##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-51439
 DIAMOND FOODS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    20-2556965(State of Incorporation)
    
    (IRS Employer Identification No.)1050 South Diamond StreetStockton, California
    
    95205-7087(Address of Principal Executive Offices)
    
    (Zip Code)209-467-6000(Telephone No.)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




---



TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II  Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSignatureEXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01 TABLE OF CONTENTS
 PagePart I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23Part II.Other Information
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    25SIGNATURE
    
    
    25EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01
 Table of Contents
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(unaudited)
 April 30,
    
    
    July 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,212
    
    
    $
    49,035Trade receivables, less allowance for doubtful accounts of
$668 and $515, respectively
    
    
    33,677
    
    
    
    42,246Inventories
    
    
    141,232
    
    
    
    111,270Deferred income taxes
    
    
    1,409
    
    
    
    2,726Prepaid expenses and other current assets
    
    
    10,294
    
    
    
    5,169Total current assets
    
    
    206,824
    
    
    
    210,446Property, plant and equipment, net
    
    
    29,894
    
    
    
    27,658Investment in CoBank
    
    
    2,191
    
    
    
    2,269Deferred income taxes
    
    
    2,118
    
    
    
    5,133Other assets
    
    
    5,241
    
    
    
    6,522Total
    
    $
    246,268
    
    
    $
    252,028LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable  members
    
    $
    
    
    
    $
    2,119Payable to members for membership interest
    
    
    
    
    
    
    17,329Accounts payable and accrued liabilities
    
    
    26,136
    
    
    
    29,422Payable to growers
    
    
    82,378
    
    
    
    72,554Total current liabilities
    
    
    108,514
    
    
    
    121,424Long-term obligations
    
    
    20,000
    
    
    
    20,000Other liabilities
    
    
    11,279
    
    
    
    11,142Commitments and contingenciesStockholders equity:Common stock, $0.001 par value; Authorized:100,000,000 shares; 15,678,111 and 15,555,506 shares issued and
outstanding at April 30, 2006 and July 31, 2005, respectively
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    92,539
    
    
    
    88,491Other comprehensive loss
    
    
    (74
    )
    
    
    Retained earnings
    
    
    13,994
    
    
    
    10,955Total stockholders equity
    
    
    106,475
    
    
    
    99,462Total
    
    $
    246,268
    
    
    $
    252,028
  3




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (2006)/
CONDENSED CONSOLIDATED STATEMENTS OF NET PROCEEDS (2005)
(In thousands, except per share amounts)
(unaudited)
 Statements of
    
    
    
    Statements of NetOperations
    
    
    
    ProceedsThree
    
    
    Nine
    
    
    
    Three
    
    
    Ninemonths
    
    
    months
    
    
    
    months
    
    
    monthsended
    
    
    ended
    
    
    
    ended
    
    
    endedApril 30, 2006
    
    
    
    April 30, 2005Net sales and other revenues
    
    $
    67,798
    
    
    $
    370,015
    
    
    
    $
    79,633
    
    
    $
    364,879Patronage inventory at beginning of period
    
    
    
    
    
    
    
    
    
    
    
    (153,041
    )
    
    
    (101,403
    )Patronage inventory at end of period
    
    
    
    
    
    
    
    
    
    
    
    115,148
    
    
    
    115,148Net sales (2006)/ Gross marketing pool proceeds (2005)
    
    
    67,798
    
    
    
    370,015
    
    
    
    
    41,740
    
    
    
    378,624Cost of sales
    
    
    59,370
    
    
    
    317,436
    
    
    
    
    33,004
    
    
    
    147,734Cost of sales-NRV amount
    
    
    
    
    
    
    2,770
    
    
    
    
    
    
    
    
    Total cost of sales
    
    
    59,370
    
    
    
    320,206
    
    
    
    
    33,004
    
    
    
    147,734Gross margin (2006)/ Proceeds before operating expenses
(2005)
    
    
    8,428
    
    
    
    49,809
    
    
    
    
    8,736
    
    
    
    230,890Operating expenses:Selling, general and administrative (includes $906 and
$2,797 for the three and nine months ended April 30,
2006 of stock-based compensation)
    
    
    8,168
    
    
    
    26,356
    
    
    
    
    7,190
    
    
    
    25,107Advertising
    
    
    5,399
    
    
    
    16,286
    
    
    
    
    4,113
    
    
    
    18,496Total operating expenses
    
    
    13,567
    
    
    
    42,642
    
    
    
    
    11,303
    
    
    
    43,603Income (loss) from operations (2006)/Operating proceeds
(deficiency) (2005)
    
    
    (5,139
    )
    
    
    7,167
    
    
    
    
    (2,567
    )
    
    
    187,287Interest expense (income), net
    
    
    (61
    )
    
    
    211
    
    
    
    
    1,114
    
    
    
    3,236Conversion costs
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    245Other
    
    
    116
    
    
    
    332
    
    
    
    
    
    
    
    
    Income (loss) before income tax expense
(benefit)(2006)/Proceeds (deficiency) before income tax
expense (benefit) (2005)
    
    
    (5,194
    )
    
    
    6,624
    
    
    
    
    (3,737
    )
    
    
    183,806Income tax expense (benefit)
    
    
    (2,019
    )
    
    
    2,648
    
    
    
    
    (505
    )
    
    
    (2,003
    )Net income (loss) (2006)/Net proceeds (deficiency) (2005)
    
    $
    (3,175
    )
    
    $
    3,976
    
    
    
    $
    (3,232
    )
    
    $
    185,809Earnings (loss) per share:Basic
    
    $
    (0.20
    )
    
    $
    0.25Fully-diluted
    
    $
    (0.20
    )
    
    $
    0.25Shares used to compute earnings (loss) per share:Basic
    
    
    15,668
    
    
    
    15,604Fully-diluted
    
    
    15,668
    
    
    
    15,630
  4




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Nine months ended April 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (2006) /Net proceeds (2005)
    
    $
    3,976
    
    
    $
    185,809Adjustments to reconcile net income (2006)/net proceeds (2005) to net
cash used in operating activities:Depreciation and amortization
    
    
    3,613
    
    
    
    3,287Deferred income taxes
    
    
    4,332
    
    
    
    Stock-based compensation
    
    
    2,797
    
    
    
    Impairment loss on equipment
    
    
    440
    
    
    
    CoBank patronage dividend paid in stock
    
    
    
    
    
    
    (119
    )Changes in assets and liabilities:Trade receivables
    
    
    8,569
    
    
    
    (8,642
    )Inventories
    
    
    (29,962
    )
    
    
    (22,727
    )Prepaid expenses and other current assets
    
    
    (5,125
    )
    
    
    (2,853
    )Other assets
    
    
    1,281
    
    
    
    991Accounts payable and accrued liabilities
    
    
    (3,360
    )
    
    
    2,781Payable to growers
    
    
    9,824
    
    
    
    Other liabilities
    
    
    777
    
    
    
    781Adjustment to current member account for change in prepaid
inventory costs
    
    
    
    
    
    
    4,845Cash payments to members
    
    
    
    
    
    
    (187,951
    )Net cash used in operating activities
    
    
    (2,838
    )
    
    
    (23,798
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (6,318
    )
    
    
    (7,858
    )Other
    
    
    107
    
    
    
    100Net cash used in investing activities
    
    
    (6,211
    )
    
    
    (7,758
    )CASH FLOWS FROM FINANCING ACTIVITIES:Notes payable borrowings (repayments), net
    
    
    (2,119
    )
    
    
    31,348Additions to long-term obligations
    
    
    
    
    
    
    10,000Payments of long-term obligations
    
    
    
    
    
    
    (10,000
    )Issuance of common stock under stock plans
    
    
    611
    
    
    
    Dividends paid
    
    
    (937
    )
    
    
    Net proceeds from initial public offering paid to members
    
    
    (17,329
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (19,774
    )
    
    
    31,348Net decrease in cash and cash equivalents
    
    
    (28,823
    )
    
    
    (208
    )Cash and cash equivalents:Beginning of period
    
    
    49,035
    
    
    
    780End of period
    
    $
    20,212
    
    
    $
    572Supplemental disclosures of cash flow information:Cash paid (received) during the period for:Interest
    
    $
    871
    
    
    $
    3,106Income taxes
    
    
    2,176
    
    
    
    (373
    )Accrued liability exchanged for options to acquire common stock
    
    
    640
    
    
    
    
  5




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##### Table of Contents



DIAMOND FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended April 30, 2006 and 2005
(In thousands, except share and per share information)
 (1) Organization and Basis of Presentation
      (2) Stock-Based Compensation
 Share-Based Payment, Accounting for Stock-Based
Compensation Accounting for Stock Issued to
Employees
 6




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Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123
 Accounting for Stock-Based Compensation
 Three
    
    
    Ninemonths
    
    
    monthsended
    
    
    endedApril 30, 2006Net income (loss), as reported
    
    $
    (3,175
    )
    
    $
    3,976Total stock-based compensation recorded in the
statement of operations, net of related tax
effects
    
    
    554
    
    
    
    1,678Total stock-based compensation expense determined
under fair value based method for all awards, net
of related tax effects
    
    
    (842
    )
    
    
    (2,497
    )Pro forma net income (loss)
    
    $
    (3,463
    )
    
    $
    3,157Net income (loss) per common equivalent share:Basic  as reported
    
    $
    (0.20
    )
    
    $
    0.25Basic  pro forma
    
    $
    (0.22
    )
    
    $
    0.20Diluted  as reported
    
    $
    (0.20
    )
    
    $
    0.25Diluted  pro forma
    
    $
    (0.22
    )
    
    $
    0.20
 Stock Option Awards:
 Nine months endedApril 30, 2006Average expected life, in years
    
    
    6.0Expected volatility
    
    
    27.5
    %Risk-free interest rate
    
    
    4.75
    %Dividend rate
    
    
    0.64
    %
 7




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##### Table of Contents



Weighted averageNumber of
    
    
    Weighted
    
    
    remaining
    
    
    AggregateShares
    
    
    average exercise
    
    
    contractual life
    
    
    intrinsic value(in thousands)
    
    
    price per share
    
    
    (in years)
    
    
    (in thousands)Outstanding at July 31, 2005
    
    
    1,123
    
    
    $
    17.00Granted
    
    
    522
    
    
    
    18.89Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (75
    )
    
    
    17.40Outstanding at April 30, 2006
    
    
    1,570
    
    
    $
    17.61
    
    
    
    9.3
    
    
    $
    2,182Exercisable at April 30, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
   WeightedNumber of
    
    
    average grantshares
    
    
    date fair value per(in thousands)
    
    
    shareNonvested at July 31, 2005
    
    
    1,123
    
    
    $
    5.50Granted
    
    
    522
    
    
    
    6.39Vested
    
    
    
    
    
    
    Cancelled
    
    
    (75
    )
    
    
    5.64Nonvested at April 30, 2006
    
    
    1,570
    
    
    $
    5.79
 8




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##### Table of Contents



Restricted Stock Awards:
 Number ofshares(in thousands)Outstanding at July 31, 2005
    
    
    598Granted
    
    
    101Exercised
    
    
    Cancelled or expired
    
    
    (21
    )Outstanding at April 30, 2006
    
    
    678
   (3) Earnings Per Share
  (4) Balance sheet items
  April 30,
    
    
    July 31,2006
    
    
    2005Raw materials and supplies
    
    $
    65,771
    
    
    $
    33,949Work in process
    
    
    23,985
    
    
    
    30,732Finished goods
    
    
    51,476
    
    
    
    46,589Total
    
    $
    141,232
    
    
    $
    111,270
 Accounting for Inventory Costs
 9




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##### Table of Contents



April 30,
    
    
    July 31,2006
    
    
    2005Accounts payable
    
    $
    15,432
    
    
    $
    15,677Accrued salaries and benefits
    
    
    3,820
    
    
    
    3,686Accrued promotion
    
    
    4,591
    
    
    
    5,241Other
    
    
    2,293
    
    
    
    4,818Total
    
    $
    26,136
    
    
    $
    29,422
 (5) Foreign Currency Hedging
 Derivative Financial Instruments
and Hedging.
 (6) Credit Facilities
     10




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##### Table of Contents



(7) Retirement Plans
   Pension Benefits
    
    
    Other BenefitsThree months ended
    
    
    Nine months ended
    
    
    Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,
    
    
    April 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    559
    
    
    $
    464
    
    
    $
    1,676
    
    
    $
    1,391
    
    
    $
    64
    
    
    $
    69
    
    
    $
    190
    
    
    $
    205Interest cost
    
    
    432
    
    
    
    438
    
    
    
    1,295
    
    
    
    1,314
    
    
    
    135
    
    
    
    148
    
    
    
    407
    
    
    
    442Expected return on plan asset
    
    
    (575
    )
    
    
    (571
    )
    
    
    (1,725
    )
    
    
    (1,713
    )Amortization of prior service cost
    
    
    (72
    )
    
    
    (72
    )
    
    
    (215
    )
    
    
    (215
    )Amortization of net loss
    
    
    202
    
    
    
    154
    
    
    
    606
    
    
    
    462Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    8
    
    
    
    15
    
    
    
    26Net periodic benefit cost
    
    $
    546
    
    
    $
    413
    
    
    $
    1,637
    
    
    $
    1,239
    
    
    $
    204
    
    
    $
    225
    
    
    $
    612
    
    
    $
    673
 Defined Contribution Plan
 (8) Contingencies
   (9) Subsequent Events
  11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
      Critical Accounting Policies
  12




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##### Table of Contents



Revenue Recognition.
 Inventories.
  Impairment of Long-Lived Assets.
 Employee Benefits.
 Income Taxes. Accounting for Income
Taxes,
 Supplemental and Non-GAAP Financial Information
  13




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##### Table of Contents




    
    is unable to determine retroactively what it would have paid for walnuts in prior years had
it not been a cooperative;
    
    is unable to determine whether what it would have paid for walnuts would approximate
amounts paid to other growers by other processors as reflected in the CASS statistics;
    
    is limited by the level of detail provided by the CASS statistics; and
    
    cannot ensure that the cost of sales amounts implied by the CASS statistics are
representative of future cost of sales amounts.
  Three months ended April 30,
    
    
    Nine months ended April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(supplemental)
    
    
    (non-GAAP)
    
    
    (supplemental)(in thousands)
    
    (unaudited)
    
    
    (unaudited)Net sales and other revenues
    
    $
    67,798
    
    
    $
    79,633
    
    
    $
    370,015
    
    
    $
    364,879Cost of sales
    
    
    59,370
    
    
    
    74,708
    
    
    
    317,436
    
    
    
    320,910Gross margin
    
    $
    8,428
    
    
    $
    4,925
    
    
    $
    52,579
    
    
    $
    43,969
  Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2005
    
    
    2006
    
    
    2005GAAP cost of sales
    
    
    
    
    
    $
    33,004
    
    
    $
    320,206
    
    
    $
    147,734Adjustment to remove one time impact
of accounting for certain inventories
on NRV basis
    
    
    
    
    
    
    
    
    
    
    (2,770
    )
    
    
    Adjustment to convert walnut
inventories from crop year pool and
NRV accounting to cost basis
accounting and to record estimated
walnut cost of goods sold
    
    
    
    
    
    
    41,704
    
    
    
    
    
    
    
    173,176Non-GAAP/supplemental cost of sales
    
    
    
    
    
    $
    74,708
    
    
    $
    317,436
    
    
    $
    320,910
 About Diamonds supplemental and non-GAAP Financial Measures
  14




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##### Table of Contents




    
    Diamond excludes a one-time charge that it incurred in connection
with its conversion. As an agricultural cooperative association,
Diamond was required to use net realizable value (NRV) accounting
for certain inventories; as a for-profit corporation Diamond is
required to use the lower of cost or market method to value all
inventories. As a result of using NRV accounting, certain
inventories were valued higher than they would have been under the
lower of cost or market method. Therefore, as these inventories
were sold, the amount charged to cost of goods sold was higher.
Diamond excluded this charge because it is non-recurring and is
not indicative of ongoing operations.
 
    
    Diamond includes the estimated cost of walnuts received from
members in 2005. Diamonds management believes that information is
useful to investors because Diamonds financial statements for
periods after July 31, 2005 include walnut acquisition costs that
were not included in its financial statements for earlier periods.
Accordingly, gross margins after this date will be materially
different than those reported in the historical cooperative
financial statements.
  Results of Operations
  15




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##### Table of Contents



Three months ended
    
    
    
    
    
    
    Nine months endedApril 30,
    
    
    
    
    
    
    April 30,2006
    
    
    2005
    
    
    
    
    
    
    2006
    
    
    2005North American Retail (1)
    
    $
    34,943
    
    
    $
    35,399
    
    
    
    (1.3
    )%
    
    $
    221,108
    
    
    $
    188,502
    
    
    
    17.3
    %International
    
    
    15,585
    
    
    
    21,483
    
    
    
    (27.5
    )
    
    
    84,921
    
    
    
    97,415
    
    
    
    (12.8
    )North American
Ingredient/Food Service
    
    
    16,461
    
    
    
    21,436
    
    
    
    (23.2
    )
    
    
    61,272
    
    
    
    75,699
    
    
    
    (19.1
    )Other
    
    
    809
    
    
    
    1,315
    
    
    
    (38.5
    )
    
    
    2,714
    
    
    
    3,263
    
    
    
    (16.8
    )Total
    
    $
    67,798
    
    
    $
    79,633
    
    
    
    (14.9
    )%
    
    $
    370,015
    
    
    $
    364,879
    
    
    
    1.4
    %
 
 (1)
    
    North American Retail represents sales of our culinary, snack and in-shell nuts in North America.    Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Walnuts
    
    
    70.1
    %
    
    
    73.3
    %
    
    
    67.2
    %
    
    
    71.5
    %Other nuts
    
    
    29.9
    
    
    
    26.7
    
    
    
    32.8
    
    
    
    28.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Gross margin.
 Selling, General and Administrative.
 16




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Advertising.
 Interest.
 Income Taxes.
  Liquidity and Capital Resources
        17




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by Fiscal Year2006
    
    
    2007-
    
    
    2009-
    
    
    There-Total
    
    
    (c)
    
    
    2008
    
    
    2010
    
    
    afterLong-term obligations (a)
    
    $
    20.0
    
    
    $
    
    
    
    $
    
    
    
    $
    4.0
    
    
    $
    16.0Interest on long-term obligations
    
    
    8.5
    
    
    
    0.7
    
    
    
    2.9
    
    
    
    2.7
    
    
    
    2.2Operating leases
    
    
    2.9
    
    
    
    0.2
    
    
    
    1.3
    
    
    
    1.1
    
    
    
    0.3Purchase commitments (b)
    
    
    0.8
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    32.2
    
    
    $
    1.7
    
    
    $
    4.2
    
    
    $
    7.8
    
    
    $
    18.5
 
 (a)
    
    Excludes $2.0 million in total letters of credit outstanding related to normal business
transactions.(b)
    
    Commitments to purchase equipment.(c)
    
    Represents obligations and commitments for the remaining three months of fiscal 2006. Effects of Inflation
  Recent Accounting Pronouncements
 Share-Based Payment
 Accounting for Inventory Costs
 RISK FACTORS
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We could be required to conduct product recalls; concerns with the safety and quality of food
products could harm our sales or cause consumers to avoid our products.
  Our raw materials are subject to fluctuations in availability and price.
   We face intense competition from national and regional competitors and snack food industry
competitors that could negatively affect our results of operations.
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The impact of the conversion and initial public offering on our business is difficult to predict;
it could disrupt existing relationships and harm our financial results.
  Sales to our top customers represented over 20% of our net sales. The loss of any major
customers could adversely impact our business.
  Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate and
our annual performance will depend largely on results from two quarters.
  Changes in the food industry, including changing dietary trends and consumer preferences, could
reduce demand for our products.
  Developments in the walnut industry could threaten our position in the industry.
  We depend on our key personnel and if we lose the services of any of these individuals, or fail to
attract and retain additional key personnel, we will not be able to implement our business strategy
or operate our business effectively.
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The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 could disrupt our
supply of imported nuts.
  Government regulation could increase our costs of production and increase our legal and regulatory
expenditures.
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We are subject to risks of doing business internationally.
  
    
    local economic and political conditions, including disruptions in trading markets;
    
    restrictive foreign governmental actions, including restrictions on transfers of funds
and trade protection measures, including export duties and quotas and customs duties and tariffs;
    
    changes in legal or regulatory requirements affecting foreign investment, loans,
taxes, imports, and exports;
    
    currency exchange rate fluctuations which, depending upon the nature of the changes,
may make our finished products more expensive compared to foreign grown products or may increase
our cost of obtaining foreign-sourced raw materials; and
    
    earthquakes, tsunamis, floods or other major disasters may limit the supply of nuts
that we purchase abroad.
  Increased costs associated with product processing and transportation, such as water, electricity,
natural gas and fuel, could increase our expenses and reduce our profitability.
  A disruption at any of our production facilities would significantly decrease production, which
could increase our cost of sales and reduce our income from operations.
  The acquisition of other businesses would pose risks to our profitability.
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We recently acquired assets from Harmony Foods Corporation, and it is difficult to determine what
the impact of the acquisition on our financial results will be.
  
    
    successful integration of Harmony products and personnel with our offerings and business;
    
    growth in demand for the Harmony products;
    
    consolidating our Lemont, Illinois operations with operations in Fishers, Indiana; and
    
    assimilating acquired assets and operations into our existing operations infrastructure.
 Our business could be negatively impacted if we fail to maintain satisfactory labor relations.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  24




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Item 6. Exhibits
  Filed with this
    
    Incorporated by referenceNumber
    
    Exhibit Title
    
    10-Q
    
    Form
    
    File No.
    
    Date Filed31.01
    
    Certification of
Chief Executive
Officer pursuant to
Exchange Act Rules
13a-14(a) and
15d-14(a), as
adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    X31.02
    
    Certification of
Chief Financial
Officer pursuant to
Exchange Act Rules
13a-14(a) and
15d-14(a), as
adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    X32.01
    
    Certifications of
Chief Executive
Officer and Chief
Financial Officer
pursuant to 18
U.S.C. Section
1350, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002
    
    X
 
 SIGNATURE
  DIAMOND FOODS, INC.Date: June 7, 2006By:
    
    /s/ Seth HalioSeth HalioChief Financial Officer andduly authorized officer
 25