or renew these loans,  or if  additional  financing is not
available  on  terms  acceptable  to us,  we  will be  unable  to  satisfy  such
facilities  by their  maturity  dates.  In such an event,  Textron  and the Note
Holders could exercise their respective rights under their loan documents, which
could  include,  among  other  things,  declaring  defaults  under the loans and
pursuing  foreclosure  on our assets  that are  pledged as  collateral  for such
loans. If such an event occurred,  it would be substantially  more difficult for
us to  effectively  continue the operation of our  business,  and it is unlikely
that we would be able to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our  exposure to market risk results  primarily  from  fluctuations  in interest
rates.  The interest rates on our outstanding  debts to Textron and Note Holders
are floating and based on the prevailing market interest rates. For market-based
debt, interest rate changes generally do not affect the market value of the debt
but do impact  future  interest  expense  and  hence  earnings  and cash  flows,
assuming other factors remain  unchanged.  A theoretical 1% increase or decrease
in market  rates in effect on December  31, 2005 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  $46,000  per year or
$11,500 per quarter.

Our sales  during the  quarters  ended  December  31, 2005 and 2004,  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.  However, further declines in the U.S. Dollar on
the  international  market,  may cause our foreign  suppliers of raw  materials,
particularly  casein, to increase their U.S. Dollar prices on future orders from
our Company.  Therefore, 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.


                                       33
<PAGE>

Item 4. Controls and Procedures

As of December 31, 2005, an evaluation was performed  under the  supervision and
with the participation of our management,  including the Chief Executive Officer
("CEO"),  and the Chief Financial  Officer ("CFO"),  of the effectiveness of the
design and operation of our  disclosure  controls and  procedures to insure that
our Company records, processes, summarizes and reports in a timely and effective
manner  the  information  required  to be  disclosed  in  reports  filed with or
submitted to the Securities and Exchange  Commission.  Based on that evaluation,
our  management,  including  the CEO and  CFO,  concluded  that  our  disclosure
controls and  procedures  were effective in timely  bringing to their  attention
material  information  related to our  Company  required  to be  included in our
periodic  Securities  and Exchange  Commission  filings,  except for the control
noted below.  Since the date of this  evaluation,  there have been no changes in
our  internal  controls  or in other  factors  that  are  reasonably  likely  to
materially affect those controls, except as noted below.

The CEO and CFO  considered  the  restatement  of our  financial  statements  in
October  2005 for the  periods  from March 31,  2001  through  June 30, 2005 and
concluded that such restatements were the result of a material weakness relating
to the  accounting and  disclosure  for complex and  non-standard  stockholders'
equity  transactions.  To address our Company's material weakness related to the
accounting  and  disclosure for complex and  non-standard  stockholders'  equity
transactions,  we have  enhanced our internal  control  processes in order to be
able to  comprehensively  review the accounting and disclosure  implications  of
such  transactions  on a  timely  basis.  As  part of the  enhancement,  we have
subscribed  to  additional  outside  research  materials  and will  consult with
additional   outside   consultants  to  confirm  our  understanding  of  complex
transactions, as necessary.


                                       34
<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," and  variations  of these words or similar  expressions  are intended to
identify  forward-looking  statements.  These  statements  are not guarantees of
future  performance  and  are  subject  to  certain  risks,   uncertainties  and
assumptions that are difficult to predict.  Therefore, actual results may differ
materially  from  our  Company's  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  believe  that  these  forward-looking  statements  are
reasonable  at the time they are made.  However,  we undertake no  obligation to
publicly update or revise any forward-looking statements for any reason, even if
new information becomes available or other events occur in the future.

In  addition  to the other  information  in this Form 10-Q and the risk  factors
previously  disclosed in our Annual Report on Form 10-K for the year ended March
31, 2005,  the  following are some of the factors 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 will need  additional  financing and such financing may not be available.

We have  incurred  substantial  debt in  connection  with the  financing  of our
business. The aggregate principal amount outstanding under our credit facilities
is  approximately  $4,638,722  as of December 31, 2005.  This amount  includes a
revolving line of credit from Textron Financial  Corporation  ("Textron") in the
amount of  $2,238,722,  and several  notes  payable to certain  Note Holders (as
described under Debt Financing) totaling  $2,400,000.  We will need to refinance
or raise  proceeds to pay the Textron  line of credit on or before its  maturity
date of May 26,  2006 and the notes  payable  to the Note  Holders  on or before
their maturity date of June 15, 2006.

If we cannot  generate enough cash from operations and the sale of our remaining
assets  that are held for sale by these  maturity  dates,  and we are  unable to
refinance or renew these loans,  or if additional  financing is not available on
terms  acceptable  to us, we will be unable to satisfy such  facilities by their
maturity  dates.  In such an event,  Textron and the Note Holders could exercise
their respective rights under their loan documents,  which could include,  among
other things, declaring defaults under the loans and pursuing foreclosure on our
assets that are pledged as collateral for such loans. If such an event occurred,
it would be  substantially  more  difficult for us to  effectively  continue the
operation of our business,  and it is unlikely that we would be able to continue
as a going concern.

Forgiveness of or foreclosure on our note  receivable  will result in a material
affect to our reported earnings.

In June 1999, in connection  with an amended and restated  employment  agreement
for Angelo S.  Morini,,  our  Founder and 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 the exercise of 2,914,286  shares
of our common stock into a single note  receivable in the amount of  $12,772,200
that is due on June 15,  2006.  This single  consolidated  note is  non-interest
bearing and  non-recourse and is secured by the 2,914,286  underlying  shares of
our common stock.  Per the terms of the June 1999 Employment  Agreement that was
amended and restated by the October 2003 Second Amended and Restated  Employment
Agreement between our Company and Mr. Morini, this loan may be forgiven upon the
occurrence of any of the following events:  1) Mr. Morini is terminated  without
cause;  2) there is a material  breach in the terms of Mr.  Morini's  employment
agreement;  or 3) there is a change  in  control  of the  Company  for which Mr.
Morini did not vote "FOR" in his capacity as a director or a stockholder.

In the event that the $12,772,200 loan is forgiven, we would reflect this amount
as a forgiveness of debt in the Statement of  Operations.  In the event that Mr.
Morini is unable to pay the loan when due and we  foreclose  on the  shares,  we
would  reflect  a loss on  collection  for the  amount  that  the  value  of the
2,914,286  underlying  collateral  shares  are below  the value of the note.  In
December 2005, we reserved  $9,129,343  against this stockholder note receivable
under the assumption  that we will not be able to collect  proceeds in excess of
the  $3,642,857  value of the  underlying  collateral  shares.  The value of the
underlying  collateral  shares was computed using the market price of our common
stock on December 31, 2005 of $1.25 multiplied by the 2,914,286 shares. Although
this reserve resulted in a material loss to our operations, it does not have any
affect on the balance sheet since the $12,772,200  loan amount was already shown
as a reduction to Stockholders' Equity (Deficit).


                                       35
<PAGE>

We lack an operating  history as a branded  marketing  company and we may not be
successful.

There can be no  assurance  that we will be  successful  as a branded  marketing
company.  While we have marketed our products  ourselves in the past, we lack an
operating  history  as solely a  branded  marketing  company  for  investors  to
evaluate our  business and  prospects.  We have  limited  meaningful  historical
financial data upon which to plan future  operating  expenses.  Accordingly,  we
face risks and uncertainties  relating to our ability to successfully  implement
our strategy.  Investors  must consider the risks,  expenses,  difficulties  and
uncertainties  frequently  encountered  by  companies  in their  early  stage of
transition.  Failure to  accurately  forecast our revenues and future  operating
expenses could cause quarterly fluctuations in our operating results,  including
cash flows,  and may result in further  volatility  of or a decline in our stock
price.

We depend on one supplier to  manufacture  and distribute all of our products to
our customers.

Pursuant  to a Supply  Agreement  dated June 30,  2005  between  our Company and
Schreiber  Foods,  Inc.   ("Schreiber"),   we  depend  solely  on  Schreiber  to
manufacture  and distribute  all of our products to our customers.  We will rely
solely on Schreiber to produce our  products at prices that are  competitive  in
the market, to maintain the quality of our products, and to supply our customers
with the  products  they  order on a timely  basis.  If  Schreiber  is unable to
deliver its services  according to the negotiated  terms of the Supply Agreement
for any reason,  including  the  deterioration  of its  financial  condition  or
over-commitment  of its resources,  we may lose customers and we may be required
to purchase  outsourcing  services from another source at a higher price. Either
of these  occurrences will likely reduce our profits to be realized or result in
a reduction in sales of our products.

We have  received a notice of failure to  satisfy a  continued  listing  rule or
standard  from the  American  Stock  Exchange  and we are in  jeopardy  of being
delisted from the American Stock Exchange.

On September 29, 2005, we received a deficiency  letter from the American  Stock
Exchange  ("AMEX") advising that, based on its review of our Quarterly Report on
Form 10-Q for the quarter  ended June 30, 2005,  we are not in  compliance  with
AMEX's continued listing requirements. Specifically, the AMEX notice stated that
we are not in compliance with (i) Section  1003(a)(i) of the AMEX Company Guide,
because our shareholders' equity is less than $2,000,000 and we sustained losses
from continuing operations and/or net losses in two out of our three most recent
fiscal years;  (ii) Section  1003(a)(ii) of the AMEX Company Guide,  because our
shareholders'  equity is less  than  $4,000,000  and we  sustained  losses  from
continuing  operations  and/or net  losses in three out of our four most  recent
fiscal years; and (iii) Section  1003(a)(iv) of the AMEX Company Guide,  because
we have  sustained  losses which are so  substantial  in relation to our overall
operations or our existing financial  resources,  or our financial condition has
become so impaired that it appears  questionable,  in the opinion of AMEX, as to
whether we will be able to continue  operations  and/or meet our  obligations as
they mature.

On October 7, 2005,  we filed an Amended  Annual  Report on Form  10-K/A for the
year ended March 31, 2005 and an Amended Quarterly Report on Form 10-Q/A for the
quarter  ended June 30, 2005.  Based on the revised  financial  information,  we
notified  AMEX on  October  11,  2005  that we are also not in  compliance  with
Section 1003(a)(iii) of the AMEX Company Guide, because our shareholders' equity
is less than  $6,000,000  and we  sustained  losses from  continuing  operations
and/or net losses in our five most recent fiscal years.

On October 28, 2005, we submitted a plan to AMEX,  advising AMEX of actions that
we have taken,  or will take,  that would bring our Company into compliance with
Section  1003(a)(i),  Section  1003(a)(ii),  Section  1003(a)(iii)  and  Section
1003(a)(iv) of the AMEX Company  Guide.  Our plan noted that we have pursued and
continue to pursue four primary  strategic  alternatives:  first,  we sought and
have since obtained  certain waivers and  modifications  of financial  covenants
from our line of  credit  lender,  Textron  Financial  Corporation;  second,  we
borrowed  $2,400,000 on a short-term basis to alleviate cash flow  difficulties;
third, we are in the process of transitioning  into a branded  marketing company
as a result of the outsourcing and equipment sale  transactions  with Schreiber,
which when completed  should enable us to reduce our debt, lower our product and
distribution costs and improve our profitability;  and finally,  we have engaged
Goldman,  Sachs & Co. to explore  strategic  alternatives for the enhancement of
shareholder value, including the possible sale of our Company.


                                       36
<PAGE>

On December  16,  2005,  AMEX  notified  us that it accepted  our plan to regain
compliance  and granted our Company an extension  until March 29, 2007 to regain
compliance with the continued listing  standards.  We will continue to be listed
during the extension period.  However,  we will be subject to periodic review by
AMEX during the extension period. If we do not make progress consistent with the
plan during the  extension  period or are not in  compliance  with the continued
listing standards at the end of the extension period,  AMEX staff has advised us
that it would likely initiate delisting  proceedings pursuant to Section 1009 of
the AMEX Company Guide.

On January 25, 2006,  we notified  AMEX that two members of our audit  committee
resigned  on January  21,  2006.  Since we have only one  remaining  independent
director on the audit committee,  we are not in compliance Section 121B(2)(a) of
the AMEX  Company  Guide  which  states  that we must  continue to have an audit
committee  consisting  of three  members.  We are  currently  in the  process of
searching for two independent  (for audit committee  purposes)  replacements who
would  be  qualified  to fill  the  vacancies  on the  audit  committee  and are
currently  using  our three  independent  Board  members  to carry out the audit
committee responsibilities until the two replacements are found and appointed.

In the event we are  delisted  from AMEX,  our  securities  may be eligible  for
trading on the OTC Bulletin Board or on other unlisted  markets such as The Pink
Sheets,  although there can be no assurance that our securities will be eligible
for trading on any  alternative  exchanges or markets.  As a consequence of such
delisting,  an investor  could find it more difficult to dispose of or to obtain
accurate  quotations  as to the  market  value of our  securities.  Among  other
consequences,  delisting  from AMEX may cause a decline  in the stock  price and
difficulty in obtaining future financing.

As of September  30, 2005,  we had a material  weakness in our internal  control
over financial  reporting,  and we might find other  material  weaknesses in the
future  which may  adversely  affect our ability to provide  timely and reliable
financial  information  and  satisfy our  reporting  obligations  under  federal
securities laws.

As of  September  30,  2005,  we did not maintain  effective  controls  over the
completeness and accuracy  relating to the accounting and disclosure for complex
and non-standard  stockholders'  equity transactions.  Specifically,  we did not
have effective  controls over accounting for our Series A convertible  preferred
stock  during  the  periods  from  April  2001  through  October  2004 and other
mark-to-market  securities,  including  warrants and shares exercised  through a
note  receivable,  during the periods from March 2001  through  June 2005.  This
control deficiency  resulted in the restatement of our financial  statements for
the fiscal  years ended  March 31,  2005,  2004,  2003,  2002 and 2001,  and the
restatement of the quarterly data for the first quarter ended June 30, 2005. Our
management  therefore  determined  that this control  deficiency  constituted  a
"material weakness" in our internal control over financial reporting relating to
the accounting and disclosure for complex and non-standard  stockholders' equity
transactions.

To address our material  weakness  related to the  accounting and disclosure for
complex and non-standard stockholders' equity transactions, we have enhanced our
internal  control  processes in order to be able to  comprehensively  review the
accounting and disclosure  implications of such  transactions on a timely basis.
As part of the  enhancement,  we have subscribed to additional  outside research
materials and will consult with  additional  outside  consultants to confirm our
understanding of complex transactions, as necessary.

We might find other material  weaknesses in our internal  control over financial
reporting  in future  periods.  To the extent that any  significant  or material
weaknesses  exist  in  our  internal  control  over  financial  reporting,  such
weaknesses  may  adversely  affect our  ability to provide  timely and  reliable
financial information necessary for the conduct of our business and satisfaction
of our reporting obligations under federal securities laws.

We have  been  subject  to  borrowing  restrictions  under  our  primary  credit
facility.

In  accordance  with the fifth  amendment to our loan  agreement  with  Textron,
Textron requires us to maintain excess borrowing  availability under the Textron
Loan in an amount no less than $500,000. Additionally, we may experience further
restrictions by Textron by virtue of reserves  Textron may require,  receivables
it may deem ineligible or other rights they have under the loan agreement.  Such
restrictions would adversely affect our cash flows and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

On December 5, 2005, we held a Special  Meeting of  Stockholders  to approve the
sale of  substantially  all of our  manufacturing  and  production  equipment to
Schreiber Foods, Inc., a Wisconsin corporation ("Schreiber"),  for $8,700,000 in
cash.


                                       37
<PAGE>

As of the record  date on  November  8, 2005,  there were  20,051,327  shares of
common stock issued,  outstanding and eligible to vote. The sale was approved by
74% of the  stockholders  with the vote tabulation as follows:  VOTES CAST FOR -
14,860,768;  VOTES CAST AGAINST - 21,311; ABSTENTIONS - 17,915; BROKER NON-VOTES
- none.

The  $8,700,000  in proceeds was used to pay  $1,319,583  for tangible  personal
property  taxes due  primarily  on the sold  assets  and  $7,374,299  to Beltway
Capital  Partners LLC (successor by assignment of Wachovia  Bank,  N.A.) for the
termination of our term loan. The remaining  proceeds balance of $6,118 was used
to reduce our asset-based line of credit from Textron Financial Corporation.


                                       38
<PAGE>

                           PART II. OTHER INFORMATION

Item 6. Exhibits

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

Exhibit No   Exhibit Description
----------   -------------------

* 3.1        Restated  Certificate of Incorporation of the Company as filed with
             the  Secretary  of State of the State of Delaware  on December  23,
             2002  (Filed as  Exhibit  3.2 on Form 10-Q for the  fiscal  quarter
             ended December 31, 2002.)

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

* 4.1        Stock Purchase Option  Agreement and Stock Purchase  Warrant by and
             between Excalibur Limited  Partnership and BH Capital  Investments,
             L.P. and Galaxy Nutritional Foods dated as of April 24, 2003 (Filed
             as Exhibit 10.52 on Form 10-Q for the fiscal quarter ended June 30,
             2003.)

* 4.2        Warrant to Purchase  Securities of Galaxy  Nutritional  Foods, Inc.
             dated as of May 29,  2003 in  favor  of  Wachovia  Bank  (Filed  as
             Exhibit 10.7 on Form 8-K filed June 2, 2003.)

* 4.3        Securities  Purchase  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods, Inc. and Fromageries Bel S.A. (Filed as
             Exhibit 10.8 on Form 8-K filed June 2, 2003.)

* 4.4        Registration  Rights  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods, Inc. and Fromageries Bel S.A. (Filed as
             Exhibit 10.9 on Form 8-K filed June 2, 2003.)

* 4.5        Securities  Purchase  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods,  Inc. and Frederick A. DeLuca (Filed as
             Exhibit 10.10 on Form 8-K filed June 2, 2003.)

* 4.6        Registration  Rights  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods,  Inc. and Frederick A. DeLuca (Filed as
             Exhibit 10.11 on Form 8-K filed June 2, 2003.)

* 4.7        Securities  Purchase  Agreement  dated as of May 21,  2003  between
             Galaxy Nutritional Foods, Inc. and Apollo Capital Management Group,
             L.P. (Filed as Exhibit 10.12 on Form 8-K filed June 2, 2003.)

* 4.8        Registration  Rights  Agreement  dated as of May 21,  2003  between
             Galaxy Nutritional Foods, Inc. and Apollo Capital Management Group,
             L.P. (Filed as Exhibit 10.13 on Form 8-K filed June 2, 2003.)

* 4.9        Securities  Purchase  Agreement  dated as of May 21,  2003  between
             Galaxy Nutritional  Foods, Inc. and Apollo MicroCap Partners,  L.P.
             (Filed as Exhibit 10.14 on Form 8-K filed June 2, 2003.)

* 4.10       Registration  Rights  Agreement  dated as of May 21,  2003  between
             Galaxy Nutritional  Foods, Inc. and Apollo MicroCap Partners,  L.P.
             (Filed as Exhibit 10.15 on Form 8-K filed June 2, 2003.)

* 4.11       Securities  Purchase  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods,  Inc. and Ruggieri of Windermere Family
             Limited  Partnership (Filed as Exhibit 10.16 on Form 8-K filed June
             2, 2003.)

* 4.12       Registration  Rights  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods,  Inc. and Ruggieri of Windermere Family
             Limited  Partnership (Filed as Exhibit 10.17 on Form 8-K filed June
             2, 2003.)

* 4.13       Securities  Purchase  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional Foods, Inc. and Ruggieri Financial Pension Plan
             (Filed as Exhibit 10.18 on Form 8-K filed June 2, 2003.)


                                       39
<PAGE>

* 4.14       Registration  Rights  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional Foods, Inc. and Ruggieri Financial Pension Plan
             (Filed as Exhibit 10.19 on Form 8-K filed June 2, 2003.)

* 4.15       Securities  Purchase  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods,  Inc. and David Lipka (Filed as Exhibit
             10.20 on Form 8-K filed June 2, 2003.)

* 4.16       Registration  Rights  Agreement  dated as of May 21,  2003  between
             Galaxy  Nutritional  Foods,  Inc. and David Lipka (Filed as Exhibit
             10.21 on Form 8-K filed June 2, 2003.)

* 4.17       Stockholder  Agreement  dated as of October 13, 2003 between Galaxy
             Nutritional  Foods,  Inc.  and Angelo S.  Morini  (Filed as Exhibit
             10.55 on Form  10-Q for the  fiscal  quarter  ended  September  30,
             2003.)

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

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

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

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

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

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

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

* 4.25       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.)

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

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

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

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

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


                                       40
<PAGE>

* 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.)

* 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.)


                                       41
<PAGE>

* 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.)

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

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

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

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

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

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

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

*     Previously filed and incorporated herein by reference.


                                       42
<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: February 21, 2006             /s/ Michael E. Broll
                                    ------------------------------
                                    Michael E. Broll
                                    Chief Executive Officer
                                    (Principal Executive Officer)


Date: February 21, 2006             /s/ Salvatore J. Furnari
                                    ------------------------------
                                    Salvatore J. Furnari
                                    Chief Financial Officer
                                    (Principal Accounting and Financial Officer)


                                       43