Galaxy Nutritional Foods Reports FY2006 Operating Results

ORLANDO, Fla., July 14, 2006 /PRNewswire-FirstCall via COMTEX/ -- Galaxy Nutritional Foods, Inc. (GXYF) , a leading developer and marketer of cheese alternative and dairy-related products, today reported its operating results for FY2006.

For the three months ended March 31, 2006, the Company reported a net loss of ($1,833,320), or ($0.09) per share, on net sales of approximately $8.4 million. These results compared with a net loss of ($2,545,790), or ($0.14) per share, and net sales of approximately $10.8 million, in the fourth quarter of the previous fiscal year.

For the twelve months ended March 31, 2006, net sales approximated $37.8 million, versus net sales of approximately $44.5 million in FY2005. The Company reported a net loss to common stockholders of ($24,148,553), or ($1.23) per share, in the most recent fiscal year, compared with a net loss to common stockholders of ($4,261,855), or ($0.25) per share, in the fiscal year ended March 31, 2005. Operating results for FY2006 included non-cash expenses of $10.1 million related to a reserve on a non-recourse stockholder note, $1.6 million associated with disposal activities, and $7.9 million in asset impairment charges.

The declines in net sales during the quarter and fiscal year ended March 31, 2006 were primarily due to (1) a reduction in private label sales to Wal- Mart and (2) customer resistance to multiple price increases that were implemented in late FY2005 and early FY2006 in response to rising raw material and other production costs. Gross margin improved to 26% of sales in FY2006, from 22% in FY2005. For the quarter ended March 31, 2006, gross margin reached 34% of sales, compared with 18% in the fourth quarter of FY2005.

We anticipate that the report from our independent accountants, relating to our March 31, 2006 audited financial statements will contain an explanatory paragraph stating that our recurring losses from operations and our inability to pay approximately $2.4 million in short-term notes which became due June 15, 2006 raise substantial doubt about our ability to continue as a going concern. Management intends to address these concerns by refinancing these short-term notes and by receiving positive cash flow from operations as a result of its recent changes to the Company's operations, mainly the outsourcing of its manufacturing and distribution functions. If we are not successful in refinancing the $2.4 million in short-term notes or in otherwise entering into a financing, sale, or business transaction that infuses sufficient cash resources into the Company in the near future, management believes that it may no longer be able to continue the implementation of its current business plan and that there would be a material adverse affect on the liquidity and financial condition of the Company.

"Our operations have stabilized significantly in the past several months, as the outsourcing of our production and distribution activities has begun to reflect itself in lower manufacturing, inventory, distribution and overhead costs," stated Michael E. Broll, Chief Executive Officer of Galaxy Nutritional Foods, Inc. "Our financial results continued to be significantly impacted by non-standard costs in the fourth quarter, when 100% of our operating loss was due to costs related to disposal activities and strategic alternatives, as well as a further non-cash charge associated with the previously disclosed default by a stockholder on a non-recourse note receivable."

"I am particularly pleased with the improvement in our gross margin to 34% of sales in the fourth quarter of fiscal 2006, compared with 26% for the full year and 18% in the fourth quarter of fiscal 2005," continued Broll. "During the current fiscal year, we plan to reduce marginally profitable private label and Galaxy imitation sales in order to improve our gross margin further. Thus, while we expect sales to decline in fiscal 2007, our goal is to restore the Company to profitability and generate positive cash flow from operations. In addition to further reductions in corporate overhead, we expect consulting, legal and audit expenses related to major contracts and review of strategic alternatives to decline significantly during fiscal 2007. Our financial goals appear realistic based on currently available information."

About Galaxy Nutritional Foods, Inc.
Galaxy Nutritional Foods, Inc. (GXYF) develops and globally markets plant-based cheese and dairy alternatives, as well as processed organic cheese and cheese food 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, and Wholesome Valley. Galaxy Nutritional Foods, Inc. is dedicated to developing nutritious products to meet the taste and dietary needs of today's increasingly health conscious consumers. For more information, visit
Galaxy Nutritional Foods, Inc. is headquartered in Orlando, Florida, and its common stock is quoted on the OTC Bulletin Board under the symbol "GXYF.

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