FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


       __________________________________________________________________

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


                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

                         ______________________________
                         COMMISSION FILE NUMBER 0-16251


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



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

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

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

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

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

     On February 14, 2003, there were 12,755,286 shares of Common Stock $.01 par
value per share, outstanding.

                                       1
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                               INDEX TO FORM 10-Q
                       FOR QUARTER ENDED DECEMBER 31, 2002

                                                                        PAGE NO.
                                                                        --------

PART I.        FINANCIAL INFORMATION

     ITEM 1.   FINANCIAL STATEMENTS

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

     ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS                  14

     ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      22

     ITEM 4.  CONTROLS AND PROCEDURES                                         22


PART II.       OTHER INFORMATION

     ITEM 1.  LEGAL PROCEEDINGS                                               23

     ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS                       23

     ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                 24

     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             24

     ITEM 5.  OTHER INFORMATION                                               24

     ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K                               25


SIGNATURES & CERTIFICATIONS                                                   29

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,      MARCH 31,
                                                                   2002            2002
                                                               ------------    ------------
                                                               (UNAUDITED)
                                     ASSETS
CURRENT ASSETS:
<S>                                                            <C>             <C>
  Cash                                                         $      1,628    $        168
  Trade receivables, net                                          4,315,262       5,283,187
  Inventories                                                     5,127,731       5,748,652
  Prepaid expenses and other                                        599,773         555,520
                                                               ------------    ------------

         Total current assets                                    10,044,394      11,587,527

PROPERTY AND EQUIPMENT, NET                                      22,763,681      24,180,636
OTHER ASSETS                                                        508,286         479,387
                                                               ------------    ------------

         TOTAL                                                 $ 33,316,361    $ 36,247,550
                                                               ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Book overdrafts                                              $    576,858    $  1,192,856
  Line of credit                                                  4,166,084       5,523,875
  Accounts payable                                                3,158,340       5,399,143
  Accrued liabilities                                             1,695,890         994,341
  Current portion of term notes payable                           2,182,913       1,809,000
  Current portion of subordinated note payable                    4,000,000              --
  Current portion of obligations under capital leases               379,170         349,380
                                                               ------------    ------------

         Total current liabilities                               16,159,255      15,268,595

TERM NOTES PAYABLE, less current portion                          7,528,734       8,391,535
SUBORDINATED NOTE PAYABLE                                                --       3,385,770
OBLIGATIONS UNDER CAPITAL LEASES, less current portion              459,493         734,156
                                                               ------------    ------------

         Total liabilities                                       24,147,482      27,780,056
                                                               ------------    ------------

COMMITMENTS AND CONTINGENCIES                                            --              --

REDEEMABLE CONVERTIBLE PREFERRED STOCK                            1,712,969       2,156,311

STOCKHOLDERS' EQUITY:
  Common stock                                                      127,553         115,400
  Additional paid-in capital                                     60,575,301      60,717,914
  Accumulated deficit                                           (40,354,283)    (41,629,470)
                                                               ------------    ------------

                                                                 20,348,571      19,203,844
  Less: Notes receivable arising from the exercise of stock
         options and sale of common stock                       (12,772,200)    (12,772,200)
        Treasury stock, 26,843 shares, at cost                     (120,461)       (120,461)
                                                               ------------    ------------

         Total stockholders' equity                               7,455,910       6,311,183
                                                               ------------    ------------

         TOTAL                                                 $ 33,316,361    $ 36,247,550
                                                               ============    ============
</TABLE>

                 See accompanying notes to financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED              NINE MONTHS ENDED
                                          DECEMBER 31,                   DECEMBER 31,
                                 ----------------------------    ----------------------------
                                     2002            2001            2002            2001
                                 ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>
NET SALES                        $  9,829,420    $ 10,325,699    $ 29,993,813    $ 33,500,132

COST OF GOODS SOLD                  6,805,863       7,355,250      21,089,597      25,524,884
                                 ------------    ------------    ------------    ------------
  Gross margin                      3,023,557       2,970,449       8,904,216       7,975,248
                                 ------------    ------------    ------------    ------------

OPERATING EXPENSES:
Selling                             1,314,235       1,983,565       3,773,908       5,499,661
Delivery                              478,331         595,162       1,561,847       1,807,783
Non-cash compensation related
  to options & warrants               190,720      (1,559,024)     (2,794,630)      2,070,243
General and administrative            864,399         786,634       2,453,148       3,197,175
Research and development               60,674          43,075         174,888         140,931
                                 ------------    ------------    ------------    ------------
  Total operating expenses          2,908,359       1,849,412       5,169,161      12,715,793
                                 ------------    ------------    ------------    ------------

INCOME (LOSS) FROM OPERATIONS         115,198       1,121,037       3,735,055      (4,740,545)

Interest expense                     (536,766)       (913,523)     (2,404,868)     (2,310,635)
Other expense                         (55,000)        (57,520)        (55,000)        (57,520)
                                 ------------    ------------    ------------    ------------

NET INCOME (LOSS)                $   (476,568)   $    149,994    $  1,275,187    $ (7,108,700)

Preferred Stock Dividends              69,017          87,500         209,017         262,500
Preferred Stock Accretion to
  Redemption Value                    198,852         244,147         273,549       1,271,038
                                 ------------    ------------    ------------    ------------

NET INCOME (LOSS) AVAILABLE TO
  COMMON SHAREHOLDERS            $   (744,437)   $   (181,653)   $    792,621    $ (8,642,238)
                                 ============    ============    ============    ============

BASIC NET INCOME (LOSS) PER
  COMMON SHARE                   $      (0.06)   $      (0.02)   $       0.07    $      (0.84)
                                 ============    ============    ============    ============

DILUTED NET INCOME (LOSS) PER
  COMMON SHARE                   $      (0.06)   $      (0.02)   $       0.06    $      (0.84)
                                 ============    ============    ============    ============
</TABLE>

                 See accompanying notes to financial statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           Notes
                                 Common Stock                                           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,
  2002                    11,540,041    $    115,400   $ 60,717,914    $(41,629,470)   $(12,772,200)   $   (120,461)   $  6,311,183

Exercise of options            1,000              10          4,240              --              --              --           4,250
Issuance of common
  stock                    1,210,764          12,108      3,146,025              --              --              --       3,158,133
Issuance of common
  stock under
  employee stock
  purchase plan                3,481              35          9,709                                                           9,744
Issuance of warrants              --              --         70,000              --              --              --          70,000
Non-cash compensation
  related to variable
  options and warrants            --              --     (2,871,605)             --              --              --      (2,871,605)
Dividends on
  preferred stock                 --              --       (209,017)             --              --              --        (209,017)
Accretion of discount
  on preferred stock                                       (291,965)             --              --              --        (291,965)
Net income                        --              --             --       1,275,187              --              --       1,275,187
                         -----------------------------------------------------------------------------------------------------------

Balance at December
  31, 2002                12,755,286    $    127,553   $ 60,575,301    $(40,354,283)   $(12,772,200)   $   (120,461)   $  7,455,910
                         ===========================================================================================================
</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,                                          2002            2001
                                                                    ------------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                 <C>             <C>
  Net Income (Loss)                                                 $  1,275,187    $ (7,108,700)
  Adjustments to reconcile net income (loss) to net cash
    from (used in) operating activities:
      Depreciation                                                     1,707,586       1,551,983
      Amortization of debt discount                                      614,230         511,859
      Provision for losses on trade receivables                         (136,700)        425,000
      Non-cash compensation related to variable options and stock
        issued under non-recourse note receivable                     (2,871,605)      1,726,857
      Amortization of consulting and director fee expense paid
        through issuance of common stock warrants                         76,975         343,386
      (Increase) decrease in:
        Trade receivables                                              1,104,625         573,229
        Inventories                                                      620,921       3,024,332
        Prepaid expenses and other                                       (44,253)        133,298
      Increase (decrease) in:
        Accounts payable                                              (1,054,170)     (2,933,124)
        Accrued liabilities                                              609,200         247,283
                                                                    ------------    ------------

   NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                 1,901,996      (1,504,597)
                                                                    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                    (195,868)       (565,110)
  Increase in other assets                                               (35,874)             --
                                                                    ------------    ------------

   NET CASH USED IN INVESTING ACTIVITIES                                (231,742)       (565,110)
                                                                    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (decrease) in book overdrafts                                (615,998)       (446,829)
  Net payments on line of credit                                      (1,357,791)     (2,737,304)
  Borrowings on term note payable                                        500,000              --
  Repayments on term notes payable                                    (1,336,363)     (1,266,964)
  Principal payments on capital lease obligations                       (339,636)       (135,512)
  Proceeds from issuance of common stock, net of offering costs        1,476,744       3,017,745
  Proceeds from exercise of common stock options                           4,250          19,521
  Proceeds from exercise of common stock warrants, net of costs               --         800,000
  Proceeds from issuance of preferred stock, net of costs                     --       2,900,959
                                                                    ------------    ------------

   NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                (1,668,794)      2,151,616
                                                                    ------------    ------------

NET INCREASE IN CASH                                                       1,460          81,909

CASH, BEGINNING OF PERIOD                                                    168             500
                                                                    ------------    ------------

CASH, END OF PERIOD                                                 $      1,628    $     82,409
                                                                    ============    ============
</TABLE>

                 See accompanying notes to financial statements.

                                       6
<PAGE>

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

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

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

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

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

     In  December  2002,  the FASB  issued  Statement  of  Financial  Accounting
     Standards No. 148, "Accounting for Stock-Based  Compensation-Transition and
     Disclosure-an  amendment of FAS 123" ("SFAS 148").  This  statement  amends
     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
     Stock-Based  Compensation"  ("SFAS 123"), to provide alternative methods of
     transition  for a  voluntary  change  to the fair  value  based  method  of
     accounting for stock-based employee  compensation and amends the disclosure
     requirements  to SFAS 123 to require  prominent  disclosures in both annual
     and  interim  financial  statements  about  the  method of  accounting  for
     stock-based  employee  compensation  and the effect of the  method  used on
     reported results.  The transition and annual disclosure  provisions of SFAS
     148 are  effective  for fiscal years ending  after  December 15, 2002.  The
     Company  will adopt SFAS 148 during  its fourth  quarter  ending  March 31,
     2003.

     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.

                                       7
<PAGE>

(2)  INVENTORIES
     -----------
     Inventories are summarized as follows:
                                   December 31, 2002     March 31, 2002
                                   -----------------     --------------
                                      (UNAUDITED)

          Raw materials              $  2,518,322         $  2,482,458
          Finished goods                2,609,409            3,266,194
                                     ------------         ------------
          Total                      $  5,127,731         $  5,748,652
                                     ============         ============

(3)  LINE OF CREDIT AND NOTES PAYABLE
     --------------------------------
     As of December  31,  2002,  the Company had a line of credit with a maximum
     principal amount of $7.5 million from FINOVA Capital  Corporation  ("FINOVA
     Capital"),  the  proceeds of which are for working  capital  purposes.  The
     amount that the  Company can borrow  under the line of credit is based on a
     formula  of up to 80%  of  eligible  accounts  receivable  plus  a  certain
     percentage of eligible  inventories not to exceed $3 million, as defined in
     the  agreement.  Pursuant  to a certain  Amendment  and  Limited  Waiver to
     Security  Agreement  dated  June  26,  2002,  the  inventory  advance  rate
     decreases  by 1% per  month  beginning  July 1, 2002 from a level of 50% at
     June 30, 2002 to 37% by the maturity date (44% at December 31,  2002).  The
     line of credit is secured by all accounts receivable, inventory, machinery,
     equipment, trademarks and patents owned by the Company. Interest is payable
     monthly on the  outstanding  draws on the line of credit at a rate of prime
     plus four percent (8.25% at December 31, 2002).  The line of credit expires
     on July 1, 2003, at which time the entire  outstanding  principal amount of
     the line of credit, and all accrued but unpaid interest thereon, is due and
     payable in full.  As of December 31, 2002,  the Company had an  outstanding
     balance of $4,166,084 under this line.

     On September 30, 1999, the Company obtained a $4 million  subordinated loan
     from FINOVA  Mezzanine  Capital,  Inc.  ("FINOVA  Mezzanine").  The Company
     received loan proceeds in the amount of $3,620,000  after paying loan costs
     of  $380,000.   Amounts  outstanding  under  the  loan  are  secured  by  a
     subordinated  lien on substantially  all of the Company's assets. A balloon
     payment of the entire  principal  amount of the loan,  and all  accrued but
     unpaid interest thereon,  is due upon maturity on July 1, 2003. Interest on
     the loan is payable monthly at a rate of 15.5% per annum. In  consideration
     of the loan, the Company  issued to FINOVA  Mezzanine a warrant to purchase
     915,000  shares of the  Company's  common  stock (of which  100,000  shares
     remain  unexercised)  at  an  exercise  price  of  $3.41  per  share  which
     represented  80% of the fair value of the  Company's  stock on the date the
     warrant was issued.  The warrant was valued at $786,900  which was recorded
     as a debt discount and was  amortized to interest  expense from the date of
     issuance of the note to an original  earlier  maturity  date of the note in
     October  2002.  As of  December  31,  2002,  this  discount  has been fully
     amortized to interest expense and the Company had an outstanding balance of
     $4,000,000 under this loan.

     The line of credit and  subordinated  loan described  above contain certain
     financial  and  operating  covenants.  In June 2002,  the Company  notified
     FINOVA  Capital and FINOVA  Mezzanine that it had failed to comply with the
     minimum  operational  cash flow to  contractual  debt service ratio and the
     funded  debt  to  EBITDA  ratio.  FINOVA  Capital  agreed  to  waive  those
     violations  for the fiscal year ended March 31, 2002 and the fiscal quarter
     ended June 30,  2002 and to amend such  covenants  for the fiscal  quarters
     beginning July 1, 2002,  pursuant to a certain Amendment and Limited Waiver
     to Security  Agreement dated June 26, 2002. FINOVA Mezzanine also agreed to
     waive the  violations  of its covenants for the fiscal year ended March 31,
     2002 and the  fiscal  quarter  ended  June  30,  2002,  and to amend  those
     covenants for future fiscal quarters  pursuant to a letter  agreement dated
     June 26, 2002 and amendments to the subordinated notes. In consideration of
     the waivers and covenant  amendments,  the Company agreed to pay a facility
     fee of  $413,500,  which was  deemed  fully  earned on June 26,  2002.  The
     facility  fee is payable as  follows:  $172,500  is due and  payable on the
     earliest  of  (a)  $28,750  per  month  beginning  January  2003,  (b)  the
     occurrence  of an event of  default,  or (c) the date on which the  Company
     repays  either  all of the  obligations  to FINOVA  Capital  under the Loan
     Agreement or any portion of the principal  obligations to FINOVA  Mezzanine
     under the FINOVA Mezzanine loan documents, with the balance of $241,000 due
     and payable only upon FINOVA Mezzanine's  exercise of its remaining 100,000
     warrants.  The Company was in compliance with all amended covenants for the
     quarter ended December 31, 2002.

     In March 2000, the Company obtained a $10 million term loan from SouthTrust
     Bank,  N.A.  This note bears  interest at prime rate (4.25% at December 31,
     2002)  and  is  due in  monthly  principal  installments  of  $93,000  plus
     interest. In a letter agreement dated September 27, 2002, the bank deferred
     the four principal payments, due in June 2002 through September 2002, until
     the  maturity  of the note.  The note  matures in March  2005.  The balance
     outstanding on this note as of December 31, 2002 was $8,397,313.  This term
     loan is secured by certain machinery and equipment.

                                       8
<PAGE>

     In October 2000, the Company obtained a $1.5 million short-term bridge loan
     from  SouthTrust  Bank,  N.A. which is secured by one million shares of the
     Company's common stock owned by the Company's  President.  Interest on this
     note is at the prime rate (4.25% at December 31,  2002).  The loan is being
     paid down by monthly  principal  payments of $50,000  plus  interest.  In a
     letter  agreement  dated  September  27, 2002,  the bank  deferred the four
     principal  payments,  due in June 2002 through  September  2002,  until the
     maturity  of the note.  The note  matures  in  October  2003.  The  balance
     outstanding on this note as of December 31, 2002 was $750,000.

     The term loan and the short-term  bridge loan from  SouthTrust  Bank,  N.A.
     contain  certain  financial  and  operating  covenants.  The Company was in
     violation of all  financial  covenants at March 31, 2002. On June 27, 2002,
     the Company received a waiver for the year ended March 31, 2002 and for all
     future  periods  through July 1, 2003.  On February  13, 2003,  the Company
     received a waiver for all future periods through March 31, 2004.

     The  Company's  ability  to  continue  as  a  going  concern  depends  upon
     successfully  obtaining  sufficient  financing  to pay down or replace  the
     FINOVA debts due in July 2003.  In the event the Company  cannot extend the
     loans,  or raise the  capital to pay off or replace  the debt in July 2003,
     FINOVA Capital and FINOVA Mezzanine could exercise their respective  rights
     under their loan documents to, among other things,  declare a default under
     the loans and pursue  foreclosure of the Company's assets which are pledged
     as  collateral  for such loans.  In the event that FINOVA  exercises  their
     right to pursue foreclosure, then SouthTrust has the ability to do the same
     based on a cross-default provision in their loan agreement.  The Company is
     seeking to obtain the necessary  funds through its positive cash flows from
     operating activities, equity financing, and/or refinancing with FINOVA or a
     substitute lender. There are no assurances,  however,  that such financing,
     if available will be at a price that will not cause substantial dilution to
     the Company's shareholders.

     In March 2002, Angelo S. Morini, the Company's  President,  loaned $330,000
     to the Company in order for it to pay down certain  notes payable that were
     coming due. This loan bears  interest at prime (4.25% at December 31, 2002)
     and is due on or before June 15, 2006.

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

     On August 15,  2002,  the Company  signed a $347,475  promissory  note with
     Target Container,  Inc. in satisfaction of its accounts payable  obligation
     to this  vendor.  This note  bears  interest  at 7% per annum and is due in
     twelve equal monthly  installments of $30,066.  The balance  outstanding on
     this note as of December 31, 2002 was $234,334.

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

                                       9
<PAGE>

     the matter,  the Company has chosen to withdraw its  challenge and to await
     the discovery of additional information on the subject.

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

(5)  CAPITAL STOCK
     -------------
     On April 6, 2001, in accordance with an exemption from  registration  under
     Regulation D promulgated under the Securities Act of 1933, as amended,  the
     Company  received  proceeds  of  approximately  $3,082,000  less  costs  of
     $181,041  for the  issuance  of  72,646  shares of the  Company's  Series A
     convertible  preferred  stock  and  warrants  to  purchase  shares  of  the
     Company's  common  stock.  The shares are subject to certain  designations,
     preferences and rights, including the right to convert each preferred share
     into ten shares of common stock,  the right to a ten percent stock dividend
     after one year of issuance  payable in shares of  preferred  stock,  and an
     eight  percent stock  dividend for the  subsequent  three years  thereafter
     payable  in  either  cash or  shares  of  preferred  stock.  The per  share
     conversion price is the lower of (x) $4.08 or (y) 95% of the average of the
     two lowest  closing bid prices on the American Stock Exchange of the common
     stock out of the fifteen trading days prior to conversion.  The liquidation
     preference of each preferred share is $48.18 plus accrued dividends ($55.89
     at December 31, 2002).

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

     On  December  26,  2002,  Excalibur  Limited  Partnership  and  BH  Capital
     Investments,  L.P.  converted 10,378 and 4,884 shares of Series A Preferred
     Stock,  respectively,  plus  accrued  dividends,  into  424,950 and 199,986
     shares of common stock, respectively. The conversion rate was $1.3633 based
     on 95% of the average of the two lowest  closing bid prices on AMEX for the
     fifteen trading days immediately prior to conversion.

     For the nine months ended December 31, 2002 and 2001, the Company  recorded
     accrued  dividends of $209,017 and  $262,500,  respectively,  in connection
     with the issuance of the preferred stock and warrants.  In fiscal 2002, the
     Company recorded a discount on preferred stock of $2,003,770 related to the
     beneficial conversion feature  ($1,449,370),  the fair value of the initial
     warrants  ($277,200) and redemption  warrants ($277,200) and the fair value
     of the mandatory  redemption  price.  The excess of the initial  redemption
     value of  $4,391,861  over  the  initial  carrying  value  of  $523,830  is
     $3,868,031  and is  being  accreted  and  recorded  as  dividends  over the
     redemption  period (48 months beginning April 2001) using the straight line
     method, which approximates the effective interest method. In addition,  the
     redemption  value is  recalculated  every  quarter  based on changes in the
     Company's stock price. The resulting change in the redemption value is then
     added to or subtracted  from the $3,868,031  initial amount to be accreted.
     For the nine months ended December 31, 2002 and 2001, the Company  recorded
     $273,549 and $1,271,038, respectively, related to the beneficial conversion
     feature of accrued  dividends and the accretion of the redemption  value of
     preferred stock. As of December 31, 2002, the value of the remaining 57,384
     shares of redeemable convertible preferred stock is $1,712,969.

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

     In accordance  with Section 4(2) of the Securities Act of 1933, as amended,
     and pursuant to a Food Service Brokerage Agreement dated June 25, 2002, the
     Company  issued  140,273  shares  of  Common  Stock  for $4.08 per share on
     September  9, 2002 to  certain  food  brokers  in  consideration  for prior
     services rendered valued at $572,310.

                                       10
<PAGE>

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

(6)  RELATED PARTY TRANSACTIONS
     --------------------------
     In June  1999,  in  connection  with an  amended  and  restated  employment
     agreement for Angelo S. Morini, the Company  consolidated two full recourse
     notes  receivable  ($1,200,000  from  November  1994 and  $11,572,200  from
     October 1995) related to 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 new  consolidated  note is non-interest
     bearing and  non-recourse  and is secured by the 2,914,286 shares of common
     stock.  As of December  31,  2002,  the Company has not yet  perfected  its
     security  interest  in the  pledged  shares.  Per the June 1999  employment
     contract,  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 shareholder. In October 2000,
     the Company obtained a $1.5 million  short-term bridge loan from SouthTrust
     Bank, N.A. which is secured by one million of the above mentioned 2,914,286
     shares of the  Company's  common  stock owned by the  Company's  President.
     These one million  shares are expected to be released  upon full payment of
     the short-term bridge loan.

     Accounting  Principles Board Opinion No. 25, Accounting for Stock Issued to
     Employees   (APB  25)  indicates  that  the  exercise  of  options  with  a
     non-recourse  note  should be treated as the grant of a stock  option.  The
     Financial  Accounting  Standards Board issued  Interpretation  No. 44 ("FIN
     44"),  which clarifies the application of APB 25 relating to the accounting
     consequences of various modifications to fixed stock options. FIN 44 states
     that when an option is repriced,  it is treated as a variable option and is
     marked to market each quarter.  In accordance  with FIN 44, the  underlying
     options related to the $12,772,200  note receivable are treated as variable
     due to the nature of the note being a non-interest bearing and non-recourse
     note.  Accordingly,  any  differences  between  the  exercise  price of the
     options  ($4.38)  and the market  price of the  Company's  common  stock is
     recorded as compensation income or expense at each reporting period. During
     the nine months ended  December 31, 2002, the market value of the Company's
     stock decreased from $5.43 at March 31, 2002 to $2.28 at December 31, 2002.
     Therefore,  the Company recorded a $3,060,000  decrease in the compensation
     (or income) related to this decrease in stock value to the floor of $4.38.

     In March 2002, Angelo S. Morini, the Company's  President,  loaned $330,000
     to the Company in order for it to pay down certain  notes payable that were
     coming due. This loan bears  interest at prime (4.25% at December 31, 2002)
     and is due on or before June 15, 2006. On May 24, 2002, in consideration of
     this personal  loan to the Company and his continued  pledge of one million
     of his shares of the  Company's  common stock for the loan with  SouthTrust
     Bank,  N.A.  (See Note 3), the Company  granted Mr. Morini stock options to
     acquire  1,163,898  shares of Common  Stock at an  exercise  price of $5.72
     (110% of market) per share.  On December 4, 2002, Mr. Morini canceled these
     options with the Company as a result of discussions and  negotiations  with
     certain major  shareholders for the purpose of improving  shareholder value
     and lessening potential financial statement expense.

     On July 1, 2002, in consideration of his pledge of 250,000 shares of common
     stock to  secure a  $550,000  promissory  note by the  Company  in favor of
     Excalibur Limited  Partnership (See Note 3), the Company granted Mr. Morini
     stock  options to acquire  289,940  shares of common  stock at an  exercise
     price of $5.17 (110% of market) per share.  These options expire on July 1,
     2007.

     On October 24, 2002, the Company entered into a special services  agreement
     with Angelo S. Morini, authorizing him to author and promote "Veggiesizing,
     the stealth/health  diet" book, which promotes the Company's  products.  In
     consideration of these services and for his continued personal pledges, the
     Company  granted him 900,000 shares at the market price of $2.05 on October
     24, 2002. On December 4, 2002, as a result of discussions and  negotiations
     with certain major shareholders, Mr. Morini canceled these options with the
     Company and accepted new options to acquire  510,060 shares of common stock
     - 200,000  options were granted at an exercise price of $4.08 per share and
     310,060 were granted at an exercise price of $2.05 per share. These options
     expire on December 4, 2012. As a result of the  cancellation and reissuance
     of options,  the Company will account for these options in accordance  with
     variable accounting standards.

     Beginning  January 13, 2003, the Company entered into a vendor  arrangement
     with one of its employees whereby they would purchase  ingredients from him
     at the  Company's  cost  plus up to  1.25%  per  month  on the  outstanding
     balance.

                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                                                                Three months ended                    Nine months ended
                                                                    December 31,                          December 31,
                                                         ---------------------------------     ---------------------------------
                                                              2002               2001               2002               2001
                                                         --------------     --------------     --------------     --------------
<S>                                                      <C>                <C>                <C>                <C>
     Net income (loss) available to common
       shareholders                                      $     (744,437)    $     (181,653)    $      792,621     $   (8,642,238)
                                                         ==============     ==============     ==============     ==============

     Weighted average shares outstanding - basic             12,139,619         10,750,790         11,898,580         10,273,538
      "In-the-money" shares under stock option
        agreements                                                   --                 --          3,198,046                 --
     "In-the-money" shares under stock warrant
        agreements                                                   --                 --            380,715                 --

     Less:  Shares assumed repurchased under treasury
       stock method                                                  --                 --         (2,618,772)                --
                                                         --------------     --------------     --------------     --------------

     Weighted average shares outstanding - diluted           12,139,619         10,750,790         12,858,569         10,273,538
                                                         ==============     ==============     ==============     ==============

     Basic net income (loss) per common share            $        (0.06)    $        (0.02)    $         0.07     $        (0.84)
                                                         ==============     ==============     ==============     ==============

     Diluted net income (loss) per common share          $        (0.06)    $        (0.02)    $         0.06     $        (0.84)
                                                         ==============     ==============     ==============     ==============
</TABLE>

     Potential  conversion  of Series A preferred  stock for  2,123,168  shares,
     options for  4,554,771  and  1,356,725  shares and warrants for 644,856 and
     264,141  shares have not been  included in the  computation  of diluted net
     income (loss) per common share for the three and nine months ended December
     31, 2002,  respectively,  as their effect would be antidilutive.  Potential
     conversion  of Series A  preferred  stock for 747,269  shares,  options for
     3,254,700 shares, and warrants for 518,286 shares have not been included in
     the computation of diluted net income (loss) per common share for the three
     and  nine  months  ended  December  31,  2001,  as  their  effect  would be
     antidilutive.

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

<TABLE>
<CAPTION>
     Nine months ended December 31,                             2002             2001
     -----------------------------------------------------------------------------------
<S>                                                        <C>              <C>
     Non-cash financing and investing activities:
     Amortization of consulting and directors fees
       paid through issuance of common stock warrants      $     76,975     $    343,386
     Purchase of equipment through capital lease
       obligations and term notes payable                        94,763          785,000
     Reduction in accounts payable through issuance of
       notes payable                                            347,475               --
     Reduction in accounts payable through issuance of
       common stock                                             839,158               --
     Discount related to preferred stock                             --        2,020,734
     Accrued preferred stock dividends                          209,017          262,500
     Beneficial conversion feature related to preferred
       stock dividends                                          (18,416)          68,100
     Accretion of discount on preferred stock                   291,965          843,538
     Preferred dividends recorded for preferred
       shareholder waiver received in exchange for
       issuance of common stock                                      --          359,400

                                       12
<PAGE>

     Cash paid for:
     Interest                                                 1,832,018        1,703,121
     Income taxes                                                51,037               --
</TABLE>

(9)  OPTION AND WARRANT REPRICING
     ----------------------------
     On October 11, 2002 through  unanimous  consent of the Board of  Directors,
     the Company repriced all outstanding  options granted to employees prior to
     this date (4,284,108  shares at former prices ranging from $2.84 to $10.28)
     to the market price of $2.05 per share. In addition,  the Company  repriced
     the  outstanding  warrants held by current  consultants  prior to this date
     (291,429 shares at former prices ranging from $3.31 to $5.50) to the market
     price of $2.05 per share. This stock option repricing  resulted in variable
     accounting  treatment  for these stock options  beginning  with the quarter
     ended  December  31, 2002 until the related  options  have been  cancelled,
     expired or exercised.  On December 4, 2002, as a result of discussions  and
     negotiations  with certain  major  shareholders,  the  Company's  President
     reversed  the  repricing  of his  options  for  the  purpose  of  improving
     shareholder  value and lessening  potential  financial  statement  expense.
     Although the exercise  prices of the options  were  reversed  back to their
     original  amounts,  the  Company is still  required  to  account  for these
     options and all new options issued to the Company's President prior to June
     4, 2003 in accordance with variable accounting standards.

     Variable  accounting  treatment  will result in  unpredictable  stock-based
     compensation  expense or income  depending on fluctuations in quoted prices
     for the Company's common stock. The remaining variable options and warrants
     as of December 31, 2002 was  3,901,110 of which  1,017,441  were vested and
     "in-the-money"  based  on the  Company's  closing  stock  price of $2.28 on
     December  31, 2002.  This  resulted in a non-cash  compensation  expense of
     $188,395. Assuming no further options or warrants are exercised or canceled
     and all are  vested,  a $0.01  increase in the  Company's  stock price will
     result in a non-cash compensation expense of approximately $39,000.

                                       13
<PAGE>

GALAXY NUTRITIONAL FOODS, INC.

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

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

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

CRITICAL ACCOUNTING POLICIES

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

The Company records revenue upon shipment of products to its customers and there
is reasonable  assurance of collection on the sale. It provides  credit terms to
customers  usually based on net 30 days.  The Company  performs  ongoing  credit
evaluations of its accounts receivable and makes reserves for anticipated future
credits that will be issued to its customers for promotions,  discounts, spoils,
etc., based on historical  experience.  In addition,  the Company  evaluates the
accounts  for  potential   uncollectible   amounts.  The  reserve  for  accounts
receivable is then adjusted to reflect these estimates. At December 31, 2002 and
March 31, 2002, the Company had reserved approximately $815,000 and $678,000 for
known and  anticipated  future  credits and doubtful  accounts.  During the nine
months ended December 31, 2002 and 2001, the Company recorded income of $136,700
and expense of $425,000, respectively, related to anticipated future credits and
doubtful  accounts.  The Company utilizes a detailed  customer invoice promotion
settlement process to methodically predict, track, manage, and resolve invoicing
issues.

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

Valuation  allowances  are  established  when  necessary to reduce  deferred tax
assets to the amount  expected  to be  realized.  Income tax  expense is the tax
payable or refundable  for the period plus or minus the change during the period
in deferred tax assets and liabilities.

Statement of Financial Accounting Standards No. 123 ("FAS 123"),  Accounting for
Stock Based Compensation, requires the Company to report compensation expense on
warrants issued to non-employees for services  rendered,  in accordance with the
fair value based method  prescribed  in FAS 123. The Company  estimates the fair
value  of  each  warrant  based  on the  expected  vesting  due  to  performance
requirements  set forth in the  warrant  or  service  agreement  and life of the
warrant  by  using a  Black-Scholes  option-pricing  model  with  the  following
assumptions  used in the fiscal 2003  option-pricing  model:  no dividend yield,
43.2%  volatility,  risk-free  interest rate of 4.25%, and expected lives of ten
years. Assumptions used for

                                       14
<PAGE>

grants in fiscal 2002: no dividend  yield,  38% volatility,  risk-free  interest
rate ranging from 4.75%, and expected lives of ten years.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2002, the FASB issued  Statement of Financial  Accounting  Standards
No. 148, "Accounting for Stock-Based  Compensation-Transition  and Disclosure-an
amendment of FAS 123" ("SFAS 148"). This statement amends Statement of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123"), to provide  alternative  methods of transition for a voluntary  change to
the fair value based method of accounting for stock-based employee  compensation
and  amends  the  disclosure  requirements  to  SFAS  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used on reported  results.  The transition and annual  disclosure  provisions of
SFAS 148 are  effective  for fiscal years ending  after  December 15, 2002.  The
Company will adopt SFAS 148 during its fourth quarter ending March 31, 2003.

RECENT DEVELOPMENTS

After  discussions  with certain major  shareholders  concerning ways to improve
shareholder value and improve financial statement results,  Angelo S. Morini and
the Company conducted following in December 2002:

On December 4, 2002, Mr. Morini canceled options to acquire  1,163,898 shares of
the  Company's  common stock at an exercise  price of $5.72 (110% of market) per
share  which  he had been  granted  on May 24,  2002,  in  consideration  of his
personal  loan to the  Company  and his  continued  pledge of one million of his
shares of the Company's common stock for the loan with SouthTrust Bank, N.A.

On December 4, 2002, Mr. Morini  canceled  options to acquire  900,000 shares of
the Company's common stock at an exercise price of $2.05 (100% of market). These
options  were  granted to him on October 24, 2002 in  connection  with a special
services agreement between the Company and Angelo S. Morini,  authorizing him to
author and promote "Veggiesizing,  the stealth/health diet" book, which promotes
the  Company's  products.  On December 4, 2002,  the Company then issued him new
options to acquire 510,060 shares of common stock - 200,000 options were granted
at an exercise  price of $4.08 per share and 310,060 were granted at an exercise
price of $2.05 per share. These options expire on December 4, 2012.

On December 4, 2002, Mr. Morini reversed the repricing of his remaining  options
granted prior to October 11, 2002 when through unanimous consent of the Board of
Directors,  the Company  repriced all  outstanding  options granted to employees
prior to this date to $2.05.  Thus,  all of his  options  are  subject  to their
original exercise prices.

On December  17, 2002,  Angelo S. Morini  resigned  from his  positions as Chief
Executive Officer and Chairman of the Board. Mr. Morini retained his position as
President and accepted an appointment as  Vice-Chairman of the Board in order to
focus his  attention on expanding the  Company's  brand  awareness and marketing
relationships.  Christopher  J. New,  formerly  the  Company's  Chief  Operating
Officer, was then appointed as the Company's Chief Executive Officer.

Additionally,  on December 17, 2002, the Board of Directors  voted to expand the
number of Board members to six and appointed  Charles L. Jarvie as the Company's
Chairman of the Board, Angelo S. Morini as Vice-Chairman of the Board, Thomas R.
Dyckman as Chairman of the Audit  Committee,  and Michael H.  Jordan,  Joseph J.
Juliano and David H. Lipka as additional directors. Former directors Dr. Douglas
Walsh and Marshall Luther  resigned from the Board of Directors  effective as of
December 17, 2002, in order to pursue other opportunities. On December 18, 2002,
the Board of  Directors  again  voted to expand the  number of Board  members to
seven and appointed  Christopher J. New, the Company's Chief Executive  Officer,
as a director.  The new  independent  directors,  Charles L.  Jarvie,  Thomas R.
Dyckman,  Michael H. Jordan and David H.  Lipka,  were each  granted  options to
acquire  200,000  shares of common stock at an exercise price of $2.17 per share
(130% of the closing  price of the common  stock as reported by AMEX on December
4, 2002 which was the date they agreed to become a director  of the  Company) in
consideration  of their  acceptance  of  positions  as  members  of the Board of
Directors.

                                       15
<PAGE>

RESULTS OF OPERATIONS

As a result of the large cash outlays related to a large plant expansion, delays
in new product  shipment,  and a sales mix skewed toward lower margin  imitation
and private label items in fiscal 2001,  the Company  experienced  shortfalls in
cash that affected  nearly every aspect of its  operations in fiscal 2002.  This
cash  constraint  on  purchasing  ingredients  forced the  Company to  eliminate
significant  amounts of business  at the key  account  level in order to achieve
sustainable  and adequate case fill and order fill levels.  In fiscal 2003,  the
Company has  returned  to positive  cash flow  levels  through  efficiencies  in
production,  purchase  discounts,  realignment  of the sales mix toward  branded
items,   reduction  in  overall  number  of  items   ("SKU's")  being  sold  and
inventoried,  improved  customer  fulfillment  levels,  new  terms of sale,  new
customer invoice promotion settlement processes, and additional cost reductions.
All  excess  cash has been put back into  operations  to improve  the  Company's
operations and financial position.

NET SALES were $9,829,420 in the three months ended December 31, 2002,  compared
to net sales of  $10,325,699  for the three  months  ended  December 31, 2001, a
decrease of 5%. The Company experienced an overall decrease of 10% for the first
nine  months  of  fiscal  2003  compared  to the same  period  in  fiscal  2002,
reflecting the continued  elimination of lower margin  business.  Although sales
for the three and nine  months of fiscal  2003 is a decrease  from the sales for
the  three  and nine  months of  fiscal  2002,  the sales are at the same  level
(approx.  $10  million) as they were for the fourth  quarter  ended  fiscal 2002
where  customer  fulfillment  levels peaked  against the Company's core business
items. While the Company has experienced  positive cash flows in fiscal 2003, it
has used this cash to improve the balance sheet by paying down debt and payables
rather than increasing inventory for sale. As a result of the constraints put on
ingredient,  packaging  and  finished  goods  availability,  the Company  made a
strategic  decision to downsize sales volume in an effort to upsize its margins.
The product mix shift to focus on  higher-margin  brand name products  under the
Veggie brand,  required the Company to turn away certain private label and other
less  desirable  business.  While both the customer and consumer  demand for the
Company's  products and private label business remains strong,  sales growth was
maintained  at lower levels so that the Company can improve  margins on its core
items and grow profitably.

COSTS OF GOODS SOLD were $6,805,863  representing 69% of net sales for the three
months ended December 31, 2002, compared with $7,355,250 or 71% of net sales for
the same period ended December 31, 2001. These costs  represented 70% and 76% of
net sales for the nine months ended December 2002 and 2001, respectively.  There
was an overall decrease in costs of $4,435,287 in the nine months of fiscal 2003
compared  to fiscal  2002.  This  decrease  in cost is  primarily  the result of
several factors:  (a) a 10% decrease in raw materials required for operations in
the first nine  months of fiscal  2003 as compared to fiscal 2002 (a decrease of
$2.6 million) which resulted from the 10% decrease in sales described above; (b)
the completed  installation of the new equipment which resulted in a substantial
decrease in the number of  production  personnel  late in fiscal 2002 and caused
labor-related  expenses to decrease by  approximately  $1.5 million in the first
nine  months of fiscal  2003 as  compared  to fiscal  2002;  (c) a  decrease  of
$600,000  in  inventory  write-offs  in the first nine  months of fiscal 2003 as
compared to fiscal 2002 which  resulted from the Company's  change in production
focus in the second  quarter of fiscal 2002 by decreasing its product mix to 200
core  items that  constituted  nearly  98% of sales;  and (d) a decrease  in raw
material costs due to improved  vendor  relations,  lower raw material costs and
purchase discounts.

Now that the  equipment  is fully  operational,  the labor  crews  are  trained,
ingredient and packaging supply is consistent, and fewer number of SKU items are
being produced based on specific sales forecasting, the Company is seeing longer
production runs, improved run rates with more, high-quality product produced per
hour.  This resulted in gross margin  increasing  from the annual rate of 19% in
fiscal 2002 to 30% in the first nine months of fiscal 2003. The Company  expects
that with its increased  efficiencies in labor,  production and purchasing along
with  continued  monitoring of items being offered and tight controls on product
mix, it will continue to sustain its improved margins in fiscal 2003.


SELLING  expenses were  $1,314,235  and $3,773,908 for the three and nine months
ended December 31, 2002,  respectively,  compared with $1,983,565 and $5,499,661
for the three and nine months ended December 31, 2001, respectively,  a decrease
of 34% and 31% in the  respective  periods.  The  decrease in expenses is due to
further  efficiencies in advertising and promotional  expenses of  approximately
$1.1 million in the first nine months of fiscal 2003 compared to the same period
in fiscal 2002. In 2002, more promotions were directed to provide  incentives to
the Company's direct customers for  merchandising  and brand item purchases.  In
addition,  the  Company  experienced  a  decrease  (approximately  $500,000)  in
brokerage  and  salary  costs  and a  decrease  in  travel  costs in  excess  of
approximately  $100,000  directly  attributable  to  deployment of more focused,
productive key account selling strategies and tactics.  The Company expects that
fiscal 2003  selling  expenses  will  continue to remain at levels below that of
fiscal 2002 expenses based on the Company's current plan

                                       16
<PAGE>

for advertising and promotional allowances that are focused against key accounts
and granted on volume purchases rather than on individual item discounts.

DELIVERY  expenses  were $478,331 and  $1,561,847  for the three and nine months
ended December 31, 2002, respectively, compared with $595,162 and $1,807,783 for
the same periods ended December 31, 2001.  Delivery  expenses  approximate 5% of
net sales each period. The decrease in delivery costs is primarily in proportion
to the decrease in net sales.

NON-CASH  COMPENSATION  RELATED TO  OPTIONS  AND  WARRANTS  showed an expense of
$190,720 and income of $2,794,630  for the three and nine months ended  December
31,  2002,  respectively,  compared  to an income of  $1,559,024  and expense of
$2,070,243 for the three and nine months ended December 31, 2001,  respectively.
The Financial  Accounting  Standards  Board issued  Interpretation  No. 44 ("FIN
44"),  which  clarifies  the  application  of APB  Opinion  25  relating  to the
accounting  consequences of various modifications to fixed stock options. FIN 44
states that when an option is repriced,  it is treated as a variable  option and
is marked to market each  quarter.  In  accordance  with FIN 44, the  underlying
options  related to the $12,772,200  note receivable from Angelo S. Morini,  the
Company's President, are treated as variable due to the nature of the note being
a non-interest  bearing and  non-recourse  note.  Accordingly,  any  differences
between the  exercise  price of the options  ($4.38) and the market price of the
Company's  common  stock is recorded as  compensation  income or expense at each
reporting  period.  During the nine months ended  December 31, 2002,  the market
value of the Company's  stock decreased from $5.43 at March 31, 2002 to $2.28 at
December 31, 2002. Therefore,  the Company recorded a $3,060,000 decrease in the
compensation  related  to this  decrease  in stock  value to the floor of $4.38.
Additionally,  the Company  recorded a $76,975 expense related to the fair value
of  warrants  issued  for  consulting  services.  During the nine  months  ended
December 31, 2001, the market value of the Company's  stock increased from $4.76
at March 31, 2001 to $5.35 at December 31, 2001. Therefore, the Company recorded
a  $1,726,857  increase in the  compensation  related to this  increase in stock
value. Additionally, the Company recorded a $343,386 expense related to the fair
value of warrants issued for consulting  services.  Due to the volatility of the
market price of the  Company's  common  stock,  it is  incapable  of  predicting
whether this expense will increase or decrease in the future.  A $0.01  increase
or decrease in the Company's common stock price results in an expense or income,
respectively, of $29,143.

On October 11, 2002 through  unanimous  consent of the Board of  Directors,  the
Company repriced all outstanding options granted to employees prior to this date
(4,284,108  shares at former prices  ranging from $2.84 to $10.28) to the market
price of $2.05 per share.  In addition,  the Company  repriced  the  outstanding
warrants  held by  current  consultants  prior to this date  (291,429  shares at
former  prices  ranging  from $3.31 to $5.50) to the  market  price of $2.05 per
share. This stock option repricing resulted in variable accounting treatment for
these stock options  beginning with the quarter ended December 31,2002 until the
related options have been cancelled,  expired or exercised. On December 4, 2002,
as a result of discussions and negotiations with certain major shareholders, the
Company's  President  reversed  the  repricing of his options for the purpose of
improving shareholder value and lessening potential financial statement expense.
Although the exercise prices of the options were reversed back to their original
amounts,  the Company is still required to account for these options and any new
options  issued to the Company's  President  prior to June 4, 2003 in accordance
with variable accounting standards.

Variable   accounting   treatment  will  result  in  unpredictable   stock-based
compensation  expense or income  depending on  fluctuations in quoted prices for
the Company's  common stock.  The remaining  variable options and warrants as of
December   31,  2002  was   3,901,110  of  which   1,017,441   were  vested  and
"in-the-money"  based on the Company's  closing stock price of $2.28 on December
31, 2002. This resulted in a non-cash compensation expense of $188,395. Assuming
no further  options or warrants are exercised or canceled and all are vested,  a
$0.01  increase  in  the  Company's  stock  price  will  result  in  a  non-cash
compensation expense of approximately $39,000.

GENERAL AND  ADMINISTRATIVE  expenses  were  $864,399 and $786,634 for the three
months ended December 31, 2002 and 2001, respectively (a 10% increase).  For the
three months ended  December 31, 2001, the Company  reversed  $75,000 of its bad
debt  reserve  due  to  a  change  in  its  reserve  estimates  creating  income
recognition for the fiscal 2002 quarter.  Without this reversal, the fiscal 2003
and 2002  quarterly  expenses  were nearly the same.  For the nine months  ended
December 31, 2002 and 2001, general and administrative  expenses were $2,453,148
and $3,197,175, respectively (a 23% decrease). The decrease was primarily due to
a decrease in bad debt expense and  personnel  costs in fiscal 2003 along with a
general  reduction  in  standard  administrative  expenses  due to cost  cutting
measures implemented at the end of fiscal 2002.

RESEARCH AND DEVELOPMENT  expenses were $60,674 and $43,075 for the three months
ended December 31, 2002 and 2001,  respectively  (a 41% increase).  For the nine
months ended December 31, 2002 and 2001,  expenses were $174,888 and $140,931 (a
24%  increase).  This  increase  is  primarily  the  result  of a change  in the
allocation of general overhead costs to

                                       17
<PAGE>

this  department.  The Company  expects that these  expenses will remain at this
level throughout the remainder of fiscal 2003 and fiscal 2004.

INTEREST  expense was $536,766 and $913,523 for the three months ended  December
31,  2002 and 2001,  respectively  (a 41% or  $376,757  decrease).  For the nine
months ended  December 31, 2002 and 2001,  interest  expense was  $2,404,868 and
$2,310,635 (a 4% increase).  On September 30, 1999,  the Company  entered into a
$4,000,000  subordinated  note  payable  with  FINOVA  Mezzanine  Capital,  Inc.
("FINOVA Mezzanine").  This debt currently bears interest at a rate of 15.5% and
included an original  issuance  discount of  $786,900,  which was  amortized  as
interest  expense  over  the term of the  debt  until  September  30,  2002.  In
connection  with FINOVA  Mezzanine's  warrant  exercise  and transfer of 815,000
shares of the Company's  Common Stock, the Company agreed to guarantee the price
at which the shares were sold to the public at $4.41 per share. The actual price
received by FINOVA  Mezzanine was $3.25 per share and the difference of $945,400
was recorded as a debt discount and was amortized over the term until  September
30,  2002.  During the three months ended  December 31, 2002,  interest  expense
decreased  $307,115 because the above debt discounts were fully  amortized.  The
remaining  decrease  resulted  from a lower  note  payable  to FINOVA  Mezzanine
($4,000,000  in fiscal 2003  compared to  $4,815,000  in fiscal 2002) during the
three months ended December 31, 2002.  During the nine months ended December 31,
2002 and 2001, $614,230 and $511,859,  respectively,  of the total debt discount
of $1,732,300  was  amortized to interest  expense.  In addition,  the loan fees
amortized to interest expense increased  approximately  $397,000 during the nine
months ended  December 31, 2002 due to  additional  loan costs and the shortened
loan periods.  The increase in the above mentioned fees was offset by a decrease
of approximately $405,000 in interest expense as a result of lower debt balances
during  fiscal  2003  compared  to fiscal  2002;  thus  resulting  in an overall
increase of $94,233  for the nine months  ended  December  31, 2002  compared to
2001. See "Debt Financing" below for further detail on the Company's outstanding
debts and interest rates thereon.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING  ACTIVITIES - Net cash provided by operating activities was $1,901,996
for the nine  months  ended  December  31,  2002  compared  to net cash  used of
$1,504,597  for the same period ended  December  31, 2001.  The increase in cash
from  operations  is  primarily  attributable  to a  net  income  of  $1,275,187
evidencing   the  improved   gross  margins  and  reduction  in  cash  operating
expenditures  in  fiscal  2003  along  with  further   collections  on  accounts
receivable and reductions in inventory  levels. In fiscal 2002, the Company used
a significant portion of its cash to decrease its amounts payable to vendors and
to fund operating losses.

INVESTING  ACTIVITIES - Net cash used in investing  activities  totaled $231,742
for the nine  months  ended  December  31,  2002  compared  to net cash  used of
$565,110  for the same  period  ended  December  31,  2001.  The  cash  used for
investing  activities  during fiscal 2003 resulted from the increase in deferred
loan costs related to the FINOVA Capital and FINOVA  Mezzanine  loans as further
discussed  below and the purchase of  equipment.  These  deferred loan costs are
capitalized  and expensed to interest over the life of the loans.  The cash used
in fiscal 2002 was all used to purchase equipment.

FINANCING  ACTIVITIES  - Net  cash  flows  used  in  financing  activities  were
$1,668,794  for the nine months ended  December 31, 2002  compared to cash flows
provided  by  financing  activities  of  $2,151,616  for the same  period  ended
December 31, 2001. During the first quarter of fiscal 2003, the Company received
loan proceeds from  Excalibur  Limited  Partnership in the amount of $500,000 in
cash.  The  proceeds  of which were used to pay down a portion of the  Company's
outstanding debt under its term loan from SouthTrust Bank, N.A. In addition, the
Company  raised  $1,500,000  through the  issuance  of common  stock (as further
discussed  below).  These  proceeds  were  used to pay off its  term  loan  from
Excalibur Limited Partnership and for working capital purposes. The Company used
its cash from  operating  activities  to reduce  the  balance  of the  Company's
outstanding  debt under its line of credit from  FINOVA  Capital and to pay down
its term debt with  SouthTrust  Bank,  N.A. The large cash flows from  financing
activities  during the nine months ended  December 31, 2001 were  primarily  the
result of the  issuance of common and  preferred  stock.  The  majority of these
proceeds  were used to pay down the line of credit  from  FINOVA  Capital and to
finance the Company's operating activities in fiscal 2002.

Debt Financing
As of  December  31,  2002,  the  Company  had a line of  credit  with a maximum
principal amount of $7.5 million from FINOVA Capital  Corporation,  the proceeds
of which are for  working  capital  purposes.  The amount  that the  Company can
borrow  under the line of credit is based on a formula of up to 80% of  eligible
accounts  receivable  plus a certain  percentage of eligible  inventories not to
exceed $3 million, as defined in the agreement.  Pursuant to a certain Amendment
and Limited  Waiver to Security  Agreement  dated June 26, 2002,  the  inventory
advance rate  decreases by 1% per month  beginning  July 1, 2002 from a level of
50% at June 30, 2002 to 37% by the maturity date (44% at December 31, 2002). The
line of credit is  secured by all  accounts  receivable,  inventory,  machinery,
equipment, trademarks and patents owned by the Company.

                                       18
<PAGE>

Interest is payable monthly on the outstanding  draws on the line of credit at a
rate of prime plus four percent (8.25% at December 31, 2002). The line of credit
expires on July 1, 2003, at which time the entire  outstanding  principal amount
of the line of credit,  and all accrued but unpaid interest thereon,  is due and
payable in full. As of December 31, 2002, the Company had an outstanding balance
of $4,166,084 under this line.

On September 30, 1999, the Company obtained a $4 million  subordinated loan from
FINOVA Mezzanine to finance additional  working capital and capital  improvement
needs.  The Company  received loan  proceeds in the amount of  $3,620,000  after
paying loan costs of $380,000. Amounts outstanding under the loan are secured by
a subordinated  lien on  substantially  all of the Company's  assets.  A balloon
payment of the entire  principal  amount of the loan, and all accrued but unpaid
interest  thereon,  is due  upon  maturity  in  July  2003.  The  interest  rate
applicable  to the loan was  increased  from  11.5%  to 13.5% in July  2001.  In
February  2002, the interest rate increased to 15.5%.  In  consideration  of the
loan,  the Company  issued to FINOVA  Mezzanine  a warrant to  purchase  915,000
shares of the  Company's  common  stock at an exercise  price of $3.41 per share
which  represented  80% of the fair value of the Company's stock on the date the
warrant was issued.  The  warrant,  valued at  $786,900,  was recorded as a debt
discount was amortized to interest expense from the date of issuance of the note
to an original earlier maturity date of the note until September 30, 2002. As of
December 31, 2002, the discount has been fully amortized to interest expense and
the Company has an outstanding principal balance of $4,000,000 under this loan.

On December 26, 2000, the FINOVA Mezzanine exercised a portion of the warrant to
purchase  815,000  shares of Common  Stock at a price of $3.41  per  share.  The
Company  received  from the exercise of the warrant net proceeds of  $2,452,329,
after paying transaction costs of $326,822. In connection with this transaction,
the Company agreed to reimburse  FINOVA  Mezzanine for brokerage  commission and
other expenses incurred by it, in connection with the sale of the 815,000 shares
to the  public,  which were sold at a price of $3.25 per share.  These costs and
expenses were recorded as a reduction in the proceeds received from the exercise
of the warrants.  In addition,  the Company agreed to guarantee the price ($4.41
per  share) at which the  shares  would be sold to the  public.  The  difference
between the actual price received by FINOVA Mezzanine ($3.25) and the guaranteed
price  ($4.41)  of  $945,400  was  recorded  as a debt  discount  and was  being
amortized over the term of the  subordinated  note until September 30, 2002. The
consideration  for the  difference  between the exercise  price of $3.41 and the
guaranteed price of $4.41 was $815,000.  FINOVA Mezzanine agreed to finance such
amount under an additional  subordinated  term loan which was payable in full on
December  29, 2001.  However,  the Company  obtained an  extension  for a fee of
$55,000 and made payments of $30,000 per business day through February 28, 2002,
at which time the additional loan was paid in full. During the nine months ended
December 31, 2002 and 2001,  $614,230 and $204,743,  respectively,  of the total
debt discounts of $1,732,300 were amortized to interest expense. At December 31,
2002,  there were no remaining  unamortized  debt  discounts  and the  remaining
principal balance due on the notes was $4,000,000.

The line of credit  and  subordinated  loans  described  above  contain  certain
financial and operating  covenants.  In June 2002, the Company  notified  FINOVA
Capital  and  FINOVA  Mezzanine  that it had failed to comply  with the  minimum
operational  cash flow to contractual  debt service ratio and the funded debt to
EBITDA ratio.  FINOVA  Capital  agreed to waive those  violations for the fiscal
year ended  March 31,  2002 and the fiscal  quarter  ended June 30,  2002 and to
amend such covenants for the fiscal quarters beginning July 1, 2002, pursuant to
a certain  Amendment  and Limited  Waiver to Security  Agreement  dated June 26,
2002. FINOVA Capital extended the maturity date from October 15, 2002 to July 1,
2003, removed any prepayment penalties, reduced the credit line from $13 million
to $7.5 million,  reduced the inventory limit from $6 million to $3 million, and
will reduce the inventory  advance rate by 1% per month  beginning  July 1, 2002
(from a level  of 50% at June  30,  2002 to 37% by the  maturity  date).  FINOVA
Mezzanine  also agreed to waive the  violations  of its covenants for the fiscal
year ended March 31, 2002 and the fiscal  quarter  ended June 30,  2002,  and to
amend those covenants for future fiscal quarters  pursuant to a letter agreement
dated June 26, 2002 and amendments to the  subordinated  notes. In consideration
of the waivers and covenant amendments, the Company agreed to pay a facility fee
of $413,500, which was deemed fully earned on June 26, 2002. The facility fee is
payable as follows:  $172,500 is due and payable on the  earliest of (a) $28,750
per month beginning January 2003, (b) the occurrence of an event of default,  or
(c) the date on which the Company repays either all of the obligations to FINOVA
Capital under the Loan Agreement or any portion of the principal  obligations to
FINOVA Mezzanine under the FINOVA Mezzanine loan documents,  with the balance of
$241,000 due and payable only upon FINOVA Mezzanine's  exercise of its remaining
100,000  warrants.  The Company was in compliance with all amended covenants for
the quarter ended December 31, 2002. The Company believes that it will remain in
compliance  with the new FINOVA loan covenants  established in the June 26, 2002
waiver and amendment documents.

In March 2000,  the Company  obtained a $10  million  term loan from  SouthTrust
Bank,  N.A. This note bears  interest at prime rate (4.25% at December 31, 2002)
and is due in monthly  principal  installments  of $93,000 plus  interest.  In a
letter  agreement dated September 27, 2002, the bank deferred the four principal
payments,  due in June 2002 through  September  2002,  until the maturity of the
note. The note matures in March 2005. The balance outstanding on this note as of
December

                                       19
<PAGE>

31, 2002 was $8,397,313.  This note was used to pay off a prior term loan and to
finance  approximately  $7.5  million in new  equipment  purchases to expand the
Company's production capacity,  including the new production equipment purchased
and installed throughout fiscal 2001 and the beginning of fiscal 2002. This term
loan is secured by certain machinery and equipment,  including the Company's new
production equipment.

In October 2000, the Company obtained a $1.5 million short-term bridge loan from
SouthTrust  Bank,  N.A.  which is secured by the pledge of one million shares of
the Company's  common stock owned by the Company's  President.  Interest on this
note is at the prime rate (4.25% at December 31,  2002).  The loan is being paid
down by  monthly  principal  payments  of  $50,000  plus  interest.  In a letter
agreement  dated  September  27,  2002,  the bank  deferred  the four  principal
payments,  due in June 2002 through  September  2002,  until the maturity of the
note. The note matures in October 2003. The balance  outstanding on this note as
of December 31, 2002 was $750,000.  In consideration of his pledge,  the Company
granted Mr. Morini stock options to acquire 343,125 shares of Common Stock at an
exercise price of $3.88 per share. These options expire on December 15, 2010.

The term loan and the short-term  bridge loan from SouthTrust Bank, N.A. contain
certain financial and operating  covenants.  The Company was in violation of all
financial  covenants at March 31, 2002. On June 27, 2002, the Company received a
waiver for the year ended March 31, 2002 and for all future periods through July
1, 2003.  On February  13,  2003,  the Company  received a waiver for all future
periods through March 31, 2004.

In March 2002, Angelo Morini,  the Company's  President,  loaned $330,000 to the
Company in order for it to pay down certain  notes payable that were coming due.
This loan bears  interest at prime (4.25% at December 31, 2002) and is due on or
before June 15, 2006.

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

On August 15, 2002,  the Company signed a $347,475  promissory  note with Target
Container,  Inc. in  satisfaction  of its accounts  payable  obligation  to this
vendor.  This note  bears  interest  at 7% per annum and is due in twelve  equal
monthly  installments  of $30,066.  The balance  outstanding  on this note as of
December 31, 2002 was $234,334.

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

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

     divided by,

                                       20
<PAGE>

     o    the  lesser of (x) $4.08 or (y) 95% of the  average  of the two lowest
          closing bid prices on the American  Stock Exchange of the Common Stock
          out of the fifteen trading days immediately prior to conversion.

In no case,  however,  shall any holder of Series A Preferred Stock be permitted
to convert Series A Preferred Stock in an amount that would cause such holder to
beneficially  own at any given time, in the aggregate,  such number of shares of
common  stock which would exceed 9.99% of the  aggregate  outstanding  shares of
common stock,  unless such holder waives such  restriction upon not less than 61
days prior notice to the Company.  The number of shares issuable upon conversion
of the Series A Preferred  Stock will vary depending upon the closing bid prices
of the Company's common stock on the AMEX.

On December 26, 2002,  Excalibur Limited Partnership and BH Capital Investments,
L.P.   converted   10,378  and  4,884  shares  of  Series  A  Preferred   Stock,
respectively,  plus accrued dividends, into 424,950 and 199,986 shares of common
stock, respectively. The conversion rate was $1.3633 based on 95% of the average
of the two  lowest  closing  bid  prices on AMEX for the  fifteen  trading  days
immediately prior to conversion.

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

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

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

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

In accordance  with Section 4(2) of the Securities Act of 1933, as amended,  and
pursuant to a Food Service Brokerage  Agreement dated June 25, 2002, the Company
issued  140,273  shares of Common Stock for $4.08 per share on September 9, 2002
to certain food brokers in consideration  for prior services  rendered valued at
$572,310.

                                       21
<PAGE>

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

The Company's  ability to continue as a going concern depends upon  successfully
obtaining  sufficient  financing  to pay down or replace the FINOVA debts due in
July 2003.  In the event the  Company  cannot  extend  the  loans,  or raise the
capital to pay off or replace the debt in July 2003,  FINOVA  Capital and FINOVA
Mezzanine could exercise their respective  rights under their loan documents to,
among other things,  declare a default under the loans and pursue foreclosure of
the  Company's  assets which are pledged as  collateral  for such loans.  In the
event that FINOVA exercises their right to pursue  foreclosure,  then SouthTrust
has the ability to do the same based on a cross-default  provision in their loan
agreement.  The  Company is seeking to obtain the  necessary  funds  through its
positive  cash  flows  from  operating  activities,   equity  financing,  and/or
refinancing  with  FINOVA  or a  substitute  lender.  There  are no  assurances,
however,  that such  financing,  if  available  will be at a price that will not
cause substantial dilution to the Company's shareholders.  If the Company is not
able to generate sufficient cash through its operating and financing  activities
in  fiscal  2003,  it will  not be able to pay its  debts  in a  timely  manner.
However, the Company,  with direct involvement from key new board and management
members,  is  currently  discussing  terms with several  independent  parties to
provide the funds required to replace  FINOVA  Capital as the Company's  primary
asset-based lender and to pay off the debt to FINOVA Mezzanine.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The interest on the Company's debt to FINOVA Capital  Corporation and SouthTrust
Bank N.A. is floating and based on the prevailing  market  interest  rates.  For
market-based  debt,  interest  rate  changes  generally do not affect the market
value of the debt but do impact future  interest  expense and hence earnings and
cash flows, assuming other factors remain unchanged.  A theoretical 1% change in
market  rates in effect on  December  31,  2002 with  respect  to the  Company's
anticipated  debt as of such date  would  increase  interest  expense  and hence
reduce net income of the Company by approximately $34,000 per quarter.

The Company's  fiscal 2002 and 2001 sales  denominated  in a currency other than
U.S.  dollars were less than 5% of total sales and no net assets were maintained
in a functional currency other than U. S. dollars at December 31, 2002 and 2001.
The effects of changes in foreign  currency  exchange rates has not historically
been significant to the Company's operations or net assets.

ITEM 4. CONTROLS AND PROCEDURES

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

                                       22
<PAGE>

                           PART II. OTHER INFORMATION
                         GALAXY NUTRITIONAL FOODS, INC.

ITEM 1.  LEGAL PROCEEDINGS

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

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

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

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

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

In accordance  with Section 4(2) of the Securities Act of 1933, as amended,  and
pursuant to a Food Service Brokerage  Agreement dated June 25, 2002, the Company
issued  141,221  shares of common stock for $4.08 per share on September 9, 2002
to certain food brokers in consideration  for prior services  rendered valued at
$576,179.  In the quarter ended December 31, 2002, one of the grantees  returned
948 shares valued at $3,869  leaving a net amount of 140,273  shares issued at a
value of $572,310.

On December 26, 2002,  Excalibur Limited Partnership and BH Capital Investments,
L.P.   converted   10,378  and  4,884  shares  of  Series  A  Preferred   Stock,
respectively,  plus accrued dividends, into 424,950 and 199,986 shares of common
stock, respectively. The conversion rate was $1.3633 based on 95% of the average
of the two  lowest  closing  bid  prices on AMEX for the  fifteen  trading  days
immediately prior to conversion.

                                       23
<PAGE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

NONE


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

NONE


ITEM 5.  OTHER INFORMATION

NONE

                                       24
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

EXHIBIT NO     EXHIBIT DESCRIPTION

3.1            Certificate of Amendment of Certificate of  Incorporation  of the
               Company,  as filed  with the  Secretary  of State of the State of
               Delaware on December 23, 2002 (Filed Herewith.)

3.2            Restated  Certificate  of  Incorporation  of the Company as filed
               with the  Secretary of State of the State of Delaware on December
               23, 2002 (Filed Herewith.)

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

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

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

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

*4.6           Form of Subscription  Agreement by and between the Registrant and
               those food brokers named in the selling  stockholders  section of
               this   Registration   Statement.   (Filed  as   Exhibit   4.6  to
               Registration Statement on Form S-3 filed September 30, 2002.)

*4.8           Common Stock and Warrants  Purchase  Agreement by and between the
               Company and Stonestreet  Limited  Partnership dated June 28, 2002
               (Filed as Exhibit  4.8 on Form 10-K for fiscal  year ended  March
               31, 2002, and incorporated herein by reference.)

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

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

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

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

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

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

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

                                       25
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

*10.25         Letter  from  SouthTrust  Bank,  N.A.  dated  September  27, 2002
               regarding  principal  deferment on  $10,000,000  Promissory  Note
               (Filed as Exhibit 10.25 on Form 10-Q for the fiscal quarter ended
               September 30, 2002, and incorporated herein by reference.)

                                       26
<PAGE>

*10.26         Letter  from  SouthTrust  Bank,  N.A.  dated  September  27, 2002
               regarding  principal  deferment  on  $1,500,000  Promissory  Note
               (Filed as Exhibit 10.26 on Form 10-Q for the fiscal quarter ended
               September 30, 2002, and incorporated herein by reference.)

10.27          Waiver Letter from SouthTrust  Bank, N.A. dated February 13, 2003
               (Filed herewith.)

*10.30         Promissory  Note payable to Angelo S. Morini dated March 28, 2002
               (Filed as Exhibit 10.30 on Form 10-Q for the fiscal quarter ended
               September 30, 2002, and incorporated herein by reference.)

*10.31         Promissory  Note payable to Target  Container,  Inc. dated August
               15,  2002  (Filed as  Exhibit  10.31 on Form 10-Q for the  fiscal
               quarter ended  September  30, 2002,  and  incorporated  herein by
               reference.)

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

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

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

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

10.44          Amended and Restated employment agreement between the Company and
               Angelo S. Morini dated June 15, 1999 (Filed herewith.)

10.45          Loan  Agreement  between the  Company and Angelo S. Morini  dated
               June 15, 1999 (Filed herewith.)

10.46          Promissory  Note from Angelo S. Morini dated June 15, 1999 (Filed
               herewith.)

10.47          Stock Pledge  Agreement  between the Company and Angelo S. Morini
               dated June 15, 1999 (Filed herewith.)

10.48          First  Amendment to Loan  Agreement  and Stock  Pledge  Agreement
               between the Company and Angelo S. Morini dated  December 16, 2002
               (Filed herewith.)

10.49          Stock Option  Agreement  between the Company and Angelo S. Morini
               dated June 15, 1999 (Filed herewith.)

10.50          Special  Services  Agreement  between  the  Company and Angelo S.
               Morini dated December 4, 2002 (Filed herewith.)

99.1           Certification  of the  Company's  Chief  Executive  Officer dated
               February 14, 2003 (Filed herewith.)

99.2           Certification  of the  Company's  Chief  Financial  Officer dated
               February 14, 2003 (Filed herewith.)


*              Previously Filed

                                       27
<PAGE>

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

There was one report on Form 8-K dated  December  17,  2002  whereby the Company
disclosed  that  Angelo  S.  Morini  resigned  from  his  position  with  Galaxy
Nutritional Foods ("the Company") as Chief Executive Officer,  but will continue
to remain as President of the Company.  Christopher J. New, the Company's  Chief
Operating Officer,  then assumed the role and  responsibilities of the Company's
Chief Executive  Officer.  In addition,  the Company disclosed that it increased
the number of Board members to six and then elected four new members,  including
Charles L. Jarvie,  Michael H. Jordan, Thomas R. Dykman, and David H. Lipka, and
simultaneously  accepted  the  resignations  of  Marshall  K. Luther and Douglas
A.Walsh, who resigned in order to pursue other opportunities.  Charles L. Jarvie
assumed the role as the Chairman of the Board, Angelo S. Morini assumed the role
as Vice-Chairman of the Board, and Thomas R. Dykman assumed the role as Chairman
of the Audit  Committee.  On December 18, 2002, the Board  increased the size to
seven  and  appointed  Christopher  J. New as a  director.  There  were no other
reports on Form 8-K filed during the three months ended December 31, 2002.

                                       28
<PAGE>

                                   SIGNATURES
                                   ----------

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


                                        GALAXY NUTRITIONAL FOODS, INC.


Date: February 14, 2003                 /s/ Christopher J. New
                                        -----------------------------
                                        Christopher J. New
                                        Chief Executive Officer
                                        (Principal Executive Officer)


Date: February 14, 2003                 /s/ Salvatore J. Furnari
                                        -----------------------------
                                        Salvatore J. Furnari
                                        Chief Financial Officer
                                        (Principal Financial Officer)

                                       29
<PAGE>

I, Christopher J. New, certify that:

1.   I have reviewed this  quarterly  report on Form 10-Q of Galaxy  Nutritional
     Foods, Inc.("the registrant");

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based  on  my  knowledge,   the  financial   statements,   other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most  recent  evaluation  to the  registrant's  auditors  and the audit
     committee of registrant's board of directors:

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors and material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


                           /s/ Christopher J. New
                           ----------------------------
                           Christopher J. New
                           Chief Executive Officer
                           February 14, 2003


                                       30
<PAGE>

I, Salvatore J. Furnari, certify that:

1.   I have reviewed this  quarterly  report on Form 10-Q of Galaxy  Nutritional
     Foods, Inc.("the registrant");

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based  on  my  knowledge,   the  financial   statements,   other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a.   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     b.   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c.   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most  recent  evaluation  to the  registrant's  auditors  and the audit
     committee of registrant's board of directors:

     a.   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors and material  weaknesses in
          internal controls; and

     b.   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


                               /s/ Salvatore J. Furnari
                               ----------------------------
                               Salvatore J. Furnari
                               Chief Financial Officer
                               February 14, 2003

                                       31
<PAGE>