##### 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 January 31, 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
(State of Incorporation)
    
    20-2556965
(IRS Employer Identification No.)1050 South Diamond Street Stockton, California
(Address of Principal Executive Offices)
    
    95205-7087
(Zip Code)209-467-6000
(Telephone No.)
 þ o
  o o þ
 o þ




---



##### 



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
    
    
    22Item 4. Controls and Procedures
    
    
    22Part IIOther Information
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 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
  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   2




---



##### 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)
 January 31,
    
    
    July 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,035
    
    
    $
    49,035Trade receivables, less allowance for
doubtful accounts of $518 and $515,
respectively
    
    
    33,041
    
    
    
    42,246Inventories
    
    
    165,384
    
    
    
    111,270Deferred income taxes
    
    
    1,409
    
    
    
    2,726Prepaid expenses and other current assets
    
    
    8,941
    
    
    
    5,169Total current assets
    
    
    239,810
    
    
    
    210,446Property, plant and equipment, net
    
    
    29,078
    
    
    
    27,658Investment in CoBank
    
    
    2,269
    
    
    
    2,269Deferred income taxes
    
    
    2,118
    
    
    
    5,133Other assets
    
    
    5,508
    
    
    
    6,522Total
    
    $
    278,783
    
    
    $
    252,028LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable  members
    
    $
    
    
    
    $
    2,119Payable to members for membership interest
    
    
    
    
    
    
    17,329Accounts payable and accrued liabilities
    
    
    25,880
    
    
    
    29,422Payable to growers
    
    
    112,794
    
    
    
    72,554Total current liabilities
    
    
    138,674
    
    
    
    121,424Long-term obligations
    
    
    20,000
    
    
    
    20,000Other liabilities
    
    
    10,849
    
    
    
    11,142Commitments and contingenciesStockholders equity:Common stock, $0.001 par value; Authorized:100,000,000 shares; 15,661,111 and
15,555,506 shares issued and outstanding
at January 31, 2006 and July 31, 2005,
respectively
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    91,639
    
    
    
    88,491Other comprehensive loss
    
    
    (34
    )
    
    
    Retained earnings
    
    
    17,639
    
    
    
    10,955Total stockholders equity
    
    
    109,260
    
    
    
    99,462Total
    
    $
    278,783
    
    
    $
    252,028
  3




---



##### 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 Operations
    
    
    
    Statements of Net ProceedsThree months
    
    
    Six months
    
    
    
    Three months
    
    
    Six monthsEnded
    
    
    Ended
    
    
    
    Ended
    
    
    EndedJanuary 31, 2006
    
    
    
    January 31, 2005Net sales and other revenues
    
    $
    124,157
    
    
    $
    302,217
    
    
    
    $
    112,488
    
    
    $
    285,246Patronage inventory at beginning of period
    
    
    
    
    
    
    
    
    
    
    
    (203,846
    )
    
    
    (101,403
    )Patronage inventory at end of period
    
    
    
    
    
    
    
    
    
    
    
    153,041
    
    
    
    153,041Net sales (2006)/ Gross marketing pool proceeds (2005)
    
    
    124,157
    
    
    
    302,217
    
    
    
    
    61,683
    
    
    
    336,884Cost of sales
    
    
    105,587
    
    
    
    258,066
    
    
    
    
    48,754
    
    
    
    114,730Cost of sales-NRV amount
    
    
    
    
    
    
    2,770
    
    
    
    
    
    
    
    
    Total cost of sales
    
    
    105,587
    
    
    
    260,836
    
    
    
    
    48,754
    
    
    
    114,730Gross margin (2006)/ Proceeds before operating expenses (2005)
    
    
    18,570
    
    
    
    41,381
    
    
    
    
    12,929
    
    
    
    222,154Operating expenses:Selling, general and administrative (includes $1,109 and $1,891 for the three
and six months ended January 31, 2006 of stock-based compensation)
    
    
    8,998
    
    
    
    18,188
    
    
    
    
    9,933
    
    
    
    17,917Advertising
    
    
    4,293
    
    
    
    10,887
    
    
    
    
    4,728
    
    
    
    14,383Total operating expenses
    
    
    13,291
    
    
    
    29,075
    
    
    
    
    14,661
    
    
    
    32,300Income from operations (2006)/Operating proceeds (deficiency) (2005)
    
    
    5,279
    
    
    
    12,306
    
    
    
    
    (1,732
    )
    
    
    189,854Interest, net
    
    
    248
    
    
    
    272
    
    
    
    
    1,081
    
    
    
    2,122Conversion costs
    
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    189Other
    
    
    3
    
    
    
    216
    
    
    
    
    
    
    
    
    Income before income tax expense (2006)/Proceeds (deficiency) before income
tax expense (2005)
    
    
    5,028
    
    
    
    11,818
    
    
    
    
    (2,976
    )
    
    
    187,543Income tax expense (benefit)
    
    
    1,951
    
    
    
    4,667
    
    
    
    
    (724
    )
    
    
    (1,498
    )Net income (2006)/Net proceeds (deficiency) (2005)
    
    $
    3,077
    
    
    $
    7,151
    
    
    
    $
    (2,252
    )
    
    $
    189,041Earnings per share:Basic
    
    $
    0.20
    
    
    $
    0.46Fully-diluted
    
    $
    0.20
    
    
    $
    0.46Shares used to compute earnings per share:Basic
    
    
    15,587
    
    
    
    15,572Fully-diluted
    
    
    15,587
    
    
    
    15,610
  4




---



##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Six months ended January 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (2006) /Net proceeds (2005)
    
    $
    7,151
    
    
    $
    189,041Adjustments to reconcile net income (2006)/net proceeds (2005) to
net cash used in operating activities:Depreciation and amortization
    
    
    2,340
    
    
    
    2,281Deferred income taxes
    
    
    4,332
    
    
    
    Stock based compensation
    
    
    1,891
    
    
    
    Abandonment loss on cogeneration facility
    
    
    449
    
    
    
    Changes in assets and liabilities:Trade receivables
    
    
    9,205
    
    
    
    (9,553
    )Inventories
    
    
    (54,114
    )
    
    
    (59,511
    )Prepaid expenses and other current assets
    
    
    (3,772
    )
    
    
    (2,712
    )Other assets
    
    
    1,014
    
    
    
    639Accounts payable and accrued liabilities
    
    
    (3,576
    )
    
    
    7,382Payable to growers
    
    
    40,240
    
    
    
    Other liabilities
    
    
    353
    
    
    
    614Adjustment to current member account for change in prepaid
inventory costs
    
    
    
    
    
    
    5,023Cash payments to members
    
    
    
    
    
    
    (145,190
    )Net cash provided by (used in) operating activities
    
    
    5,513
    
    
    
    (11,986
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (4,209
    )
    
    
    (3,921
    )Other
    
    
    
    
    
    
    107Net cash used in investing activities
    
    
    (4,209
    )
    
    
    (3,814
    )CASH FLOWS FROM FINANCING ACTIVITIES:Notes payable borrowings (repayments), net
    
    
    (2,119
    )
    
    
    15,878Issuance of common stock under stock plans
    
    
    611
    
    
    
    Dividends paid
    
    
    (467
    )
    
    
    Net proceeds from initial public offering paid to members
    
    
    (17,329
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (19,304
    )
    
    
    15,878Net increase (decrease) in cash and cash equivalents
    
    
    (18,000
    )
    
    
    78Cash and cash equivalents:Beginning of period
    
    
    49,035
    
    
    
    780End of period
    
    $
    31,035
    
    
    $
    858Supplemental disclosures of cash flow information:Cash paid (received) during the period for:Interest
    
    $
    633
    
    
    $
    1,601Income taxes
    
    
    3,195
    
    
    
    (380
    )Accrued liability exchanged for options to acquire common stock
    
    
    646
    
    
    
    
  5




---



##### Table of Contents



DIAMOND FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended January 31, 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 Accounting for Stock Issued to Employees
 6




---



##### Table of Contents



Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement
No. 123
 Accounting for Stock-Based Compensation
 Three
    
    
    Sixmonths
    
    
    monthsended
    
    
    endedJanuary 31, 2006Net income, as reported
    
    $
    3,077
    
    
    $
    7,151Total stock-based compensation
recorded in the statement of
operations, net of related tax effects
    
    
    679
    
    
    
    1,144Total stock-based compensation expense
determined under fair value based
method for all awards, net of related
tax effects
    
    
    (967
    )
    
    
    (1,684
    )Pro forma net income
    
    $
    2,789
    
    
    $
    6,611Net income per common equivalent share:Basic  as reported
    
    $
    0.20
    
    
    $
    0.46Basic  pro forma
    
    $
    0.18
    
    
    $
    0.42Diluted  as reported
    
    $
    0.20
    
    
    $
    0.46Diluted  pro forma
    
    $
    0.18
    
    
    $
    0.42
 Stock Option Awards:
 7




---



##### Table of Contents



Three months endedJanuary 31, 2006Average expected life, in years
    
    
    6Expected volatility
    
    
    27.5
    %Risk-free interest rate
    
    
    4.45
    %Dividend rate
    
    
    0.57
    %
  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
    
    
    496
    
    
    
    18.94Exercised
    
    
    
    
    
    
    Cancelled or expired
    
    
    (67
    )
    
    
    17.22Outstanding at January 31, 2006
    
    
    1,552
    
    
    $
    17.61
    
    
    
    9.6
    
    
    $
    5,356Exercisable at January 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
   Number of
    
    
    Weightedshares
    
    
    average grant(in thousands)
    
    
    date fair value pershareNonvested at July 31, 2005
    
    
    1,123
    
    
    $
    5.50Granted
    
    
    496
    
    
    
    6.41Vested
    
    
    
    
    
    
    Cancelled
    
    
    (67
    )
    
    
    5.57Nonvested at January 31, 2006
    
    
    1,552
    
    
    $
    5.78
 8




---



##### Table of Contents



Restricted Stock Awards:
 Number ofshares(in thousands)Outstanding at July 31, 2005
    
    
    598Granted
    
    
    84Exercised
    
    
    Cancelled or expired
    
    
    (21
    )Outstanding at January 31, 2006
    
    
    661
   (3) Earnings Per Share
  (4) Balance sheet items
  January 31,
    
    
    July 31,2006
    
    
    2005Raw materials and supplies
    
    $
    96,598
    
    
    $
    33,949Work in process
    
    
    23,976
    
    
    
    30,732Finished goods
    
    
    44,810
    
    
    
    46,589Total
    
    $
    165,384
    
    
    $
    111,270
 9




---



##### Table of Contents



Accounting for Inventory Costs
  January 31,
    
    
    July 31,2006
    
    
    2005Accounts payable
    
    $
    14,819
    
    
    $
    15,677Accrued salaries and benefits
    
    
    3,453
    
    
    
    3,686Accrued promotion
    
    
    4,450
    
    
    
    5,241Accrued other
    
    
    3,158
    
    
    
    4,818Total
    
    $
    25,880
    
    
    $
    29,422
 (5) Foreign Currency Hedging
 Derivative Financial Instruments
and Hedging.
 (6) Credit Facilities
    10




---



##### Table of Contents



(7) Retirement Plans
   Pension Benefits
    
    Other BenefitsThree months ended
    
    Six months ended
    
    Three months ended
    
    Six months endedJanuary 31
    
    January 31
    
    January 31
    
    January 312006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Service cost
    
    $
    527
    
    
    $
    454
    
    
    $
    1,117
    
    
    $
    927
    
    
    $
    63
    
    
    $
    68
    
    
    $
    126
    
    
    $
    136Interest cost
    
    
    414
    
    
    
    431
    
    
    
    863
    
    
    
    876
    
    
    
    136
    
    
    
    147
    
    
    
    272
    
    
    
    294Expected return on plan assets
    
    
    (570
    )
    
    
    (565
    )
    
    
    (1,150
    )
    
    
    (1,142
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    (71
    )
    
    
    (72
    )
    
    
    (143
    )
    
    
    (143
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of net loss
    
    
    185
    
    
    
    151
    
    
    
    404
    
    
    
    308
    
    
    
    5
    
    
    
    9
    
    
    
    10
    
    
    
    18Net periodic benefit cost
    
    $
    485
    
    
    $
    399
    
    
    $
    1,091
    
    
    $
    826
    
    
    $
    204
    
    
    $
    224
    
    
    $
    408
    
    
    $
    448
 Defined Contribution Plan
 (8) Contingencies
   11




---



##### Table of Contents



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




---



##### 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




---



##### 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 January 31,
    
    
    Six months ended January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(non-GAAP)
    
    
    (supplemental)
    
    
    (non-GAAP)
    
    
    (supplemental)(in thousands)
    
    (unaudited)
    
    
    (unaudited)Net sales and other revenues
    
    $
    124,157
    
    
    $
    112,488
    
    
    $
    302,217
    
    
    $
    285,246Cost of sales
    
    
    105,587
    
    
    
    98,167
    
    
    
    258,066
    
    
    
    246,202Gross margin
    
    
    18,570
    
    
    
    14,321
    
    
    
    44,151
    
    
    
    39,044Operating expenses:Selling, general and administrative
    
    
    8,998
    
    
    
    9,933
    
    
    
    18,188
    
    
    
    17,917Advertising
    
    
    4,293
    
    
    
    4,728
    
    
    
    10,887
    
    
    
    14,383Total operating expenses
    
    
    13,291
    
    
    
    14,661
    
    
    
    29,075
    
    
    
    32,300Operating income (loss)
    
    
    5,279
    
    
    
    (340
    )
    
    
    15,076
    
    
    
    6,744Interest expense
    
    
    248
    
    
    
    1,081
    
    
    
    272
    
    
    
    2,122Other
    
    
    3
    
    
    
    163
    
    
    
    216
    
    
    
    189Income (loss) before income tax
expense
    
    $
    5,028
    
    
    $
    (1,584
    )
    
    $
    14,588
    
    
    $
    4,433
 14




---



##### Table of Contents



Three months ended
    
    
    Six months endedJanuary 31,

    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005GAAP cost of sales
    
    $
    105,587
    
    
    $
    48,754
    
    
    $
    260,836
    
    
    $
    114,730Adjustment 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
    
    
    
    
    
    
    49,413
    
    
    
    
    
    
    
    131,472Non-GAAP/supplemental cost of sales
    
    $
    105,587
    
    
    $
    98,167
    
    
    $
    258,066
    
    
    $
    246,202GAAP income before income tax expense
    
    $
    5,028
    
    
    
    
    
    
    $
    11,818Adjustment to remove one time impact of
accounting for certain inventories on NRV
basis
    
    
    
    
    
    
    
    
    
    
    2,770Non-GAAP income before income tax expense
    
    
    5,028
    
    
    
    
    
    
    
    14,588Non-GAAP income tax expense
    
    
    1,951
    
    
    
    
    
    
    
    5,762Non-GAAP net income
    
    $
    3,077
    
    
    
    
    
    
    $
    8,826Non-GAAP earnings per share-fully diluted
    
    $
    0.20
    
    
    
    
    
    
    $
    0.57Shares used in computing non-GAAP
earnings per share-fully diluted
    
    
    15,587
    
    
    
    
    
    
    
    15,610
 Results of Operations
   Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31,
    
    
    
    
    
    
    January 31,2006
    
    
    2005
    
    
    
    
    
    
    2006
    
    
    2005North American Retail (1)
    
    $
    78,835
    
    
    $
    63,988
    
    
    
    23.2
    %
    
    $
    186,165
    
    
    $
    153,103
    
    
    
    21.6
    %International
    
    
    24,328
    
    
    
    22,231
    
    
    
    9.4
    
    
    
    69,336
    
    
    
    75,932
    
    
    
    (8.7
    )North American Ingredient/Food Service
    
    
    20,275
    
    
    
    25,183
    
    
    
    (19.5
    )
    
    
    44,811
    
    
    
    54,263
    
    
    
    (17.4
    )Other
    
    
    719
    
    
    
    1,086
    
    
    
    (33.8
    )
    
    
    1,905
    
    
    
    1,948
    
    
    
    (2.2
    )Total
    
    $
    124,157
    
    
    $
    112,488
    
    
    
    10.4
    %
    
    $
    302,217
    
    
    $
    285,246
    
    
    
    6.0
    %
 
  15




---



##### Table of Contents



Three months ended
    
    
    Six months endedJanuary 31,
    
    
    January 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Walnuts
    
    
    64.8
    %
    
    
    68.4
    %
    
    
    66.5
    %
    
    
    71.0
    %Other nuts
    
    
    35.2
    
    
    
    31.6
    
    
    
    33.5
    
    
    
    29.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Gross margin.
 Selling, General and Administrative.
 Advertising.
 Interest.
 Income Taxes.
  16




---



##### Table of Contents



Liquidity and Capital Resources
         17




---



##### 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
    
    
    2.5
    
    
    
    0.4
    
    
    
    1.2
    
    
    
    0.8
    
    
    
    0.1Purchase commitments (b)
    
    
    3.0
    
    
    
    3.0
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    34.0
    
    
    $
    4.1
    
    
    $
    4.1
    
    
    $
    7.5
    
    
    $
    18.3
 
 (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 six months of fiscal 2006. Effects of Inflation
  Recent Accounting Pronouncements
 Share-Based Payment
 Accounting for Inventory Costs
 RISK FACTORS
  18




---



##### Table of Contents



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.
   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.
  19




---



##### Table of Contents



Sales to our top four customers represent over 25% of our net sales. As a result, the loss of any
of these 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.
  20




---



##### Table of Contents



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.
  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.
  21




---



##### Table of Contents



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.
  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
  22




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     
 Item 3. Defaults Upon Senior Securities
  23




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    To elect three Class I directors, each to serve until our 2009 annual
meeting of stockholders and until his successor has been elected and
qualified or until his earlier resignation, death or removal.
  VotesFor
    
    
    WithheldJoseph P. Silveira
    
    
    10,460,006
    
    
    
    607,006Laurence M. Baer
    
    
    10,971,080
    
    
    
    95,932Michael J. Mendes
    
    
    10,878,378
    
    
    
    188,634
 2.
    
    To ratify the appointment of Deloitte & Touche LLP
as our independent registered public accounting
firm for the fiscal year ending July 31, 2006
The stockholders votes with respect to the
appointment of Deloitte & Touche LLP as our
independent registered public accounting firm for
the fiscal year ending July 31, 2006 were as
follows:
 VotesFor
    
    Against
    
    
    Abstentions10,981,331
    

    36,110
    
    
    49,571
 
 Item 5. Other Information
  24




---



##### Table of Contents



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: March 9, 2006By:
    
    /s/ Seth HalioSeth HalioChief Financial Officer
and duly authorized
officer
 25