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Galaxy Nutritional Foods Reports FY2008 Results

July 1, 2008

ORLANDO, Fla., July 1 /PRNewswire-FirstCall/ — Galaxy Nutritional Foods, Inc. (BULLETIN BOARD: GXYF) , a leading developer and marketer of cheese alternatives, organic dairy and other organic and natural food products, today reported operating results for the fourth quarter and fiscal year ended March 31, 2008. The Company will host an investor conference call to discuss these results at 11:00 a.m. Eastern Time (EDT) today, July 1, 2008 (see details below).

For the three months ended March 31, 2008, the Company reported net income of $232,150, or $0.01 per diluted share, on net sales of approximately $6.4 million. These results compared with net sales of approximately $6.5 million and net income of $201,179, or $0.01 per share, in the fourth quarter of the previous fiscal year.

For the twelve months ended March 31, 2008, the Company reported a net income of $1,338,855, or $0.07 per diluted share, on net sales of approximately $25.2 million. Operating expenses during FY2008 included a previously disclosed employment contract expense in the amount of $346,447. Exclusive of this item, the Company would have reported income from operations of approximately $2.2 million in the fiscal year ended March 31, 2008.

In the twelve months ended March 31, 2007, the Company reported net income of $146,498, or $0.01 per diluted share, on net sales of approximately $27.2 million. FY2007 operating expenses included a previously disclosed write-down of a non-recurring, non-cash reserve on a stockholder note receivable in the amount of $1,428,000; expenses related to disposal activities of $295,651; and $108,160 in non-cash stock-based compensation expense. Exclusive of these items, the Company would have reported income from operations of approximately $2.7 million in the fiscal year ended March 31, 2007.

The Company generated EBITDA, as adjusted (a non-GAAP measure), of $2,195,659 (8.7% of net sales) in FY2008, compared with EBITDA, as adjusted, of $2,955,491 (10.9% of net sales) in FY2007 (see EBITDA table at end of this release for further Non-GAAP information).

“The last half of fiscal 2008 brought sharp, continuous cost increases in critical commodities that squeezed our margins, but with selective price increases, reductions in other costs and emphasis on non-casein products, Galaxy delivered solid operating profits,” stated Michael E. Broll, Chief Executive Officer of Galaxy Nutritional Foods, Inc.

CONFERENCE CALL AND WEBCAST INFORMATION

The Company will host an investor conference call to discuss FY2008 operating results at 11:00 a.m. EDT today, July 1, 2008.

Shareholders and other interested parties may participate in the conference call by dialing 888-200-8867 (international/local participants dial 973-935-8765) and referencing the ID code 53770300 a few minutes before 11:00 a.m. EDT on July 1, 2008. A replay of the conference call will be available on Galaxy Nutritional Foods’ website at: http://www.galaxyfoods.com/investors/transcripts.asp starting on Wednesday, July 2, 2008.

About Galaxy Nutritional Foods, Inc.

Galaxy Nutritional Foods, Inc. (BULLETIN BOARD: GXYF) develops and globally markets plant-based cheese alternatives, organic dairy and other organic and natural food products to grocery and natural foods retailers, mass merchandisers and foodservice accounts. Veggie, the leading brand in the grocery cheese alternative category and the Company’s top selling product group, is primarily merchandised in the produce section and provides calcium and protein without cholesterol, saturated fat or trans-fat. Other popular brands include: Rice, Veggy, Vegan, Rice Vegan and Wholesome Valley. Galaxy Nutritional Foods, Inc. is dedicated to developing nutritious and delicious food products made with high quality natural ingredients that exceed the expectations of today’s health conscious consumers. Galaxy is also committed to reducing its environmental impact as part of an Eat Green for Body & Earth(TM) program that offsets carbon emissions associated with product shipping and emphasizes the use of organic ingredients. For more information on Galaxy’s products or green initiatives, visit http://www.galaxyfoods.com/ .

Galaxy Nutritional Foods, Inc. is headquartered in Orlando, Florida, and its common stock is quoted on the OTC Bulletin Board under the symbol “GXYF.”

Any statement of future expectations in this press release, including without limitation, as to future revenues, earnings and profitability, plans and objectives for future operations, future economic performance or expected operational developments, and all other statements regarding the future are “forward looking” statements within the meaning of the Private Securities Litigation Act of 1995. These forward looking statements are based on the Company’s strategic plans and involve risks and uncertainties that may cause actual results to differ materially and adversely from these forward looking statements. Such risks and uncertainties include, without limitation: the Company’s ability to execute its business strategy in a very competitive service and pricing environment; the Company’s ability to refinance or repay certain short-term indebtedness due an affiliate of the Company and its potential impact on the Company’s ability to continue as a going concern, risks associated with the launch of new marketing campaigns; continued relations with and pricing dependence on third party suppliers; and other risks referenced from time to time in the Company’s filings with the Securities and Exchange Commission, including without limitation, the Company’s annual report on Form 10-K for the year ended March 31, 2008. Readers are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward- looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments.

                       (Financial statements follow)                          GALAXY NUTRITIONAL FOODS, INC.                               Balance Sheets                                                      MARCH 31,    MARCH 31,                                                       2008         2007                      ASSETS   CURRENT ASSETS:     Cash                                           $1,893,425  $   879,487     Trade receivables, net of allowance of      $658,000 and $1,498,000                        2,516,496    2,652,845     Inventories, net of reserve of $38,533      and $0                                           116,902      377,432     Prepaid expenses and other                         95,906      261,693        Total current assets                          4,622,729    4,171,457    PROPERTY AND EQUIPMENT, NET                          65,671       90,181   OTHER ASSETS                                         68,463      102,980        TOTAL                                        $4,756,863  $ 4,364,618          LIABILITIES AND STOCKHOLDERS' DEFICIT   CURRENT LIABILITIES:     Secured borrowings                             $       --  $   556,886     Accounts payable                                1,393,810    1,718,088     Accrued and other current liabilities           1,028,049      823,258     Related party note payable                      2,685,104     Current portion of accrued employment      contracts                                        282,599      366,305        Total current liabilities                     5,389,562    3,464,537    ACCRUED EMPLOYMENT CONTRACTS, less    current portion                                         --      194,491   RELATED PARTY NOTE PAYABLE                               --    2,677,144        Total liabilities                             5,389,562    6,336,172    COMMITMENTS AND CONTINGENCIES                            --           --    STOCKHOLDERS' DEFICIT:     Common stock, $.01 par value; authorized      85,000,000 shares; 17,110,016 shares      issued                                           171,100      171,100      Additional paid-in capital                     70,167,149   70,167,149      Accumulated deficit                           (70,970,948) (72,309,803)        Total stockholders' deficit                    (632,699)  (1,971,554)        TOTAL                                        $4,756,863  $ 4,364,618                          GALAXY NUTRITIONAL FOODS, INC.                            Statements of Income    Fiscal Years Ended March 31,                        2008         2007    Net Sales                                       $25,190,600  $27,162,110    Cost of Goods Sold                               15,676,654   16,224,549      GROSS MARGIN                                   9,513,946   10,937,561    OPERATING EXPENSES:   Selling                                           3,492,129    3,719,986   Delivery                                          1,023,440      902,979   General and administrative, including $0    and $108,160 non-cash compensation    related to stock-based transactions              2,516,590    3,429,261   Employment contract expense-general and    administrative                                     346,447           --   Research and development                            330,557      224,843   Reserve on stockholder note receivable                   --    1,428,000   Cost of disposal activities                              --      295,651   Loss on disposal of assets                              615       44,280      Total operating expenses                       7,709,778   10,045,000    INCOME FROM OPERATIONS                            1,804,168      892,561      INTEREST EXPENSE                                 (453,313)    (746,063)    INCOME BEFORE TAXES                               1,350,855      146,498    INCOME TAX EXPENSE                                  (12,000)          --    NET INCOME                                       $1,338,855  $   146,498    BASIC NET INCOME PER COMMON SHARE                $     0.08  $      0.01   DILUTED NET INCOME PER COMMON SHARE              $     0.07  $      0.01                          GALAXY NUTRITIONAL FOODS, INC.                          Statements of Cash Flows    Fiscal Years Ended March 31,                        2008         2007    CASH FLOWS FROM OPERATING ACTIVITIES:     Net Income                                     $1,338,855  $   146,498     Adjustments to reconcile net income to      net cash from (used in) operating      activities:       Depreciation and amortization                    44,429      141,339       Amortization of debt discount and        financing costs                                 42,477      271,046       Provision for future credits and        doubtful accounts on trade receivables        (836,500)    (179,971)       Inventory reserve                                38,533           --       Provision for loss on stockholder note        receivable                                          --    1,428,000       Non-cash compensation related to        stock-based transactions                            --      108,160       Loss on disposal of assets                          615       44,280       (Increase) decrease in:         Trade receivables                             972,849    1,545,932         Inventories                                   221,997     (103,904)         Prepaid expenses and other                    165,787     (190,976)     Increase (decrease) in:         Accounts payable                             (324,278)    (937,427)         Accrued and other liabilities                 (73,406)    (347,848)       NET CASH FROM OPERATING ACTIVITIES             1,591,358    1,925,129    CASH FLOWS FROM INVESTING ACTIVITIES:     Purchase of property and equipment                (20,534)     (27,868)     Proceeds from sale of equipment                        --       45,455     Increase in other assets                               --       69,844      NET CASH FROM (USED IN) INVESTING      ACTIVITIES                                       (20,534)      87,431    CASH FLOWS FROM FINANCING ACTIVITIES:      Net payments on secured borrowings               (556,886)  (1,362,116)     Borrowings on notes payable                            --    1,200,000     Repayments on notes payable                            --   (1,200,000)     Financing costs for long term debt                     --     (144,011)     Principal payments on capital lease      obligations                                           --      (62,826)      NET CASH USED IN FINANCING ACTIVITIES            (556,886)  (1,568,953)    NET INCREASE IN CASH                              1,013,938      443,607    CASH, BEGINNING OF YEAR                             879,487      435,880    CASH, END OF YEAR                                $1,893,425  $   879,487                          GALAXY NUTRITIONAL FOODS, INC.          EBITDA, as adjusted, (a non-GAAP measure) Reconciliation                                (Unaudited)                                THREE MONTHS ENDED       TWELVE MONTHS ENDED                                  MARCH 31,                  MARCH 31,                              2008        2007         2008         2007   NET SALES              $ 6,427,240 $ 6,491,152  $ 25,190,600  $ 27,162,110    NET INCOME             $   232,150 $   201,179  $  1,338,855  $    146,498     Plus:   Non-cash compensation    expense                        --          --            --       108,160   G&A expenses related to    strategic alternatives         --          --            --        45,500   Employment contract    expense                        --          --       346,447            --   Reserve on stockholder    note receivable                --          --            --     1,428,000   Cost of disposal    activities                     --      12,104            --       295,651   Loss on disposal of    assets                        103          --           615        44,280   Interest expense           110,000     122,790       453,313       746,063   Taxes                           --          --        12,000            --   Depreciation and    amortization    expense                    11,121      11,237        44,429       141,339       EBITDA, as        adjusted          $   353,374 $   347,310   $ 2,195,659  $  2,955,491        As a % of Net Sales      5.5 %       5.4 %         8.7 %        10.9 %     Footnote on non-GAAP Measures Presented Above  

Management utilizes certain non-GAAP measures such as EBITDA, as adjusted, because it provides useful information to management and investors in order to accurately review the Company’s current on-going operations and business trends related to its financial condition and results of operations. Additionally, these measures are key factors upon which the Company prepares its budgets and forecasts. In its determination of non-GAAP measures, management excludes the non-cash compensation related to stock-based compensation, G&A expenses related to strategic alternatives, the cost of disposal activities, impairment or loss on the disposal of assets, employment contract expense, and the reserve against a stockholder note receivable from its analysis of operating income because it believes that these items do not accurately reflect the Company’s current on-going operations. With respect to non-cash compensation, this is calculated based on fluctuations in the Company’s stock price which are outside the Company’s control and typically do not reflect the Company’s operations. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures reported by other companies.

Galaxy Nutritional Foods, Inc.

CONTACT: Dawn M. Robert, Investor Relations, Galaxy Nutritional Foods,Inc., +1-407-854-0433

Web site: http://www.galaxyfoods.com/http://www.galaxyfoods.com/investors/transcripts.asp




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