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 SEPTEMBER 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 November 14, 2003,  there were 15,314,676  shares of Common Stock,  $.01
par value per share, outstanding.

<PAGE>

                         GALAXY NUTRITIONAL FOODS, INC.

                               INDEX TO FORM 10-Q
                      FOR QUARTER ENDED SEPTEMBER 30, 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                  17

     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    24

     ITEM 4. CONTROLS AND PROCEDURES                                       25

PART II. OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS                                             26

     ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                     27

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES                               27

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS           27

     ITEM 5. OTHER INFORMATION                                             28

     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                              30

SIGNATURES                                                                 35

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,     MARCH 31,
                                                          NOTES       2003            2003
                                                          -----   ------------    ------------
                                                                   (UNAUDITED)
                     ASSETS
<S>                                                       <C>     <C>             <C>
CURRENT ASSETS:
   Cash                                                           $    217,932    $      1,598
   Trade receivables, net                                            4,367,651       5,109,247
   Inventories                                                       4,491,056       5,294,500
   Prepaid expenses and other                                          525,418         553,396
                                                                  ------------    ------------

         Total current assets                                        9,602,057      10,958,741

PROPERTY AND EQUIPMENT, NET                                         21,159,692      22,168,404
OTHER ASSETS                                                           440,769         274,918
                                                                  ------------    ------------

         TOTAL                                                    $ 31,202,518    $ 33,402,063
                                                                  ============    ============


     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Book overdrafts                                                $         --    $  1,151,276
   Line of credit                                           2        4,731,092       4,939,894
   Accounts payable                                                  1,601,483       2,622,996
   Accrued liabilities                                               1,782,167       1,891,773
   Current portion of term notes payable                    2        1,181,000       1,497,760
   Current portion of subordinated note payable             2               --       2,000,000
   Current portion of obligations under capital leases                 302,275         363,152
                                                                  ------------    ------------

         Total current liabilities                                   9,598,017      14,466,851

TERM NOTES PAYABLE, less current portion                    2        9,231,985       7,786,985
SUBORDINATED NOTE PAYABLE                                   2               --       2,000,000
OBLIGATIONS UNDER CAPITAL LEASES, less current portion                 254,545         383,210
                                                                  ------------    ------------

         Total liabilities                                          19,084,547      24,637,046
                                                                  ------------    ------------

COMMITMENTS AND CONTINGENCIES                               3               --              --

REDEEMABLE CONVERTIBLE PREFERRED STOCK                      4        3,713,392       2,324,671

STOCKHOLDERS' EQUITY:                                       4
   Common stock                                                        151,714         127,617
   Additional paid-in capital                                       63,939,117      59,800,732
   Accumulated deficit                                             (42,793,591)    (40,595,342)
                                                                  ------------    ------------

                                                                    21,297,240      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                                  8,404,579       6,440,346
                                                                  ------------    ------------

         TOTAL                                                    $ 31,202,518    $ 33,402,063
                                                                  ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED               SIX MONTHS ENDED
                                             SEPTEMBER 30,                   SEPTEMBER 30,
                                     ----------------------------    ----------------------------
                                         2003            2002            2003            2002
                                     ------------    ------------    ------------    ------------
<S>                                  <C>             <C>             <C>             <C>
NET SALES                            $  9,329,907    $ 10,062,331    $ 18,025,688    $ 20,040,035

COST OF GOODS SOLD                      6,329,977       7,047,230      12,381,093      14,283,734
                                     ------------    ------------    ------------    ------------
   Gross margin                         2,999,930       3,015,101       5,644,595       5,756,301
                                     ------------    ------------    ------------    ------------

OPERATING EXPENSES:
Selling                                 1,446,859       1,345,678       2,760,732       2,335,315
Delivery                                  433,959         511,954         885,776       1,083,516
Non-cash compensation related to
   options & warrants (Note 1 and
   Note 5)                                128,258      (1,348,089)      1,435,389      (2,985,350)
General and administrative                886,019         747,243       1,869,498       1,588,749
Research and development                   62,908          56,440         125,992         114,214
                                     ------------    ------------    ------------    ------------
   Total operating expenses             2,958,003       1,313,226       7,077,387       2,136,444
                                     ------------    ------------    ------------    ------------

INCOME (LOSS) FROM OPERATIONS              41,927       1,701,875      (1,432,792)      3,619,857

Interest expense                          270,072         969,630         765,457       1,868,102
                                     ------------    ------------    ------------    ------------

NET INCOME (LOSS)                    $   (228,145)   $    732,245    $ (2,198,249)   $  1,751,755

Preferred Stock Dividends (Note 4)         53,836          70,000         108,616         140,000
Preferred Stock Accretion to
   Redemption Value (Note 4)              651,404         120,700       1,546,333         459,977
                                     ------------    ------------    ------------    ------------

NET INCOME (LOSS) AVAILABLE TO
   COMMON SHAREHOLDERS               $   (933,385)   $    541,545    $ (3,853,198)   $  1,151,778
                                     ============    ============    ============    ============



BASIC NET INCOME (LOSS) PER
   COMMON SHARE (Note 6)             $      (0.06)   $       0.05    $      (0.27)   $       0.10
                                     ============    ============    ============    ============
DILUTED NET INCOME (LOSS) PER
   COMMON SHARE (Note 6)             $      (0.06)   $       0.04    $      (0.27)   $       0.09
                                     ============    ============    ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                    Common Stock                                            Notes
                             ---------------------------    Additional     Accumulated  Receivable for    Treasury
                                 Shares       Par Value   Paid-In Capital    Deficit     Common Stock       Stock          Total
                             -------------------------------------------------------------------------------------------------------
<S>                            <C>          <C>            <C>            <C>            <C>            <C>            <C>
Balance at March 31, 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        2,147,386         21,473      3,775,395             --             --             --      3,796,868
Conversion of preferred
   stock                           62,364            624        103,194             --             --             --        103,818
Fair value of warrants
   and employee options
   issued                              --             --        565,800             --             --             --        565,800
Non-cash compensation
   related to variable
   securities                          --             --        920,041             --             --             --        920,041
Dividends on preferred
   stock                               --             --       (108,616)            --             --             --       (108,616)
Accretion of discount on
   preferred stock                     --             --     (1,475,429)            --             --             --     (1,475,429)
Net loss                               --             --             --     (2,198,249)            --             --     (2,198,249)
                             -------------------------------------------------------------------------------------------------------
Balance at September
   30, 2003                    15,171,435   $    151,714   $ 63,939,117   $(42,793,591)  $(12,772,200)  $   (120,461)  $  8,404,579
                             =======================================================================================================
</TABLE>

                See accompanying notes to financial statements.

                                       5
<PAGE>

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


<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,                                   NOTES          2003            2002
                                                                 -----      ------------    ------------
<S>                                                              <C>       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income (Loss)                                                        $ (2,198,249)   $  1,751,755
   Adjustments to reconcile net income (loss) to net cash
    from (used in) operating activities:
      Depreciation and amortization                                            1,108,799       1,138,945
      Amortization of debt discount and financing costs                          152,022         989,205
      Provision for losses on trade receivables                                   (5,000)        158,300
      Non-cash compensation related to options and warrants        1,5         1,435,389      (2,985,350)
      (Increase) decrease in:
         Trade receivables                                                       746,596         184,062
         Inventories                                                             803,444         501,719
         Prepaid expenses and other                                               27,978         (37,160)
      Increase (decrease) in:
         Accounts payable                                                     (1,021,513)       (953,465)
         Accrued liabilities                                                    (238,762)        161,661
                                                                            ------------    ------------

   NET CASH FROM (USED IN) OPERATING ACTIVITIES                                  810,704         909,672
                                                                            ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                           (100,087)       (192,578)
   Increase in other assets                                                        1,807              --
                                                                            ------------    ------------

   NET CASH FROM (USED IN) INVESTING ACTIVITIES                                  (98,280)       (192,578)
                                                                            ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Book overdrafts                                                            (1,151,276)       (809,285)
   Net payments on lines of credit                                              (208,802)       (624,053)
   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                                             (871,760)       (904,840)
   Principal payments on capital lease obligations                              (189,542)       (230,116)
   Financing costs for long term debt                                           (231,578)       (128,289)
   Proceeds from issuance of common stock, net of offering costs     4         3,796,868       1,480,994
   Proceeds from exercise of common stock warrants                   2           360,000              --
                                                                            ------------    ------------

   NET CASH FROM (USED IN) FINANCING ACTIVITIES                                 (496,090)       (715,589)
                                                                            ------------    ------------

NET INCREASE (DECREASE) IN CASH                                                  216,334           1,505

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

CASH, END OF PERIOD                                                 7       $    217,932    $      1,673
                                                                            ============    ============
</TABLE>

                See accompanying notes to financial statements.

                                       6
<PAGE>

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

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------
     The unaudited financial statements have been prepared by the Company, under
     the rules and  regulations of the Securities and Exchange  Commission.  The
     accompanying  financial statements contain all normal recurring adjustments
     which  are,  in  the  opinion  of   management,   necessary  for  the  fair
     presentation  of  such  financial   statements.   Certain  information  and
     disclosures  normally  included  in the  financial  statements  prepared in
     accordance with generally accepted accounting  principles have been omitted
     under such rules and  regulations  although the Company  believes  that the
     disclosures are adequate to make the information  presented not misleading.
     The  March  31,  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 six-month period
     ended  September 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:

                                                 September 30,    September 30,
          Six Months Endeds                            2003             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>
                                             THREE MONTHS ENDED               SIX MONTHS ENDED
                                                SEPTEMBER 30,                   SEPTEMBER 30,
                                        ----------------------------    ----------------------------
                                            2003            2002            2003            2002
                                        ------------    ------------    ------------    ------------
<S>                                     <C>             <C>             <C>             <C>
Net income (loss) to common             $   (933,385)   $    541,545    $ (3,853,198)   $  1,151,778
  shareholders as reported
  Add:  Stock-based compensation
  expense included in reported net
  income                                     128,258      (1,348,089)      1,435,389      (2,985,350)
  Deduct:  Stock-based compensation
  expense determined under fair value
  based method for all awards               (207,629)        632,768      (1,707,756)     (1,300,633)
                                        ------------    ------------    ------------    ------------
  Pro forma net income (loss) to        $ (1,012,756)   $   (173,776)   $ (4,125,565)   $ (3,134,205)
  common shareholders
                                        ============    ============    ============    ============

Net income (loss) per common share:
  Basic - as reported                   $      (0.06)   $       0.05    $      (0.27)   $       0.10
  Basic - pro forma                     $      (0.07)   $      (0.01)   $      (0.29)   $      (0.27)
  Diluted - as reported                 $      (0.06)   $       0.04    $      (0.27)   $       0.09
  Diluted - pro forma                   $      (0.07)   $      (0.01)   $      (0.29)   $      (0.27)
</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. On November 7, 2003, the FASB
     deferred the classification  and measurement  provisions of SFAS No. 150 as
     they apply to certain  mandatorily  redeemable  non-controlling  interests.
     This  deferral is expected to remain in effect while these  provisions  are
     further  evaluated by the FASB. The application of the requirements of SFAS
     150 did not have any impact on the Company's  financial  position or result
     of operations as the Company's Series A convertible  preferred stock is not
     mandatorily redeemable.

     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.

                                       8
<PAGE>

(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)  eighty-five  percent  (85%) of the
     net amount of its  eligible  accounts  receivable  plus (ii) 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  (5.75% at  September  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 September
     30,  2003,  the  outstanding  principal  balance  on the  Textron  Loan was
     $4,731,092.

     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 dated 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 September 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 September 30, 2003 was $9,831,985.

     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
     Founder,  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 September  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 September 30,
     2003 was $251,000.  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.

                                       9
<PAGE>

     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 Founder,  loaned $330,000 to
     the Company in order for it to pay down  certain  notes  payable  that were
     coming due.  This loan bore interest at the prime rate (4% at September 30,
     2003) and was due on or before June 15, 2006. In  connection  with a Second
     Amended  and  Restated  Employment  Agreement  effective  October  13, 2003
     between  Mr.  Morini  and the  Company,  the  Company  offset  $167,603  of
     unreimbursed  advances  owed to it by Mr.  Morini  prior  to June  2002 and
     certain  family  members  against  the  balance  of the loan and  issued an
     aggregate  of 55,087  shares  of the  Company's  common  stock  (valued  at
     approximately $2.95 per share) as payment in full.

     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 bore interest at 7% per annum and was
     due in twelve equal monthly installments of $30,066.  This note was paid in
     full by September 30, 2003.

(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  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

                                       10
<PAGE>

     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 and we
     are awaiting that supplemental opinion.

     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.  In the event we are found to have  infringed the Schreiber  Foods'
     patents,  in addition to being liable to Schreiber  Foods for damages which
     may be substantial,  we may also be prohibited from using in the future any
     wrapping machine which is found to be infringing, or, alternatively, we may
     be required to pay Schreiber  Foods a royalty on our  individually  wrapped
     products produced with the infringing  machines on an ongoing basis. Any of
     the foregoing will have a material adverse affect on the Company's  results
     of operations and financial condition.

(4)  CAPITAL STOCK
     -------------
     Series A Convertible Preferred Stock
     ------------------------------------
     On April 6, 2001, in accordance with an exemption from  registration  under
     Regulation D promulgated under the Securities Act of 1933, as amended,  the
     Company received 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 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,  ($58.76
     at September 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 of common
     stock 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 may 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 Series A  convertible  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 Series A convertible  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.

     As of  September  30, 2003,  BH Capital  Investments,  L.P.  and  Excalibur
     Limited  Partnership  had converted 6,684 and 10,378 shares of the Series A
     convertible  preferred stock,  respectively,  plus accrued dividends,  into
     262,350 and 424,950  shares of common stock,  respectively.  The conversion
     prices ranged from $1.3633 and $1.75 and were based on the lower of (a) 95%
     of the  average  of the two lowest  closing  bid prices on the AMEX for the
     fifteen trading days immediately  prior to conversion or (b) $1.75.  During
     October 2003, BH Capital  Investments,  L.P.  converted 4,828 shares of the
     Series A convertible preferred stock, plus accrued dividends,  into 162,598
     shares of common stock at a conversion price of $1.75.

     The Series A Preferred Holders have the right to receive on any outstanding
     Series A convertible  preferred stock a ten percent dividend on the shares,
     payable one year after the issuance of such preferred  stock,  and an eight
     percent  dividend for the  subsequent  three years  thereafter,  payable in
     either  cash or  shares  of  preferred  stock.  For the  six  months  ended
     September 30, 2003 and 2002, the Company  recorded  preferred  dividends of
     $108,616 and $140,000, 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

                                       11
<PAGE>

     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 six months  ended  September  30, 2003 and 2002,  the Company  recorded
     $1,546,333  and  $459,977,  respectively,  related to the  accretion of the
     redemption value of preferred stock and the beneficial  conversion  feature
     of accrued dividends.  As of September 30, 2003, the value of the remaining
     55,584 shares of redeemable convertible preferred stock is $3,713,392.

     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 the  Series A  Preferred
     Holders were  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 Series A Preferred  Holders 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 September  30,  2003,  the  Company's
     shareholders, by majority vote, approved the issuance by the Company of all
     required common stock in the event of a conversion of the Company's  Series
     A  Convertible  Preferred  Stock and upon the exercise of certain  warrants
     held by the Series A Preferred Holders.

     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
     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  (which the
     Company did not exercise by the  expiration  date) 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  warrants  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
     purchased raw materials for the Company in an aggregate amount that did not
     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.

     Common Stock Issuances
     ----------------------
     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

                                       12
<PAGE>

     $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  former  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  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
     during  the  six  months  ended  September  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 $1,369,714 and
     $3,060,000  for  the  three  and  six  months  ended  September  30,  2002,
     respectively,  based on the decrease in the market  price of the  Company's
     common stock from $5.43 at March 31, 2002 to $3.14 at  September  30, 2002.
     The Company did not record any further  non-cash  compensation  income once
     the stock price fell below the Floor of $4.38  during the six months  ended
     September 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
     Founder  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 in accordance with variable accounting standards each quarter.

     The Company recorded $86,399 and $920,041 as non-cash  compensation expense
     related to these variable  options and warrants in the three and six months
     ended September 30, 2003, respectively.  The remaining outstanding variable
     options and warrants as of September 30, 2003 were 3,888,949.

                                       13
<PAGE>

     Option and Warrant Issuances
     ----------------------------
     The Company recorded $41,859 and $527,665 as non-cash  compensation expense
     related to employee  stock,  options and warrants that it issued during the
     three and six months ended  September 30, 2003,  respectively.  The Company
     recorded  $19,300 and $70,000 as non-cash  compensation  expense related to
     employee  options  and  warrants  that it issued  during  the three and six
     months ended September 30, 2002,  respectively.  Additionally,  it recorded
     non-cash  compensation  income  of  $12,317  during  the six  months  ended
     September  30,  2003  related  to the  amortization  of the  fair  value of
     warrants it issued in periods prior to September 30, 2003;  and it recorded
     non-cash compensation expense of $2,325 and $4,650 during the three and six
     months ended  September  30, 2002 related to the  amortization  of the fair
     value of warrants it issued in periods prior to 2002, respectively.

                                       14
<PAGE>

(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               SIX MONTHS ENDED
                                                     SEPTEMBER 30,                   SEPTEMBER 30,
                                             ----------------------------    ----------------------------
                                                 2003            2002            2003            2002

<S>                                          <C>             <C>             <C>             <C>
Net income (loss) per common share           $   (933,385)   $    541,545    $ (3,853,198)   $  1,151,778
                                             ============    ============    ============    ============

Average shares outstanding - basic             15,156,722      11,978,691      14,378,079      11,764,984
"In-the-money" shares under stock
   option agreements                                   --       1,420,502              --       1,792,771
"In-the-money" shares under stock
   warrant agreements                                  --         245,000              --         335,429
Less: Shares assumed repurchased
   under treasury stock method                         --      (1,544,310)             --      (1,677,333)
                                             ------------    ------------    ------------    ------------
Average shares outstanding - diluted           15,156,722      12,099,883      14,378,079      12,215,851
                                             ============    ============    ============    ============

Basic net income (loss) per common share     $      (0.06)   $       0.05    $      (0.27)   $       0.10
Diluted net income (loss) per common share   $      (0.06)   $       0.04    $      (0.27)   $       0.09
</TABLE>

     Potential conversion of Series A convertible  preferred stock for 1,866,286
     shares, options for 4,648,680 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 and six months  ended  September  30,  2003,  as
     their  effect  would be  antidilutive.  Potential  conversion  of  Series A
     preferred stock for 1,384,906  shares,  options for 2,872,220 and 2,499,951
     shares and warrants for 410,570 and 320,141  shares have not been  included
     in the  computation  of diluted net income  (loss) per common share for the
     three and six months  ended  September  30,  2002,  respectively,  as their
     effect would be antidilutive.

(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.

     Six months ended September 30,                      2003           2002
     ---------------------------------------------------------------------------

     Non-cash financing and investing activities:
     Fair value of options and warrants issued       $    565,800   $     70,000

     Accrued preferred stock dividends                    108,616        140,000
     Beneficial conversion feature related to
        preferred stock dividends                          57,653         17,844
     Accretion of discount on preferred stock           1,488,680        442,133
     Purchase of equipment through capital lease
        obligations and term  notes payable                    --         94,763
     Reduction in accounts payable through
        issuance of notes payable                              --        347,475
     Reduction in accounts payable through
        issuance of common stock                               --        843,027

     Cash paid for:
     Interest                                             800,270      1,317,039
     Income taxes                                              --         51,037

(8)  RELATED PARTY TRANSACTIONS
     --------------------------
     In June  1999,  in  connection  with an  amended  and  restated  employment
     agreement  for  Angelo  S.  Morini,  the  Company's  Founder,  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

                                       15
<PAGE>

     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 Angelo S.  Morini 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 Founder,  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 September  30, 2002)
     and is due on or before June 15, 2006.

     Included in the Balance Sheet as "prepaid  expenses and other" at September
     30, 2003 and 2002 is $111,446 and  $262,209,  respectively,  in advances to
     the Angelo S. Morini.

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

     1.   For the term of Mr. Morini's  employment,  the Company shall cause Mr.
     Morini to be nominated for election to the Company's  Board of Directors as
     a member of the slate of  directors  proposed  by the  Company in its proxy
     statement for any meeting of the Company's  stockholders  whereby directors
     shall be elected. Notwithstanding the foregoing, in the event Mr. Morini is
     not elected to the Board of Directors by the stockholders at any meeting of
     the  Company's  stockholders  for which the proxy  statement  indicates Mr.
     Morini is  nominated  for  election  as a member of the slate of  directors
     proposed by the Company, such obligations shall immediately cease.

     2.   The Company will obtain, and maintain in effect during the term of Mr.
     Morini's employment, for the benefit of Mr. Morini (or reimburse Mr. Morini
     for the cost of) a Two  Million  Dollar  ($2,000,000)  term life  insurance
     policy  insuring Mr.  Morini's  life, the  beneficiaries  of which shall be
     designated by Mr. Morini.

     3.   Mr. Morini and the Company  agreed that Mr. Morini and certain  family
     members   received   advances  from  the  Company  of  which  $167,603  was
     unreimbursed  as of October 13, 2003, and (ii) the Company owed $330,000 to
     Mr. Morini pursuant to a loan on March 28, 2002 to the Company.  Mr. Morini
     and the  Company  agreed to offset the  unreimbursed  advances  against the
     amounts  owed by the Company,  and, in  repayment  of the  remainder of the
     amounts  owed by the  Company,  the Company  issued an  aggregate of 55,087
     shares of the Company's common stock to Mr. Morini (valued at approximately
     $2.95 per share  based on the  average of the  closing  prices for the five
     trading days preceding the effective date of the Agreement).

     4.   Mr. Morini has agreed that during the term of his employment,  and for
     a period of one (1) year  following his  termination  of employment for any
     reason other than pursuant to termination  without cause, a material breach
     in the  Agreement,  or a change of control (as defined in the Agreement) in
     the Company for which he did not vote, he will not, directly or indirectly,
     either as an employee,  employer,  consultant,  agent, principal,  partner,
     stockholder  (other  than  owning  fewer  than  one  percent  (1%)  of  the
     outstanding shares of a public corporation),  corporate officer,  director,
     or any other individual or representative  capacity,  engage or participate
     in any business that directly  competes with the Company within those areas
     in the United States in which the Company is doing  business as of the date
     of termination.

     5.   If the  Agreement is  terminated  by the Company  without  cause,  Mr.
     Morini  shall:  (a)  be  entitled  to  continued   payment  of  his  annual
     compensation, health insurance benefits, club dues, auto allowance and life
     insurance  benefits  for the  remainder of the term of the  Agreement,  (b)
     become  fully  "vested"  under  the terms of any  stock  option  agreements
     executed and delivered prior to, along with, or after the Agreement and (c)
     be released from the terms of

                                       16
<PAGE>

     the  $12,772,200  Loan  Agreement  dated  June  15,  1999  and  all  monies
     outstanding  thereunder will be forgiven by the Company.  The provisions of
     the Agreement  related to the  forgiveness of the  $12,772,200  loan remain
     unchanged from the first Amended and Restated  Employment  Agreement  dated
     June 15, 1999.  Mr.  Morini  acknowledges  that his change in role does not
     constitute a  termination  of Mr.  Morini by the  Company,  under the First
     Amended and Restated Employment Agreement dated June 15, 1999.

     6.   If Mr. Morini  terminates  his  employment in any manner other than in
     connection with a material breach of the Agreement by the Company, he shall
     not be entitled to receive any further  compensation  or  benefits,  except
     that if he terminates his employment in connection with a change of control
     (as defined in the  Agreement) in the Company for which he did not vote, he
     will be released from the terms of the  $12,772,200  Loan  Agreement  dated
     June 15, 1999 and all monies outstanding thereunder will be forgiven by the
     Company.  The provisions of the Agreement related to the forgiveness of the
     $12,772,200  loan remain  unchanged  from the first  Amended  and  Restated
     Employment Agreement dated June 15, 1999.

     Beginning  January 13, 2003, the Company entered into a vendor  arrangement
     with one of its  employees  pursuant to which the  employee  purchased  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
     purchased raw materials for the Company in an aggregate amount that did not
     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 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.

                                       17
<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
reasonable  assurance of  collection  on the sale.  It provides  credit terms to
customers  usually based on net 30 days.  The Company  performs  ongoing  credit
evaluations of its accounts receivable and makes reserves for anticipated future
credits that will be issued to its customers for promotions,  discounts, spoils,
etc., based on historical  experience.  In addition,  the Company  evaluates the
accounts  for  potential   uncollectible   amounts.  The  reserve  for  accounts
receivable is then adjusted to reflect  these  estimates.  At September 30, 2003
and  March  31,  2003,   the  Company  had  reserved   $482,000  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 six months ended  September 30, 2003 and 2002
was approximately $7,000 and $21,267, respectively.

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

                                       18
<PAGE>

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:

                                                September 30,     September 30,
     Six Months Ended                                2003              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

Net Sales were  $9,329,907 and  $10,062,331 in the three months ended  September
30,  2003 and 2002,  respectively,  a decrease of $732,424 or 7%. Net sales were
$18,025,688 and $20,040,035 in the six months ended September 30, 2003 and 2002,
respectively,  a decrease of $2,014,347 or 10%.  However,  the decrease in gross
margin was only $15,171 and $111,706 in the three and six months ended September
30,  2003  compared  to the three  and six  months  ended  September  30,  2002,
respectively.  These  decreases in net sales are primarily due to a reduction in
retail grocery sales from fiscal year 2003. Such reduction is mainly a result of
management's  previous  decision  to turn away lower  margin  private  label and
sandwich  slice  business in order to  reallocate  the  Company's  limited  cash
resources  (prior to the financial  restructuring  that was completed on May 30,
2003) for production of higher margin "branded" items.  While the effect of this
decision  caused gross sales to diminish,  this approach was the key factor that
enabled  the  Company's  gross  profit to improve 2% in the three and six months
ended  September 30, 2003  compared to the three and six months ended  September
30, 2002.

Since the financial  restructuring  is now complete,  the Company has once again
begun to pursue  strategic  private label business,  which it previously  turned
away due to cash  constraints.  The  Company's  management  has also  identified
several  market  factors,  which  have had a  negative  effect on the  Company's
business.  First,  consumers  eating  habits are changing  with the recent trend
toward  low-carbohydrate  meal preparation  during all meals (breakfast,  lunch,
snack, and dinner).  This has put downward pressure on consumption of items such
as bread and complimentary products such as cheese slices.  Secondly, the number
of consumers shopping in the retail grocery stores is down versus the prior year
due to the further  emergence and presence of Wal*Mart.  The  Company's  product
selection is growing but still  limited at Wal*Mart.  Therefore,  the  Company's
sales growth with this account has not been able to fully counter the decline in
retail  grocery  trends.  In response to this change in consumer  shopping,  the
Company is redesigning its products and packaging formats to specifically target
the "warehouse" club and mass merchandiser (such as Kmart, Target, and Wal*Mart)
markets.

After  achieving  7% growth in net sales in the second  quarter  of fiscal  2004
(ended  September 30, 2003)  compared to the first quarter of fiscal 2004 (ended
June 30,  2003),  the Company  expects net sales in the third  quarter of fiscal
2004 (ending December 31, 2003) to be comparable to its second quarter of fiscal
2004 after  incorporating the seasonal  reduction on sales and merchandising due
to holidays.  The Company  anticipates that the annual net sales for fiscal 2004
will be equal to or up by 5% compared to net sales for fiscal 2003. This revised
net sales forecast of 0% to a 5% increase  compared to prior  expectations  of a
10% increase in net sales reflect (a) recent  changes in  consumer's  eating and
shopping  behavior;  (b) slower than expected timing for securing  private label
opportunities;  and (c) slower than expected  placement of additional  points of
distribution of the Company's branded items.

The Company  will  continue  its strategy to achieve  greater  availability  and
visibility of its higher margin  branded  products.  Additionally,  now that the
Company has sufficient resources,  management will also focus its efforts toward
generating  consumer  awareness,  product  trials , and  generating  more repeat
purchases for its brands.  Finally, the Company plans to redevelop relationships
with strategic private-label customers,  which will enable the Company to better
utilize some of its excess production  capacity.  These efforts should result in
greater operating cash flow and a higher return on invested capital.

COST OF GOODS SOLD were  $6,329,977 and $7,047,230  representing  68% and 70% of
net sales for the three months ended September 30, 2003 and 2002,  respectively.
Cost of goods sold were $12,381,093 and $14,283,734  representing 69% and 71% of
net sales for the six months ended  September  30, 2003 and 2002,  respectively.
These two percent  improvements  primarily resulted from a price decrease in raw
material costs. The Company expects that it will continue to control costs

                                       19
<PAGE>

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  $1,446,859 (16% of net sales) and $1,345,678 (13% of net
sales) in the three months ended September 30, 2003 and 2002,  respectively,  an
increase of $101,181 or 8%. Selling  expenses were $2,760,732 (15% of net sales)
and $2,335,315 (12% of net sales) in the six months ended September 30, 2003 and
2002,  respectively,  an increase  of  $425,417 or 18%. In the six months  ended
September 30, 2003, the Company recorded increases of approximately  $287,000 in
promotional costs and $264,000 in advertising costs. These costs were limited in
the fiscal year 2003 due to the prior financial  constraints of the Company. The
Company  noted  a  decrease  of   approximately   $137,000  in  brokerage  costs
corresponding  with the decrease in sales and additional  decreases in personnel
expenses in the six months ended  September  30, 2003 compared to the six months
ended  September  30,  2002.  The Company  expects that fiscal year 2004 selling
expenses  will  increase  compared  to fiscal  year 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 $433,959 and $511,954 in the three months ended September
30, 2003 and 2002, respectively, a decrease of $77,995 or 15%. Delivery expenses
were  $885,776 and  $1,083,516  in the six months ended  September  30, 2003 and
2002, respectively, a decrease of $197,740 or 18%. Delivery expenses approximate
5% of net sales  each  period.  The  decrease  in  delivery  costs is due to the
decrease in net sales.

NON-CASH COMPENSATION RELATED TO OPTIONS AND WARRANTS was an expense of $128,258
for the  three  months  ended  September  30,  2003  compared  to an  income  of
$1,348,089 for the three months ended  September 30, 2002. The Company  recorded
an expense of $1,435,389 for the six months ended September 30, 2003 compared to
an income of $2,985,350 for the six months ended September 30, 2002. 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,  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
     during  the  six  months  ended  September  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 $1,369,714 and
     $3,060,000  for  the  three  and  six  months  ended  September  30,  2002,
     respectively,  based on the decrease in the market  price of the  Company's
     common stock from $5.43 at March 31, 2002 to $3.14 at  September  30, 2002.
     The Company did not record any further  non-cash  compensation  income once
     the stock price fell below the Floor of $4.38  during the six months  ended
     September 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 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
     Founder  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

                                       20
<PAGE>

     back to their  original  amounts,  the Company is still required to account
     for any outstanding options related to these  reversed-repriced  options in
     accordance with variable accounting standards each quarter.

     The Company recorded $86,399 and $920,041 as non-cash  compensation expense
     related to these variable  options and warrants in the three and six months
     ended September 30, 2003, respectively.  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 $41,859 and $527,665 as non-cash  compensation expense
     related to employee  options and warrants  that it issued  during the three
     and six months ended September 30, 2003, respectively. The Company recorded
     $19,300 and $70,000 as non-cash  compensation  expense  related to employee
     options and warrants  that it issued  during the three and six months ended
     September  30,  2002,  respectively.  Additionally,  it  recorded  non-cash
     compensation  income of $12,317  during the six months ended  September 30,
     2003 related to the amortization of the fair value of warrants it issued in
     periods prior to September 30, 2003; and it recorded non-cash  compensation
     expense  of  $2,325  and  $4,650  during  the three  and six  months  ended
     September  30,  2002  related  to the  amortization  of the  fair  value of
     warrants it issued in periods prior to 2002, respectively.

GENERAL AND  ADMINISTRATIVE  expenses  were  $886,019  and $747,243 in the three
months ended September 30, 2003 and 2002, respectively,  an increase of $138,776
or 19%.  General and  administrative  expenses were $1,869,498 and $1,588,749 in
the six months ended September 30, 2003 and 2002,  respectively,  an increase of
$280,749 or 18%. For the three and six months ended  September  30, 2003,  there
was an increase of approximately $218,000 and $242,000,  respectively,  in legal
and audit fees due to the ongoing Schreiber lawsuit,  refinancing activities and
additional reporting  requirements during the fiscal year 2004.  Additionally in
the three and six months ended  September 30, 2003,  the Company had an increase
of  approximately  $50,000 and $100,000,  respectively,  in director and related
insurance  expenses due to the expanded Board of Directors and their activity in
the fiscal year 2004.  For the six months ended  September  30, 2003,  there was
also an increase in personnel  costs of  approximately  $141,000  related to the
addition  of several  new  employees  and an  increase in wages paid to existing
administrative  personnel in July 2002.  These  increases  for the three and six
months ended  September 30, 2003 were offset by decreases in consulting  fees of
approximately $84,000 and $109,000,  respectively,  and general allocation costs
of approximately $46,000 and $81,000, respectively.

RESEARCH AND  DEVELOPMENT  expenses were $62,908 and $56,440 in the three months
ended September 30, 2003 and 2002,  respectively,  an increase of $6,468 or 11%.
Research and  development  expenses were $125,992 and $114,214 in the six months
ended September 30, 2003 and 2002, respectively,  an increase of $11,778 or 10%.
These  increases  are  primarily  the result of an increase  in quality  control
testing as required by the Company and its customers.

INTEREST  expense was $270,072 and $969,630 in the three months ended  September
30, 2003 and 2002, respectively, a decrease of $699,558 or 72%. Interest expense
was $765,457 and $1,868,102 in the six months ended September 30, 2003 and 2002,
respectively,  a decrease of $1,102,645 or 59%.  During the three and six months
ended September 30, 2002, the Company amortized to interest expense $307,115 and
$614,230,  respectively,  related to debt discounts on its prior  mezzanine loan
from FINOVA Mezzanine Capital,  Inc. ("FINOVA  Mezzanine").  The Company noted a
decrease in loan costs of  $190,236  and  $222,952  for the three and six months
ended  September 30, 2003  compared to the three and six months ended  September
30,  2002,  respectively.  The  remaining  decrease in interest  expense was the
result of lower debt balances and a reduction in the prime rate by three-fourths
of a percent  (0.75%) during the six months ended September 30, 2003 compared to
the six months ended September 30, 2002. See "Debt  Financing" below for further
detail on the Company's outstanding debts and interest rates thereon.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING  ACTIVITIES - Net cash provided by operating  activities  was $810,704
and $909,672 in the six months ended September 30, 2003 and 2002,  respectively.
The decrease in cash provided by  operations  in the six months ended  September
30, 2003 is primarily attributable to reductions in accounts payable and accrued
liabilities   offset  by  substantial   collections  on  trade  receivables  and
reductions in inventory levels.

                                       21
<PAGE>

INVESTING ACTIVITIES - Net cash used in investing activities totaled $98,280 and
$192,578 in the six months ended September 30, 2003 and 2002, respectively.  The
decrease  in cash used for  investing  activities  during the six  months  ended
September  30,  2003 as  compared  to the six months  ended  September  30, 2002
primarily resulted from less purchases of fixed assets during the period.

FINANCING  ACTIVITIES - Net cash provided by financing  activities  was $496,090
and $715,589 in the six months ended September 30, 2003 and 2002,  respectively.
During the three  months  ended June 30,  2003,  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 used for operations and to further reduce the Company's
accounts payable and debt balances. During the first quarter of fiscal 2003, the
Company received loan proceeds from Excalibur Limited  Partnership in the amount
of  $500,000 in cash.  The  proceeds of which were used to pay down a portion of
the  Company's  outstanding  debt under its term loan from  SouthTrust  Bank. In
addition, in the three months ended June 30, 2002, 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 its book
overdrafts and loan balances on the Company's outstanding debt.

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)
eighty-five  percent (85%) of the net amount of its eligible accounts receivable
plus (ii) 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  (5.75% at  September  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 September 30, 2003, the outstanding
principal balance on the Textron Loan was $4,731,092.

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 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 dated 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 September 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

                                       22
<PAGE>

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,  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
September 30, 2003 was $9,831,985.

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  Founder,  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 September  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 September 30, 2003 was $251,000.  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. In accordance with SFAS 123, 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  Founder,  loaned $330,000 to the
Company in order for it to pay down certain  notes payable that were coming due.
This loan bore interest at the prime rate (4% at September 30, 2003) and was due
on or before June 15, 2006.  In  connection  with a Second  Amended and Restated
Employment  Agreement  effective  October  13, 2003  between Mr.  Morini and the
Company, the Company offset $167,603 of unreimbursed  advances owed to it by Mr.
Morini prior to June 2002 and certain family members  against the balance of the
loan and issued an  aggregate  of 55,087  shares of the  Company's  common stock
(valued at approximately $2.95 per share) as payment in full.

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 bore interest at 7% per annum and was due in twelve equal
monthly  installments  of $30,066.  This note was paid in full by September  30,
2003.

In January 2003, Ruggieri of Windermere Family Limited Partnership, an affiliate
of Mr. John  Ruggieri,  the Company's  former Vice  President of  Manufacturing,
entered  into a  credit  arrangement  with the  Company  pursuant  to which  the
partnership purchased 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 Mr.
Deluca  purchased raw materials for the Company in an aggregate  amount that did
not 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) of the number of shares of common stock for
each share of Series A convertible preferred stock equal to the quotient of:

                                       23
<PAGE>

$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,

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 of common stock 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 Series A  convertible  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 Series A convertible  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.

As of September 30, 2003,  BH Capital  Investments,  L.P. and Excalibur  Limited
Partnership  had  converted  6,684 and 10,378 shares of the Series A convertible
preferred stock, respectively,  plus accrued dividends, into 262,350 and 424,950
shares of common stock, respectively.  The conversion prices ranged from $1.3633
and  $1.75  and were  based on the  lower of (a) 95% of the  average  of the two
lowest closing bid prices on the AMEX for the fifteen  trading days  immediately
prior to conversion or (b) $1.75.  During October 2003, BH Capital  Investments,
L.P.  converted 4,828 shares of the Series A convertible  preferred stock,  plus
accrued dividends,  into 162,598 shares of common stock at a conversion price of
$1.75.

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
the Series A Preferred Holders were 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 Series A Preferred  Holders  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 September
30, 2003, the Company's shareholders, by majority vote, approved the issuance by
the Company of all required  common  stock in the event of a  conversion  of the
Company's Series A convertible  preferred stock and upon the exercise of certain
warrants held by the Series A Preferred Holders.

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 (which the Company did not exercise by the
expiration  date) 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.  In  accordance  with SFAS 123,
the fair value of these  warrants was estimated at $230,000,  which was recorded
as non-cash compensation expense in the first quarter of fiscal year 2004.

                                       24
<PAGE>

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 Mr.
Deluca  purchased raw materials for the Company in an aggregate  amount that did
not 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.  In accordance with SFAS 123, the fair value of this
warrant was  estimated at $63,000,  which was recorded as non-cash  compensation
expense in the first  quarter of fiscal year 2004.  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 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  former  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 and Textron 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 September 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 $37,000 per quarter.

The Company's  sales during the six-month  periods ended  September 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.

                                       25
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the fiscal quarter ended  September 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 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  September  30,  2003 that has
materially  affected,  or is reasonably  likely to materially  affect,  internal
control over financial reporting.

                                       26
<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 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 and we are awaiting that supplemental opinion.

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.  In
the  event we are found to have  infringed  the  Schreiber  Foods'  patents,  in
addition  to  being  liable  to  Schreiber   Foods  for  damages  which  may  be
substantial,  we may also be  prohibited  from using in the future any  wrapping
machine which is found to be infringing,  or, alternatively,  we may be required
to pay Schreiber Foods a royalty on our individually  wrapped products  produced
with the infringing machines on an ongoing basis. Any of the foregoing will have
a material  adverse affect on the Company's  results of operations and financial
condition.

                                       27
<PAGE>

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

NA

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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 contains  certain  financial and operating  covenants.  In August 2003, the
Company  notified  Textron  that the Company 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.

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

The Company held its annual  shareholders  meeting on September  30, 2003. As of
the record date on August 4, 2003, there were 15,153,932  shares of common stock
issued,  outstanding  and eligible to vote.  In this meeting,  the  shareholders
voted on and approved the following proposals:

     1.   To fix the  number  of  directors  at  eight  and to  elect a Board of
          Directors for the ensuing  year.  The board members were voted in with
          the following number of votes for their election:

                                         VOTES CAST     VOTES CAST
               DIRECTOR                     FOR          AGAINST
          --------------------------------------------------------
          David H. Lipka                 13,267,957        145,474
          Thomas R. Dyckman              13,268,311        145,120
          Charles L. Jarvie              13,267,027        146,404
          Joseph J. Juliano              13,254,426        159,005
          Angelo S. Morini               11,601,148      1,812,283
          Christopher J. New             11,913,469      1,499,962
          C. Anthony Wainwright          13,268,026        145,405
          Patrice M.A. Videlier          13,268,555        144,876

     2.   To approve the issuance by the Company of common stock in the event of
          a conversion of the Company's Series A Convertible Preferred Stock and
          upon the exercise of certain warrants held by the Series A convertible
          preferred  stockholders.  The vote tabulation for this proposal was as
          follows:  VOTES CAST FOR -  9,605,519;  VOTES CAST  AGAINST - 249,432;
          ABSTENTIONS - 18,538; BROKER NON-VOTES - 3,539,942

     3.   To approve the issuance by the Company of common  stock or  securities
          convertible into common stock in a potential offering, the proceeds of
          which  will  be  used  to  finance  the  Company's  redemption  of any
          outstanding,  unconverted Series A Convertible  Preferred Stock and to
          pay all costs and expenses  related to such  offering and  redemption.
          The vote tabulation for this proposal was as follows: VOTES CAST FOR -
          9,394,885; VOTES CAST AGAINST - 460,353;  ABSTENTIONS - 18,251; BROKER
          NON-VOTES - 3,539,942

     4.   To approve certain  issuances and potential  issuances of common stock
          or other  securtieis  convertible  into common stock by the Company to
          officers,  directors and key employees.  The vote  tabulation for this
          proposal  was as  follows:  VOTES  CAST FOR -  9,273,693;  VOTES  CAST
          AGAINST - 559,459; ABSTENTIONS - 40,337; BROKER NON-VOTES - 3,539,942

                                       28
<PAGE>

     5.  To ratify the  retention  of BDO  Seidman,  L.L.P.  as the  independent
         auditors of the Company for the fiscal  years ending March 31, 2003 and
         March 31, 2004.  The vote  tabulation for this proposal was as follows:
         VOTES CAST FOR - 13,345,834; VOTES CAST AGAINST - 57,918; ABSTENTIONS -
         9,679

ITEM 5. OTHER INFORMATION

     Upon the death of C. Anthony  Wainwright in October  2003,  the Company had
     and continues to have only seven members  actively  serving on its Board of
     Directors.  It is  not  known  at  this  time  if  the  Board  will  seek a
     replacement  to fill the  vacancy  or will  reduce  its size from  eight to
     seven.

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

     1.   For the term of Mr. Morini's  employment,  the Company shall cause Mr.
     Morini to be nominated for election to the Company's  Board of Directors as
     a member of the slate of  directors  proposed  by the  Company in its proxy
     statement for any meeting of the Company's  stockholders  whereby directors
     shall be elected. Notwithstanding the foregoing, in the event Mr. Morini is
     not elected to the Board of Directors by the stockholders at any meeting of
     the  Company's  stockholders  for which the proxy  statement  indicates Mr.
     Morini is  nominated  for  election  as a member of the slate of  directors
     proposed by the Company, such obligations shall immediately cease.

     2.   The Company will obtain, and maintain in effect during the term of Mr.
     Morini's employment, for the benefit of Mr. Morini (or reimburse Mr. Morini
     for the cost of) a Two  Million  Dollar  ($2,000,000)  term life  insurance
     policy  insuring Mr.  Morini's  life, the  beneficiaries  of which shall be
     designated by Mr. Morini.

     3.   Mr. Morini and the Company  agreed that Mr. Morini and certain  family
     members   received   advances  from  the  Company  of  which  $167,603  was
     unreimbursed  as of October 13, 2003, and (ii) the Company owed $330,000 to
     Mr. Morini pursuant to a loan on March 28, 2002 to the Company.  Mr. Morini
     and the  Company  agreed to offset the  unreimbursed  advances  against the
     amounts  owed by the Company,  and, in  repayment  of the  remainder of the
     amounts  owed by the  Company,  the Company  issued an  aggregate of 55,087
     shares of the Company's common stock to Mr. Morini (valued at approximately
     $2.95 per share  based on the  average of the  closing  prices for the five
     trading days preceding the effective date of the Agreement).

     4.   Mr. Morini has agreed that during the term of his employment,  and for
     a period of one (1) year  following his  termination  of employment for any
     reason other than pursuant to termination  without cause, a material breach
     in the  Agreement,  or a change of control (as defined in the Agreement) in
     the Company for which he did not vote, he will not, directly or indirectly,
     either as an employee,  employer,  consultant,  agent, principal,  partner,
     stockholder  (other  than  owning  fewer  than  one  percent  (1%)  of  the
     outstanding shares of a public corporation),  corporate officer,  director,
     or any other individual or representative  capacity,  engage or participate
     in any business that directly  competes with the Company within those areas
     in the United States in which the Company is doing  business as of the date
     of termination.

     5.   If the  Agreement is  terminated  by the Company  without  cause,  Mr.
     Morini  shall:  (a)  be  entitled  to  continued   payment  of  his  annual
     compensation, health insurance benefits, club dues, auto allowance and life
     insurance  benefits  for the  remainder of the term of the  Agreement,  (b)
     become  fully  "vested"  under  the terms of any  stock  option  agreements
     executed and delivered prior to, along with, or after the Agreement and (c)
     be released from the terms of the $12,772,200 Loan Agreement dated June 15,
     1999 and all monies outstanding thereunder will be forgiven by the Company.
     The  provisions  of  the  Agreement  related  to  the  forgiveness  of  the
     $12,772,200  loan remain  unchanged  from the first  Amended  and  Restated
     Employment  Agreement dated June 15, 1999. Mr. Morini acknowledged that his
     change in role  does not  constitute  a  termination  of Mr.  Morini by the
     Company,  under the First Amended and Restated  Employment  Agreement dated
     June 15, 1999.

     6.   If Mr. Morini  terminates  his  employment in any manner other than in
     connection with a material breach of the Agreement by the Company, he shall
     not be entitled to receive any further  compensation  or  benefits,  except
     that if he terminates his employment in connection with a change of control
     (as defined in the  Agreement) in the Company for which he did not vote, he
     will be released from the terms of the  $12,772,200  Loan  Agreement  dated
     June 15, 1999 and all monies outstanding thereunder will be forgiven by the
     Company.  The provisions of the Agreement related to the forgiveness of the
     $12,772,200  loan remain  unchanged  from the first  Amended  and  Restated
     Employment Agreement dated June 15, 1999.

                                       29
<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 10.7 on Form 8-K filed June 2, 2003.)

                                       30
<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.)

                                       31
<PAGE>

*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.)

*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.)

                                       32
<PAGE>

*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.)

*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         Stock purchase  warrant  issued to SouthTrust  Bank dated May 29,
               2003 (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.)

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<PAGE>

*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.)

*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 as Exhibit 10.52 on Form 10-Q for the fiscal quarter ended
               June 30, 2003.)

*10.53         Waiver Letter from Textron  Financial  Corporation to the Company
               dated  August 13, 2003  (Filed as Exhibit  10.52 on Form 10-Q for
               the fiscal quarter ended June 30, 2003.)

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

 10.55         Stockholder Agreement dated as of October 13, 2003 between Galaxy
               Nutritional Foods, Inc. and Angelo S. Morini (Filed herewith.)

 20.1          Audit Committee Charter (Filed herewith.)

 20.2          Compensation Committee Charter (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
-------------------

     On July 8, 2003, the Company filed a Current Report on Form 8-K to disclose
     the press release announcing the Company's financial results for its fiscal
     year  ended  March 31,  2003,  its plan to amend its Forms  10-Q's  for the
     quarters  ended  June 30,  September  30 and  December  31,  2002,  and its
     guidance for its fiscal year to end March 31, 2004. On August 15, 2003, the
     Company  filed a Current  Report on Form 8-K to disclose the press  release
     announcing  the Company's  financial  results for its first fiscal  quarter
     ended June 30, 2003.

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<PAGE>

                                   SIGNATURES

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

                                        GALAXY NUTRITIONAL FOODS, INC.


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


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

                                       35