SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
       __________________________________________________________________

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                          _____________________________

                         COMMISSION FILE NUMBER 1-15345


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



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

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

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

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

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

     On August 14, 2003, there were 15,153,932  shares of Common Stock, $.01 par
value per share, outstanding.

                                       1
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                               INDEX TO FORM 10-Q
                         FOR QUARTER ENDED JUNE 30, 2003

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

      ITEM 1.  FINANCIAL STATEMENTS

           Balance Sheets                                                      4
           Statements of Operations                                            5
           Statement of Stockholders' Equity                                   6
           Statements of Cash Flows                                            7
           Notes to Financial Statements                                       8

      ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATION                   16

      ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     22

      ITEM 4.  CONTROLS AND PROCEDURES                                        22

PART II.       OTHER INFORMATION

      ITEM 1.  LEGAL PROCEEDINGS                                              24

      ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS                      24

      ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                25

      ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                               26

SIGNATURES                                                                    31

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         JUNE 30,        MARCH 31,
                                                           NOTES           2003            2003
                                                           -----       ------------    ------------
                                                                       (UNAUDITED)
<S>                                                          <C>       <C>             <C>
                         ASSETS

CURRENT ASSETS:
  Cash                                                                 $         --    $      1,598
  Trade receivables, net                                                  4,220,674       5,109,247
  Inventories                                                             5,161,497       5,294,500
  Prepaid expenses and other                                                613,001         553,396
                                                                       ------------    ------------

      Total current assets                                                9,995,172      10,958,741

PROPERTY AND EQUIPMENT, NET                                              21,701,667      22,168,404
OTHER ASSETS                                                                454,343         274,918
                                                                       ------------    ------------

      TOTAL                                                            $ 32,151,182    $ 33,402,063
                                                                       ============    ============

          LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Book overdrafts                                                      $    193,880    $  1,151,276
  Line of credit                                              2           4,690,218       4,939,894
  Accounts payable                                                        1,844,186       2,622,996
  Accrued liabilities                                                     1,616,483       1,891,773
  Current portion of term notes payable                       2           1,285,610       1,497,760
  Current portion of subordinated note payable                2                  --       2,000,000
  Current portion of obligations under capital leases                       334,201         363,152
                                                                       ------------    ------------

      Total current liabilities                                           9,964,578      14,466,851

TERM NOTES PAYABLE, less current portion                      2           9,561,742       7,786,985
SUBORDINATED NOTE PAYABLE                                     2                  --       2,000,000
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                      318,227         383,210
                                                                       ------------    ------------

      Total liabilities                                                  19,844,547      24,637,046
                                                                       ------------    ------------

COMMITMENTS AND CONTINGENCIES                                 3                  --              --

REDEEMABLE CONVERTIBLE PREFERRED STOCK                        4           3,114,652       2,324,671

STOCKHOLDERS' EQUITY:                                         4
  Common stock                                                              151,529         127,617
  Additional paid-in capital                                             64,498,561      59,800,732
  Accumulated deficit                                                   (42,565,446)    (40,595,342)
                                                                       ------------    ------------

                                                                         22,084,644      19,333,007
  Less: Notes receivable arising from the exercise of        5,8
        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                                          9,191,983       6,440,346
                                                                       ------------    ------------

      TOTAL                                                            $ 32,151,182    $ 33,402,063
                                                                       ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       1
<PAGE>

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,                                NOTES           2003            2002
                                                           -----       ------------    ------------
<S>                                                          <C>       <C>             <C>
NET SALES                                                              $  8,695,781    $  9,977,704

COST OF GOODS SOLD                                                        6,051,116       7,236,504
                                                                       ------------    ------------
  Gross margin                                                            2,644,665       2,741,200
                                                                       ------------    ------------

OPERATING EXPENSES:
Selling                                                                   1,313,873         989,637
Delivery                                                                    451,817         571,562
Non-cash compensation related to options and warrants        1,5          1,307,131      (1,637,261)
General and administrative                                                  983,479         841,506
Research and development                                                     63,084          57,774
                                                                       ------------    ------------
  Total operating expenses                                                4,119,384         823,218
                                                                       ------------    ------------

INCOME (LOSS) FROM OPERATIONS                                            (1,474,719)      1,917,982

Interest expense                                                            495,385         898,472
                                                                       ------------    ------------

NET INCOME (LOSS)                                                      $ (1,970,104)   $  1,019,510

Preferred Stock Dividends                                     4              54,780          70,000
Preferred Stock Accretion to Redemption Value                 4             894,929         339,277
                                                                       ------------    ------------

NET INCOME (LOSS) TO COMMON SHAREHOLDERS                               $ (2,919,813)   $    610,233
                                                                       ============    ============

BASIC NET INCOME (LOSS) PER COMMON SHARE                      6        $      (0.21)   $       0.05
                                                                       ============    ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE                    6        $      (0.21)   $       0.05
                                                                       ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                       Common Stock                                          Notes
                                  ----------------------    Additional     Accumulated   Receivable for   Treasury
                                    Shares     Par Value  Paid-In Capital    Deficit      Common Stock      Stock          Total
                                  --------------------------------------------------------------------------------------------------
<S>                               <C>          <C>         <C>            <C>             <C>             <C>          <C>
Balance at March 31, 2003         12,761,685   $ 127,617   $59,800,732    $(40,595,342)   $(12,772,200)   $(120,461)   $  6,440,346

Exercise of warrants                 200,000       2,000       358,000              --              --           --         360,000
Issuance of common stock           2,138,891      21,389     3,771,731              --              --           --       3,793,120
Conversion of preferred stock         52,302         523        85,686              --              --           --          86,209
Fair value of warrants and
  employee options issued                 --          --       565,800              --              --           --         565,800
Non-cash compensation related
  to variable securities                  --          --       833,642              --              --           --         833,642
Dividends on preferred stock              --          --       (54,780)             --              --           --         (54,780)
Accretion of discount on
  preferred stock                         --          --      (862,250)             --              --           --        (862,250)
Net loss                                  --          --            --      (1,970,104)             --           --      (1,970,104)
                                  --------------------------------------------------------------------------------------------------

Balance at June 30, 2003          15,152,878   $ 151,529   $64,498,561    $(42,565,446)   $(12,772,200)   $(120,461)   $  9,191,983
                                  ==================================================================================================
</TABLE>

                See accompanying notes to financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,                                NOTES           2003            2002
                                                           -----       ------------    ------------
<S>                                                          <C>       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Income (Loss)                                                    $ (1,970,104)   $  1,019,510
  Adjustments to reconcile net income (loss) to net cash
    from (used in) operating activities:
      Depreciation and amortization                                         558,125         568,770
      Amortization of debt discount and financing costs                      99,440         439,272
      Provision for losses on trade receivables                             (91,000)       (179,037)
      Non-cash compensation related to options and warrants  1,5          1,307,131      (1,637,261)
      (Increase) decrease in:
        Trade receivables                                                   979,573         155,610
        Inventories                                                         133,003         793,019
        Prepaid expenses and other                                          (59,605)        (21,636)
      Increase (decrease) in:
        Accounts payable                                                   (778,810)       (559,571)
        Accrued liabilities                                                (316,130)        144,863
                                                                       ------------    ------------

   NET CASH FROM (USED IN) OPERATING ACTIVITIES                            (138,377)        723,539
                                                                       ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                        (91,388)       (126,623)
  Increase in other assets                                                    1,807              --
                                                                       ------------    ------------

   NET CASH FROM (USED IN) INVESTING ACTIVITIES                             (89,581)       (126,623)
                                                                       ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Book overdrafts                                                          (957,396)       (493,285)
  Net payments on lines of credit                                          (249,676)     (1,021,456)
  Repayments on subordinated note payable                     2          (4,000,000)             --
  Borrowings on term note payable                             2           2,000,000         500,000
  Repayments on term notes payable                                         (437,393)       (876,802)
  Principal payments on capital lease obligations                           (93,934)        (91,715)
  Financing costs for long term debt                                       (188,361)        (83,289)
  Proceeds from issuance of common stock,
    net of offering costs                                     4           3,793,120       1,467,000
  Proceeds from exercise of common stock options                                 --           4,250
  Proceeds from exercise of common stock warrants             2             360,000              --
                                                                       ------------    ------------

   NET CASH FROM (USED IN) FINANCING ACTIVITIES                             226,360        (595,297)
                                                                       ------------    ------------

NET INCREASE (DECREASE) IN CASH                                              (1,598)          1,619

CASH, BEGINNING OF PERIOD                                                     1,598             168
                                                                       ------------    ------------

CASH, END OF PERIOD                                           7        $         --    $      1,787
                                                                       ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       4
<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,  2003  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  31,2003.  Interim  results of operations  for the  three-month
     period ended June 30, 2003 may not necessarily be indicative of the results
     to be expected for the full year.

     Stock Based Compensation
     ------------------------
     The Company accounts for its stock-based employee  compensation plans under
     the accounting  provisions of Accounting  Principles  Board Opinion No. 25,
     "Accounting for Stock Issued to Employees", and has furnished the pro forma
     disclosures  required  under  Statement of Financial  Accounting  Standards
     ("SFAS") No. 123, "Accounting for Stock-Based  Compensation",  and SFAS No.
     148, "Accounting for Stock-Based Compensation - Transition and Disclosure".

     SFAS No. 123,  "Accounting  for Stock  Based  Compensation",  requires  the
     Company to provide pro forma  information  regarding  net income (loss) and
     earnings (loss) per share amounts as if compensation cost for the Company's
     employee and director stock options had been  determined in accordance with
     the fair market  value-based method prescribed in SFAS No. 123. The Company
     estimates  the fair value of each stock option at the grant date by using a
     Black-Scholes option-pricing model. The following assumptions were used for
     options issued during the periods:

          Quarter Ended                   June 30, 2003      June 30, 2002
                                          -------------      -------------
          Dividend Yield                       None               None
          Volatility                        41% to 42%         37% to 44%
          Risk Free Interest Rate         2.01% to 3.77%     1.71% to 5.03%
          Expected Lives in Months           36 to 120          60 to 120

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

<TABLE>
<CAPTION>
          Quarter Ended                                         June 30, 2003      June 30, 2002
                                                                --------------     --------------
<S>                                                             <C>                <C>
          Net income (loss) to common shareholders as           $   (2,919,813)    $      610,233
          reported
          Add:  Stock-based compensation expense included
          in reported net income                                     1,307,131         (1,637,261)
          Deduct:  Stock-based compensation expense
          determined under fair value based method for all
          awards                                                    (1,500,127)        (2,404,346)
                                                                --------------     --------------
          Pro forma net income (loss) to common shareholders    $   (3,112,809)    $   (3,431,374)
                                                                ==============     ==============

          Net income (loss) per common share:
            Basic - as reported                                 $        (0.21)    $         0.05
                                                                ==============     ==============
            Basic - pro forma                                   $        (0.23)    $        (0.30)
                                                                ==============     ==============
            Diluted - as reported                               $        (0.21)    $         0.05
                                                                ==============     ==============
            Diluted - pro forma                                 $        (0.23)    $        (0.30)
                                                                ==============     ==============
</TABLE>

                                       7
<PAGE>

     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
     convertible 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  inventory  obsolescence,  and  valuation of deferred  taxes,  employee
     options and warrants. Actual results could differ from those estimates.

     New Accounting Pronouncements
     -----------------------------
     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
     Compensation--Transition  and  Disclosure--an  Amendment to SFAS 123." SFAS
     148 provides two additional  transition methods for entities that adopt the
     preferable method of accounting for stock based compensation.  Further, the
     statement requires  disclosure of comparable  information for all companies
     regardless of whether,  when, or how an entity adopts the preferable,  fair
     value based method of accounting.  These  disclosures  are now required for
     interim  periods in  addition to the  traditional  annual  disclosure.  The
     amendments to SFAS 123, which provides for additional  transition  methods,
     are  effective  for fiscal years ending after  December 15, 2002,  although
     earlier  application  is  permitted.   The  amendments  to  the  disclosure
     requirements  are  required  for  financial  reports  containing  condensed
     financial statements for interim periods beginning after December 15, 2002.
     Effective  April 1, 2003,  the  Company  adopted  the fair value  method of
     recording  compensation  expense related to all stock options granted after
     March 31, 2003, in accordance  with SFAS 123 and SFAS 148 (the  prospective
     method,  as  defined  by SFAS  148).  Accordingly,  the fair value of stock
     options  as  determined  on the  date  of  grant  using  the  Black-Scholes
     option-pricing  model,  will be  expensed  over the  vesting  period of the
     related stock options.  The negative  impact on diluted  earnings per share
     related  to the  issuance  of  employee  stock  options  in fiscal  2004 is
     estimated to be approximately $0.01. The actual impact may differ from this
     estimate as this estimate is based upon a number of factors including,  but
     not limited to, the number of stock  options  granted and the fair value of
     the stock options on the date of grant.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of both Liabilities and Equity."
     The  Statement  establishes  standards  for how an  issuer  classifies  and
     measures  in  its  statement  of  financial   position  certain   financial
     instruments  with  characteristics  of  both  liabilities  and  equity.  It
     requires that an issuer classify a financial  instrument that is within its
     scope  as a  liability  (or an asset in some  circumstances)  because  that
     financial  instrument  embodies an obligation  of the issuer.  Many of such
     instruments  were  previously   classified  as  equity.  The  statement  is
     effective for financial  instruments entered into or modified after May 31,
     2003,  and  otherwise is effective  at the  beginning of the first  interim
     period  beginning  after June 15,  2003,  except for  mandatory  redeemable
     financial  instruments  of  nonpublic  entities.  The  application  of  the
     requirements of SFAS 150 did not have any impact on the Company's financial
     position or result of operations.

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

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

(2)  LINE OF CREDIT AND NOTES PAYABLE
     --------------------------------
     Effective  May 30,  2003,  the  Company  obtained  from  Textron  Financial
     Corporation ("Textron") a revolving credit facility (the "Textron Loan") in
     the  maximum  principal  amount  of  $7,500,000  pursuant  to the terms and
     conditions of a Loan and Security  Agreement  dated May 27, 2003 (the "Loan
     Agreement").  The  Textron  Loan is  secured  by the  Company's  inventory,
     accounts receivable and all other assets. Generally, subject to the maximum
     principal amount,  which can be borrowed under the Textron Loan and certain
     reserves that must be maintained  during the term of the Textron Loan,  the
     amount  available  under the Textron Loan for borrowing by the Company from
     time to time is equal to the sum of (i) up to  eight-five  percent (85%) of
     the net amount of its eligible  accounts  receivable  plus (ii) up to sixty

                                       8
<PAGE>

     percent (60%) of the Company's eligible inventory not to exceed $3,500,000.
     Advances under the Textron Loan bear interest at a variable rate,  adjusted
     on the first (1st) day of each month,  equal to the prime rate plus one and
     three-quarter percent (1.75%) per annum (6% at June 30, 2003) calculated on
     the average  cash  borrowings  for the  preceding  month.  The Textron Loan
     matures and all amounts  are due and payable in full on May 26,  2006.  The
     Textron Loan replaced the Company's asset-based credit facility with FINOVA
     Capital  Corporation on May 30, 2003,  which had an  outstanding  principal
     balance of $4,254,667 at the time of replacement.  As of June 30, 2003, the
     outstanding principal balance on the Textron Loan was $4,690,218.

     The Textron Loan described above contains  certain  financial and operating
     covenants.  In August 2003, the Company notified Textron that it had failed
     to comply with the fixed charge coverage ratio in June 2003.  Pursuant to a
     certain  Waiver Letter dated August 13, 2003,  Textron  agreed to waive the
     requirement to meet the fixed charge coverage ratio for each monthly period
     through September 30, 2003. Additionally,  Textron agreed that after August
     13, 2003,  all of the  financial  covenants  required of the Company  under
     Section  7.6 of the  Loan  Agreement  will  be  measured  and  tested  on a
     quarterly rather than monthly basis.

     On September 30, 1999, the Company obtained a $4 million  subordinated loan
     from FINOVA  Mezzanine to finance  additional  working  capital and capital
     improvement  needs.  This  loan was paid in full as of May 30,  2003 by the
     proceeds from a new loan from  SouthTrust  Bank as discussed below and from
     the  equity  proceeds  raised in the  private  placements  in May 2003,  as
     discussed in Note 4. In accordance with a warrant  agreement from September
     30,  1999,  the  exercise  price on 200,000  warrants  still held by FINOVA
     Mezzanine on May 30, 2003,  was reduced from $3.41 to $1.80 per share based
     on the  sales  price of the  Company's  common  stock in May  2003.  FINOVA
     Mezzanine  exercised  these  warrants  to  purchase  200,000  shares of the
     Company's  common stock on June 2, 2003. The Company  received net proceeds
     of $119,000 after a deduction of $241,000 due to FINOVA Capital Corporation
     for waiver fees  pursuant  to a certain  Amendment  and  Limited  Waiver to
     Security Agreement dated June 26, 2002.

     Simultaneous  with the closing of the Textron Loan in May 2003,  SouthTrust
     Bank  extended  the  Company  a new term  loan in the  principal  amount of
     $2,000,000.  This loan was consolidated  with the Company's March 2000 term
     loan with SouthTrust Bank, which had a then outstanding  principal  balance
     of $8,131,985 for a total term loan amount of $10,131,985. The revised term
     loan bears interest at SouthTrust Bank's prime rate of interest plus 1% (5%
     at June 30, 2003), and is due in increasing principal  installments by June
     2009.  Each month,  the Company  will pay the accrued  interest on the loan
     plus  principal  amounts as follows:  $75,000  from July 2003 to June 2004,
     $110,000  from July 2004 to June 2005,  and  $166,250  from July 2005 until
     maturity  in June  2009.  This  note  is  secured  by all of the  Company's
     equipment and certain  related  assets.  The proceeds of the new term loan,
     together with the proceeds from certain sales of the Company's common stock
     conducted  in May 2003 (as  discussed  in Note 4),  were  used to repay the
     Company's  $4,000,000  mezzanine  loan from FINOVA  Mezzanine.  The balance
     outstanding on the new term loan as of June 30, 2003 was $10,056,742.

     In October  2000,  the  Company  obtained a $1.5  million  bridge loan from
     SouthTrust  Bank,  which is guaranteed  by Angelo S. Morini,  the Company's
     President, and secured by the pledge of one million shares of the Company's
     common  stock owned by him.  Interest on this note is at the prime rate (4%
     at June 30,  2003).  The  loan is  being  paid  down by  monthly  principal
     payments of $50,000 plus  interest.  In May 2003,  SouthTrust  Bank amended
     this loan to extend the  maturity  date from  October  2003 to April  2004.
     Principal  payments  of $50,000 are due each month  beginning  June 1, 2003
     until  maturity.  The balance  outstanding on this note as of June 30, 2003
     was $401,000. In consideration of his guarantee and stock pledge in respect
     to this loan,  the Company  issued an option to acquire  343,125  shares of
     common stock to Mr. Morini on December 15, 2000. The option has an exercise
     price of $3.88 per share, which is equal to the fair value of the Company's
     common  stock  at the date of the  grant.  Such  options  shall  expire  on
     December 15, 2010.

     In connection with the consolidations and extensions of the SouthTrust Bank
     loans as described  above, the Company issued a warrant to purchase 100,000
     shares of the Company's  common stock to  SouthTrust  Bank on May 29, 2003.
     The warrant is exercisable until June 1, 2009 at an exercise price of $1.97
     per share. The fair value of this warrant was estimated at $101,000,  which
     will be amortized as non-cash  compensation over 72 months beginning in May
     2003.

     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 the prime rate (4% at June 30,
     2003) and is due on or before June 15, 2006.

                                       9
<PAGE>

     On August 15, 2002, the Company executed and delivered to Target Container,
     Inc. a $347,475  promissory note 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 June 30, 2003 was $59,610.


(3)  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  certain  claims  of  U.S.  Patents  Nos.  5,112,632,   5,440,860,
     5,701,724  and  6,085,680.  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. Schreiber Foods has not specified the amount of money
     damages  it  plans  to seek  at the  time of  trial;  however,  preliminary
     discussions  between  the parties  lead the  Company to  conclude  that the
     amount  requested  will be at least several  million  dollars,  and will be
     based roughly on a cents-per-pound of product formula.

     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.  However,  the
     Company  understands  that a motion to rescind the verdict and  judgment is
     currently  pending.  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 its Kustner  machines.  The two Hart Design machines were
     modified by the  manufacturer  from the standard Hart Design  configuration
     and were  delivered to the Company as modified.  The Company  believes that
     the  modifications to the machines take them even further outside the ambit
     of the Schreiber patents at issue.

     As well, the Company has,  through legal counsel,  advised the Court of the
     scope it believes should be given to the claims at issue in the lawsuit (as
     part of the  so-called  Markman  briefing  process).  Schreiber has taken a
     different view of the claims. The Court conducted a hearing on the issue on
     August 4, 2003,  and the Company  received the Court's ruling on August 13,
     2003.  The Court  adopted  Schreiber's  view on many of the claim  terms at
     issue.  The Company,  through legal and patent counsel,  is still reviewing
     the ruling.

     The  Company  and  Schreiber  recently  participated  in a  Court-sponsored
     mediation  of claims that did not result in a settlement  agreement.  Based
     upon the  failure of that  mediation  process to resolve  the  matter,  the
     Company  requested the formal  opinion of patent counsel with regard to the
     merits of Schreiber's patent and Schreiber's claims of infringement. Patent
     counsel has advised that, in his opinion,  the patent claim  interpretation
     being  asserted  by the  Company  in the  Markman  briefing  process is the
     correct  one,  and that the  Company's  machines do not infringe the patent
     claims if that claim  interpretation  is adopted by the Court.  The Company
     has requested  patent counsel to review his opinion in light of the Court's
     ruling.

     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.

(4)  CAPITAL STOCK
     -------------
     Preferred and Common Stock Issuances
     ------------------------------------
     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 from BH Capital  Investments,  L.P. and Excalibur  Limited
     Partnership  (the "Series A Preferred  Holders")  proceeds of approximately
     $3,082,000 less costs of $181,041 for the

                                       10
<PAGE>

     issuance of 72,646 shares of the Company's  Series A convertible  preferred
     stock with a face value of  $3,500,000  and warrants to purchase  shares of
     the Company's common stock. The shares are subject to certain designations,
     preferences  and rights  including  the right to convert  such  shares into
     shares of common stock at any time. The per share  conversion  price is now
     equal the  quotient  of $48.18,  plus all accrued  dividends  that are then
     unpaid for each share of the Series A convertible preferred stock then held
     by the holder, ($57.81 at June 30, 2003), divided by the lower of (x) $1.75
     or (y) 95% of the  average  of the two  lowest  closing  bid  prices of the
     Company's  common stock on the American Stock Exchange  ("AMEX") out of the
     fifteen trading days immediately prior to conversion.

     In no case,  however,  shall any Series A Preferred  Holder be permitted to
     convert the Series A  convertible  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 convertible
     preferred  stock will vary  depending  upon the  closing  bid prices of the
     Company's common stock on the AMEX.

     The Series A  Preferred  Holders  have the right to require  the Company to
     redeem their shares of preferred  stock on April 6, 2005 or upon occurrence
     of other specified events.  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  number of shares of common  stock  that  would be then  issuable  upon
     conversion of the preferred stock and times the market price on the date of
     redemption.  The market price is based on a five-day average of the closing
     bid prices for the five trading days prior to 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 the  Series A
     convertible  preferred stock,  respectively,  plus accrued dividends,  into
     424,950 and 199,986  shares of common stock,  respectively.  The conversion
     price was $1.3633 based on 95% of the average of the two lowest closing bid
     prices  on the AMEX  for the  fifteen  trading  days  immediately  prior to
     conversion.  On June 3, 2003, BH Capital Investments,  L.P. converted 1,500
     shares of the Series A  convertible  preferred  stock into 52,302 shares of
     common stock.  The conversion price was $1.6483 based on 95% of the average
     of the two lowest  closing bid prices on the AMEX for the  fifteen  trading
     days immediately prior to conversion.

     The Series A Preferred Holders have the right to receive on any outstanding
     Series A convertible  preferred  stock a ten percent stock  dividend on the
     shares, payable one year after the issuance of such preferred stock, and an
     eight percent stock  dividend for the  subsequent  three years  thereafter,
     payable in either cash or shares of preferred  stock.  For the three months
     ended June 30, 2003 and 2002, the Company recorded  preferred  dividends of
     $54,780 and $70,000,  respectively,  in connection with the issuance of the
     preferred  stock on April 6, 2001. On April 6, 2001,  the Company  recorded
     the  initial  carrying  value of the  preferred  stock as  $521,848,  which
     included  adjustment for the estimated  fair value of the initial  warrants
     ($277,200) and  redemption  warrants  ($277,200).  Each quarter the Company
     calculates  the  estimated  redemption  value based on the formulas  stated
     above  and the  difference  between  the  initial  carrying  value  and the
     estimated  redemption value is then accreted over the redemption period (48
     months  beginning  April  2001)  using  the  straight  line  method,  which
     approximates the effective interest method. For the three months ended June
     30,  2003  and  2002,   the  Company   recorded   $894,929  and   $339,277,
     respectively, related to the accretion of the redemption value of preferred
     stock and the beneficial  conversion  feature of accrued  dividends.  As of
     June 30,  2003,  the value of the  remaining  55,884  shares of  redeemable
     convertible preferred stock is $3,114,652.

     On November 7, 2002, BH Capital  Investments,  L.P. and  Excalibur  Limited
     Partnership,  as  holders  of a  majority  of the  shares  of the  Series A
     convertible  preferred  stock,  exercised  their right  under the  Purchase
     Agreement   to  require  the  Company  to  solicit  the   approval  of  its
     shareholders  for the  Company's  issuance  of all of the  shares of common
     stock  potentially  issuable  upon  conversion  of the Series A convertible
     preferred  stock in full and the  exercise  of their  warrants.  This right
     arose  when the  number  of shares of common  stock  they are  entitled  to
     receive,  assuming  conversion  of  the  all of the  Series  A  convertible
     preferred  stock and the  exercise of their  warrants,  exceeded 15% of the
     Company's then-outstanding shares of common stock. The Company was required
     to hold a  shareholders  meeting  to  solicit  such  approval  on or before
     February  5, 2003.  Pursuant to a letter  agreement  in January  2003,  the
     holders of the Series A  convertible  preferred  stock agreed to extend the
     deadline to hold a meeting to March 31, 2003. Subsequently, pursuant to the
     Stock Purchase Option Agreement  described below, the holders of the Series
     A convertible  preferred  stock agreed,  among other things,  to extend the
     deadline to September 30, 2003.

     On April 24, 2003,  the Company and the holders of the Series A convertible
     preferred stock entered into that certain Stock Purchase Option  Agreement,
     whereby the Company was granted the option to purchase all of the shares of

                                       11
<PAGE>

     the Series A convertible  preferred stock owned by such holders at the time
     the purchase is consummated.  The option may be exercised by the Company or
     its  assigns at any time  until the  earlier of five days after the date of
     the  Company's  next annual  shareholders  meeting or  September  30, 2003.
     Pursuant  to such  agreement,  the  holders  of the  Series  A  convertible
     preferred  stock also agreed to extend the deadline to hold a  shareholders
     meeting to September 30, 2003. In exchange for the option and the extension
     of the  annual  meeting  date,  the  Company  issued to each of BH  Capital
     Investments,  L.P. and Excalibur Limited  Partnership  warrants to purchase
     250,000  shares  of  the  Company's   common  stock.   These  warrants  are
     exercisable  until July 15,  2006 at an  exercise  price equal to $2.00 per
     share,  which  price was  greater  than the market  value of the  Company's
     common stock on April 24, 2003.  The Company  agreed to register the shares
     underlying  the warrants by no later than December 31, 2003. The fair value
     of these warrant was estimated at $230,000,  which was recorded as non-cash
     compensation expense in the quarter ended June 30, 2003.

     On April 10, 2003, the Company entered into a credit  arrangement  with one
     of its greater than 5% shareholders pursuant to which the shareholder would
     purchase raw materials for the Company in an aggregate amount not to exceed
     $500,000.  The amounts paid for the purchased  materials,  plus interest at
     the rate of 15% per annum on such  amounts,  was due and payable in full on
     July 9, 2003.  In  consideration  of the credit  arrangement,  the  Company
     issued to the  shareholder  a warrant  to  purchase  100,000  shares of the
     Company's  common  stock at an exercise  price of $1.70.  The fair value of
     this  warrant  was  estimated  at $63,000,  which was  recorded as non-cash
     compensation  expense in the quarter ended June 30, 2003.  All amounts owed
     under  the  credit   arrangement  were  repaid  in  full  and  such  credit
     arrangement was terminated on June 27, 2003.

     Pursuant  to the  Company's  Restated  Certificate  of  Incorporation,  the
     warrant issued to the above shareholder caused the maximum conversion price
     of the Series A convertible preferred stock to decrease to $1.75, such that
     the conversion  rate of the Series A convertible  preferred stock to common
     stock is currently  equal to the  quotient of (i) $48.18,  plus all accrued
     dividends  that are then unpaid for each share of the Series A  convertible
     preferred stock then held by the holder,  divided by (ii) the lesser of (x)
     $1.75 or (y) 95% of the average of the two lowest closing bid prices of the
     Company's  common stock on AMEX out of the fifteen trading days immediately
     prior to conversion.

     Pursuant to seven  Securities  Purchase  Agreements dated May 21, 2003, the
     Company  issued a total of 2,138,891  shares of its common stock at a price
     per share  equal to $1.80 for  aggregate  gross  proceeds to the Company of
     $3,850,000. Pursuant to a Registration Rights Agreement dated May 21, 2003,
     the Company has agreed to register the shares of common stock  purchased by
     the investors  with the  Securities  and Exchange  Commission no later than
     November 24, 2003.  Sales to related parties under the Securities  Purchase
     Agreements  include:  555,556  shares of common  stock sold at an aggregate
     sales  price  of  $1,000,000  to  Frederick   DeLuca,  a  greater  than  5%
     shareholder; 55,556 shares of common stock sold at an aggregate sales price
     of $100,000 to David H. Lipka, a Director of the Company; 83,333 and 55,556
     shares of common  stock sold at an  aggregate  sales price of $150,000  and
     $100,000,   respectively,   to  Ruggieri  of  Windermere   Family   Limited
     Partnership  and Ruggieri  Financial  Pension Plan,  respectively,  each an
     affiliate of John Ruggieri,  the Company's Vice President of Manufacturing;
     1,111,112  shares of  common  stock  sold at an  aggregate  sales  price of
     $2,000,000 to  Fromageries  Bel S.A., a leading  branded  cheese company in
     Europe which signed a Master Distribution and Licensing Agreement effective
     May 22,  2003 with the  Company.  Sales to  non-related  parties  under the
     Securities Purchase Agreements include: 138,889 shares of common stock sold
     at an aggregate  sales price of $250,000 Apollo Capital  Management  Group;
     and  138,889  shares of common  stock sold at an  aggregate  sales price of
     $250,000 Apollo MicroCap Partners, L.P.

     The Company used  $2,000,000 of the proceeds  generated from these May 2003
     private placements to pay down the balance of the Company's  mezzanine loan
     from FINOVA Mezzanine Capital, Inc. The Company then applied the additional
     proceeds from the new loan from SouthTrust Bank, as discussed above, to pay
     the remaining $2,000,000 on the FINOVA Mezzanine loan. The Company utilized
     the  remainder of the private  placement  proceeds for working  capital and
     general corporate purposes.


(5)  NON-CASH COMPENSATION RELATED TO OPTIONS AND WARRANTS
     -----------------------------------------------------
     Notes Receivable for Common Stock
     ---------------------------------
     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 covers specific events that occurred after December 15, 1998 and was
     effective  as of July 2,  2000.  FIN 44  clarified  that  when an option is
     repriced,  it is treated as a variable  option and is marked to market each
     quarter.  Accordingly,  any increase in the market  price of the  Company's
     common stock over the exercise price of the options that was not previously
     recorded is recorded as compensation  expense at each reporting  period. If
     there is a decrease in the market

                                       12
<PAGE>

     price of the Company's common stock compared to the prior reporting period,
     the reduction is recorded as compensation  income.  Compensation  income is
     limited to the original base  exercise  price (the "Floor") of the options.
     In accordance with FIN 44, the underlying shares related to the $12,772,200
     note receivable from Angelo S. Morini,  as disclosed in Note 8, are treated
     as variable  due to the nature of the note being  non-interest  bearing and
     non-recourse.  There was no non-cash compensation expense or income related
     to these  shares  recorded in the three  months  ended June 30, 2003 as the
     price of the Company's  common stock at the beginning and end of the period
     was below the Floor. The Company recorded non-cash  compensation  income of
     $1,690,286  for the three  months ended June 30, 2002 based on the decrease
     in the market price of the  Company's  common stock from $5.43 at March 31,
     2002 to $4.85 at June 30, 2002.

     Option and Warrant Repricing
     ----------------------------
     On October 11, 2002, the Company  repriced all outstanding  options granted
     to employees prior to October 11, 2002  (4,284,108  shares at former prices
     ranging  from $2.84 to $10.28) to the market  price of $2.05 per share.  In
     addition,  the Company  repriced the  outstanding  warrants held by current
     consultants as of October 11, 2002 (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 and such
     variable accounting  treatment will continue 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 agreed to reverse the repricing of his 3,692,035  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 any  outstanding  options  related to these  reversed-repriced
     options and all new options issued to the Company's President prior to June
     4, 2003 in accordance with variable accounting standards each quarter.

     The Company recorded $833,642 as non-cash  compensation  expense related to
     these  variable  options and  warrants in the three  months  ended June 30,
     2003. The remaining  outstanding  variable  options and warrants as of June
     30, 2003 were 3,890,860.

     Option and Warrant Issuances
     ----------------------------
     The Company recorded $485,806 and $50,700 as non-cash  compensation expense
     related to employee  options and warrants  that it issued  during the three
     months  ended  June  30,  2003 and  2002,  respectively.  Additionally,  it
     recorded non-cash  compensation income of $12,317 and non-cash compensation
     expense of $2,325 related to the amortization of the fair value of warrants
     it issued in periods prior to June 30, 2003 and 2002, respectively.

(6)  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 June 30,                                          2003           2002
--------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>
Net income (loss) per common share                              $ (2,919,813)   $    610,233
Basic net income (loss) per common share                        $      (0.21)   $       0.05
                                                                ------------    ------------

Average shares outstanding - basic                                13,590,879      11,548,929
"In-the-money" shares under stock option agreements                       --       2,570,504
"In-the-money" shares under stock warrant agreements                      --         460,429
Less:  Shares assumed repurchased under treasury stock method             --      (2,246,511)
                                                                ------------    ------------

Average shares outstanding - diluted                              13,590,879      12,333,351
                                                                ------------    ------------

Diluted income (loss) per common share                          $      (0.21)   $       0.05
                                                                ============    ============
</TABLE>

     Potential conversion of Series A convertible  preferred stock for 1,815,502
     shares, options for 4,651,521 shares and warrants for 1,242,856 shares have
     not been  included  in the  computation  of diluted  net income  (loss) per
     common  share for the three  months  ended June 30,  2003,  as their effect
     would  be  antidilutive.  Potential  conversion  of  Series  A  convertible
     preferred  stock for  943,648  shares,  options  for  1,401,296  shares and
     warrants for 195,141 shares have not

                                       13
<PAGE>

     been  included in the  computation  of diluted net income (loss) per common
     share for the three months  ended June 30,  2002,  as their effect would be
     antidilutive.


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

<TABLE>
<CAPTION>
          Three months ended June 30,                                     2003              2002
          --------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>
          Non-cash financing and investing activities:
          Fair value of options and warrants issued                   $565,800          $ 50,700
          Accrued preferred stock
          dividends                                                     54,780            70,000
          Beneficial conversion feature related to preferred
          stock dividends                                               25,105            12,971
          Accretion of discount on preferred stock                     869,824           326,306
          Cash paid for:
          Interest                                                     530,198           451,766
          Income taxes                                                      --            24,000
</TABLE>

(8)  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.  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 bridge loan from SouthTrust Bank, which is guaranteed by Mr. Angelo
     S. Morini, the Company's President, and secured by one million of his above
     mentioned 2,914,286 shares of the Company's common stock. These one million
     shares are  expected to be released to the Company upon full payment of the
     bridge loan.

     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% at June 30, 2002) and is
     due on or before June 15, 2006.

     Included  in the  Balance  Sheet as prepaid  and other at June 30, 2003 and
     2002 is $140,288 and $259,761 in advances to the Company's President.

     Beginning  January 13, 2003, the Company entered into a vendor  arrangement
     with one of its employees pursuant to which the employee would purchase raw
     materials for the Company approximating  $500,000. The amounts paid for the
     purchased  materials,  plus  interest  at the rate of 15% per annum on such
     amounts, was due and paid in full by May 31, 2003.

     On April 10, 2003, the Company entered into a credit  arrangement  with one
     of its greater than 5% shareholders pursuant to which the shareholder would
     purchase raw materials for the Company in an aggregate amount not to exceed
     $500,000.  The amounts paid for the purchased  materials,  plus interest at
     the rate of 15% per annum on such  amounts,  was due and payable in full on
     July 9, 2003.  In  consideration  of the credit  arrangement,  the  Company
     issued to the  shareholder  a warrant  to  purchase  100,000  shares of the
     Company's  common  stock at an exercise  price of $1.70.  The fair value of
     this  warrant  was  estimated  at $63,000,  which was  recorded as non-cash
     compensation  expense in the quarter ended June 30, 2003.  All amounts owed
     under  the  credit   arrangement  were  repaid  in  full  and  such  credit
     arrangement was terminated on June 27, 2003.

     On May 22,  2003,  the  Company  entered  into a  Master  Distribution  and
     Licensing  Agreement (the "Agreement") with Fromageries Bel S.A. ("Bel"), a
     leading branded cheese company in Europe.  The Agreement  became  effective
     upon

                                       14
<PAGE>

     the closing of the Textron Financial  Corporation asset based loan, the new
     $2 million loan from SouthTrust Bank and the private  placements  described
     above.  Under  the  Agreement,   the  Company  has  granted  Bel  exclusive
     distribution  rights  for the  Company's  products  (the  "Products")  in a
     territory  comprised of the European Union States and to more than 21 other
     European countries and territories (the "Territory").  The Company has also
     granted Bel the exclusive  option during the term of the Agreement to elect
     to  manufacture  the Products  designated  by Bel for  distribution  in the
     Territory.  The term of the Agreement is ten years, provided that either of
     the parties may elect to terminate  the  Agreement by delivery of notice to
     the other between March 24, 2007 and May 22, 2007, which  termination shall
     be  effective  as of  first  anniversary  of  the  date  of the  notice  of
     termination.  Alternatively,  the  parties may  mutually  agree to continue
     operating under the Agreement,  to convert the Agreement to a manufacturing
     and license agreement, or to terminate the Agreement.

                                       15
<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

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

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 the  Company's  current  expectations,
estimates and projections about the Company's 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,  the  Company's  actual
results may differ  materially  from those  described  in these  forward-looking
statements  due to among other  factors,  competition  in the Company's  product
markets,  dependence on suppliers, the Company's manufacturing  experience,  and
production  delays or  inefficiencies.  The Company  undertakes 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  inventory  obsolescence,   and
valuation of deferred taxes, employee options 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 June 30, 2003 and
March 31, 2003,  the Company had reserved  $396,000 and $487,000,  respectively,
for known and anticipated future promotional credits and doubtful accounts.  The
Company utilizes a detailed  customer invoice  promotion  settlement  process to
methodically  predict,  track, manage, and resolve invoicing issues.  Actual bad
debt  expense  during the three  months  ended June 30,  2003 was  approximately
$7,000.  There was no bad debt  expense  recorded  during the three months ended
June 30, 2002.

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 ("SFAS 123"),  "Accounting
for Stock  Based  Compensation",  requires  the  Company  to  provide  pro-forma
information regarding net income (loss) and earnings (loss) per share amounts as
if compensation  cost for the Company's  employee and director stock options had
been determined in accordance with the fair market value-based method prescribed
in SFAS No. 123. The Company estimates the fair value of each stock option at

                                       16
<PAGE>

the grant date by using a  Black-Scholes  option-pricing  model.  The  following
assumptions were used for options issued during the periods:

          Quarter Ended                   June 30, 2003        June 30, 2002
                                          -------------        -------------
          Dividend Yield                      None                  None
          Volatility                       41% to 42%            37% to 44%
          Risk Free Interest Rate        2.01% to 3.77%        1.71% to 5.03%
          Expected Lives in Months          36 to 120             60 to 120

RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 ("first quarter fiscal 2004") Compared to Three
--------------------------------------------------------------------------------
Months Ended June 30, 2002 ("first quarter fiscal 2003")
--------------------------------------------------------

NET SALES were  $8,695,781 in first quarter fiscal 2004 compared to net sales of
$9,977,704 in first  quarter  fiscal 2003, a decrease of $1,281,923 or 13%. This
decrease is primarily due to a reduction in retail  grocery sales from the prior
year  mainly as a result of  management's  decision  to turn away  lower  margin
private label and sandwich  slice  business in order to reallocate the Company's
limited cash resources for production of higher margin "branded" items.  Another
factor in the sales  decrease  was the  reduction  in the  number of core  items
produced in order to eliminate  lower volume and lower margin  items.  While the
effect of these  decisions  caused top line sales to  diminish  initially,  this
approach  enabled  the  Company's  gross  margin to  increase  from 27% in first
quarter  fiscal 2003 to 30% in first  quarter  fiscal  2004.  Additionally,  the
reduction  in the number of items  produced  by the  Company  will  enable it to
rebuild its  top-line  sales by  focusing on a smaller  base of core items which
generate higher production volumes and margins.

COST OF GOODS  SOLD  were  $6,051,116  representing  70% of net  sales for first
quarter  fiscal 2004,  compared  with  $7,236,504  or 73% of net sales for first
quarter fiscal 2003.  The three percent  improvement  primarily  resulted from a
price decrease in raw material costs.  The Company expects that it will continue
to control costs throughout fiscal 2004 by virtue of its increased  efficiencies
in  production  and  purchasing  along with tight  controls  on product  mix and
individual item margins.

SELLING  expenses  were  $1,313,873  in first  quarter  fiscal 2004  compared to
$989,637 in first quarter  fiscal 2003, an increase of $324,236 or 33%. In first
quarter fiscal 2004, the Company recorded increases of approximately $338,000 in
promotional costs and $115,000 in advertising costs. These costs were limited in
the prior  year due to the  prior  financial  constraints  of the  Company.  The
Company  noted  a  decrease  of   approximately   $110,000  in  brokerage  costs
corresponding  with the decrease in sales and additional  decreases in personnel
expenses in first quarter fiscal 2004 compared to first quarter fiscal 2003. The
Company  expects that fiscal 2004 selling  expenses  will  increase  compared to
fiscal  2003  expenses  based  on  the  Company's  current  plan  for  expanding
distribution of strategic products,  and advertising and promotional  allowances
that are focused towards specific regions and customers.

DELIVERY  expenses  were  $451,817  in first  quarter  fiscal  2004  compared to
$571,562 in first quarter  fiscal 2003, a decrease of $119,745 or 21%.  Delivery
expenses approximate 5% of net sales each period. The decrease in delivery costs
is in direct proportion to the decrease in net sales.

NON-CASH  COMPENSATION  RELATED  TO  OPTIONS  AND  WARRANTS  was an  expense  of
$1,307,131 in first quarter  fiscal 2004 compared to an income of $1,637,261 for
first quarter fiscal 2003. The Company values the non-cash  compensation related
to its securities on three primary items:

     a.   Notes Receivable for Common Stock
     --------------------------------------
     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 covers specific events that occurred after December 15, 1998 and was
     effective  as of July 2,  2000.  FIN 44  clarified  that  when an option is
     repriced,  it is treated as a variable  option and is marked to market each
     quarter.  Accordingly,  any increase in the market  price of the  Company's
     common stock over the exercise price of the options that was not previously
     recorded is recorded as compensation  expense at each reporting  period. If
     there is a  decrease  in the market  price of the  Company's  common  stock
     compared  to the prior  reporting  period,  the  reduction  is  recorded as
     compensation  income.  Compensation  income is limited to the original base
     exercise price (the "Floor") of the options. In accordance with FIN 44, the
     underlying shares related to the $12,772,200 note receivable from Angelo S.
     Morini  are  treated  as  variable  due to the  nature  of the  note  being
     non-interest bearing and non-recourse. There was no non-cash

                                       17
<PAGE>

     compensation  expense or income  related to these shares  recorded in first
     quarter  fiscal  2004 as the  price of the  Company's  common  stock at the
     beginning and end of the period was below the Floor.  The Company  recorded
     non-cash  compensation  income of $1,690,286  in first quarter  fiscal 2003
     based on the  decrease in the market  price of the  Company's  common stock
     from  $5.43  at March  31,  2002 to  $4.85  at June  30,  2002.  Due to the
     volatility  of the  market  price  of its  common  stock,  the  Company  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  approximately
     $29,000.

     b.   Option and Warrant Repricing
     ---------------------------------
     On October 11, 2002, the Company  repriced all outstanding  options granted
     to employees prior to October 11, 2002  (4,284,108  shares at former prices
     ranging  from $2.84 to $10.28) to the market  price of $2.05 per share.  In
     addition,  the Company  repriced the  outstanding  warrants held by current
     consultants  prior to October 11,  2002  (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 and such
     variable accounting  treatment will continue 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 agreed to reverse the repricing of his 3,692,035  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 any  outstanding  options  related to these  reversed-repriced
     options and all new options issued to the Company's President prior to June
     4, 2003 in accordance with variable accounting standards each quarter.

     The Company recorded $833,642 as non-cash  compensation  expense related to
     these variable options and warrants in first quarter fiscal 2004.  Variable
     accounting treatment will result in unpredictable  stock-based compensation
     expense  or income  depending  on  fluctuations  in quoted  prices  for the
     Company's  common  stock.  Assuming  no  further  options or  warrants  are
     exercised or cancelled and all are vested,  a $0.01 increase or decrease in
     the  Company's  stock price results in a non-cash  compensation  expense or
     income, respectively, of approximately $39,000.

     c.   Option and Warrant Issuances
     ---------------------------------
     The Company recorded $485,806 and $50,700 as non-cash  compensation expense
     related to employee  options and warrants  that it issued  during its first
     quarter  fiscal  2004 and its  first  quarter  fiscal  2003,  respectively.
     Additionally,  it  recorded  non-cash  compensation  income of $12,317  and
     non-cash  compensation expense of $2,325 related to the amortization of the
     fair value of warrants it issued in periods prior to first  quarter  fiscal
     2004 and first quarter fiscal 2003, respectively.

GENERAL AND  ADMINISTRATIVE  expenses were $983,479 in first quarter fiscal 2004
compared to $841,506 in first  quarter  fiscal  2003, a $141,973 or 17% increase
due  primarily  to an increase  in  personnel,  legal,  insurance  and  director
expenses.  The increase in personnel costs in first quarter fiscal 2004 compared
to first quarter fiscal 2003 related to the addition of several new employees, a
change in  classification  of wages from  selling to general and  administrative
expense due to a change in the job functions of Mr.  Christopher  J. New when he
became  Chief  Executive  Officer,  and an  increase  in wages paid to  existing
administrative personnel.

RESEARCH AND  DEVELOPMENT  expenses  were $63,084 in first  quarter  fiscal 2004
compared to $57,774 in first quarter fiscal 2003, a $5,310 or 9% increase.  This
increase is  primarily  the result of an increase in the  allocation  of general
overhead costs to this department.

INTEREST  expense was $495,385 in first quarter fiscal 2004 compared to $898,472
in first quarter  fiscal 2003, a $403,087 or 45% decrease.  During first quarter
fiscal 2003, the Company  amortized to interest expense $307,115 related to debt
discounts  on its prior  mezzanine  loan from  FINOVA  Mezzanine  Capital,  Inc.
("FINOVA  Mezzanine").  Additionally,  interest expense decreased as a result of
lower debt  balances  and a reduction in the prime rate by one-half of a percent
(0.5%) during first quarter  fiscal 2004 compared to first quarter  fiscal 2003.
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 used in operating  activities  was $138,377 in
first quarter fiscal 2004 compared to net cash provided by operating  activities
of  $723,539  in  first  quarter  fiscal  2003.  The  increase  in cash  used in
operations in first quarter fiscal 2004 is primarily  attributable to reductions
in accounts payable and accrued liabilities offset by substantial

                                       18
<PAGE>

collections  on trade  receivables.  In first quarter  fiscal 2003,  the Company
received a significant  portion of its cash from  operations  by decreasing  its
inventory levels.

INVESTING ACTIVITIES - Net cash used in investing activities totaled $89,581 and
$126,623 in first quarter  fiscal 2004 and 2003,  respectively.  The decrease in
cash used for investing  activities during first quarter fiscal 2004 as compared
to first quarter  fiscal 2003  primarily  resulted from less  purchases of fixed
assets during the period.

FINANCING ACTIVITIES - Net cash provided by financing activities was $226,360 in
first quarter  fiscal 2004 compared to net cash used in financing  activities of
$595,297 in first quarter  fiscal 2003.  During first quarter  fiscal 2004,  the
Company  raised  $3,850,000  through the issuance of common stock and $2,000,000
from a new term loan with SouthTrust  Bank, as described below. The Company used
$4,000,000 of these proceeds to pay in full the principal balance owed to FINOVA
Mezzanine. The remaining proceeds were for used operations and to further reduce
the Company's  accounts  payable and debt balances.  During first quarter 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. In addition in first quarter fiscal 2003,  the Company  raised  $1,500,000
through the issuance of common  stock.  These  proceeds were used to pay off the
Company's 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 Corporation ("FINOVA Capital").

Debt Financing
--------------
Effective May 30, 2003, the Company obtained from Textron Financial  Corporation
("Textron") a revolving  credit  facility  (the  "Textron  Loan") in the maximum
principal  amount of $7,500,000  pursuant to the terms and  conditions of a Loan
and Security  Agreement dated May 27, 2003 (the "Loan  Agreement").  The Textron
Loan is secured by the Company's  inventory,  accounts  receivable and all other
assets.  Generally,  subject  to the  maximum  principal  amount,  which  can be
borrowed  under the Textron Loan and certain  reserves  that must be  maintained
during the term of the Textron Loan, the amount available under the Textron Loan
for  borrowing by the Company from time to time is equal to the sum of (i) up to
eight-five  percent (85%) of the net amount of its eligible accounts  receivable
plus (ii) up to sixty percent (60%) of the Company's  eligible  inventory not to
exceed  $3,500,000.  Advances under the Textron Loan bear interest at a variable
rate,  adjusted on the first  (1st) day of each  month,  equal to the prime rate
plus one and  three-quarter  percent  (1.75%)  per annum  (6% at June 30,  2003)
calculated on the average cash borrowings for the preceding  month.  The Textron
Loan  matures and all amounts are due and payable in full on May 26,  2006.  The
Textron Loan  replaced the  Company's  asset-based  credit  facility with FINOVA
Capital  on  May  30,  2003,  which  had an  outstanding  principal  balance  of
$4,254,667  at the time of  replacement.  As of June 30, 2003,  the  outstanding
principal balance on the Textron Loan was $4,690,218.

The Textron Loan  described  above  contains  certain  financial  and  operating
covenants.  In August 2003, the Company  notified  Textron that it had failed to
comply with the fixed charge coverage ratio in June 2003.  Pursuant to a certain
Waiver Letter dated August 13, 2003,  Textron agreed to waive the requirement to
meet the fixed charge  coverage ratio for each monthly period through  September
30, 2003.  Additionally,  Textron  agreed that after August 13, 2003, all of the
financial  covenants  required  of the  Company  under  Section  7.6 of the Loan
Agreement will be measured and tested on a quarterly rather than monthly basis.

On September 30, 1999, the Company obtained a $4 million  subordinated loan from
FINOVA Mezzanine to finance additional  working capital and capital  improvement
needs.  This loan was paid in full as of May 30, 2003 by the proceeds from the a
loan from  SouthTrust  Bank and from the equity  proceeds  raised in the private
placements  in May  2003,  as  discussed  below.  In  accordance  with a warrant
agreement from September 30, 1999, the exercise price on 200,000  warrants still
held by FINOVA  Mezzanine on May 30,  2003,  was reduced from $3.41 to $1.80 per
share based on the sales price of the Company's common stock in May 2003. FINOVA
Mezzanine  exercised these warrants to purchase  200,000 shares of the Company's
common  stock on June 2, 2003.  The Company  received  net  proceeds of $119,000
after a deduction of $241,000 due to FINOVA Capital  Corporation for waiver fees
pursuant to a certain  Amendment and Limited Waiver to Security  Agreement dated
June 26, 2002.

Simultaneous  with the closing of the Textron Loan in May 2003,  SouthTrust Bank
extended the Company a new term loan in the principal amount of $2,000,000. This
loan was  consolidated  with the Company's  March 2000 term loan with SouthTrust
Bank, which had a then outstanding  principal  balance of $8,131,985 for a total
term loan  amount of  $10,131,985.  The  revised  term loan  bears  interest  at
SouthTrust  Bank's prime rate of interest plus 1% (5% at June 30, 2003),  and is
due in increasing  principal  installments by June 2009. Each month, the Company
will pay the  accrued  interest on the loan plus  principal  amounts as follows:
$75,000 from July 2003 to June 2004,  $110,000 from July 2004 to June 2005,  and
$166,250 from July 2005 until maturity in June 2009. This note is secured by all
of the Company's equipment

                                       19
<PAGE>

and certain related assets. The proceeds of the new term loan, together with the
proceeds from certain sales of the Company's common stock conducted in May 2003,
were  used  to  repay  the  Company's  $4,000,000  mezzanine  loan  from  FINOVA
Mezzanine. The balance outstanding on this new term loan as of June 30, 2003 was
$10,056,742.

In October 2000, the Company obtained a $1.5 million bridge loan from SouthTrust
Bank,  which is guaranteed by Angelo S. Morini,  the  Company's  President,  and
secured by the pledge of one million shares of the Company's  common stock owned
by him.  Interest on this note is at the prime rate (4% at June 30,  2003).  The
loan is being paid down by monthly principal  payments of $50,000 plus interest.
In May 2003,  SouthTrust Bank amended this loan to extend the maturity date from
October  2003 to April  2004.  Principal  payments of $50,000 are due each month
beginning June 1, 2003 until maturity.  The balance  outstanding on this note as
of June 30, 2003 was  $401,000.  In  consideration  of his  guarantee  and stock
pledge in respect to this loan, the Company issued an option to acquire  343,125
shares of common stock to Mr.  Morini on December  15,  2000.  The option has an
exercise  price  of $3.88  per  share,  which is equal to the fair  value of the
Company's  common stock at the date of the grant.  Such options  shall expire on
December 15, 2010.

In connection  with the  consolidations  and extensions of the  SouthTrust  Bank
loans as  described  above,  the Company  issued a warrant to  purchase  100,000
shares of the  Company's  common stock to SouthTrust  Bank on May 29, 2003.  The
warrant  is  exercisable  until June 1, 2009 at an  exercise  price of $1.97 per
share.  The fair value of this warrant was estimated at $101,000,  which will be
amortized as non-cash compensation over 72 months beginning in May 2003.

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 the prime rate (4% at June 30,  2003) and is due on
or before June 15, 2006.

On August 15, 2002, the Company executed and delivered to Target Container, Inc.
a $347,475 promissory note 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 June
30, 2003 was $59,610.

In January 2003, Ruggieri of Windermere Family Limited Partnership, an affiliate
of Mr. John Ruggieri,  the Company's Vice  President of  Manufacturing,  entered
into a credit  arrangement  with the Company  pursuant to which the  partnership
would purchase for the Company raw materials approximating $500,000. The amounts
paid for the purchased materials,  plus interest at the rate of 15% per annum on
such amounts, was due and paid in full by May 31, 2003.

On April 10,  2003,  the  Company  entered  into a credit  arrangement  with Mr.
Frederick Deluca, one of its greater than 5% shareholders, pursuant to which the
shareholder  would purchase raw materials for the Company in an aggregate amount
not to exceed  $500,000.  The amounts  paid for the  purchased  materials,  plus
interest  at the rate of 15% per annum on such  amounts,  was due and payable in
full on July 9, 2003. All amounts owed under the credit  arrangement were repaid
in full and such credit arrangement was terminated on June 27, 2003.

Equity Financing
----------------
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  from BH  Capital  Investments,  L.P.  and  Excalibur  Limited
Partnership  (the  "Series  A  Preferred  Holders")  proceeds  of  approximately
$3,082,000  less costs of  $181,041  for the  issuance  of 72,646  shares of the
Company's  Series A convertible  preferred stock with a face value of $3,500,000
and warrants to purchase  shares of the  Company's  common  stock.  The Series A
Preferred  Holders  have  the  right  to  receive  on any  outstanding  Series A
convertible preferred stock a ten percent stock dividend on the shares,  payable
one year after the issuance of such preferred  stock, and an eight percent stock
dividend for the subsequent  three years  thereafter,  payable in either cash or
shares of preferred stock.  The Series A convertible  preferred stock is subject
to certain  designations,  preferences  and  rights  set forth in the  Company's
Restated  Certificate  of  Incorporation,  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:

$48.18,  plus all accrued  dividends  that are then unpaid for each share of the
Series A convertible preferred stock then held by the holder,

     divided by,

                                       20
<PAGE>

the lesser of (x) $1.75 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 Series A Preferred Holder be permitted to convert
the Series A  convertible  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 convertible  preferred stock will vary depending upon
the closing bid prices of the Company's common stock on the AMEX.

The Series A Preferred  Holders  have the right to require the Company to redeem
their shares of  preferred  stock on April 6, 2005 or upon  occurrence  of other
specified  events.  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 number of shares
of common stock that would be then  issuable  upon  conversion  of the preferred
stock and times the market price on the date of redemption.  The market price is
based on a five-day  average of the closing bid prices for the five trading days
prior to 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 the Series A  convertible  preferred
stock, respectively,  plus accrued dividends, into 424,950 and 199,986 shares of
common stock, respectively. The conversion price was $1.3633 based on 95% of the
average of the two lowest closing bid prices on the AMEX for the fifteen trading
days immediately prior to conversion.  On June 3, 2003, BH Capital  Investments,
L.P.  converted  1,500 shares of the Series A convertible  preferred  stock into
52,302 shares of common stock.  The conversion price was $1.6483 based on 95% of
the  average of the two lowest  closing  bid prices on the AMEX for the  fifteen
trading days immediately prior to conversion.

On  November  7, 2002,  BH  Capital  Investments,  L.P.  and  Excalibur  Limited
Partnership,  as holders of a majority of the shares of the Series A convertible
preferred stock,  exercised their right under the Purchase  Agreement to require
the  Company to solicit  the  approval  of its  shareholders  for the  Company's
issuance  of all  of the  shares  of  common  stock  potentially  issuable  upon
conversion of the Series A convertible  preferred stock in full and the exercise
of their  warrants.  This right arose when the number of shares of common  stock
they are  entitled to receive,  assuming  conversion  of the all of the Series A
convertible preferred stock and the exercise of their warrants,  exceeded 15% of
the Company's  then-outstanding shares of common stock. The Company was required
to hold a shareholders meeting to solicit such approval on or before February 5,
2003.  Pursuant to a letter agreement in January 2003, the holders of the Series
A convertible preferred stock agreed to extend the deadline to hold a meeting to
March 31, 2003.  Subsequently,  pursuant to the Stock Purchase Option  Agreement
described below, the holders of the Series A convertible preferred stock agreed,
among other things, to extend the deadline to September 30, 2003.

On April 24, 2003, the Company and the Series A Preferred  Holders  entered into
that certain Stock Purchase  Option  Agreement,  whereby the Company was granted
the option to purchase all of the shares of the Series A  convertible  preferred
stock owned by such holders at the time the purchase is consummated.  The option
may be  exercised by the Company or its assigns at any time until the earlier of
five days after the date of the Company's  next annual  shareholders  meeting or
September 30, 2003.  Pursuant to such agreement,  the Series A Preferred Holders
also agreed to extend the deadline to hold a  shareholders  meeting to September
30,  2003.  In exchange for the option and the  extension of the annual  meeting
date, the Company issued to each of BH Capital  Investments,  L.P. and Excalibur
Limited Partnership  warrants to purchase 250,000 shares of the Company's common
stock.  These warrants are exercisable  until July 15, 2006 at an exercise price
equal to $2.00 per share,  which price was greater  than the market value of the
Company's  common  stock on April 24, 2003.  The Company  agreed to register the
shares  underlying  the warrants by no later than  December  31, 2003.  The fair
value of these warrant was estimated at $230,000, which was recorded as non-cash
compensation expense in first quarter fiscal 2004.

On April 10,  2003,  the  Company  entered  into a credit  arrangement  with Mr.
Frederick Deluca, one of its greater than 5% shareholders, pursuant to which the
shareholder  would purchase raw materials for the Company in an aggregate amount
not to exceed  $500,000.  The amounts  paid for the  purchased  materials,  plus
interest  at the rate of 15% per annum on such  amounts,  was due and payable in
full on July 9, 2003. In  consideration of the credit  arrangement,  the Company
issued to Mr.  Deluca a warrant  to  purchase  100,000  shares of the  Company's
common stock at an exercise  price of $1.70.  The fair value of this warrant was
estimated  at $63,000,  which was recorded as non-cash  compensation  expense in
first quarter  fiscal 2004. All amounts owed under the credit  arrangement  were
repaid in full and such credit arrangement was terminated on June 27, 2003.

                                       21
<PAGE>

Pursuant to the Company's  Restated  Certificate of  Incorporation,  the warrant
issued  to Mr.  Deluca  caused  the  maximum  conversion  price of the  Series A
convertible  preferred stock to decrease to $1.75, such that the conversion rate
of the Series A convertible  preferred  stock to common stock is currently equal
to the quotient of (i) $48.18,  plus all accrued  dividends that are then unpaid
for each  share of the  Series A  convertible  preferred  stock then held by the
holder, divided by (ii) the lesser of (x) $1.75 or (y) 95% of the average of the
two lowest  closing bid prices of the Company's  common stock on AMEX out of the
fifteen trading days immediately prior to conversion.

In accordance with an exemption from registration under Regulation D promulgated
under the Securities Act of 1933, as amended,  and pursuant to seven  Securities
Purchase  Agreements  dated May 21, 2003, the Company sold and issued a total of
2,138,891  shares of its  common  stock at a price per share  equal to $1.80 for
aggregate   gross  proceeds  to  the  Company  of  $3,850,000.   Pursuant  to  a
Registration  Rights  Agreement  dated May 21,  2003,  the Company has agreed to
register  the  shares  of  common  stock  purchased  by the  investors  with the
Securities  and Exchange  Commission no later than  November 24, 2003.  Sales to
related parties under the Securities Purchase Agreements include: 555,556 shares
of common  stock sold at an  aggregate  sales price of  $1,000,000  to Frederick
DeLuca, a greater than 5% shareholder;  55,556 shares of common stock sold at an
aggregate  sales price of $100,000 to David H. Lipka, a Director of the Company;
83,333 and 55,556  shares of common  stock sold at an  aggregate  sales price of
$150,000 and $100,000,  respectively,  to Ruggieri of Windermere  Family Limited
Partnership and Ruggieri Financial Pension Plan, respectively, each an affiliate
of John  Ruggieri,  the Company's  Vice  President of  Manufacturing;  1,111,112
shares of  common  stock  sold at an  aggregate  sales  price of  $2,000,000  to
Fromageries  Bel S.A., a leading branded cheese company in Europe which signed a
Master  Distribution  and  Licensing  Agreement  effective May 22, 2003 with the
Company.  Sales to non-related  parties under the Securities Purchase Agreements
include:  138,889  shares of common  stock sold at an  aggregate  sales price of
$250,000  Apollo Capital  Management  Group;  and 138,889 shares of common stock
sold at an aggregate sales price of $250,000 Apollo MicroCap Partners, L.P.

The  Company  used  $2,000,000  of the  proceeds  generated  from these May 2003
private placements to pay down the balance of the Company's  mezzanine loan from
FINOVA Mezzanine Capital,  Inc. The Company then applied the additional proceeds
from the new loan from SouthTrust Bank, as discussed above, to pay the remaining
$2,000,000 on the FINOVA  Mezzanine loan. The Company  utilized the remainder of
the  private  placement  proceeds  for working  capital  and  general  corporate
purposes.

Summary
-------
Management  believes  that with the  proceeds  received in  connection  with its
revised  credit  facilities and equity  financings  together with cash flow from
current  operations,  the  Company  will have  enough  cash to meet its  current
liquidity needs based on current operation levels.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's  exposure to market risk results  primarily from  fluctuations  in
interest rates. The interest rates on most of the Company's  outstanding  debts,
including  its debt to  SouthTrust  Bank,  Textron  and  Angelo S.  Morini,  are
floating and based on the prevailing  market  interest rates.  For  market-based
debt, interest rate changes generally do not affect the market value of the debt
but do impact  future  interest  expense  and  hence  earnings  and cash  flows,
assuming other factors remain  unchanged.  A theoretical 1% increase or decrease
in market  rates in  effect  on June 30,  2003  with  respect  to the  Company's
anticipated debt as of such date would increase or decrease interest expense and
hence reduce or increase net income of the Company by approximately  $39,000 per
quarter.

The Company's sales during the three-month  periods ended June 30, 2003 and 2002
which were  denominated in a currency other than U.S.  dollars were less than 5%
of gross sales and no net assets were maintained in a functional  currency other
than U. S. dollars  during such  periods.  Therefore,  the effects of changes in
foreign currency  exchange rates have not  historically  been significant to the
Company's operations or net assets.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the fiscal  quarter  ended June 30,  2003,  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 ensure that the information
required to be  disclosed by the Company in the reports that it files or submits
under the

                                       22
<PAGE>

Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and reported  within the time periods  specified in the  Securities and Exchange
Commission's  rules  and  forms.   Based  on  that  evaluation,   the  Company's
management,  including the CEO and CFO, concluded that the Company's  disclosure
controls and  procedures  were  effective as of the end of the period covered by
this report.

There was no change in the Company's  internal control over financial  reporting
that occurred  during the fiscal quarter ended June 30, 2003 that has materially
affected,  or is reasonably likely to materially  affect,  internal control over
financial reporting.

                                       23
<PAGE>

                           PART II. OTHER INFORMATION
                           --------------------------

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 certain claims of U.S. Patents Nos.  5,112,632,
5,440,860, 5,701,724 and 6,085,680. 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.  Schreiber  Foods has not  specified  the amount of money  damages it
plans to seek at the time of trial; however, preliminary discussions between the
parties lead the Company to conclude that the amount  requested will be at least
several  million  dollars,  and will be based  roughly on a  cents-per-pound  of
product formula.

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.
However,  the  Company  understands  that a motion to rescind  the  verdict  and
judgment is currently  pending.  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  its  Kustner  machines.  The two Hart  Design  machines  were
modified by the  manufacturer  from the standard Hart Design  configuration  and
were  delivered  to the  Company as  modified.  The  Company  believes  that the
modifications  to the machines  take them even further  outside the ambit of the
Schreiber patents at issue.

As well, the Company has, through legal counsel,  advised the Court of the scope
it  believes  should be given to the claims at issue in the  lawsuit (as part of
the so-called Markman briefing process). Schreiber has taken a different view of
the claims.  The Court  conducted a hearing on the issue on August 4, 2003,  and
the Company  received the Court's  ruling on August 13, 2003.  The Court adopted
Schreiber's view on many of the claim terms at issue. The Company, through legal
and patent counsel, is still reviewing the ruling.

The Company and Schreiber recently  participated in a Court-sponsored  mediation
of claims that did not result in a settlement agreement.  Based upon the failure
of that  mediation  process to resolve the matter,  the  Company  requested  the
formal opinion of patent counsel with regard to the merits of Schreiber's patent
and Schreiber's claims of infringement.  Patent counsel has advised that, in his
opinion,  the patent claim  interpretation  being asserted by the Company in the
Markman briefing process is the correct one, and that the Company's  machines do
not infringe the patent  claims if that claim  interpretation  is adopted by the
Court.  The Company has requested  patent counsel to review his opinion in light
of the Court's ruling.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In accordance with an exemption from registration under Regulation D promulgated
under the Securities Act of 1933, as amended,  and pursuant to seven  Securities
Purchase  Agreements  dated May 21, 2003, the Company sold and issued a total of
2,138,891  shares of its  common  stock at a price per share  equal to $1.80 for
aggregate   gross  proceeds  to  the  Company  of  $3,850,000.   Pursuant  to  a
Registration  Rights  Agreement  dated May 21,  2003,  the Company has agreed to
register  the  shares  of  common  stock  purchased  by the  investors  with the
Securities  and Exchange  Commission no later than  November 24, 2003.  Sales to
individual investors were as follows:

                                       24
<PAGE>


Investor                           Shares Purchased        Total Purchase Price
--------                           ----------------        --------------------
Frederick A. DeLuca                      555,556              $     1,000,000
David H. Lipka                            55,556              $       100,000
Ruggieri of Windermere Family
  Limited Partnership                     83,333              $       150,000
Ruggieri Financial Pension Plan           55,556              $       100,000
Fromageries Bel S.A.                   1,111,112              $     2,000,000
Apollo Capital Management Group          138,889              $       250,000
Apollo MicroCap Partners, L.P.           138,889              $       250,000
                                     -----------              ---------------
  Total                                2,138,891              $     3,850,000
                                     ===========              ===============

The Company used $2,000,000 of the proceeds  generated from the May 2003 private
placements to pay down the balance of the Company's  mezzanine  loan from FINOVA
Mezzanine  Capital,  Inc. The Company then applied the additional  proceeds from
the new loan from  SouthTrust  Bank,  as discussed  above,  to pay the remaining
$2,000,000 on the FINOVA  Mezzanine loan. The Company  utilized the remainder of
the  private  placement  proceeds  for working  capital  and  general  corporate
purposes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Textron Loan  described  above  contains  certain  financial  and  operating
covenants.  In August 2003, the Company  notified  Textron that it had failed to
comply with the fixed charge coverage ratio in June 2003.  Pursuant to a certain
Waiver Letter dated August 13, 2003,  Textron agreed to waive the requirement to
meet the fixed charge  coverage ratio for each monthly period through  September
30, 2003.  Additionally,  Textron  agreed that after August 13, 2003, all of the
financial  covenants  required  of the  Company  under  Section  7.6 of the Loan
Agreement will be measured and tested on a quarterly rather than monthly basis.

                                       25
<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           Restated  Certificate  of  Incorporation  of the Company as filed
               with the  Secretary of State of the State of Delaware on December
               23,  2002  (Filed  as  Exhibit  3.2 on Form  10-Q for the  fiscal
               quarter ended December 31, 2002.)

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

*4.3           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.)

*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.)

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

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

*4.12          Renewal Promissory Note in the principal amount of $10.131,984.85
               dated as of May 28,  2003 by Galaxy  Nutritional  Foods,  Inc. in
               favor of SouthTrust Bank (Filed as Exhibit 10.1 on Form 8-K filed
               June 2, 2003.)

*4.13          Renewal  Promissory  Note in the principal  amount of $501,000.00
               dated as of May 28,  2003 by Galaxy  Nutritional  Foods,  Inc. in
               favor of SouthTrust Bank (Filed as Exhibit 10.1 on Form 8-K filed
               June 2, 2003.)

*4.14          Amendment  of Loan  Agreement  dated as of May 28,  2003  between
               Galaxy  Nutritional  Foods,  Inc. and  SouthTrust  Bank (Filed as
               Exhibit 10.1 on Form 8-K filed June 2, 2003.)

*4.15          Amendment of Security  Agreement dated as of May 28, 2003 between
               Galaxy  Nutritional  Foods,  Inc. and  SouthTrust  Bank (Filed as
               Exhibit 10.1 on Form 8-K filed June 2, 2003.)

*4.16          Warrant to Purchase  Securities of Galaxy Nutritional Foods, Inc.
               dated as of May 29,  2003 in favor of  SouthTrust  Bank (Filed as
               Exhibit 10.1 on Form 8-K filed June 2, 2003.)

                                       26
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

                                       27
<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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*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.)

*10.25         Letter from SouthTrust  Bank.  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.)

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<PAGE>

*10.26         Letter from  SouthTrust  Bank 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.)

*10.27         Waiver Letter from SouthTrust Bank dated February 13, 2003 (Filed
               as  Exhibit  10.27 on Form  10-Q  for the  fiscal  quarter  ended
               December 31, 2002.)

*10.28         Renewal Promissory Note in the principal amount of $10,131,984.85
               in favor of SouthTrust  Bank dated May 28, 2003 (Filed as Exhibit
               10.3 on Form 8-K filed June 2, 2003.)

*10.29         Renewal  Promissory  Note in the principal  amount of $501,000 in
               favor of  SouthTrust  Bank dated May 28,  2003  (Filed as Exhibit
               10.4 on Form 8-K filed June 2, 2003.)

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

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

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

*10.33         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.)

*10.34         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.)

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

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

*10.40         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.)

*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.)

*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.)

*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.)

*10.44         Amended and Restated employment agreement between the Company and
               Angelo S. Morini  dated June 15, 1999 (Filed as Exhibit  10.44 on
               Form 10-Q for the fiscal quarter ended December 31, 2002.)

*10.45         Loan  Agreement  between the  Company and Angelo S. Morini  dated
               June 15, 1999 (Filed as Exhibit 10.45 on Form 10-Q for the fiscal
               quarter ended December 31, 2002.)

*10.46         Promissory  Note from Angelo S. Morini dated June 15, 1999 (Filed
               as  Exhibit  10.46 on Form  10-Q  for the  fiscal  quarter  ended
               December 31, 2002.)

*10.47         Stock Pledge  Agreement  between the Company and Angelo S. Morini
               dated June 15, 1999 (Filed as Exhibit  10.47 on Form 10-Q for the
               fiscal quarter ended December 31, 2002.)

                                       29
<PAGE>

*10.48         First  Amendment to Loan  Agreement  and Stock  Pledge  Agreement
               between the Company and Angelo S. Morini dated  December 16, 2002
               (Filed as Exhibit 10.48 on Form 10-Q for the fiscal quarter ended
               December 31, 2002.)

*10.49         Stock Option  Agreement  between the Company and Angelo S. Morini
               dated June 15, 1999 (Filed as Exhibit  10.49 on Form 10-Q for the
               fiscal quarter ended December 31, 2002.)

*10.50         Special  Services  Agreement  between  the  Company and Angelo S.
               Morini  dated  December 4, 2002  (Filed as Exhibit  10.50 on Form
               10-Q for the fiscal quarter ended December 31, 2002.)

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

10.52          Stock Purchase Option Agreement and Stock Purchase Warrant by and
               between Excalibur Limited Partnership and BH Capital Investments,
               L.P.  and Galaxy  Nutritional  Foods  dated as of April 24,  2003
               (Filed herewith.)

10.53          Waiver Letter from Textron  Financial  Corporation to the Company
               dated August 13, 2003 (Filed herewith.)

31.1           Section  302  Certification  of  the  Company's  Chief  Executive
               Officer (Filed herewith.)

31.2           Section  302  Certification  of  the  Company's  Chief  Financial
               Officer (Filed herewith.)

32.1           Section  906  Certification  of  the  Company's  Chief  Executive
               Officer (Filed herewith.)

32.2           Section  906  Certification  of  the  Company's  Chief  Financial
               Officer (Filed herewith.)

*    Previously filed and incorporated herein by reference.

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

     During the  fiscal  quarter  ended June 30,  2003,  the  Company  filed one
     Current  Report on Form 8-K,  dated May 30, 2003 and filed on June 2, 2003,
     to disclose the Company's  financial  restructuring  and other  significant
     contracts  including  its new asset  based  credit  facility  with  Textron
     Financial Corporation,  its new term loan and modification of existing term
     loans with SouthTrust  Bank, its private  placement of 2,138,891  shares of
     common stock,  and its master  distribution  and licensing  agreement  with
     Fromageries Bel, S.A. Additionally, the Company reported the payment of the
     amounts owed to FINOVA Capital  Corporation  under its asset-based  line of
     credit and to FINOVA Mezzanine Capital, Inc. under its mezzanine loan.

                                       30
<PAGE>

                                   SIGNATURES
                                   ----------

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



                                        GALAXY NUTRITIONAL FOODS, INC.


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


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

                                       31
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