Diamond Foods 10K/A 2007 Annual report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

Form 10-K

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2007


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 No.: 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 Street
Stockton, California		95205-7087
(Address of Principal Executive Offices)		(Zip Code)

209-467-6000
(Telephone No.)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class:		Name of Exchange on Which Registered:
Common Stock, $0.001 par value		NASDAQ Global Select Market
Series A Junior Preferred Stock Purchase Right		NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

As of January 31, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $286,386,970 based on the closing sale price as reported on the NASDAQ Stock Market. As of November 14, 2007, there were 16,110,070 shares of common stock outstanding.

EXPLANATORY NOTE

Diamond Foods, Inc. is filing this amendment to its Annual Report on Form 10-K for the fiscal year ended July 31, 2007, as filed with the Securities and Exchange Commission on October 12, 2007 (the “Form 10-K”). This amendment includes each Item of Part III of the Form 10-K that previously was incorporated by reference from Diamond’s definitive proxy statement to be filed in connection with the registrant’s annual meeting of shareholders.

For the convenience of the reader, the entirety of the Form 10-K is included in this amendment. All reproduced material, including the previously issued consolidated financial statements and footnotes, are unchanged. No attempt has been made in this amendment to modify or update disclosures in the Form 10-K except as necessary to provide the information required in Part III.

TABLE OF CONTENTS


		Page
PART I
Item 1.	Business		4
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		12
Item 2.	Properties		12
Item 3.	Legal Proceedings		13
Item 4.	Submission of Matters to a Vote of Security Holders		13
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
Item 6.	Selected Financial Data		14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		22
Item 8.	Financial Statements and Supplementary Data		23
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		44
Item 9A.	Controls and Procedures		44
Item 9B.	Other Information		44
PART III
Item 10.	Directors, Executive Officers the Registrant and Corporate Governance		44
Item 11.	Executive Compensation		49
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		64
Item 13.	Certain Relationships and Related Transactions, and Director Independence		66
Item 14.	Principal Accounting Fees and Services		67
PART IV
Item 15.	Exhibits, Financial Statement Schedules		68
Signatures			71
EXHIBIT 23.01
EXHIBIT 23.02
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Annual Report regarding our future financial and operating performance and results, business strategy, market prices, future commodity prices, supply of raw material, plans and forecasts and other statements that are not historical facts are forward-looking statements. We have based these forward-looking statements on our assumptions, expectations and projections about future events only as of the date of this Annual Report.

Our forward looking statements include the discussion under “Business — Our Strategy” and discussions of trends and anticipated developments under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We use the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek” and other similar expressions to identify forward-looking statements that discuss our future expectations, contain projections of our results of operations or financial condition or state other “forward-looking” information. These forward-looking statements also involve many risks and uncertainties that could cause actual results to differ from our expectations in material ways. Please refer to the risks and uncertainties discussed in the section titled “Risk Factors.” You also should carefully consider other cautionary statements elsewhere in this Annual Report and in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by us during our 2008 fiscal year. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

PART I

Item 1. Business

Overview

Diamond Foods, Inc. was incorporated in Delaware in 2005 as the successor to Diamond Walnut Growers, Inc., a member-owned California agricultural cooperative association. In July 2005, Diamond Walnut Growers, Inc. merged with and into Diamond Foods, Inc., converted from a cooperative association to a Delaware corporation and completed an initial public offering of Diamond Foods’ common stock. The terms “Diamond Foods,” “Diamond,” “Company,” “Registrant,” “we,” “us” and “our” mean Diamond Foods, Inc. and its subsidiaries unless the context indicates otherwise.

We are a branded food company specializing in processing, marketing and distributing culinary, in-shell and ingredient nuts and snack products. Our company was founded in 1912 and has a strong heritage in the inshell and culinary markets under the Diamond of California brand. We intend to expand our existing business, and to continue to introduce new higher-value branded products in our culinary and snack businesses, including snack products marketed under our Emerald brand name. Our products are sold in over 60,000 retail locations in the United States and in over 100 countries.

We have four product lines:

	•		Culinary. We sell culinary nuts under the Diamond of California brand in grocery store center aisle and produce aisles and through mass merchandisers and club stores. Culinary nuts are marketed to individuals who prepare meals or baked goods at home and who value fresh, high-quality products.

	•		Snack. We sell snack products under the Emerald and Emerald/Harmony brands. These products, which include roasted, glazed and flavored nuts, trail mixes, seeds, dried fruit and similar offerings packaged in innovative resealable containers, are typically available in grocery store snack and produce aisles, mass merchandisers, club stores, convenience stores, drug stores and other places where snacks are sold.

	•		In-shell. We sell in-shell nuts under the Diamond of California brand, primarily during the winter holiday season. These products are typically available in grocery store produce sections, mass merchandisers and club stores.

	•		Ingredient/Food Service. We market ingredient and food service nuts under the Diamond of California brand to food processors, restaurants, bakeries and food service companies and their suppliers. Our institutional and industrial customers use our standard or customer-specified products to add flavor and enhance nutritional value and texture in their product offerings.

Our net sales were as follows (in millions):


	Year Ended July 31, 2007						Year Ended July 31, 2006						Year Ended July 31, 2005
	North		Inter-				North		Inter-				North		Inter-
	America		national		Total		America		national		Total		America		national		Total
Culinary	$	207.0	$	9.0	$	216.0	$	189.4	$	12.1	$	201.5	$	164.2	$	21.0	$	185.2
Snack		79.6		—		79.6		40.7		—		40.7		21.5		—		21.5
In-shell		46.5		34.7		81.2		44.7		40.3		85.0		42.8		42.3		85.1

Total retail		333.1		43.7		376.8		274.8		52.4		327.2		228.5		63.3		291.8
Ingredient/food service		73.9		69.1		143.0		84.5		62.4		146.9		107.0		59.2		166.2
Other		2.8		—		2.8		3.1		—		3.1		4.5		—		4.5

Total	$	409.8	$	112.8	$	522.6	$	362.4	$	114.8	$	477.2	$	340.0	$	122.5	$	462.5

Sales to Wal-Mart Stores, Inc. accounted for approximately 19%, 19%, and 17% of our net sales for the years ended July 31, 2007, 2006 and 2005, respectively. Sales to Costco Wholesale Corporation accounted for 10% of our net sales for the year ended July 31, 2007. Sales to Costco were less than 10% of our net sales for the years ended July 31, 2006 and 2005. No other single customer accounted for more than 10% of our net sales

Our disclosure reports that we file with the Securities and Exchange Commission are available free of charge on the Investor Relations page of our website,www.diamondfoods.com.

Our Strategy

Our goal is to continue to grow our revenues by increasing our market share in the snack category, while strengthening our position as the number one marketer and distributor of culinary nuts. In addition, we intend to expand our profit margins by increasing sales of higher-margin retail products at a faster rate than non-retail products and by reducing costs. To achieve these goals we intend to:

Increase market share in the snack industry. We plan to promote our broad line of snack products aggressively, by investing in creative advertising, marketing and promotional programs. We believe our continued investments in national advertising campaigns will help differentiate our products and improve our competitive position. National consolidation of retailers has created a need for distribution efficiencies, such as fewer stock keeping units, or SKUs, conservation of warehouse space, supply chain support and national merchandising. We are capable of providing these efficiencies. We intend to gain additional market share in the snack market, especially snack nuts, by exploiting our national brand and distribution systems.

Improve gross and operating margins. We intend to increase our margins through shifting product mix and investing in capital improvements and other cost reduction activities. We expect a greater proportion of our sales in the future to be represented by higher-margin products. We plan to invest capital for projects that lower our costs. We intend to examine the location and function of our processing, storage and distribution facilities and optimize the utilization of these assets. We are also investing in additional processing and packaging equipment. We expect that these investments will increase our production flexibility, enabling us to serve our customers better and improve our margins.

Expand and improve our distribution channels. We plan to expand in existing sales channels, such as mass merchandisers and club stores, and introduce our snack products in new distribution channels, particularly in the convenience store channel. We believe these outlets represent excellent growth opportunities for our snack products because sales in these channels are generally growing faster than traditional grocery stores. We plan to leverage our existing supply chain management capabilities to cost-effectively distribute our products through these new channels.

Pursue external growth opportunities. In order to maintain and grow our leading market share in culinary nuts and expand our presence in the snack industry, we may make strategic acquisitions, enter into strategic alliances or pursue other external growth opportunities. In particular, we intend to identify opportunities that will allow us to:

	•		introduce new products that are complementary to our existing product lines and are capable of being marketed through our existing production and distribution systems;

	•		build our brand’s value; and

•

enhance our processing and distribution capabilities to lower our costs.

Principal Products

We market and sell the following products:


Category	Products	Product Features
Culinary	• Shelled nuts	• Whole, sliced, chopped and ground nuts

	• Pegboard nuts	• Recipe ready packages ranging from 2.25- 4.0 ounce sizes

	• Glazed nuts

	• Harvest Reserve Premium nuts	• Premium specialty nuts sold in stand-up resealable bags

Snack	• Glazed nuts	• Patented glazing process combined with unique flavors

	• Mixed nuts	• Package sizes ranging from 2.5-ounce to 40-ounce in foil bags, canisters, and Polyethylene Terephthalate (PET) Jugs

	• Roasted nuts	• Innovative canisters designed to be portable with a lid measuring one serving — 1.5 oz of nuts

	• Trail mix	• Unique blends and nutritionally dense products

	• Natural snack products for the produce aisle	• 4 segments for produce snacks: nuts and seeds; trail/snack mixes; dried fruits; and sweet snacks, under the Emerald/Harmony brand

In-shell	• Various uncracked nuts, cleaned and/or polished	• Packaged in clear visible bags, mesh bags and bulk display units

	• Mixed nuts	• Various package sizes ranging from one-pound bags to 25-kilogram sacks, with nut sizes ranging from baby to jumbo

Ingredient/Food Service	• Shelled and processed nuts	• Whole, sliced, chopped and diced ground nuts

	• Custom-processed nuts	• Food processor product of uniform size and consistent color

	• Glazed nuts	• Various large package sizes (ranging from 2 pounds to 30 pounds) tailored for business usage

		• Flexible processing and packaging operations

In May 2006, we acquired certain net assets of Harmony Foods Corporation. This acquisition added production capability and product line expansion such as trail mixes, specialty dried fruits, nuts and seeds, sweet/salty snacks and organic snacks.

We offer all of our products in an array of packages to meet different market needs. We sell our culinary nut products in packages that are smaller and more convenient to use than our traditional one-pound packages, and have broadened their appeal and differentiated them from our competitors’ products. Our snack nut products are sold in various “on-the-go” package styles, including resealable foil bags and resealable plastic containers. For example, we offer Emerald snack products in immediate consumption packages (2.25 ounce to 2.5 ounce) designed primarily for convenience stores. We also offer snack products in 20 ounce to 40 ounce PET containers and bags for the club channel. With colorful, eye-catching labels and ergonomically designed, lightweight canisters, our products look and feel different than our competitors’ products, which have traditionally been marketed with understated labels in heavy glass or composite canisters.

Marketing

We believe that our marketing efforts are fundamental to the success of our business. Advertising expenses were $20.4 million in 2007, $18.0 million in 2006 and $22.2 million in 2005. We develop marketing strategies specific to each existing or new product line. Our marketing efforts are focused on building brand awareness, attracting new consumers and increasing consumption. In order to maintain good customer relationships, these efforts are designed to establish a premium value proposition to minimize the impact on our customers’ private label sales. Marketing to ingredient/food service customers is focused on trade-oriented activities.

Our consumer-targeted marketing campaigns include television, print and on-line advertisements, coupons, co-marketing arrangements with complementary consumer product companies, and cooperative advertising with select retail customers. Our television advertising airs on national network and cable channels and often features key sport venues suited to our product demographic such as the Super Bowl, the NFL and Major League Baseball. We design and provide point-of-purchase displays for use by our retail customers. These displays, and other shelving and pegboard displays, help ensure that our products are promoted in a consistent, eye-catching manner. They also enable us to make our products available for sale in multiple locations in a store, often outside of the baking and snack aisles, thus increasing impulse purchase opportunities. Our public relations and event sponsorship efforts are an important component of our overall marketing and brand awareness strategy. Our public relations efforts include distribution of free consumer publications designed to educate consumers about diet and health in addition to the convenience and versatility of nuts as both a snack and recipe ingredient. We also conduct news media outreach programs and use our websites for product promotion and consumer entertainment. We offer samples and reach out to active lifestyle consumers by sponsoring events such as marathons, other running events and a nationally televised college football bowl game, the Emerald Bowl.

Promotional activities associated with our ingredient/food service products include attending regional and national trade shows, trade publication advertising, and customer-specific marketing efforts. These promotional efforts highlight our commitment to quality assurance, our processing and storage capabilities, and product customization. We enter into co-branding arrangements with customers, such as McDonalds, General Mills, and Old Colony Baking, where the producer of another branded product indicates on the package that Diamond of California brand products are an ingredient.

Sales and Distribution

We market our consumer products through our sales personnel directly to large, national grocery, mass merchandiser, club and convenience stores and drug store chains. Our sales department also oversees a network of over 170 independent brokers and various independent distributors and suppliers to regional grocery store chains and convenience stores.

We distribute our products from our California, Alabama and Indiana production facilities, and from leased warehouse and distribution facilities located in California, Florida, Georgia, Illinois, Indiana, Massachusetts, New Jersey, Pennsylvania, Texas, Wisconsin and Canada. Our sales administration and logistics department manages the administration and fulfillment of customer orders. The majority of our products are shipped from our production, warehouse and distribution facilities by contract and common carriers.

Product Development and Production

We develop our products through an arrangement with Mattson & Company, an independent food product development firm. This arrangement enables us to use top-quality talent to develop innovative products quickly, particularly for our snack nut product line, while minimizing product development costs. Our management team works closely with Mattson & Company throughout all phases of new product development.

Once new products have been identified and developed, our internal production staff manages the process from inception to large-scale production and is responsible for consistently delivering high-quality products to market. We process and package most of our products at our Stockton, California, Robertsdale, Alabama and Fishers, Indiana facilities. Periodically, we may use third parties to process and package a portion of our products when warranted by demand requirements for our products.

Competition

We operate in a highly competitive environment. Our products compete against food products sold by many regional and national companies, some of which are larger and have substantially greater resources than Diamond. We believe that additional competitors will enter the snack nut market as large food companies begin to offer products that directly compete with our snack offerings. We also compete for shelf space of retail grocers, convenience stores, drug stores, mass merchandisers and club stores. As these retailers consolidate, the number of customers and potential customers declines and their purchasing power increases. As a result, there is greater pressure to manage distribution capabilities in ways that increase efficiency for these large retailers, especially on a national scale. In general, competition in our markets is based on product quality, price, brand recognition, and loyalty. The combination of the strength of our brands, our product quality and differentiation as well as our broad channel distribution enable us to compete effectively in each of these categories. Our principal competitors are national nut distributors, such as Planters, nut processors, and regional and international food suppliers.

Raw Materials and Supplies

We obtain nuts from domestic and international sources. We currently obtain the majority of our walnuts from growers that have entered into long-term supply contracts, and we purchase all of our other nut requirements from processors on the open market. During 2007, all of the walnuts, peanuts and almonds we obtained were grown in the United States. We obtain all of our walnuts directly from growers located in California and we purchase other nuts from importers and domestic processors. Most of our supply of hazelnuts and pecans were grown in the United States. We import Brazil nuts from the Amazon basin; cashew nuts from India, Africa, Brazil and Southeast Asia; hazelnuts from Turkey; pecans from Mexico; and pine nuts from China.

We believe that we will be able to procure an adequate supply of raw materials for our products in the future, although the availability and cost of raw materials for the production of our products are subject to crop size, quality, yield fluctuations, and changes in governmental regulation, the rate of supply contract renewals as well as other factors.

We purchase from third parties all other supplies used in our business, including roasting oils, seasonings, plastic containers, foil bags, labels and other packaging materials. We believe that each of these supplies is available from multiple sources and that our business is not materially dependent upon any individual supplier relationship.

Trademarks and Patents

We market our products primarily under the Diamond and Emerald brands, which are registered as trademarks with the U.S. Patent and Trademark Office as well as in various other jurisdictions. Our agreement with Blue Diamond Growers limits our use of the Diamond brand in connection with our marketing of snack nut products, but preserves our exclusive use of our Diamond brand for all culinary and inshell nut products. We also own two U.S. patents of various durations related to our processing methods. While these patents are an important element of our success, our business as a whole is not materially dependent on either one of them. We expect to continue to renew for the foreseeable future those trademarks that are important to our business.

Seasonality

We experience seasonality in our business. Demand for our products is highest during the months of September, October, November and December. We purchase walnuts, pecans and almonds, our principal raw materials, between August and February, and process them throughout the year until the following harvest. As a result of this seasonality, our personnel, working capital requirements and inventories peak during the last four months of the calendar year. We experience seasonality in capacity utilization at our Stockton, California facility associated with the annual harvest during this period.

Employees

As of July 20, 2007, we had 754 full-time employees, consisting of 550 production and distribution employees, 176 corporate staff employees and 28 sales employees. Our labor requirements typically peak during the last quarter of the calendar year, when we generally use temporary labor to supplement our full-time work force. Our production and distribution employees in the Stockton, California plant are members of the International Brotherhood of Teamsters. In 2005, we entered into a five-year collective bargaining agreement with these employees that expires in March 2010. We consider our relations with our employees to be good.

Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed or implied in such forward-looking statements due to such risks and uncertainties. Factors that may cause such a difference include, but are not limited to, those discussed below, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report.

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.

We face risks associated with product liability claims and product recalls if our products cause injury, or become adulterated, mislabeled or misbranded. Our products are subject to product tampering, and to contamination risks, such as mold, bacteria, insects and other pests, shell fragments, cross-contamination and off-flavor contamination. If any of our products were to be tampered with, or become tainted in any of these respects and we were unable to detect this prior to shipment, our products could be subject to a recall. Our ability to sell products could be reduced if governmental agencies conclude that our products have been tampered with, or that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of the crop or that the crop has been contaminated by aflatoxin or other agents. A significant product recall could cause our products to be unavailable for a period of time and reduce our sales. Adverse publicity could result in a loss of consumer confidence in our products and also reduce our sales. Product liability claims and product recalls could increase our expenses and have a material adverse effect on demand for our products and, consequently, reduce our sales, net income and liquidity.

Our raw materials are subject to fluctuations in availability and price.

The availability, size, quality and cost of raw materials for the production of our products, including walnuts, pecans, peanuts, cashews, almonds and other nuts, are subject to risks inherent to farming, such as crop size, quality, and yield fluctuations caused by poor weather and growing conditions, pest and disease problems, and other factors beyond our control. Nut market prices fluctuate based on supply and demand. Worldwide demand for nuts has been increasing, and if the supply of nuts does not expand to meet demand, our costs will continue to increase. Supply shortages and resulting price increases could adversely impact our profitability. High prices might dampen growth of consumer demand for nuts. Currently, we do not hedge against changes in nut commodity prices. Because walnuts currently represent approximately 60% of our net sales, we are particularly vulnerable to crop disasters or other events that could cause significant fluctuations in the availability and cost of walnuts.

We receive our walnut crop each Fall, and process and sell the crop over the next 12 to 15 months. We start each Fall with a large inventory of walnuts, which diminishes as we process and sell the crop. If there is a decline in the market price of walnuts, a significant portion of our inventories could decline in value, and this might result in a write-down of inventory. Our inventories of other nuts are also substantial. Any write-down of inventory would adversely impact our operating results.

We source our walnuts primarily directly from growers pursuant to walnut purchase agreements. These agreements are output contracts that require growers to supply, and Diamond to purchase, all walnut product from the orchards specified in the agreement. To the extent growers under contract produce more walnuts than we anticipate, we would still be required to purchase the entire output, which could lead to an over supply situation in which we may be forced to carry more inventory than we can profitably sell. Similarly, if growers under contract produce fewer walnuts than we anticipate, or if a significant number of growers decide not to renew their contracts as they expire, our supply of walnuts would decline, which would constrain the amount of raw material we have to process and sell. Any significant over supply or shortage of walnuts could adversely impact our operating results.

We face intense competition from national and regional competitors and snack food industry competitors that could negatively affect our results of operations.

We operate in a highly competitive environment. In general, competition in our markets is based on product quality, price, brand recognition, and brand loyalty. Our products compete against food and snack products sold by many regional and national companies, some of which are substantially larger and have greater resources. We also compete for shelf space in retail grocery, convenience, drug, mass merchandiser, and club stores. As these retailers consolidate, the number of customers and potential customers declines and the purchasing power of the consolidated retailers increases. As a result, there is also greater pressure to manage distribution capabilities in ways that increase efficiency for these large retailers, especially on a national scale. Our competitors with greater resources may be in a better position to meet these requirements. If we cannot improve our national distribution capabilities, we might not be able to compete effectively and our sales may decline.

We compete in the highly competitive snack food industry with our Emerald brand snack product line. Some channels through which we sell our Emerald products, such as drug and convenience stores, are different than those that we typically use for culinary and in-shell products, and we have less experience in these channels than our competitors. Furthermore, to compete in other channels, such as club stores, the sales cycle can be extended one year or longer and may require displacing incumbent vendors who have longer relationships with the buyers. Our principal competitors in the snack industry have substantial financial, marketing and other resources. If our competitors lower their prices or increase their promotional spending, or we are unable to compete effectively, our growth opportunities, margins and profitability may decline.

Our snack business currently generates minimal gross margins. If we are not successful in increasing snack sales and lowering unit costs, we may not be able to increase our profitability.

Sales to our top customer represented approximately 19% of our net sales. The loss of any major customer could adversely impact our business.

We depend on a few significant customers for a large proportion of our net sales. This concentration has become more pronounced with the trend toward consolidation in the retail grocery store industry. Sales to Wal-Mart Stores, Inc. represented approximately 19% of total net sales for the year ended July 31, 2007. Sales to Costco Wholesale Corporation represented 10% of total net sales for the year ended July 31, 2007. The loss of a significant customer or a material decrease in purchases could result in decreased sales and adversely impact our net income.

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.

Our business is highly seasonal, reflecting the general pattern of peak consumer demand for nut products during the months of September, October, November, and December. Typically, a substantial portion of our revenues are earned during our first and second fiscal quarters. We generally experience lower revenues during our third and fourth fiscal quarters and in the future may incur losses in these quarters. Sales in the first and second fiscal quarters accounted for approximately 60% of our revenues for the year ended July 31, 2007. If sales in these quarters are lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on our annual operating results.

Changes in the food industry, including changing dietary trends and consumer preferences, could reduce demand for our products.

Consumer tastes can change rapidly due to many factors, including shifting consumer preferences, dietary trends, and purchasing patterns. Our growth is largely dependent on the snack industry, where consumer preferences are particularly unpredictable. To address consumer preferences, we invest significant resources in research and development of new products. If we fail to anticipate, identify or react to consumer trends, or if new products we develop do not achieve acceptance by retailers or consumers, demand for our products could decline, which would in turn cause our revenue and profitability to be lower.

Developments in the walnut industry could threaten our position in the industry.

Advances in walnut shelling and processing equipment have recently made it possible for large growers with consistent supplies of easy-to-crack varieties of walnuts to shell their own walnuts and compete directly with us in the ingredient products segment. In the future, these growers could have lower processing costs than we do. In addition, other walnut handlers compete with us to recruit growers to gain access to walnut crop, and their success could impact our supply of raw walnut material. In order to compete effectively in our markets, we will need to develop strategies for responding to these developments. If we are unable to respond effectively to this change, our sales and profits could be impaired.

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.

Our future success largely depends on the contributions of our senior operating management team. We believe that the expertise and knowledge of these individuals about our industry and their respective fields, are critical factors to our continued

growth and success. We do not have key person insurance. The loss of the services of any of these individuals could have a material adverse effect on our business and prospects. Our success also depends upon our ability to attract and retain additional qualified marketing, technical, and other personnel.

The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 could disrupt our supply of imported nuts.

The Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which we refer to as the Bioterrorism Act, includes a number of provisions designed to help guard against the threat of bioterrorism, including new authority for the Secretary of Health and Human Services to take action to protect the nation’s food supply against the threat of intentional contamination. The U.S. Food and Drug Administration, or FDA, is responsible for developing and implementing these food safety measures. The FDA has been in the process of issuing new rules, and the uncertainty of the content of these rules makes it difficult for us to predict what impact they might have on our business. The potential actions that may be taken by the federal government under the Bioterrorism Act and related rules may have a material adverse effect on our business by limiting our supply of or increasing prices for cashews and other imported nuts. In addition, the Bioterrorism Act and related rules may also result in higher costs for plant security and product safety, and create additional costs associated with the new regulatory requirements. If we are unable to pass these higher costs on to our customers, our results of operations and financial condition may be adversely affected.

Government regulation could increase our costs of production and increase our legal and regulatory expenditures.

We are subject to extensive regulation by government agencies. Among other things, these regulations govern the manufacturing, importation, processing, packaging, storage, distribution, and labeling of our products. We are also subject to environmental regulations governing the discharge of air emissions, water and food waste, and the generation, handling, storage, transportation, treatment and disposal of waste materials. New or amended statutes and regulations, increased production at our existing facilities, and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits and could require us to change our methods of operations at costs that could be substantial. For example, we currently fumigate walnuts with methyl bromide to control pest infestations during the transport and storage of walnuts. A recent amendment to the Clean Air Act requires the use of methyl bromide for pest control to be phased out. We have obtained a temporary exemption from the phase out of methyl bromide, but we may not be able to maintain the exemption in the future. The currently available alternatives to methyl bromide are more expensive than methyl bromide and are less effective at controlling pest infestations. As a result, if we are unable to continue to use methyl bromide, our costs would increase, shipments of our products could be delayed and we may suffer pest infestations that could harm the nuts we use in our products. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, all of which could have a material adverse effect on our business.

We are subject to risks of doing business internationally.

We conduct a substantial amount of business with vendors and customers located outside the United States. During 2007, sales outside the United States, primarily in Germany, Japan, Spain and Italy, accounted for approximately 26% of our net sales. Our international operations are subject to a number of inherent risks, including:

	•		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.

Any of these international business risks could have a material and adverse effect on our operating results.

Increased costs associated with product processing and transportation, such as water, electricity, natural gas and fuel, could increase our expenses and reduce our profitability.

We require a substantial amount of energy and water to process our nuts. Also, transportation costs represent a significant portion of the cost of our products, as we deliver our products and receive our raw materials via third party truck and rail companies. The price of energy, water, and transportation such as fuel prices and labor costs, fluctuate significantly over time. We may not be able to pass on increased costs of production or transportation to our customers. In addition, from time to time, transportation service providers have a backlog of shipping requests, which could impact our ability to ship products in a timely fashion. Increases in the cost of water, electricity, natural gas, fuel or labor, and failure to ship products on time, could substantially harm our business and results of operations.

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.

A temporary or extended interruption in operations at any of our facilities, whether due to technical or labor difficulties, destruction or damage from fire or earthquake, infrastructure failures such as power or water shortages or any other reason, whether or not covered by insurance, could interrupt our manufacturing operations, disrupt communications with our customers and suppliers and cause us to write off inventory and to lose sales. These risks to our business are particularly acute with respect to our Stockton, California facility, where we produced products accounting for over 80% of our net sales for 2007. Further, current and potential customers might not purchase our products if they perceive our lack of an alternate manufacturing facility to be a risk to their continuing source of products.

The acquisition of other businesses could pose risks to our profitability.

We intend to review acquisition prospects that we believe would complement our existing business. Future acquisitions could result in accounting charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities, any of which could have a material adverse effect on our business and the market price of our common stock. Acquisitions entail many risks, including the integration of the acquired operations, diversion of management’s attention, risks of entering markets in which we have limited prior experience, and the potential loss of key employees of acquired organizations. We may be unable to integrate successfully businesses or the personnel of any business that might be acquired in the future, and our failure to do so could have a material adverse effect on our business and on the market price of our common stock.

Our business could be negatively impacted if we fail to maintain satisfactory labor relations.

The success of our business depends substantially upon our ability to maintain satisfactory relations with our employees. The production and distribution employees working in our Stockton, California plant, who represent approximately 70% of our year-round work force, are members of the International Brotherhood of Teamsters. If a work stoppage or slow down were to occur under our collective bargaining agreement, in connection with the negotiation of a new contract in March 2010 or otherwise, it could adversely affect our business and disrupt our operations.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

We own our facility located on 70 acres in Stockton, California. This facility consists of approximately 635,000 square feet of office and production space and 120,000 square feet of refrigerated storage space. We lease office space in San Francisco, California. Two other production facilities are located in Robertsdale, Alabama and Fishers, Indiana. The Robertsdale facility is owned by us and consists of approximately 55,000 square feet of office and production space and 15,000 square feet of refrigerated storage space. The Fishers facility is leased and consists of approximately 117,000 square feet of office and production space and 60,000 square feet of warehouse/storage space. The leases on the Fishers facility are noncancellable operating leases which expire through 2019.

We also lease warehousing facilities in California, Florida, Georgia, Illinois, Indiana, Massachusetts, New Jersey, Pennsylvania, Texas, Wisconsin and Canada. We believe that our facilities are generally well maintained and are in good operating condition, and will be adequate for our needs for the foreseeable future.

Item 3. Legal Proceedings

We are the subject of various legal actions in the ordinary course of our business. All such matters are subject to many uncertainties that make their outcomes unpredictable. On February 3, 2006, PG&E filed a complaint in San Francisco County Superior Court alleging, among other things, breach of contract as a result of the our decision to cease operating our cogeneration facility. PG&E’s complaint seeks payment of approximately $1.4 million from us plus interest under the contract’s termination provisions as well as PG&E’s costs for the lawsuit. We believe that the termination payment provision constitutes an unenforceable penalty and intend to vigorously defend ourselves against PG&E’s lawsuit. We believe that any additional liability in excess of amounts recorded, resulting from the eventual outcome of this matter will not be material to our financial condition or operating results.

Item 4. Submission of Matters to a Vote of Security Holders

None

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock began trading on the Nasdaq National Market on July 21, 2005 under the symbol “DMND”. Prior to that date, there was not a public market for our common stock. On July 3, 2006 our common stock began to trade on the NASDAQ Global Select Market. The following table sets forth for the periods indicated the high and low sales prices of our common stock on the Nasdaq Stock Market and quarterly cash dividends declared on common shares:


						Dividends
	High			Low		Declared
Year Ended July 31, 2007:
Fourth Quarter	$	18.20		$	15.25	$	0.03
Third Quarter	$	19.64		$	15.00	$	0.03
Second Quarter	$	19.93		$	15.90	$	0.03
First Quarter	$	18.10	��	$	13.15	$	0.03
Year Ended July 31, 2006:
Fourth Quarter	$	20.04		$	13.85	$	0.03
Third Quarter	$	21.80		$	16.52	$	0.03
Second Quarter	$	22.00		$	15.45	$	0.03
First Quarter	$	22.54		$	16.01	$	—

One of our credit agreements specifies certain limitations on the amount of dividends that may be declared or paid in a fiscal year. See Liquidity and Capital Resources.

As of August 31, 2007, we had approximately 1,378 holders of record of our common stock, although we believe that there are a larger number of beneficial owners.

The following are details of repurchases of common stock during the three months ended July 31, 2007:


					Total Number of		Approximate Dollar
	Total Number		Average Price		Shares Repurchased as		Value of Shares
	of Shares		Paid per		Part of Publicly		That May yet Be Purchased
Period	Repurchased(1)		Share		Announced Plans		Under the Plans
Repurchases from May 1 through May 31, 2007		3,002	$	16.58		—		—
Repurchases from June 1 through June 30, 2007		2,498	$	17.51		—		—
Repurchases from July 1 through July 31, 2007		64,815	$	17.03		—		—

Total		70,315	$	17.03		—		—


(1)		All of the shares in the table above were originally granted to employees as restricted stock pursuant to our 2005 Equity Incentive Plan (“EIP”). Pursuant to the EIP, all of the shares reflected above were relinquished by employees in exchange for Diamond’s agreement to pay federal and state withholding obligations resulting from the vesting of the restricted stock. The repurchases reflected above were not made pursuant to a publicly announced plan and are treated as treasury shares available for reissuance.

Item 6. Selected Financial Data

The following table sets forth selected financial data for each of the fiscal years in the five year period ended July 31, 2007:


	Years Ended July 31,
	2007		2006		2005			2004			2003
	(In thousands, except per share information)
Statements of operations (2007 and 2006)/Net proceeds data (1):
Net sales	$	522,585	$	477,205	$	462,548		$	359,683		$	308,450
Patronage inventory at beginning of period		—		—		(101,403	)		(94,701	)		(96,508	)
Patronage inventory at end of period		—		—		67,152			101,403			94,701


	Years Ended July 31,
	2007			2006			2005			2004			2003
	(In thousands, except per share information)
Net sales (2007 and 2006)/Gross marketing pool proceeds		522,585			477,205			428,297			366,385			306,643
Total cost of sales		443,945			411,809			191,387			142,592			111,483

Gross margin (2007 and 2006)/Proceeds before operating expenses		78,640			65,396			236,910			223,793			195,160
Operating expenses:
Selling general and administrative		42,541			37,046			33,188			28,169			26,937
Advertising		20,445			17,977			22,153			14,673			8,744
Restructuring and other costs, net		(15	)		3,442			—			—			—
Loss on termination of defined benefit plan		3,054			—			—			—			—

Total operating expenses		66,025			58,465			55,341			42,842			35,681
Income from operations (2007 and 2006) / Operating proceeds		12,615			6,931			181,569			180,951			159,479
Interest, net		1,291			295			4,433			3,403			3,282
Conversion costs		—			—			697			—			—
Early extinguishment of debt		—			—			2,028			—			—
Other		98			310			—			—			—

Income/Proceeds before income taxes		11,226			6,326			174,411			177,548			156,197
Income tax expense (benefit)		2,793			(1,010	)		(8,385	)		(43	)		1,526

Net income (2007 and 2006)/Net proceeds	$	8,433		$	7,336		$	182,796		$	177,591		$	154,671

Earnings per share
Basic	$	0.53		$	0.47
Diluted	$	0.53		$	0.47
Shares used to compute earnings per share
Basic		15,786			15,634
Diluted		15,786			15,653


	Years Ended July 31,
	2007			2006			2005			2004			2003
	(In thousands)
Balance sheet data:
Cash and cash equivalents	$	33,755		$	35,614		$	49,035		$	4,780		$	306
Working capital		100,527			87,689			89,022			72,556			56,343
Total assets		236,403			253,032			252,028			205,895			172,168
Total debt, including short-term debt		20,507			20,000			22,119			79,756			61,239
Total stockholders’/members’ equity		125,341			110,826			99,462			59,214			44,216
Other data (Unaudited):
Walnuts sales as a percentage of total net sales		59.8	%		67.0	%		71.4	%		71.7	%		75.7	%


(1)		As an agricultural cooperative association, we derived revenues from our patronage business, which consisted of processing and marketing walnuts on behalf of Diamond members and our non-patronage business, which consisted of purchasing, processing and marketing nut varieties other than walnuts. Our financial statements prior to fiscal year 2006 included statements of net proceeds prepared in accordance with GAAP for agricultural cooperative associations, rather than statements of operations. Net proceeds are amounts distributable to member growers from the patronage business. Net proceeds also include net income or loss from non-patronage business. Net proceeds do not include walnut acquisition costs. Effective August 1, 2005, our financial statements have been prepared in accordance with GAAP for companies that are not cooperative associations. We were not a public company during fiscal years prior to 2006, thus no earnings per share data is presented for those years. Also see Note 1 of notes to consolidated financial statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Summary

We are a branded food company specializing in processing, marketing and distributing culinary, in-shell and ingredient nuts and snack products. Our company was founded in 1912 and has a strong heritage in the inshell and culinary markets under the Diamond of California brand. On July 26, 2005 we converted from an agricultural cooperative association to a Delaware corporation and completed the initial public offering of our common stock. As a public company, our focus is on building stockholder value. We intend to expand our existing business and to continue to introduce higher-value branded products in our culinary and snack businesses, including snack products marketed under our Emerald and Emerald/Harmony brand names. Our

products are sold in over 60,000 retail locations in the United States and in over 100 countries. We sell products to approximately 900 customers, including over 150 international customers. In general, we sell directly to retailers, particularly large, national grocery store and drug store chains, and indirectly through wholesale distributors who serve independent and small regional retail grocery store chains and convenience stores. We also sell our products to mass merchandisers, club stores, convenience stores and through other retail channels.

Our business is seasonal. Consumer demand for nut products, particularly in-shell nuts and to a lesser extent, culinary nuts, is highest during the months of October, November and December. We receive our principal raw material, walnuts, during the period from September to November and process it throughout the year. As a result of this seasonality, our personnel and working capital requirements and walnut inventories peak during the last quarter of the calendar year. This seasonality also impacts capacity utilization at our facilities, which routinely operate at capacity for the last four months of the calendar year.

Diamond’s focus is on expanding sales of products in the North American retail channel, particularly snack and culinary products. For non-retail channels, during the last two years, Diamond has focused on increasing sales of higher value added, higher margin products while reducing sales of lower margin products. As a result, volume sales have declined in this channel and are expected to decline for at least the next year. Accordingly, Diamond periodically assesses its walnut supply requirements and sources, including the volume of walnuts to be received under long-term contracts or from other sources. The allocation of walnuts received from the various sources may vary from year to year depending on a variety of factors, including contract renewals, Diamond’s assessment of future walnut supply and demand and other factors.

A disproportionate amount of our net sales and related net income (net proceeds prior to the fiscal year ended July 31, 2006) are recognized in the first half of our fiscal year. For example, net sales in the first half of 2007 and 2006 were 59.9% and 63.3% of net sales for each full fiscal year. In the near term, we expect a higher percentage of our net income to be earned in the first half of our fiscal year because many of our operating costs are fixed and cannot be reduced when net sales are lower quarter to quarter. However, as we continue to introduce new products, such as snack products, we expect net sales, and related net income, to be less seasonal.

The historical financial information contained herein for fiscal years prior to 2006 have been derived from financial statements prepared in accordance with GAAP for agricultural cooperative associations. Effective August 1, 2005, our financial statements have been prepared in accordance with GAAP for companies that are not cooperative associations. The principal difference relates to accounting for walnut inventories. As an agricultural cooperative association we used the net realizable value, or NRV, method to value walnut inventories delivered by members. NRV is the estimated sales price of inventories less estimated completion, distribution and selling costs. Our financial statements prior to August 1, 2005 did not include a cost of goods sold for walnuts received from members. Effective August 1, 2005, we account for purchases of walnuts from growers on a lower of cost or market basis. Consequently, the results of operations reported subsequent to fiscal year 2005 are significantly different than net proceeds reported in fiscal year 2005 and prior.

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies are set forth below.

Revenue Recognition. We recognize revenue when a persuasive arrangement exists, title has transferred (based upon terms of shipment), price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, introductory or slotting payments, coupons, promotion and marketing allowances. Customers have the right to return certain products. These product returns are estimated based upon historical results and are reflected as a reduction in net sales.

Inventories. All inventories are accounted for on a lower of cost (first-in, first-out) or market basis.

In connection with our July 2005 initial public offering, we entered into long-term Walnut Purchase Agreements with substantially all of our former member growers. Under these agreements, growers deliver their entire walnut crop to us during the Fall harvest season and we provide to each grower their purchase price for this inventory by March 31 of the following

year. This purchase price will be a price determined by Diamond in good faith, taking into account market conditions, crop size, quality, and varieties, among other relevant factors. Since the ultimate price to be paid will be determined each March subsequent to receiving the walnut crop, management must make an estimate of this price for the first and second quarter interim financial statements. These estimates are subject to change and such changes, if any, could be material. We determined the purchase prices for the 2005 and 2006 crops in March 2006 and 2007, respectively. These determinations had no material impact on previously reported quarterly results.

Valuation of Long-lived and Intangible Assets and Goodwill. We periodically review long-lived assets and certain identifiable intangible assets for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 144,“Accounting for the Impairment or Disposal of Long-lived Assets.”Goodwill is reviewed for impairment in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets”in the fourth quarter of each year. We cannot assure you that a material impairment charge will not be recorded in the future.

For assets to be held and used, including acquired intangibles, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of intangible assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in this process.

Employee Benefits. We incur various employment-related benefit costs with respect to qualified and nonqualified pension and deferred compensation plans. Assumptions are made related to discount rates used to value certain liabilities, assumed rates of return on assets in the plans, compensation increases, employee turnover and mortality rates. We utilize Curcio Webb LLC, a third-party actuarial firm to assist us in determining appropriate assumptions and plan valuations. Different assumptions could result in the recognition of differing amounts of expense over different periods of time.

Income Taxes. We account for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes”, which requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at current tax rates. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both our historical and anticipated earnings levels and is reviewed periodically to determine if an adjustment to the valuation allowance is necessary to state such assets at amounts that will more likely than not be recovered.

Accounting for Stock-Based Compensation. We account for stock-based compensation arrangements, including stock option grants and restricted stock awards, in accordance with the provisions of SFAS No. 123(R)Share-Based Payment. Under SFAS No. 123(R), compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. We use the Black Scholes option pricing model to determine the fair value of stock options at the date of grant. This model requires us to make assumptions such as expected term, volatility and forfeiture rates that determine the stock options fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results are not consistent with our assumptions and judgments used in estimating these factors, we may be required to increase or decrease compensation expense or income tax expense, which could be material to our results of operations.

Non-GAAP Financial Information

The following non-GAAP financial information excludes a one-time charge to cost of sales in the first quarter of fiscal 2006 as a result of the conversion from a cooperative association to a public company in July 2005. This charge relates to the use of NRV accounting for certain inventories acquired prior to August 1, 2005. Starting August 1, 2005, we began using the lower of cost or market method of valuing walnut inventories acquired subsequent to that date. As a result of using NRV accounting for certain inventories through July 31, 2005, these inventories were valued higher than they would have been under the lower of cost or market method. Therefore, as those inventories were sold, the amount charged to cost of goods sold was higher.

Beginning August 1, 2005, our cost basis for walnuts is the price we pay for them. For the year ended July 31, 2005, estimated walnut acquisition cost is presented for purposes of comparability of our financial results to the years ended July 31, 2007 and 2006. Estimated walnut acquisition costs are based on the “field price” reported by the California Statistical Office of the USDA National Agricultural Statistics Service, or CASS, for each related crop year. We believe this information is the only available measure of industry-wide walnut acquisition costs. We cannot determine an actual cost basis for walnuts acquired and sold in years prior to fiscal year 2006. In addition, we:

	•		are unable to determine retroactively what we would have paid for walnuts in prior years had we not been a cooperative association;

	•		are unable to determine whether what we would have paid for walnuts would approximate amounts paid to other growers by other processors as reflected in the CASS statistics;

	•		are 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.

We have not undertaken any effort to validate the accuracy of the CASS statistics.


	Year Ended July 31,
	2007		2006		2005
	(In thousands)
Net sales	$	522,585	$	477,205	$	462,548
Non-GAAP cost of sales		443,945		409,039		413,750

Non-GAAP gross margin	$	78,640	$	68,166	$	48,798

A reconciliation of GAAP to non-GAAP information is as follows:


	Year Ended July 31,
	2006			2005
	(In thousands)
GAAP cost of sales	$	411,809		$	191,387
Adjustment to remove one time impact of accounting for certain inventories on NRV basis		(2,770	)		—
Adjustment to convert walnut inventories to cost basis and to record estimated walnut cost of goods sold		—			222,363

Non-GAAP cost of sales	$	409,039		$	413,750

Results of Operations

2007 Compared to 2006

Net sales were $522.6 million and $477.2 million for the years ended July 31, 2007 and 2006. The increase in net sales was primarily due to higher volumes in North American Retail, partially offset by lower volume in the North American Ingredient and International channels. Volume increased from 193.8 million pounds sold in 2006 to 209.7 million pounds sold in 2007, an increase of 8.2%.


	Years ended July 31,				% Change from
	2007		2006		2006 to 2007
North American Retail(1)	$	333,117	$	274,879		21.2	%
International		112,830		114,781		(1.7	)
North American Ingredient/Food Service		73,822		84,475		(12.6	)
Other		2,816		3,070		(8.3	)

Total	$	522,585	$	477,205		9.5	%


(1)		North American Retail represents sales of our culinary, snack and in-shell products in North America.

The increase in North American Retail sales resulted from the continued expansion of our snack products, sales of which were $79.6 million in 2007 compared to $40.7 million in 2006, and to increased sales of culinary products, particularly in the club channel, offset by lower culinary sales in the mass merchandiser channel. Sales were lower in the mass merchandiser channel as a result of our decision not to participate in a seasonal program with one customer. Total culinary sales in dollar terms increased 9.3% in 2007. Inshell sales, in dollar terms increased 3.8% in 2007. International and ingredient sales declined primarily as a result of fewer products available to sell. This decline in volume was offset, in part, by higher pricing.

Sales of walnuts and other nuts as a percentage of net sales were:


	Years ended July 31,
	2007			2006
Walnuts		59.8	%		67.0	%
Other nuts		40.2	%		33.0	%

Total		100.0	%		100.0	%

Gross margin. Gross margin as a percentage of net sales was 15.0% and 13.7% for the years ended July 31, 2007 and 2006. Gross Margin in 2006 included a one-time charge to cost of sales as a result of the conversion from cooperative to public company, as described above. Excluding this charge, gross margin in 2006 was 14.3%. On a non-GAAP basis, gross margin per pound shipped increased 6.5% to $0.375 in 2007 from $0.352 in 2006.

Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation, facility costs and stock-based compensation. Selling, general and administrative expenses were $42.6 million and $37.0 million for the years ended July 31, 2007 and 2006. Selling, general and administrative expenses included stock based compensation charges of $5.9 million and $4.0 million for 2007 and 2006. Selling, general and administrative expense as a percentage of net sales were 8.1% and 7.8% for 2007 and 2006. The increase in selling, general and administrative expenses is primarily due to additional sales and marketing costs and non-cash stock-based compensation expense.

Advertising. Advertising expense was $20.4 million and $18.0 million for the years ended July 31, 2007 and 2006. The increase is principally due to our continued investment in the brand equity of Emerald.

Restructuring and other costs, net. Restructuring and other costs for the year ended July 31, 2007 totaled $(0.02) million. This net credit related principally to 1) costs of closing the our Lemont facility and the consolidation of operations in the Fishers’ facility of $1.0 million 2) contract termination costs and certain professional fees of $0.2 million offset by 3) a gain on the sale of the Lemont facility of $1.2 million.

Restructuring and other costs totaled $3.4 million in 2006 and consist of 1) restructuring expenses principally related to the closure of our Lemont facility and the consolidation of operations in our Fishers’ facility; 2) costs related to terminating two contracts, one with PG&E associated with our cogeneration plant and one associated with a former distributor for Germany; and 3) professional service fees related to the identification of California Enterprise Zone tax credits as described in the income tax benefit section below.

Loss on termination of defined benefit plan. During the year ended July 31, 2007, we recorded a substantially non-cash loss on termination of defined benefit plan of $3.1 million related to the termination of a qualified defined benefit plan covering all salaried employees.

Interest. Net interest expense was $1.3 million and $0.3 million for the years ended July 31, 2007 and 2006. The increase was primarily due to less average net cash available for investment during 2007 as compared to 2006.

Income taxes. Income tax expense was $2.8 million in 2007 compared to a benefit of $(1.0) million in 2006. The 2006 income tax benefit includes approximately $3.8 million (net of federal income tax impact) of California Enterprise Zone tax credits for years prior to 2006. Without such benefit, the effective tax rate would have been 42% in 2006. During 2007, we reduced our effective tax rate for the year from 42% to 38%, and recognized the effect of discrete tax items (including reduction of a valuation reserve of approximately $1.0 million as we have been profitable since the conversion) which reduced our effective tax rate to approximately 25%. Income tax expense for 2008 is expected to be approximately 38% of pre-tax income before the impact of any discrete tax items.

2006 Compared to 2005

Net sales were $477.2 million and $462.5 million for the years ended July 31, 2006 and 2005. The increase in net sales was primarily due to higher prices and to sales from the acquired Harmony business, partially offset by lower volume. Volume decreased from 225.7 million pounds sold in 2005 to 193.8 million pounds sold in 2006. The increase in prices reflected higher commodity costs for raw materials, which we were able to pass on, in part, to consumers. This higher pricing was principally for walnuts, pecans and almonds in the North American Retail channel, and walnuts in the North American Ingredient/Food

Service and International channels.

Net sales by channel (in thousands):


	Years ended July 31,				% Change from
	2006		2005		2005 to 2006
North American Retail	$	274,879	$	228,522		20.3	%
International		114,781		122,514		(6.3	)
North American Ingredient/Food Service		84,475		107,029		(21.1	)
Other		3,070		4,483		(31.5	)

Total	$	477,205	$	462,548		3.2	%

The increase in North American Retail sales reflects the expansion of our snack products, sales of which were $40.7 million in 2006 (including $6.7 million sales of Harmony products) compared to $21.6 million in 2005, price increases on various products, and increased volume for culinary products, particularly in the mass merchandisers and club channels. International and ingredient/food service sales decreased as a result of less product available to sell due to lower ending inventory at July 31, 2005. The decline in volume was partially offset by higher pricing.

Sales of walnuts and other nuts as a percentage of net sales were as follows:


	Years Ended July 31,
	2006			2005
Walnuts		67.0	%		71.4	%
Other nuts		33.0	%		28.6	%

Total		100.0	%		100.0	%

Gross margin. Gross margin was 13.7% for the year ended July 31, 2006 and included a one-time charge to cost of sales as described above. On a non-GAAP basis gross margin for the years ended July 31, 2006 and 2005 were 14.3% and 10.6%, respectively and gross margin per pound shipped increased 63.0% to $0.352 in 2006 from $0.216 in the same period of 2005.

Selling, general and administrative. Selling, general and administrative expenses were $37.0 million and $33.2 million for the years ended July 31, 2006 and 2005. Selling, general and administrative expenses for the year ended July 31, 2006 included stock-based compensation charges of $4.0 million. There was no such charge in 2005. Selling, general and administrative expenses as a percentage of net sales were 7.8% and 7.2% for 2006 and 2005.

Advertising. Advertising expense was $18.0 and $22.2 million for the years ended July 31, 2006 and 2005. The change related principally to the timing of certain advertising programs and to initial Emerald advertising associated with its national launch in 2005.

Interest. Net interest expense was $0.3 million and $4.4 million for the years ended July 31, 2006 and 2005. This decrease reflected lower borrowings due to repayment of indebtedness and utilization of cash from the July 2005 initial public offering to fund working capital requirements.

Income taxes. Income tax benefit was $1.0 and $8.4 million for the years ended July 31, 2006 and 2005. The 2006 income tax benefit includes approximately $3.8 million (net of federal income tax impact) of California Enterprise Zone tax credits for years prior to 2006. Without such benefit, the effective tax rate would have been 42%. As an agricultural cooperative association in 2005, income taxes were not provided on patronage net proceeds. Income taxes were provided based on the pre-tax income of our non-patronage business. The benefit in the year ended July 31, 2005 arose from the loss before income taxes of the non-patronage business and from establishing certain net deferred tax assets related to the former patronage business as a result of the conversion. Effective August 1, 2005, all of our business activities are taxable under provisions of the Internal Revenue Code and certain state tax laws.

Liquidity and Capital Resources

Our liquidity is dependent upon funds generated from operations and external sources of financing.

As of July 31, 2007, we had a total of $20.0 million of senior notes outstanding with two institutional investors. We are required to make annual principal repayments on these notes in the amount of $4.0 million starting in December 2009. The notes mature in December 2013 and bear interest at a rate of 7.35% per annum.

We have an unsecured master loan agreement with CoBank, which provides for both a revolving line of credit in an aggregate principal amount of $77.5 million that bears interest at a rate of LIBOR plus 0.65% per annum, and a long-term revolver that provides an aggregate principal amount of $20.0 million that bears interest at a rate of LIBOR plus 0.70% per annum. The expiration of the long-term revolver agreement is April 1, 2012. The expiration of the revolving line of credit is April 1, 2009. As of July 31, 2007 and 2006, there were no borrowings outstanding on either facility.

We have a credit agreement with another bank that provides for an unsecured revolving line of credit in an aggregate principal amount of $52.5 million and a $3.0 million letter of credit facility. The revolving line of credit expires on January 15, 2008 and bears interest at a rate of LIBOR plus 0.65% per annum. As of July 31, 2007 and 2006, there were no borrowings outstanding on this credit facility.

All credit facilities subject us to financial and other covenants and certain customary events of default. Further, the credit agreement with a bank limits the amount of dividends declared or paid to 3% of the Company’s market capitalization. As of July 31, 2007 and July 31, 2006, we were in compliance with all applicable covenants in our credit facilities.

Our investment in CoBank represents our cost basis in its stock. We are required to maintain this investment to comply with our borrowing agreements with CoBank. This investment cannot be readily converted to cash because we cannot dispose of it without the prior approval of CoBank and only in the event of termination of our borrowing agreements with CoBank.

Working capital and stockholders’ equity were $100.5 million and $125.3 million at July 31, 2007 compared to $87.7 million and $110.8 million at July 31, 2006.

During the year ended July 31, 2007, cash provided by operating activities was $3.8 million compared to $34.0 million during the year ended July 31, 2006. The decrease in cash from operating activities was primarily due to timing and amount of payments to growers. Cash used in investing activities was $3.6 million in 2007 compared to $27.4 million in 2006. This change is primarily due to the acquisition of Harmony during 2006 and the sale of the Lemont facility in 2007 which resulted in cash proceeds of $2.9 million. Cash used in financing activities during 2007 was $2.0 million compared to $20.0 million in 2006. Payments in 2006 principally represent initial public offering proceeds paid to former members.

Cash provided by operating activities during the year ended July 31, 2006, was $34.0 million compared to $10.5 million during the year ended July 31, 2005. The increase was due to improved management of working capital. Cash used in investing activities was $27.4 million in 2006 compared to $10.4 million in 2005. The increase was primarily due to the acquisition of Harmony for approximately $19.2 million. Cash used in financing activities during 2006 was $20.0 million which principally represented amounts paid to former members for their membership interests. This compares to cash provided by financing activities of $48.2 million in 2005 which represents proceeds from the initial public offering of $105.8 million, partially offset by $57.6 million used to pay off short and long-term debt.

We believe cash on hand, cash equivalents and cash expected to be provided from our operations, in addition to borrowings available under our existing lines of credit, will be sufficient to fund our contractual commitments, repay obligations as required, and meet our operational requirements through the year ending July 31, 2008.

Contractual Obligations and Commitments

Contractual obligations and commitments at July 31, 2007 are as follows (in millions):


	Payments Due by Period
			Less than		1-3		3-5		More than
	Total		1 Year		Years		Years		5 Years
Long-term obligation (a)	$	20.3	$	0.1	$	4.1	$	8.1	$	8.0
Interest on long-term obligations		6.5		1.5		2.8		1.7		0.5
Operating leases		13.8		2.0		3.8		3.7		4.3
Purchase commitments (b)		3.6		3.6		—		—		—
Other long-term liabilities (c)		6.7		0.2		0.4		0.5		5.6

Total	$	50.9	$	7.4	$	11.1	$	14.0	$	18.4


(a)		Excludes $2.3 million in letters of credit outstanding related to normal business transactions.


(b)		Commitments to purchase new equipment. Excludes purchase commitments under Walnut Purchase Agreements.

(c)		Excludes $0.4 million in deferred rent liabilities.

Off-Balance Sheet Arrangements

As of July 31, 2007, we did not have any off balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Effects of Inflation

The most significant inflationary factor affecting our net sales and cost of sales is the change in market prices for purchased nuts. The prices of these commodities are affected by world market conditions and are volatile in response to supply and demand, as well as political and economic events. The price fluctuations of these commodities do not necessarily correlate with the general inflation rate. Inflation may, however, adversely affect operating costs such as labor, energy and materials.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109,which clarifies the accounting for income taxes recognized in an enterprise’s financial statements. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of SFAS No. 157 on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on these items will be reported in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We do not believe that the adoption of SFAS No. 159 will have a material impact on our results of operations or financial conditions.

In June 2007, the FASB approved the issuance of Emerging Issues Task Force Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”(EITF 06-11). EITF 06-11 requires that tax benefits from dividends paid on unvested restricted shares be charged directly to stockholders’ equity instead of benefiting income tax expense. This EITF is effective for financial statements issued for fiscal years beginning after September 15, 2007. We are currently evaluating the impact of EITF 06-11 and do not expect that it will have a material effect on our financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk. Our principal market risks are exposure to changes in commodity prices and interest rates on borrowings. Although we have international sales and related trade receivables from foreign customers, there is no significant foreign currency exchange risk as substantially all sales are denominated in U.S. dollars.

Commodities Risk. The availability, size, quality and cost of raw materials for the production of our products, including walnuts, pecans, peanuts, cashews, almonds and other nuts, are subject to risks inherent to farming, such as crop size and yield fluctuations caused by poor weather and growing conditions, pest and disease problems, and other factors beyond our control. Additionally, our supply of raw materials could be reduced if governmental agencies conclude that our products have been tampered with, or that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions

of the crop or that the crop has been contaminated by aflatoxin or other agents.

Interest Rate Risk. We have established a formal investment policy to help minimize the market risk exposure of our cash and cash equivalents, which are primarily affected by credit quality and movements in interest rates. These guidelines focus on managing liquidity and preserving principal. Our cash equivalents are primarily held for liquidity purposes and are comprised of high quality investments with maturities of less than 90 days when purchased. With such a short maturity, our portfolio’s market value is relatively insensitive to interest rate changes.

The sensitivity of our cash and cash equivalent portfolio as of July 31, 2007 to a 100 basis point increase or decrease in interest rates would be an increase of pretax income of approximately $0.3 million or a decrease of pretax income of $0.3 million, respectively.

Interest rate volatility could also materially affect the fair value of our fixed rate debt, as well as the interest rate we pay on future borrowings against our lines of credit and revolver. The interest rate we pay on future borrowings under our lines of credit and revolver are dependent on the London Interbank Offered Rate (LIBOR).

Item 8. Financial Statements and Supplementary Data

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Diamond Foods, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of July 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

Based on our assessment using the criteria set forth by COSO in Internal Control — Integrated Framework, management concluded that our internal control over financial reporting was effective as of July 31, 2007.

Deloitte & Touche LLP, an independent registered public accounting firm, has issued an audit report on the Company’s internal control over financial reporting.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Michael J. Mendes		/s/ Seth Halio

President and		Executive Vice President and
Chief Executive officer		Chief Financial Officer

October 11, 2007

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Diamond Foods, Inc.
Stockton, California

We have audited the accompanying consolidated balance sheets of Diamond Foods, Inc. and subsidiaries (the “Company”) as of July 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the statements of net proceeds, member’s equity and cash flows for the year ended July 31, 2005. We also have audited the Company’s internal control over financial reporting as of July 31, 2007, based on criteria established inInternal Control— Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Foods, Inc. and subsidiaries as of July 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2007, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 13 to the consolidated financial statements, in fiscal year 2007, the Company adopted Financial Accounting Standards No. 158,“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”.Also, as discussed in Note 2 to the consolidated financial statements, the Company adopted Financial Accounting Standards No. 123(R),“Share-Based Payment”, effective August 1, 2005.

/s/ Deloitte & Touche LLP

San Francisco, California
October 11, 2007

DIAMOND FOODS, INC.

CONSOLIDATED BALANCE SHEETS


	July 31,
	2007			2006
	(In thousands, except share
	and per share information)
ASSETS
Current assets:
Cash and cash equivalents	$	33,755		$	35,614
Trade receivables, net		50,662			49,536
Inventories		90,619			99,177
Deferred income taxes		4,805			4,578
Prepaid income taxes		1,854			3,147
Property held for sale		—			1,728
Prepaid expenses and other current assets		2,417			4,182

Total current assets		184,112			197,962
Property, plant and equipment, net		33,936			34,291
Investment in CoBank		1,774			2,191
Deferred income taxes		4,922			4,812
Goodwill		5,432			5,077
Other intangible assets, net		3,707			3,941
Other assets		2,520			4,758

Total assets	$	236,403		$	253,032

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long term obligations	$	162		$	—
Accounts payable and accrued liabilities		26,306			28,371
Payable to growers		57,117			81,902

Total current liabilities		83,585			110,273
Long-term obligations		20,345			20,000
Other liabilities		7,132			11,933
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding		—			—
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 15,848,717 and 15,737,194 shares issued and 15,764,647 and 15,737,194 shares outstanding at July 31, 2007 and 2006, respectively		16			16
Treasury stock, at cost: 84,070 shares at July 31, 2007		(1,436	)		—
Additional paid-in capital		101,106			93,962
Accumulated other comprehensive income (loss)		2,233			(36	)
Retained earnings		23,422			16,884

Total stockholders’ equity		125,341			110,826

Total liabilities and stockholders’ equity	$	236,403		$	253,032

See notes to consolidated financial statements

DIAMOND FOODS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (2007 AND 2006)
CONSOLIDATED STATEMENT OF NET PROCEEDS (2005)


	Year Ended July 31,
	2007			2006			2005
	(In thousands, except per share information)
Net sales	$	522,585		$	477,205		$	462,548
Patronage inventory at end of period		—			—			(101,403	)
Patronage inventory at beginning of period		—			—			67,152

Net sales (2007 and 2006)/Gross marketing pool proceeds (2005)		522,585			477,205			428,297
Cost of sales		443,945			409,039			191,387
Cost of sales — NRV amount		—			2,770			—

Total cost of sales		443,945			411,809			191,387

Gross margin (2007 and 2006)/Proceeds before operating expenses (2005)		78,640			65,396			236,910
Operating expenses:
Selling, general and administrative (including $5,859 and $3,992 of stock-based compensation for 2007 and 2006)		42,541			37,046			33,188
Advertising		20,445			17,977			22,153
Restructuring and other costs, net		(15	)		3,442			—
Loss on termination of defined benefit plan		3,054			—			—

Total operating expenses		66,025			58,465			55,341

Income from operations (2007 and 2006)/Operating proceeds (2005)		12,615			6,931			181,569
Interest expense, net		1,291			295			4,433
Conversion costs		—			—			697
Other		98			310			—
Early extinguishments of debt		—			—			2,028

Income before income tax expense (benefit)(2007 and 2006)/ Proceeds before income tax (benefit) (2005)		11,226			6,326			174,411
Income tax expense (benefit)		2,793			(1,010	)		(8,385	)

Net income (2007 and 2006)/Net proceeds (2005)	$	8,433		$	7,336		$	182,796

Earnings per share
Basic	$	0.53		$	0.47
Diluted	$	0.53		$	0.47
Shares used to compute earnings per share
Basic		15,786			15,634
Diluted		15,786			15,653

See notes to consolidated financial statements

DIAMOND FOODS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’/MEMBERS’ EQUITY


																	Accumulated			Total
									Additional		Working						Other			Stockholders’/
	Common Stock					Treasury			Paid-In		Capital			Retained			Comprehensive			Members’
	Shares			Amount		Stock			Capital		Retains			Earnings			Income/(Loss)			Equity
	(In thousands, except share information)
Balance, July 31, 2004				$	—	$	—		$	—	$	41,714		$	17,500		$	—		$	59,214
Nonpatronage loss												—			(6,545	)					(6,545	)
Working capital retains												38,500			—						38,500
Initial public offering of common stock, net of underwriting and offering expenses and amounts due former members electing cash in lieu of common stock		15,555,506			16					88,491		(38,500	)								50,007
Revolvement of working capital retains		—			—		—			—		(41,714	)		—			—			(41,714	)

Balance, July 31, 2005		15,555,506			16					88,491		—			10,955						99,462
Shares issued under Employee Stock Purchase Plan (ESPP)		57,872								802											802
Stock compensation expense		123,816								3,992											3,992
ESPP disqualifying dispositions										37											37
Conversion of Long Term Incentive Plan										640											640
Dividends paid															(1,407	)					(1,407	)
Comprehensive Income:
Net income															7,336						7,336
Other comprehensive loss																		(36	)		(36	)

Total comprehensive income:		—			—		—			—		—			—			—			7,300

Balance, July 31, 2006		15,737,194			16					93,962		—			16,884			(36	)		110,826
Shares issued under ESPP and upon stock option exercises		88,355								1,204											1,204
Stock compensation expense		23,168								5,859											5,859
ESPP disqualifying dispositions										78											78
Tax benefit — restricted stock										3											3
Treasury stock repurchase		(84,070	)				(1,436	)													(1,436	)
Dividends paid															(1,895	)					(1,895	)
Adjustment to initially apply SFAS No. 158																		2,230			2,230
Comprehensive income:
Net income															8,433						8,433
Other comprehensive income																		39			39

Total comprehensive income:		—			—		—			—		—			—			—			8,472

Balance, July 31, 2007		15,764,647		$	16	$	(1,436	)	$	101,106	$	—		$	23,422		$	2,233		$	125,341

See notes to consolidated financial statements

DIAMOND FOODS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended July 31,
	2007			2006			2005
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (2007 and 2006)/Net proceeds (2005)	$	8,433		$	7,336		$	182,796
Adjustments to reconcile net income (2007 and 2006)/net proceeds (2005) to net cash provided by operating activities:
Depreciation and amortization		7,561			5,532			4,717
Deferred income taxes		(1,874	)		(1,531	)		(6,593	)
Loss on termination of defined benefit plan		2,575
Tax benefit related to stock-based compensation plans		81			37			—
Excess tax benefit from ESPP and stock option transactions		(81	)		(37	)		—
Stock-based compensation		5,859			3,992			—
Gain on sale of property held for sale		(1,193	)		—			—
Loss on disposal of fixed assets		19			442			—
Gain on foreign currency		39			—			—
Early extinguishment of debt		—			—			233
CoBank patronage dividend paid in stock		(2	)		(47	)		(119	)
Changes in assets and liabilities (net of effects of acquisition):
Trade receivables		(1,048	)		(4,805	)		(9,470	)
Inventories		8,077			17,278			24,346
Prepaid expenses and other current assets		1,581			(1,957	)		(1,482	)
Other assets		454			1,764			1,310
Accounts payable and accrued liabilities		(1,871	)		(4,419	)		8,106
Payable to growers		(24,785	)		9,348
Other liabilities		(11	)		1,027			811
Adjustment to current member account for change in prepaid inventory costs		—			—			7,216
Cash payments to members		—			—			(201,415	)

Net cash provided by operating activities		3,814			33,960			10,456

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital revolvement from CoBank		419			126			100
Proceeds from sales of property, plant and equipment		2,941			49			—
Acquisition of Harmony		(197	)		(19,186	)		—
Purchases of property, plant, and equipment		(6,790	)		(8,354	)		(10,500	)

Net cash used in investing activities		(3,627	)		(27,365	)		(10,400	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable borrowings (repayments), net		—			(2,119	)		(42,173	)
Net proceeds from initial public offering		—			—			105,836
Payment to members for membership interests		—			(17,329	)		—
Issuance of common stock under stock plans		1,204			802			—
Dividends paid		(1,895	)		(1,407	)		—
Excess tax benefit from ESPP and stock option transactions		81			37			—
Purchases of treasury stock		(1,436	)		—			—
Additions to long-term obligation		—			—			10,000
Payments of long-term obligations		—			—			(25,464	)

Net cash provided by (used in) financing activities		(2,046	)		(20,016	)		48,199

Net increase (decrease) in cash and cash equivalents		(1,859	)		(13,421	)		48,255
Cash and cash equivalents:
Beginning of period		35,614			49,035			780

End of period	$	33,755		$	35,614		$	49,035

Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest	$	1,638		$	696		$	4,580
Income taxes		3,878			2,178			(296	)
Non-cash investing activities:
Liabilities assumed in Harmony acquisition		—			3,404			—
Accrued capital expenditures		94			380			420
Non-cash financing activities:
Net proceeds from initial public offering payable to members		—			—			17,329
Accrued liability exchanged for options to acquire common stock		—			640			—
Capital lease obligations incurred		507			—			—

See notes to consolidated financial statements

DIAMOND FOODS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2007, 2006 and 2005
(In thousands, except share and per share information)

(1) Conversion and Initial Public Offering

On July 26, 2005, after receiving required approvals and meeting certain conditions, Diamond Walnut Growers, Inc. (“Diamond Walnut”) converted from an agricultural cooperative association to a Delaware corporation through a merger with and into its wholly-owned subsidiary, Diamond Foods, Inc. (the “Company” or “Diamond”), and at the same time completed an initial public offering of Diamond common stock. The Company retained its July 31 fiscal year end. The conversion was accounted for using the historical carrying values of the assets and liabilities of Diamond Walnut. Immediately after the conversion, the working capital retains of members of Diamond Walnut were reclassified to payable to members. At the time of the conversion and initial public offering, all patronage member interests in Diamond Walnut were exchanged for Diamond common stock or a combination of Diamond common stock and cash. The results of operations of Diamond subsequent to the conversion were not significant, and accordingly, the accompanying financial statements for 2005 are presented as though Diamond were a cooperative for the entire year.

(2) Organization and Significant Accounting Policies

Business

Diamond processes, markets and distributes culinary, in-shell and ingredient/food service nuts and snack products. The Company obtains the majority of its walnuts from growers who are located in California and through July 26, 2005, were members of Diamond Walnut. The Company obtains its other nuts from independent suppliers. Diamond sells products to approximately 900 customers, including over 150 international customers. In general, the Company sells directly to retailers, particularly large, national grocery and club stores, mass merchandisers, and drug store chains, and indirectly through wholesale distributors who serve independent and small regional retail grocery store chains and convenience stores.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”). Prior to August 1, 2005 the Company’s financial statements were prepared in accordance with GAAP for agricultural cooperative associations. The principal difference relates to accounting for walnut inventories received from cooperative members. As a cooperative association, Diamond used the net realizable value method to value these inventories. Walnuts received by Diamond subsequent to July 31, 2005 are accounted for under the lower of cost (first-in, first-out), or market method. As a result, the statements of operations for the years ended July 31, 2007 and 2006 and the statements of net proceeds for the year ended July 31, 2005 are not comparable.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to inventories, trade receivables, fair value of investments, useful lives of property, plant and equipment and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for management’s judgments about the carrying values of assets and liabilities.

Certain Risks and Concentrations

The Company’s revenues are principally derived from the sale of culinary, in-shell and ingredient/food service nuts and snack products, the market for which is highly competitive. Significant changes in customer buying behavior could adversely affect the Company’s operating results. Sales to the Company’s largest customer accounted for approximately 19%, 19% and 17% of net sales in 2007, 2006 and 2005, respectively. Sales to the second largest customer accounted for approximately 10%

of net sales in 2007. Sales to the second largest customer accounted for less than 10% of net sales in 2006 and 2005.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

Cash and cash equivalents include investment of surplus cash in securities (primarily money market funds) with maturities at date of purchase of three months or less.

Inventories

Prior to August 1, 2005, patronage inventories (walnuts acquired from members) were stated at estimated net realizable value (estimated sales price less estimated completion, distribution and selling costs). Other inventories include purchased commodities, processed walnuts used in non-patronage products, manufacturing costs and packing materials and supplies, and are stated at the lower of cost (first-in, first-out basis) or market. Effective August 1, 2005 all inventories are accounted for at the lower of cost (first-in, first-out) or market.

Crop Accounting Policy

Through July 31, 2005, Diamond operated on a pool year basis, with crop year pools established for members’ products delivered for processing and marketing. Net patronage proceeds of the pool were partially distributed as advances for raw products delivered. In addition, net patronage proceeds or losses from the sale of member products were allocated to the members in the appropriate commodity crop year pool. Payments to members were specifically identified as to crop year pool and were charged directly to current member accounts. Each crop year pool was closed when the related crop was substantially sold by making a final distribution to members based upon their patronage in that pool. The board of directors determined the amount and timing of payments to and for its members.

Investment in CoBank

The investment in CoBank represents Diamond’s cost basis in the Bank’s stock. The investment is required to comply with borrowing agreements with the Bank.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of assets of approximately 30 years for buildings and ranging from three to fifteen years for equipment.

Slotting and Other Contractual Arrangements

In certain situations, the Company pays slotting fees to retail customers to acquire access to shelf space. These payments are recognized as a reduction of sales. In addition, the Company makes payments pursuant to contracts that stipulate the term of the agreement, the quantity and type of products to be sold and other requirements. Payments pursuant to these agreements are capitalized and included in other current and long-term assets, and are amortized on a straight-line basis over the term of the contract. The Company expenses payments if no written arrangement exists.

Impairment of Long-Lived and Intangible Assets and Goodwill

Management periodically reviews for impairment long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144,“Accounting for the Impairment or Disposal of Long-lived Assets”and goodwill and certain intangible assets, not subject to amortization, in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets.”

For assets to be held and used, including acquired intangibles, the Company initiates a review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in this process.

Revenue Recognition

The Company recognizes revenue when a persuasive arrangement exists, title has transferred (based upon terms of shipment), price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, coupons, promotion and marketing allowances. Customers have the right to return certain products. These product returns are estimated based upon historical results and reflected as a reduction in net sales.

Promotion and Advertising Costs

Promotional allowances, customer rebates, coupons and marketing allowances are recorded at the time the related revenue is recognized and are reflected as reductions of net sales. Annual volume rebates, promotion, and marketing allowances are recorded based upon the terms of the arrangements. Coupon incentives are recorded at the time of distribution in amounts based on estimated redemption rates. The Company expenses advertising costs as they occur. Payments to certain customers to reimburse them for cooperative advertising programs are recorded in accordance with EITF No. 01-09,“Accounting for Consideration Given by a Vendor to a Customer.”

Shipping and Handling Costs

Shipping and handling costs billed to customers are included in net sales. Shipping and handling costs are charged to cost of sales as incurred.

Income Taxes

Prior to July 31, 2005, Diamond was a nonexempt cooperative association under the federal tax code. Nonexempt cooperative associations accrue income taxes only on net non-patronage proceeds and certain expenses, which are not deductible for tax purposes. No provision for taxes was made for net patronage proceeds paid or allocated to members as qualified notices of allocation. Effective August 1, 2005, all business activities of Diamond became taxable under provisions of the Internal Revenue Code and certain state tax laws.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred income taxes not expected to be recovered.

Fair Value of Financial Instruments

The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the amounts recorded in the balance sheet based on information available to Diamond with respect to current interest rates and terms for similar financial instruments. It is not practicable to estimate the fair value of Diamond’s investment in CoBank.

Foreign Currency Hedging

To reduce the risk of foreign currency exchange movements, Diamond periodically enters into forward contracts. These derivative instruments have settlement dates generally less than one year, are recorded at fair value, and are included in accrued liabilities (balances at July 31, 2007 and 2006 were not material). There were no outstanding forward contracts at July 31, 2007. At July 31, 2006 Diamond had outstanding forward contracts to deliver 1.1 million Euros at various dates through

January 2007. These contracts had an average exchange rate of 1.22 US Dollars per Euro. Forward contracts totaling 483 Euros were designated as cash flow hedges in accordance with SFAS No. 133,“Derivative Financial Instruments and Hedging.”Accordingly, changes in derivative fair values were deferred and recorded as a component of other comprehensive income until the underlying transaction was recorded in earnings. In the period in which the hedged item affects earnings, gains or losses on the derivative instrument are reclassified from other comprehensive income to the statement of operations. Diamond assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

The following table summarizes the impact of cash flow hedges on other comprehensive income in 2007 (in thousands):


At July 31, 2006	$	(36	)
Net change on cash flow hedges		0
Reclassification to other income		36

At July 31, 2007	$	—

Stock-Based Compensation

The Company has various stock-based compensation programs that provide for equity awards, including stock options and restricted stock. On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004),“Share-Based Payment,”which is a revision of SFAS No. 123,“Accounting for Stock-Based Compensation.”The statement supercedes APB Opinion No. 25,“Accounting for Stock Issued to Employees,”and its related implementation guidance. The Company adopted the provisions of SFAS No. 123(R) in fiscal year 2006 and accounts for all share-based awards in accordance with that standard.

Adoption of SFAS. No. 158

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The Company adopted the recognition and measurement provisions of this standard effective July 31, 2007 and recognized an after-tax increase in accumulated other comprehensive income of $2.2 million. See Note 13.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109,which clarifies the accounting for income taxes recognized in an enterprise’s financial statements. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on these items will be reported in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not believe that the adoption of SFAS No. 159 will have a material impact on its results of operations or financial conditions.

In June 2007, the FASB approved the issuance of Emerging Issues Task Force Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 requires that tax benefits from dividends paid on unvested restricted shares be charged directly to stockholders’ equity instead of benefiting income tax expense. This EITF is effective for financial statements issued for fiscal years beginning after September 15, 2007. The Company is currently evaluating the impact of EITF 06-11 but does not expect that it will have a material effect on our financial statements.

(3) Stock-Based Compensation

The Company uses a broad based equity incentive plan to help align employee and director incentives with stockholders’ interests. The 2005 Equity Incentive Plan (the “Plan”) was approved in March 2005 and provides for the awarding of options, restricted stock, stock bonuses, restricted stock units, and stock appreciation rights. The Compensation Committee of the Board of Directors administers the Plan. A total of 2,500,000 shares of common stock were initially reserved for issuance under the Plan, and the number of shares available for issuance under the Plan will increase by an amount equal to 2% of the Company’s total outstanding shares as of July 31 each year.

In 2005, the Company began granting shares of restricted stock and stock options under the Plan. The shares of restricted stock vest over a three-year period. The stock options expire in ten years and vest over three years. As of July 31, 2007, options to purchase 1,621,170 shares of common stock were outstanding, of which 877,297 were exercisable. At July 31, 2007, the Company had 503,864 shares available for future grant under the Plan.

The 2005 Employee Stock Purchase Plan provides for eligible employees to purchase shares of common stock at a discount on a periodic basis. As of July 31, 2007, 556,781 shares of common stock were reserved for issuance under the Employee Stock Purchase Plan, and shares available for issuance will increase by an amount equal to 1% of the Company’s total outstanding shares as of July 31 each year, up to a maximum of 4,000,000 shares. During the year ended July 31, 2007, 53,837 shares were issued under the Employee Stock Purchase Plan.

SFAS No. 123R requires all entities to recognize compensation expense in an amount equal to the fair value of share-based awards. Beginning with its adoption by the Company in August 2005, the fair value of all stock options granted subsequent to August 1, 2005 will be recognized as an expense in the Company’s statement of operations, typically over the related vesting period of the options. SFAS No. 123R requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period, generally three years from date of grant or award.

As required under SFAS No. 123R the Company continues to account for stock-based compensation for options granted prior to August 1, 2005 using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees.”Since the options were granted at market price, no compensation expense is recognized. Prior to the adoption of SFAS No. 123(R), tax benefits for any deduction in excess of recognized compensation costs were reported as operating cash flows. After adoption of SFAS No. 123(R) excess tax benefits from stock option exercises are reported as financing cash flows.

As required by SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123”, the Company has provided fair value based pro-forma disclosures in its financial statements related to stock options. If compensation expense for the Company’s various stock option plans had been determined based upon the estimated fair values at the grant dates for all awards in accordance with SFAS No. 123,“Accounting for Stock-Based Compensation,”the Company’s pro-forma net income, basic and diluted earnings per common share would have been as follows (for the years ended July 31):


	2007			2006
Net income, as reported	$	8,433		$	7,336
Total stock-based compensation recorded in the statement of operations, net of related tax effects		4,401			2,388
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(5,748	)		(3,514	)

Pro forma net income	$	7,086		$	6,210

Net income per common equivalent share:
Basic — as reported	$	0.53		$	0.47
Basic — pro forma	$	0.45		$	0.40
Diluted — as reported	$	0.53		$	0.47
Diluted — pro forma	$	0.45		$	0.40

The pro-forma effect on net proceeds in 2005 was not material.

Stock Option Awards: The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted and forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields for notes with comparable terms as the option grants, in effect at the time of the grant. For purposes of this valuation model, dividends are based on the historical rate. Assumptions used in the Black-Scholes model are presented below (for the years ended July 31):


	2007			2006
Average expected life, in years		6			6
Expected volatility		30.00	%		27.50	%
Risk-free interest rate		4.75	%		4.61	%
Dividend rate		0.72	%		0.67	%

The following table summarizes option activity during the years ended July 31, 2007 and 2006:


				Weighted Average		Weighted Average
	Number of			Exercise Price Per		Remaining		Aggregate
	Shares			Share		Contractual Life		Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Outstanding at July 31, 2005		1,123		$	17.00
Granted		657			18.15
Exercised		—			—
Cancelled		(132	)		17.44

Outstanding at July 31, 2006		1,648			17.43		9.2	$	—
Granted		117			16.93
Exercised		(35	)		16.97
Cancelled		(109	)		17.88

Outstanding at July 31, 2007		1,621			17.37		8.3	$	226

Exercisable at July 31, 2006		341			17.00		9.0	$	—
Exercisable at July 31, 2007		877			17.18		8.2	$	159

The weighted average fair value of options granted during the 2007, 2006 and 2005 were $5.91, $6.13 and $5.18, respectively. The total intrinsic value of options exercised during 2007 was $55. No options were exercised in 2006 and 2005. The total fair value of options vested during 2007 and 2006 were $3,510 and $1,766. No options vested in 2005.

Changes in the Company’s nonvested options during 2007 and 2006 are summarized as follows:


				Weighted Average
	Number of			Grant Date Fair
	Shares			Value Per Share
	(In thousands)
Nonvested at July 31, 2005		1,123		$	5.18
Granted		657			6.13
Vested		(341	)		5.18
Cancelled		(132	)		5.66

Nonvested at July 31, 2006		1,307			5.80
Granted		117			5.91
Vested		(615	)		5.71
Cancelled		(65	)		5.84

Nonvested at July 31, 2007		744			5.89

As of July 31, 2007, there was $2.5 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.9 years. The total intrinsic value of restricted stock vested in 2007 and 2006 was $4,123 and $2,903. No restricted stock vested in 2005.

Restricted Stock Awards: Restricted stock activity during 2007 and 2006 is summarized as follows:


				Weighted Average
	Number of			Grant Date Fair
	Shares			Value Per Share
	(In thousands)
Outstanding at July 31, 2005		598		$	17.00
Granted		149			18.94
Vested		(193	)		17.00
Cancelled		(25	)		17.65

Outstanding at July 31, 2006		529			17.52
Granted		27			16.75
Vested		(242	)		17.37
Cancelled		(4	)		19.67

Outstanding at July 31, 2007		310			17.50

The weighted average grant date fair value of restricted stock awards granted during 2007, 2006 and 2005 were $16.75, $18.94 and $17.00, respectively.

As of July 31, 2007, there was $4.9 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of 1.3 years.

Employee Stock Purchase Plan: Under the Employee Stock Purchase Plan, full-time employees are permitted to purchase a limited number of Diamond common shares at 85% of market value. Under this plan, Diamond sold 53,837 shares to employees in fiscal 2007 and 57,872 in fiscal 2006. Compensation expense is calculated for the fair value of employees’ purchase rights using the Black-Scholes model and the following weighted-average assumptions (for the years ended July 31):


	2007			2006
Average expected life, in years		0.75			0.75
Expected volatility		29.4	%		27.5	%
Risk-free interest rate		4.8	%		4.3	%
Dividend rate		0.68	%		0.71	%

The weighted-average fair value of the purchase rights granted during fiscal 2007 and 2006 were $3.52 and $3.70.

(4) Earnings Per Share

Options to purchase 1,621,170 and 1,648,459 shares of common stock were outstanding at July 31, 2007 and 2006, respectively. Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and includes the dilutive effect of common shares issuable upon the exercise of outstanding options, calculated using the treasury stock method. All options to purchase common stock are excluded from the diluted earnings per share calculation in periods with net loss. Options to purchase 1,196,775 shares of common stock were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of Diamond’s common stock of $16.71 for the year ended July 31, 2007, and therefore their effect would be antidilutive. Options to purchase 837,631 shares of common stock were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of Diamond’s common stock of $17.88 for the year ended July 31, 2006 and therefore their effect would be antidilutive.

(5) Acquisition of Assets of Harmony Foods Corporation

On May 9, 2006, Diamond completed its acquisition of certain net assets of Harmony Foods Corporation (“Harmony”) for approximately $19 million in cash (including transaction costs) and the assumption of certain defined liabilities. The assets acquired and liabilities assumed from Harmony are herein referred to as the “Harmony- Retail Division.” Among the assets Diamond acquired is Harmony’s strategically located processing and packaging plant in Fishers, Indiana. This plant has the capacity to produce products such as trail mixes, specialty dried fruits, nuts and seeds, sweet/salty snacks and organic snacks, which are available in multiple packaging options including resealable single and multiple serve bags, deli cups and self-serve produce bins. Diamond also acquired the Harmony and Homa brands, as well as $4.5 million of working capital. Additionally, as part of the acquisition, the Company offered employment to approximately 100 former employees of Harmony Foods Corporation. In fiscal year 2007, the Company reached final settlement with the seller and paid additional acquisitions costs.

As a result, an additional $355 of goodwill was recognized as of July 31, 2007.

The acquisition has been accounted for as a business combination in accordance with SFAS No. 141,“Business Combinations.”

The total purchase price was $19.4 million, including $1.3 million in transaction related costs, which has been allocated to the fair values of assets acquired and liabilities assumed as follows:


Accounts receivable	$	2,563
Inventory		4,704
Prepaid expenses		203
Property, plant and equipment		5,640
Customers contracts and related relationships		2,400
Trademark and trade names		1,600
Goodwill	��	5,432
Liabilities assumed		(3,159	)

Purchase price	$	19,383

Intangible assets (gross) consisted of the following:


	July 31,
	2007		2006
Goodwill	$	5,432	$	5,077
Intangible assets subject to amortization:
Customer contracts and related relationships		2,400		2,400
Trademarks and trade names		1,600		1,600

		4,000		4,000

Total goodwill and intangible assets	$	9,432	$	9,077

Intangible assets (net) consisted of the following:


	July 31,
	2007		2006
Goodwill	$	5,432	$	5,077
Intangible assets subject to amortization:
Customer contracts and related relationships, net of accumulated amortization of $150 and $30, for 2007 and 2006, respectively		2,250		2,370
Trademarks and trade names, net of accumulated amortization of $143 and $29, for 2007 and 2006, respectively		1,457		1,571

		3,707		3,941

Total goodwill and intangible assets, net	$	9,139	$	9,018

Customer contracts and relationships relate primarily to underlying customer relationships of the Division-Retail, which will be amortized on a straight-line basis over an average estimated life of 20 years. Trademarks and trade names, relate to the “Harmony” and “Homa” brand names, which will be amortized on a straight-line basis over an estimated life of 14 years.

The total weighted average amortization period of identifiable intangible assets is approximately 18 years with amortization expense of approximately $234 and $59 recognized in 2007 and 2006.

Identifiable intangible asset amortization expense for each of the five succeeding years will amount to approximately $234.

Pro Forma — Financial Information

The following reflects the unaudited pro forma combined results of operations of the Company and Harmony — Retail Division as if the acquisition had taken place at the beginning of 2005 (in thousands, except per share data):


	July 31,
	2006			2005
Net sales	$	502,503		$	522,649
Net loss	$	(397	)	$	(14,667	)
Diluted earnings per share	$	(0.03	)		*


*		As a cooperative association prior to the conversion, Diamond had no shares outstanding; therefore earnings per share is not meaningful.

(6) Notes Payable and Long-Term Obligations

As of July 31, 2007, the Company had a total of $20.0 million of senior notes outstanding with two institutional investors. The Company is required to make annual principal repayments on these notes in the amount of $4.0 million starting in December 2009. The notes mature in December 2013 and bear interest at a rate of 7.35% per annum.

The Company has an unsecured master loan agreement with CoBank, which provides for both a revolving line of credit in an aggregate principal amount of $77.5 million that bears interest at a rate of LIBOR plus 0.65% per annum, and a long-term revolver that provides an aggregate principal amount of $20.0 million that bears interest at a rate of LIBOR plus 0.70% per annum. The expiration of the long-term revolver agreement is April 1, 2012. The expiration of the revolving line of credit agreement is April 1, 2009. As of July 31, 2007 and 2006, there were no borrowings outstanding on either facility.

The Company has a credit agreement with another bank that provides for an unsecured revolving line of credit in an aggregate principal amount of $52.5 million and a $3.0 million letter of credit facility. The revolving line of credit expires on January 15, 2008 and bears interest at a rate of LIBOR plus 0.65% per annum. As of July 31, 2007 and 2006, there were no borrowings outstanding on this credit facility.

All credit facilities subject the Company to financial and other covenants and certain customary events of default. Further, the credit agreement with a bank limits the amount of dividends declared or paid to 3% of the Company’s market capitalization. As of July 31, 2007 and 2006, the Company was in compliance with all applicable covenants in its credit facilities.

(7) Balance sheet items

Inventories consisted of the following:


	July 31,
	2007		2006
Raw materials and supplies	$	19,653	$	32,484
Work in process		14,043		16,148
Finished goods		56,923		50,545

Total	$	90,619	$	99,177

Accounts payable and accrued liabilities consisted of the following:


	July 31,
	2007		2006
Accounts payable	$	15,151	$	19,090
Accrued salaries and benefits		4,082		4,496
Accrued promotion		5,882		3,477
Other		1,191		1,308

Total	$	26,306	$	28,371

(8) Property, Plant and Equipment

Property, plant and equipment consisted of the following:


	July 31,
	2007			2006
Land and improvements	$	1,569		$	1,569
Buildings and improvements		16,975			16,933
Machinery, equipment and software		95,037			86,700
Construction in progress		4,221			5,898

Total		117,802			111,100
Less accumulated depreciation		(83,866	)		(76,809	)

Property, plant and equipment, net	$	33,936		$	34,291

(9) Income Taxes

Income tax expense (benefit) consisted of the following:


	Year Ended July 31,
	2007			2006			2005
Current Federal	$	4,449		$	688		$	(1,684	)
State		218			(167	)		(108	)
Deferred		(1,874	)		(1,531	)		(6,593	)

Total	$	2,793		$	(1,010	)	$	(8,385	)

A reconciliation of the statutory federal income tax rate of 35% to Diamond’s effective income tax rate is as follows:


	Year Ended July 31,
	2007			2006			2005
Federal tax computed at the statutory rate	$	3,929		$	2,214		$	61,044
Benefit for payments to members		—			—			(66,322	)
Stock-based compensation		56			114			—
Change in valuation allowance		(1,044	)		—			(19	)
Recognition of net deferred tax assets resulting from the conversion, net of valuation allowance of $799		—			—			(1,912	)
State taxes, net of federal impact		211			(3,503	)		(746	)
Other items, net		(359	)		165			(430	)

Income tax expense (benefit)	$	2,793		$	(1,010	)	$	(8,385	)

The tax effect of temporary differences and net operating losses which give rise to deferred tax assets and liabilities consist of the following:


	At		At July 31, 2006
	July 31,				Valuation
	2007		Gross		Allowance			Net
Deferred tax assets:
Current:
Inventories	$	878	$	873	$			$	873
Receivables		228		240					240
Accruals		2,475		2,881					2,881
Retirement benefits		260		—					—
Net operating loss		17		168					168
Other		947		416					416

Total current		4,805		4,578					4,578
Non-current:
Enterprise Zone Credits		3,608		3,692					3,692
AMT Credits		—		67					67
Retirement benefits		4,705		4,636		(1,044	)		3,592

Total non-current		8,313		8,395		(1,044	)		7,351
Deferred tax liabilities:
Non-current:
Retirement benefits		3,013		2,355					2,355
Property, plant and equipment		28		157					157
Other		350		27					27

Total non-current		3,391		2,539					2,539

Total deferred income taxes	$	9,727	$	10,434	$	(1,044	)	$	9,390

Composed of:
Net current deferred income taxes	$	4,805						$	4,578
Net long-term deferred income taxes		4,922							4,812

Total deferred income taxes	$	9,727						$	9,390

During 2007, the Company determined it no longer required a valuation reserve for its deferred tax assets and reversed this reserve as a reduction of income tax expense.

At July 31, 2007, the Company has net operating loss carry forwards of approximately $0.3 million for state tax purposes which will expire in 2014, if unused.

(10) Commitments and Contingencies

On February 3, 2006, PG&E filed a complaint in San Francisco County Superior Court alleging, among other things, breach of contract as a result of Diamond’s decision to cease operating the Company’s cogeneration facility. PG&E’s complaint seeks payment of approximately $1.4 million from Diamond plus interest under the contract’s termination provisions as well as PG&E’s costs for the lawsuit. Diamond believes that the termination payment provision constitutes an unenforceable penalty and intends to vigorously defend itself against PG&E’s lawsuit. Diamond believes that any additional liability, in excess of amounts recorded, resulting from the eventual outcome of this matter, will not be material to the Company’s financial condition or operating results (see also Note 14).

The Company has various other legal actions in the ordinary course of business. All such matters are subject to many uncertainties that make their ultimate outcomes unpredictable. However, in the opinion of management, their resolution is not expected to have a material adverse effect on the Company’s financial condition, operating results or cash flows.

At July 31, 2007, the Company had commitments of $3.6 million to purchase new equipment.

Operating lease expense for the years ended July 31, 2007, 2006 and 2005 was $2.3 million, $1.1 million, and $0.7 million, respectively

At July 31, 2007, future minimum payments under non-cancelable operating leases (primarily for real property) were as follows:


2008	$	1,962
2009		1,921
2010		1,912
2011		1,455
2012		1,155
Thereafter		5,454

Total	$	13,859

(11) Segment Disclosures

The Company operates in a single segment: the processing, marketing and distributing of culinary, in-shell and ingredient/food service nuts and snack products. The geographic presentation of net sales below is based on the destination of the sale. The “Europe” category consists primarily of Germany, Spain, Italy, Netherlands and the U.K. The “Other” category consists primarily of Japan, Canada, Korea, Israel and Australia. The geographic distributions of the Company’s net sales for the years ended July 31, 2007, 2006 and 2005 are as follows:


	2007		2006		2005
United States	$	389,230	$	342,369	$	322,461
Europe		57,343		57,734		70,526
Other		76,012		77,102		69,561

Total	$	522,585	$	477,205	$	462,548

All long-lived assets are located in the United States.

Net sales by channel:


	2007		2006		2005
North American Retail	$	333,117	$	274,879	$	228,522
International		112,830		114,781		122,514
North American Ingredient/Food Service		73,822		84,475		107,029
Other		2,816		3,070		4,483

	$	522,585	$	477,205	$	462,548

(12) Valuation Reserves and Qualifying Accounts


			Amount
	Beginning		Charged			Charged to			End of
	of Period		to Expense			Reserve			Period
Allowance for Doubtful Accounts
Year ended July 31, 2005	$	883	$	196		$	(564	)	$	515
Year ended July 31, 2006		515		204			(121	)		598
Year ended July 31, 2007		598		(228	)		(22	)		348
Deferred Tax Asset Valuation Allowance
Year ended July 31, 2005		264		780			—			1,044
Year ended July 31, 2006		1,044		—			—			1,044
Year ended July 31, 2007		1,044		(1,044	)		—			—

(13) Retirement Plans

During the year ended July 31, 2007, Diamond provided retiree medical benefits and sponsored three defined benefit pension plans — a qualified plan covering all salaried employees, a qualified plan covering all regular hourly employees, and a nonqualified plan for certain salaried employees. The amounts shown for pension benefits are combined amounts for all three plans.

On July 25, 2006, the Company determined it would terminate the qualified defined benefit pension plan covering all salaried employees. During the year ended July 31, 2007, the Company terminated this plan and recorded a substantially non-cash loss on termination of defined benefit plan of $3.1 million.

Obligations and funded status of the remaining benefit plans at July 31:


	Pension Benefits						Other Benefits
Change in benefit obligation	2007			2006			2007			2006
Benefit obligation at beginning of year	$	32,581		$	34,901		$	5,279		$	10,575
Service cost		1,209			2,234			114			253
Interest cost		1,763			1,726			310			543
Plan participants’ contributions		—			—			178			287
Plan amendments		81			—			—			—
Curtailments		(2,556	)		—			—			—
Settlements		(3,191	)		—			—			—
Actuarial loss (gain)		107			(3,417	)		(909	)		(5,756	)
Benefits paid		(14,796	)		(2,863	)		(520	)		(623	)

Benefit obligation at end of year	$	15,198		$	32,581		$	4,452		$	5,279


	Pension Benefits						Other Benefits
Change in plan assets	2007			2006			2007			2006
Fair value of plan assets at beginning of year	$	29,046		$	30,522		$	—		$	—
Actual return on plan assets		3,114			1,387			—			—
Employer contribution		345			—			342			336
Plan participants’ contributions		—			—			178			287
Benefits paid		(14,796	)		(2,863	)		(520	)		(623	)
Settlements		(3,191	)		—			—			—

Fair value of plan assets at end of year	$	14,518		$	29,046		$	—		$	—

Funded status at end of year	$	(680	)	$	(3,535	)	$	(4,452	)	$	(5,279	)

Assets (liabilities) recognized in the consolidated balance sheets at July 31 consisted of:


	Pension Benefits						Other Benefits
	2007			2006			2007			2006
Noncurrent assets	$	1,792		$	5,857		$	—		$	—
Current liabilities		—			—			(183	)		(240	)
Noncurrent liabilities		(2,472	)		(1,644	)		(4,269	)		(9,645	)

	$	(680	)	$	4,213		$	(4,452	)	$	(9,885	)

Amounts recognized in accumulated other comprehensive income (pre-tax) after the adoption of SFAS No. 158 as of July 31, 2007 consist of:


	Pension Benefits		Other Benefits
Net loss (gain)	$	1,111	$	(5,061	)
Prior service cost (credit)		183		—

	$	1,294	$	(5,061	)

The accumulated benefit obligation for all defined benefit pension plans was $14,325 and $29,182 at July 31, 2007 and 2006, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets is as follows:


	2007		2006
Projected benefit obligation	$	2,472	$	2,395
Accumulated benefit obligation		1,842		1,556
Fair value of plan assets		—		—

Components of net periodic benefit cost for the year ended July 31 were as follows:


	Pension Benefits									Other Benefits
Net Periodic Benefit Cost /(Income)	2007			2006			2005			2007			2006		2005
Service cost	$	1,209		$	2,234		$	2,013		$	114		$	253	$	273
Interest cost		1,763			1,726			1,845			310			543		589
Expected return on plan assets		(2,236	)		(2,300	)		(2,299	)		—			—		—
Amortization of prior service cost		(57	)		(287	)		(287	)		—			—		—
Amortization of net (gain) loss		499			809			699			(454	)		21		35

Net periodic benefit cost /(income)		1,178			2,182			1,971			(30	)		817		897
Gain on curtailment of defined benefit plan		(3,039	)		—			—			—			—		—
Loss on settlement of defined benefit plan (1)		5,805			—			—			—			—		—

Total benefit cost /(income)	$	3,944		$	2,182		$	1,971		$	(30	)	$	817	$	897


(1)		Excludes $288 of costs to terminate the plan.

The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $5 and $26, respectively. The estimated net gain and prior service cost for the other defined benefit postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $530 and $0, respectively.

For calculation of retiree medical benefit cost, prior service cost is amortized on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants. For calculation of net periodic pension cost, prior service cost is amortized on a straight-line basis over the average remaining years of service of the active plan participants.

Assumptions

Weighted-average assumptions used to determine benefit obligations at July 31 were as follows:


	Pension Benefits									Other Benefits
	2007			2006			2005			2007			2006			2005
Discount rate		6.40	%		5.91	%		5.25	%		6.40	%		6.00	%		5.25	%
Rate of compensation increase		5.50			5.50			5.50			N/A			N/A			N/A

Weighted-average assumptions used to determine net periodic benefit cost for the years ended July 31 were as follows:


	Pension Benefits									Other Benefits
	2007			2006			2005			2007			2006			2005
Discount rate		5.91	%		5.25	%		6.00	%		6.00	%		5.25	%		6.00	%
Expected long-term return on plan assets		8.00			8.00			8.00			N/A			N/A			N/A
Rate of compensation increase		5.50			5.50			5.50			N/A			N/A			N/A

The expected long-term rate of return on plan assets is based on the established asset allocation.

Assumed trend rates for medical plans were as follows:


	2007			2006			2005
Health care cost trend rate assumed for next year		11.0	%		8.0	%		8.5	%
Rate to which the cost trend rate assumed to decline (the ultimate trend rate)		5.0	%		5.0	%		5.0	%
Year the rate reaches ultimate trend rate		2020			2013			2013

For measurement purposes for years ended July 31, 2006 and 2005, a level 5% annual rate of increase in the per capita cost of covered dental and vision care benefits was assumed for all future years. As of July 31, 2007, dental and vision care are no longer covered.

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:


	One		One
	Percentage		Percentage
	Point		Point
	Increase		Decrease
Effect on total of service and interest cost	$	78	$	(62	)
Effect on postretirement benefit obligation		625		(518	)

Plan Assets

The Company’s pension plan weighted-average asset allocations at July 31 were as follows:


	2007			2006			2005
Asset category:
Equity securities		73.5	%		78.5	%		75.0	%
Debt securities		24.3			20.7			25.0
Cash and equivalents		2.2			0.8			0.0

Total		100.0	%		100.0	%		100.0	%

Pension obligations and expenses are most sensitive to the expected return on pension plan assets and discount rate assumptions. Other post retirement benefit obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rate. Diamond determines the expected return on pension plan assets based on an expectation of the average annual returns over an extended period of time. This expectation is based, in part, on the actual returns achieved by the Company’s pension plan in prior periods. The Company also considers the weighted average historical rates of return on securities with similar characteristics to those in which the Company’s pension assets are invested.

The investment objectives for the Diamond plans are to maximize total returns within reasonable and prudent levels of risk. The plan asset allocations are a key element in achieving the expected investment returns on plan assets. The asset allocation strategy targets an allocation of 70% for equity securities and 30% for debt securities with adequate liquidity to meet expected cash flow needs. Actual asset allocation may fluctuate within acceptable ranges due to market value variability. If fluctuations cause an asset class to fall outside its strategic asset allocation range, the portfolio will be rebalanced as appropriate.

Cash Flows

Estimated future benefit payments, which reflect expected future service, as appropriate, expected to be paid are as follows:


	Pension		Other
	Benefits		Benefits
2008	$	338	$	183
2009		384		217
2010		439		225
2011		515		243
2012		541		265
2013 — 2017		5,352		1,588

Incremental Effect of Applying FASB Statement No. 158 on Individual Line Items in the Statement of Financial Position — July 31, 2007


	Before					After
	Application of					Application of
	SFAS No. 158		Adjustments			SFAS No. 158
Liability for postretirement benefits	$	8,899	$	(3,767	)	$	5,132
Deferred income tax assets		11,264		(1,537	)		9,727
Total liabilities		115,669		(4,607	)		111,062
Accumulated other comprehensive income		3		2,230			2,233
Total stockholders’ equity		123,111		2,230			125,341

Defined Contribution Plan

The Company also recognized defined contribution plan expenses of $425, $368, and $301 for the years ended July 31, 2007, 2006, and 2005, respectively.

(14) Restructuring and Other Costs, Net

Restructuring and other costs for the year ended July 31, 2007 included charges related principally to 1) costs of closing the Lemont facility and the consolidation of operations in the Fishers’ facility 2) contract termination costs and certain professional fees offset by 3) a gain on the sale of the Lemont facility.

Restructuring and other costs for the year ended July 31, 2006 included approximately $1.0 million principally related to the closure of Diamond’s Lemont facility and consolidation of operations in its Fishers facility. On May 9th, 2006, Diamond announced the closing of its Lemont, Illinois facility, which primarily packages in-shell nuts and processes and packs certain other culinary and snack products, and plan to shift these activities to the Harmony facility. As a result of closing the Lemont facility, Diamond eliminated approximately 20 positions and recorded expenses of approximately $500 related to employee severance and benefit costs, and $500 of other costs.

Also included in restructuring and other costs for the year ended July 31, 2006 are costs of $1.4 million associated with terminating two contracts, one with PG&E associated with Diamond’s cogeneration plant and one associated with a former distributor for Germany; and professional service fees of $1.0 million related to the identification of California Enterprise Zone tax credits for years prior to 2006.

(15) Quarterly Financial Information (unaudited)


	First		Second			Third			Fourth
	Quarter		Quarter			Quarter			Quarter
Year ended July 31, 2007
Net sales and other revenues	$	169,512	$	143,622		$	97,016		$	112,435
Gross margin		27,940		20,341			13,706			16,653
Operating expenses		11,067		16,439			21,766			16,753
Net income (loss)		9,641		2,030			(4,012	)		774
Diluted earnings per share		0.61		0.13			(0.25	)		0.05
Diluted shares (in thousands)		15,737		15,772			15,808			15,826
Year ended July 31, 2006
Net sales and other revenues	$	178,060	$	124,157		$	67,798		$	107,190
Gross margin		22,811		18,570			8,428			15,587
Operating expenses		15,784		13,291			13,567			15,823
Net income (loss)		4,074		3,077			(3,175	)		3,360
Diluted earnings per share		0.26		0.20			(0.20	)		0.21
Diluted shares (in thousands)		15,634		15,587			15,668			15,722
Year ended July 31, 2005
Net sales and other revenues	$	172,758	$	112,488		$	79,633		$	97,669
Proceeds before operating expense		209,225		12,929			8,736			6,020
Operating expenses		17,639		14,661			11,303			11,738
Net Proceeds (loss)		191,293		(2,252	)		(3,232	)		(3,013	)

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the 1934 Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of July 31, 2007, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

The annual report of our management on internal control over financial reporting and the report of Deloitte and Touche LLP, our independent registered public accounting firm, regarding our internal control over financial reporting are provided in Item 8 of this report.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during our fiscal quarter ended July 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers of the Registrant and Corporate Governance

DIRECTORS AND OFFICERS

Directors

The names of the members of the Board of Directors, their ages and background information are set forth below:


				Director
Name of Director	Age		Principal Occupation	Since
Laurence M. Baer		50	Executive Vice President and Chief Operating Officer, San Francisco Giants.		2005
John J. Gilbert		64	Owner and President of Gilbert Orchards and Rio Oso Groves, Inc.		2005
Robert M. Lea		64	Founder and Owner, Law Offices of Robert Lea.		2005
Michael J. Mendes		44	President and Chief Executive Officer of Diamond Foods, Inc.		2005
Dennis Mussell		65	Retired, former President and Chief Executive Officer of Chicken of the Sea International.		2005
Steven M. Neil		55	Executive Vice President and Chief Financial Officer of The Cooper Companies, Inc.		2005
Joseph P. Silveira		60	President of Farmland Management Services, Inc.		2005
Glen C. Warren		51	President, Chief Financial Officer and a director of Antero Resources Corporation.		2005
Robert J. Zollars		50	Chairman and Chief Executive Officer of Vocera Communications, Inc.		2005

Laurence M. Baerhas served as Executive Vice President of the San Francisco Giants Baseball Club since 1992 and as its Chief Operating Officer since 1996. From 1990 until 1992, he served as Assistant to the Chairman of CBS, Inc., a media and entertainment corporation. Mr. Baer holds a B.A. from the University of California, Berkeley, and an M.B.A. from Harvard Business School.

John J. Gilbertis our Chairman of the Board of Directors. He served as the Chairman of the board of directors of our predecessor company, Diamond Walnut Growers, from 1996 to July 2005. Since 1983, Mr. Gilbert has been the owner and President of Gilbert Orchards and Rio Oso Groves, Inc., each of which is a family corporation focusing on walnuts. He holds a B.S. from California Polytechnic State University, San Luis Obispo.

Robert M. Leaserved as a member of the Board of Directors of our predecessor company, Diamond Walnut Growers, from 1993 to July 2005. Since November 2004, Mr. Lea has practiced law as a solo practitioner with the Law Offices of Robert Lea, which he founded. From January 2004 to November 2004, Mr. Lea served as the Managing Partner of Lea and Shepherd, a law firm. From 1984 to December 2003, he was a partner of the law firm Lea & Arruti. Mr. Lea holds a B.A. from the University of California, Davis and a J.D. from the University of California, Berkeley, School of Law (Boalt Hall).

Michael J. Mendeshas served as President and Chief Executive Officer of Diamond since 1998, and served as Vice President of International Sales and Marketing, prior to being appointed as CEO. Mr. Mendes served as Manager of International Marketing of the Dole Food Company from 1989 to 1991. Mr. Mendes has served as Chairman of the Grocery Manufactures Association’s President's Advisory Council and currently serves on the Industry Affairs Council. He is currently on the Advisory Board of the Wine Group and has served on the boards of various industry associations. He holds a B.S. from the California Polytechnic State University, San Luis Obispo, and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Dennis Mussellis the retired former President and Chief Executive Officer of Chicken of the Sea International, a packaged seafood company, after serving from August 1997 until January 2005. Prior to holding this position, he served in various senior capacities with Van Camp Seafood Company, Inc., the predecessor corporation to Chicken of the Sea International, including most recently Chief Operating Officer. Mr. Mussell has extensive work experience in the packaged food industry. He holds a B.S. from Southwest Missouri State University.

Steven M. Neilhas served as Executive Vice President and Chief Financial Officer of The Cooper Companies, Inc., a company that manufactures specialty healthcare products, since April 2007. From January 2005 to April 2007, Mr. Neil was Vice President and Chief Financial Officer of The Cooper Companies. From July 2003 to January 2005, he served as Executive Vice President, Chief Financial Officer and Secretary of Ocular Sciences, Inc., a contact lens company. From October 1997 to June 2003, he was Executive Vice President, Finance, Chief Financial Officer, Treasurer and Secretary of Sola International, a marketer of eyeglass lenses. He holds a B.A. from the University of California, Santa Barbara, and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Joseph P. Silveiraserved as a member of Board of Directors of our predecessor company, Diamond Walnut Growers, from June 2002 to July 2005. Since 1994, Mr. Silveira has served as President of Farmland Management Services, Inc., directing property acquisitions, operations, leases and sales. He holds a B.S. from California Polytechnic State University, San Luis Obispo.

Glen C. Warren, Jr.has served as President, Chief Financial Officer and a director of Antero Resources Corporation, a natural gas exploration and production company, since June 2002. Prior to joining Antero Resources Corporation, he served as a Managing Director of Concert Energy Advisors, a consulting firm to energy companies, from November 2001 to June 2002. From 1998 to March 2001, Mr. Warren served as Chief Financial Officer, Executive Vice President and a member of the Board of Directors of Pennaco Energy, Inc., an energy exploration and production company, from 1998 to March 2001. From 1989 to 1998, he was an investment banker with Dillon, Read & Co., Inc., Kidder, Peabody & Co. Incorporated and

Lehman Brothers Inc. Mr. Warren holds a B.A. from the University of Mississippi, a J.D. from the University of Mississippi School of Law and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Robert J. Zollarshas served as Chairman and Chief Executive Officer of Vocera Communications, Inc., a company providing instant wireless communications solutions, since June 2007. From May 2006 to June 2007, Mr. Zollars was President and Chief Executive Officer of Wound Care Solutions, LLC, a holding company that operates chronic wound care centers in partnership with hospitals in the U.S., since May 2006. From July 1999 to March 2006, Mr. Zollars was chairman of the Board of Directors and Chief Executive Officer of Neoforma, Inc., a provider of supply chain management solutions for the healthcare industry. From 1997 to July 1999, he served as Executive Vice President and Group President of Cardinal Health, Inc., a healthcare products and services company. Earlier in his career, while employed at Baxter International, a healthcare products and services company, Mr. Zollars served as President of a dietary products joint venture between Baxter International and Kraft General Foods. He holds a B.S. from Arizona State University and an M.B.A. from John F. Kennedy University.

Executive Officers


Name	Age		Position
Michael J. Mendes		44	President, Chief Executive Officer and Director
Gary K. Ford		53	Chief Operating Officer, Executive Vice President
Seth Halio		45	Chief Financial Officer, Executive Vice President
Samuel J. Keiper		57	Vice President, Corporate Affairs and Human Resources
Andrew Burke		41	Senior Vice President, Marketing

Gary K. Fordhas served as our Executive Vice President and Chief Operating Officer since 1998. Mr. Ford served as general manager of the in-shell nut division of Sun-Diamond Growers of California, a cooperative joint venture, from 1995 to 1998. From 1992 to 1995, Mr. Ford served as General Manager of Metz Baking Company, and from 1979 to 1992, he served in various management capacities at PepsiCo, Inc.’s Frito-Lay division. He holds a B.S. from William Carey College and an M.B.A. from Georgia College and State University.

Seth Haliohas served as our Executive Vice President and Chief Financial Officer since January 2005. From July 2002 to January 2005, Mr. Halio served in various senior financial management positions at Ocular Sciences, Inc., a contact lens manufacturer, including Corporate Controller and Director of Finance. From 1997 to April 2002, he served in various capacities with Spectra-Physics, Inc., a manufacturer of lasers, including most recently as Vice President, Finance. Earlier in his career, Mr. Halio spent over eight years with Ernst & Young LLP. Mr. Halio holds a B.S. from Bucknell University.

Samuel J. Keiperhas served as our Vice President of Corporate Affairs and Human Resources since August 2005. From 1994 until August 2005, he served as our Vice President of Grower Relations and Corporate Affairs. From 1992 to 1994, Mr. Keiper served as our Director of Member Services. Prior to joining our Diamond Walnut Growers in 1987, Mr. Keiper owned and operated a diversified farming company. He holds a B.S. from the University of California, Davis.

Andrew Burkehas served as our Senior Vice President of Marketing since March 2007. From June 2006 to March 2007, Mr. Burke was our Vice President of Marketing. From October 2004 until June 2006, Mr. Burke served as Vice

President, Marketing for Economy Wine, Spirits, Sparking and Beverages, at Ernest & Julio Gallo Winery. From 1997 until September 2004, Mr. Burke worked at Kraft Foods, Inc. in a variety of capacities, including as a Category Business Director from September 2003 to September 2004 and a Senior Brand Manager from 2001 until September 2003. Prior to Kraft, Mr. Burke worked at Young & Rubicam, Inc., as an Account Supervisor and Financial Analyst, and Laura Ashley, as a financial and inventory analyst. Mr. Burke holds an M.B.A from Fordham University and a B.A. from Rutgers.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16 of the Securities Exchange Act requires our directors and officers, and persons who own shares representing more than 10% of our common stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. The Securities and Exchange Commission regulations also require these persons to furnish us with a copy of all Section 16(a) forms they file. Based solely on our review of the copies of the forms furnished to us and written representations from our executive officers and directors, we believe that all Section 16(a) filing requirements were met during the 2007 fiscal year.

CORPORATE GOVERNANCE

We are committed to maintaining high standards of business conduct and corporate governance, which we believe are essential to running our business efficiently, serving our stockholders well and maintaining our integrity in the marketplace. We have adopted a code of conduct and ethics for directors, officers and employees, known as the Diamond Code of Conduct. Our certificate of incorporation, bylaws, committee charters and Diamond Code of Conduct form our corporate governance framework. The Diamond Code of Conduct and the charters of our Audit Committee, Compensation Committee and Nominating Committee are available through the investor relations page at our web site:www.diamondfoods.com. We will post on this web site any amendments to the Diamond Code of Conduct or waivers of the Diamond Code of Conduct for our directors and executive officers.

Composition of Board of Directors

Our Board of Directors has nine authorized members, who are Jack Gilbert, Robert Lea, Joseph Silveira, Laurence Baer, Dennis Mussell, Steven Neil, Glen Warren, Robert Zollars and Michael Mendes.

Our Board is divided into three classes:

	•		Class I directors, whose terms expire at the 2009 annual meeting of stockholders;

	•		Class II directors, whose terms expire at the 2010 annual meeting of stockholders; and

	•		Class III directors, whose terms expire at the 2008 annual meeting of stockholders.

At each annual meeting of stockholders, the successors to directors whose terms have expired will be elected to serve from the time of their election and qualification until the third annual meeting following their election.

Board of Directors Meetings and Committees

During the 2007 fiscal year, our Board of Directors met five times and acted by unanimous written consent twice. No director attended fewer than 75% of the total number of meetings of the Board held while the director served and the total number of meetings held by all committees of the Board of Directors on which the director served during the 2007 fiscal year.

Audit Committee. The audit committee reviews and evaluates our financial statements, accounting practices and internal audit and control functions, selects our independent auditors and reviews the results and scope of the audit and other services provided by our independent auditors. The members of our audit committee currently are Mr. Silveira, Mr. Mussell and Mr. Neil, with Mr. Neil serving as chairman of the committee. The Board of Directors has determined that Mr. Neil qualifies as an “audit committee financial expert” as defined by the rules of the SEC and that all of the members of the audit committee are independent under applicable NASDAQ listing standards. The audit committee met four times during fiscal 2007.

Compensation Committee. The compensation committee reviews and determines the compensation and benefits of our officers and directors. The committee also administers our equity compensation and employee benefits plans and reviews general policies relating to compensation and benefits. The members of our compensation committee are Mr. Baer, Mr. Warren and Mr. Zollars, with Mr. Zollars serving as chairman of the committee. The Board of Directors has determined that all of the members of the compensation committee are independent directors as defined under applicable NASDAQ listing standards. The compensation committee met four times and acted by unanimous written consent four times during fiscal 2007.

Nominating and Governance Committee. The nominating and governance committee makes recommendations to our Board of Directors concerning candidates for election as directors and other corporate governance related matters. The members of our nominating and governance committee are Mr. Mussell, Mr. Warren and Mr. Zollars, with Mr. Warren serving as chairman of the committee. The Board of Directors has determined that all of the members of the nominating and governance committee are independent directors as defined under applicable NASDAQ listing standards. The nominating committee met once during the 2007 fiscal year.

Consideration of Director Nominees

Director Qualifications.The goal of the nominating and governance committee is to ensure that our Board of Directors possesses a variety of perspectives and skills derived from high-quality business and professional experience. The nominating and governance committee seeks to achieve a balance of knowledge, experience and capability on our Board of Directors. To this end, the committee seeks nominees with high professional and personal integrity, an understanding of our business lines and industry, diversity of business experience and expertise, broad-based business acumen and the ability to think strategically. In addition, the committee considers the level of the candidate’s commitment to active participation as a director, both at board and committee meetings and otherwise. Although the committee uses these and other criteria to evaluate potential nominees, we have not established any particular minimum criteria for nominees. When appropriate, the committee may retain executive recruitment firms to assist in identifying suitable candidates. After its evaluation of potential nominees, the committee submits nominees to the Board of Directors for approval. The committee does not use different standards to evaluate nominees depending on whether they are proposed by our directors and management or by our stockholders.

Stockholder Nominees. The nominating and governance committee will consider stockholder recommendations for director candidates. If a stockholder would like to recommend a director candidate for the possible election at the next annual meeting of stockholders, the stockholder must deliver the recommendation to our Corporate Secretary at our principal executive offices no later than the close of business on the 75^th day and no earlier than the close of business on the 105th day prior to the anniversary date of the mailing of our proxy statement in connection with the previous year’s annual meeting of stockholders. However, if the next annual meeting of stockholders occurs on a date more than 30 days earlier or later than the anniversary of the prior year’s annual meeting of stockholders, then nominations must be received not earlier than close of business on the 105^th day prior to the annual meeting and not later than close of business on the later to occur of (i) the 75^th day prior to the annual meeting or (ii) the 10^th day after the date we first publicly announced the date of the annual meeting.

Recommendations for candidates should be accompanied by the information required by Section 1.11(a)(ii) of our Bylaws. A stockholder recommending a candidate may be asked to submit additional information as determined by our Corporate Secretary and as necessary to satisfy the rules of the Securities and Exchange Commission or The NASDAQ Stock Market. If a stockholder’s recommendation is received within the time period set forth above and the stockholder has met the criteria set forth above, the nominating and governance committee will evaluate such candidate, along with the other candidates being evaluated by the committee, in accordance with the committee’s charter and will apply the criteria described in this section.

Independent Directors

The Board of Directors has determined that each of Mr. Baer, Mr. Mussell, Mr. Neil, Mr. Warren, Mr. Silveira and Mr. Zollars is an “independent director” under applicable NASDAQ listing standards, a “non-employee director” as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, and an “outside director” as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986. Mr. Baer is the Executive Vice President and Chief Operating Officer of the San Francisco Giants, with whom we have a corporate sponsorship arrangement. In connection with the sponsorship, we paid the San Francisco Giants a fee and receive sampling, signage and other brand exposure benefits at AT&T Park during the baseball season. The

amount of the fee is not material to Diamond or the San Francisco Giants, and Mr. Baer does not receive any material direct or indirect benefit from the fee that would impair his independence. Mr. Silveira is the President of Farmland Management Services, which provides farming services to clients. One of Farmland Management’s clients is John Hancock, which operates a number of farming assets including walnut orchards from which we purchase walnuts. Mr. Silveira receives a management fee from John Hancock for providing farming services, which is unrelated to the purchase price we pay to John Hancock for walnuts. We do not believe that Mr. Silveira has a material direct or indirect interest in our arrangement with John Hancock that would impair his independence.

Communication with the Board

You may contact the Board of Directors by sending a letter addressed to the Board of Directors, care of Corporate Secretary, Diamond Foods, Inc., 1050 S. Diamond Street, Stockton, California 95205. An employee will forward these letters directly to the Board of Directors, except for spam, junk mail, mass mailings, product complaints or inquiries, job inquiries, surveys, business solicitations or advertisements, or patently offensive or otherwise inappropriate material. We may forward correspondence, such as product-related inquiries, elsewhere within Diamond for review and possible response. We reserve the right not to forward to the Board of Directors any abusive, threatening or otherwise inappropriate materials.

Director Attendance at Meetings

Each member of the Board of Directors is expected to be available to attend all regularly scheduled meetings of the board and any committees on which the director serves, and our annual meeting of stockholders. Each director is expected to make his best effort to attend all special board and committee meetings.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

In this section we provide an explanation and analysis of the material elements of the compensation provided to our Chief Executive Officer and the four other executive officers named in the Summary Compensation Table on page 53 (referred to as our “named executive officers”). The purpose of this discussion is to provide the context for the specific compensation for our named executive officers, as described in the tables and narratives following this discussion and analysis.

Diamond’s Compensation Philosophy and Objectives

The central objective of our executive compensation program is to attract and retain executives of exceptional ability who will provide strong leadership within Diamond to drive stockholder value. To that end, our executive compensation is designed to be competitive with our industry, with a significant portion of total compensation “at-risk” in the form of near- and long-term financial incentives. We believe that these incentives reward executives when they accomplish individual goals, Diamond meets corporate strategic objectives and when stockholder value increases.

Executive Compensation Processes

Role of the compensation committee. The compensation committee (referred to as the “Committee”) of our Board of Directors is responsible for making all decisions regarding compensation for our named executive officers other than our Chief Executive Officer. With respect to the Chief Executive Officer, the Committee makes its compensation recommendations to the Board of Directors (other than Mr. Mendes) for approval. Information regarding the Committee and its role is provided on page 48 under the heading “Corporate Governance – Compensation Committee.”

The Committee Uses Reports from Consultants. Since our initial public offering in July 2005, we have commissioned compensation studies from Aon Consulting to provide our management and the Committee with benchmarks regarding base salary, bonus, and long-term equity incentives for executive officers. During fiscal 2007, Aon Consulting provided updated data on cash and equity compensation practices in the industry, which we used in connection with compensation determinations for fiscal 2008.

In establishing compensation benchmarks, Aon summarized survey data from Towers Perrin, Economic Research Institute, Watson Wyatt Data Services and William Mercer for companies of similar size to Diamond in the non-durable goods manufacturing sector and the food industry. In order to provide additional points of reference for our Chief Executive Officer and Chief Financial Officer positions, Aon collected proxy statement data for comparable positions at 11 peer companies selected by Aon after consultation with our management. We have used the same peer group for this purpose since 2005. Although most of the 11 peer companies were larger than Diamond, the group is relevant since we compete with many of those same companies for executive talent. In analyzing compensation levels at these companies, however, the studies commissioned from Aon applied a regression formula to the compensation data to account for the differences in market capitalization with larger firms.

The peer group identified in the last Aon study included the following companies:

•		Kraft Foods, Inc.

•		Campbell Soup Co.

•		Hershey Foods Corp.

•		McCormick & Co., Inc.

•		Smucker JM Co.

•		Lance, Inc.

•		Hain Celestial Group, Inc.

•		J&J Snack Foods Corp.

•		Tootsie Roll Industries, Inc.

•		Weider Nutrition International, Inc.

•		SunOpta, Inc.

The CEO Makes Recommendations.At the beginning of each fiscal year our CEO works with each of our other named executive officers to develop their individual goal achievement plans for their annual bonuses. After completion of each fiscal year, the CEO reviews the performance of each named executive officer and makes recommendations to the Committee about specific compensation levels for those executive officers, including base salary, bonus compensation and equity awards. After the end of each fiscal year, the CFO reports to the Board of Directors, including the Committee members, Diamond’s financial results for the year, which the Committee and the Board take into account in rendering compensation decisions.

Components of Executive Compensation

The material elements of compensation for our named executive officers are annual salaries, annual bonuses and equity incentives. Named executive officers also receive perquisites and participate in other programs.

Base Salary.Base salaries enable us to attract and retain executive talent by establishing a minimum compensation upon which executives can rely. Over time, salary increases are designed to reward sustained individual performance, advancement through the organization and increasing levels of responsibility. The Committee reviews base salaries annually, generally targeting adjustments equal to the percentage increase budgeted by us for employees generally. In addition, the Committee analyzes benchmark data provided by Aon Consulting, which establishes a range of competitive salaries by reference to survey data and peer company compensation practices. These salary benchmarks enable us to gauge the competitiveness of an executive’s base salary or other compensation, but we do not set salaries based on the benchmarks.

In establishing base salaries for named executive officers in fiscal 2007, the Committee reviewed recommendations by the CEO with respect to the named executive officers other than himself, based on the CEO’s subjective assessments of each named executive officer’s experience, responsibilities, teamwork, performance and reference to benchmark data. The Committee also made subjective assessments about the CEO’s performance, and reference to benchmark data, in recommending Mr. Mendes’ base salary for fiscal 2007. At the beginning of fiscal 2007, the executive officers received raises to their base salaries as follows: Chief Executive Officer – 5.0%; Chief Operating Officer – 10.0%; Chief Financial Officer – 5.0%; Vice President Corporate Affairs and Human Resources – 6.0%; and Senior Vice President Marketing – 3.48%. The raises for the positions other than the Senior Vice President Marketing were higher than we typically provide, in order to offset a portion of the impact of our termination of a defined benefit pension plan. Our Senior Vice President Marketing joined Diamond during fiscal 2005 and was not eligible to receive pension plan benefits.

Annual Bonus Incentives. We pay annual bonuses to our named executive officers under our Diamond Annual Bonus Program, which is administered by the Committee. Annual bonuses are intended to promote the achievement of our annual financial goals and corporate initiatives. For fiscal 2007, the maximum achievable bonuses for each of our named executive officers were as follows: Chief Executive Officer – 100% of base salary; Chief Operating Officer – 70% of base salary; Chief Financial Officer – 70% of base salary; Vice President Corporate Affairs and Human Resources – 50% of base salary; and Senior Vice President Marketing – 50% of base salary. Historically, the bonus period

would run from December 1 to November 30 each year. Accordingly, bonuses were paid in December 2006 for the period from December 1, 2005 to November 30, 2006. Commencing December 1, 2006, the bonus period was changed to align with the fiscal year, which ends July 31. As a result, bonuses were paid in September 2007 and were pro rated for the eight month period from December 1, 2006 to July 31, 2007.

Each year, our Board reviews and approves an annual plan outlining Diamond’s business objectives and key initiatives for the upcoming fiscal year. Each of our named executive officers other than the Chief Executive Officer develops a detailed plan consisting of individual goals, the achievement of which support the annual plan. Each of the major categories of business goals and objectives contained in our corporate annual plan is supported by one or more of these individual goal achievement plans. The individual goal achievement plans are reviewed and approved by our Chief executive Officer. At the end of the fiscal year, each named executive officer other than the Chief Executive Officer performs a self-assessment of his performance relative to his individual goal achievement plan, which is reviewed and approved by our Chief Executive Officer. At the conclusion of this process, each named executive officer other than the Chief Executive Officer is assigned a score on a 200 point scale, with 200 points signifying maximum performance, at which the maximum bonus would be earned. The Committee reviews the Chief Executive Officer’s recommendations and approves bonus payments to these officers based on this score as recommended by our CEO.

After the end of each fiscal year, the Committee evaluates the performance of our Chief Executive Officer by reference to our performance relative to the Company annual plan, and recommends to the Board his bonus compensation based on the Committee’s assessment of the achievement of our goals and initiatives for the year. The fiscal 2007 annual plan against which our Chief Executive Officer’s performance was measured consisted of an extensive list of specific business goals and corporate objectives that were approved by our Board of Directors at the beginning of fiscal 2007. The various specific goals and objectives fall into the following main categories: revenue and profitability; development of our Emerald and Diamond brands; improvements in production yields and labor productivity; cost savings and profitability initiatives; and improvements in manufacturing and financial system infrastructure. Due to the number and complexity of goals and objectives included in the Company annual plan and each of the executive officers’ individual goal achievement plans, and due to the fact that our CEO expects each of the other named executive officers to set at least some goals that are difficult to achieve, the Committee believes that achievement of maximum bonus payments has been and will continue to be a rare occurrence. In 2006 and 2007 none of our named executive officers received the maximum allowable bonus.

Equity Incentives.In fiscal 2007 the Committee granted no equity awards, due to its decision to alter the timing of equity awards from mid-year to the beginning of the fiscal year, to coincide with the timing of executive officer base salaries and annual bonus determinations. However, the Committee believes that equity awards are a key component of its executive compensation program. Our 2005 Equity Incentive Plan enables Diamond to grant stock options, stock appreciation rights, restricted stock, and other equity awards. The Committee believes that these equity-based incentives serve the following purposes:

	•		align the interests of our executives with those of other shareholders;

	•		promote performance orientation among executives through stock option grants the value of which is at risk;

	•		augment total compensation to be competitive with executive compensation at other companies; and

	•		retain executives through vesting of equity awards, particularly restricted stock.

We anticipate that most of our equity awards to executive officers will be made pursuant to an annual grant program, although the Committee and Board retain the discretion to make additional awards of options or restricted stock to executives at other times for recruiting or retention purposes. The Committee makes annual grants either at in-person meetings or by unanimous written consent. To the extent stock options have been granted by the Committee, the exercise price equaled the closing price of our stock on the date of the meeting or the date on which all of the written consents were signed. In addition, from time to time, the Committee has approved new hire grants of options to officers who join Diamond by unanimous written consent. In these situations, the Committee’s practice has been to use the closing price of our stock on the date all written consents have been signed. The Committee delegated to the Chief Executive Officer the authority to grant equity awards to non-officer employees, provided that he may not grant more than 13,000 options or 2,000 shares of restricted stock to any employee. In exercising this delegated authority, the Chief Executive Officer reviews proposed equity grants on the fifteenth

day of each month (or the next business day if the fifteenth is a holiday or weekend day). If he approves the grant of an option, the exercise price is established as the closing price of our stock on that date.

Severance and Change of Control Benefits.Each of our named executive officers is covered by an arrangement under which he will receive payments in the event the executive’s employment is terminated after a change of control of Diamond. Payments vary from one to three times salary, based on position and tenure in the company. In addition, if we terminate our Chief Executive Officer without cause, he is entitled to continuation of his salary and health, dental and vision insurance benefits for up to 12 months, as well as certain outplacement services. Finally, under our 2005 Equity Incentive Plan, all outstanding equity awards will vest upon a change of control of Diamond if not assumed by the acquirer. We believe that these benefits are competitive in the industry and assist in recruiting and retaining executive officers. For more information, please refer to“Potential Payments upon Employment Termination and Change of Control Events,” which begins on page 61.

Retirement Plans. The executive officers participate in the same 401(k) plan on the same terms provided to all administrative employees. Pursuant to the 401(k) plan, we make a contribution of 3% of base salary into 401(k) accounts, up to a maximum of $30,000 per year. In addition, the Chief Executive Officer participates in Diamond Walnut Growers Retirement Restoration Plan, a non-qualified supplemental retirement plan that provides supplemental benefits upon retirement. This retirement program, which was first implemented in 1989, was established to incent and retain senior executives by rewarding long-term contributions by providing income security upon retirement. For more information regarding the Diamond Walnut Growers Retirement Restoration Plan, please see “Pension Benefits” on page 59.

Perquisites. We provide executive officers with perquisites and other personal benefits that we believe are consistent with our overall compensation program, in order to enable us to attract and retain executives. The Committee periodically reviews the types of perquisites and other personal benefits provided to executive officers.

REPORT OF THE COMPENSATION COMMITTEE

The Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussions, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in Diamond’s Annual Report on Form 10-K for the year ended July 31, 2007.

COMPENSATION COMMITTEE

Robert Zollars, Chairman
Larry Baer
Glen Warren

EXECUTIVE COMPENSATION

The following table presents information about the compensation for the 2007 fiscal year awarded to, earned by or paid to our named executive officers serving in that capacity as of July 31, 2007. We also provide benefits to our executive officers that are generally available to all of our employees.

Summary Compensation Table


													Change in Pension
													Value and
													Nonqualified
											Non-Equity		Deferred
						Stock		Option			Incentive Plan		Compensation		All Other
Name and Principal	Fiscal		Salary		Bonus	Awards		Awards			Compensation		Earnings		Compensation
Position	Year		($)		($)	($) (1)		($)			($) (2)		($) (3)		($) (4)		Total ($)
Michael Mendes President and Chief Executive Officer		2007		509,280	—		1,583,176		287,901	(5)		456,225		120,184		246,275		3,203,041

Gary Ford Executive Vice President, Chief Operating Officer		2007		274,039	—		685,384		42,143	(6)		171,646		—		74,278		1,247,490

Seth Halio Executive Vice President, Chief Financial Officer		2007		251,539	—		595,974		38,457	(6)		142,590		—		41,030		1,069,590

Sam Keiper Vice President, Corporate Affairs and Human Resources		2007		185,097	—		232,684		18,232	(6)		77,601		—		33,102		546,716

Andrew Burke Senior Vice President, Marketing		2007		237,692	—		74,622		36,077	(6)		83,795		—		16,546		448,732


(1)		The amounts shown in this column represent compensation expense recognized for financial reporting purposes during fiscal 2007 in accordance with SFAS 123R related to the awards of restricted shares granted in fiscal years 2005, 2006 and 2007. Additional information regarding our SFAS 123R assumptions can be found in “Note 3 of the Notes to Consolidated Financial Statements” on page 33, with the exceptions that the valuation shown here in the Summary Compensation Table assumes no forfeitures for the named executive officers. The restricted shares reflected in this column vest over a three-year period from the date of grant. During the vesting period, the named executive officers are the beneficial owners of the restricted shares and possess all voting and dividend rights. Dividends are payable at the same rate as is paid on the Company’s common shares generally. During fiscal 2007, we paid quarterly dividends at a rate of $0.03 per share.

(2)		Amounts in this column reflect annual, non-equity incentive plan awards earned under the Annual Bonus Program during fiscal 2007. The payments were based on achievement of company annual plan objectives, for the Chief Executive Officer, and of individual goal plan objectives for the other named executive officers. The amounts are comprised of bonus paid in December 2006, pro rated for four months, and in September 2007, which amount was based on an eight-month period. Additional information regarding the Annual Bonus Program is provided under “Compensation Discussion and Analysis — Components of Executive Compensation — Annual Bonus Incentives.”


(3)		Amounts in this column represent the increase in present value of accumulated benefits accrued under the Diamond Walnut Growers Retirement Restoration Plan, in which the Chief Executive Officer participates. Additional information regarding the Retirement Restoration Plan is set forth below in “Pension Benefits.”

(4)		Amounts shown in this column for each of the named executive officers include the following:


	Mr. Mendes		Mr. Ford		Mr. Halio		Mr. Keiper		Mr. Burke
Housing and Moving Expenses	$	111,321	$	32,400	$	0	$	0	$	0

Travel Reimbursements		2,131		834		0		1,241		1,428

Health and Wellness Programs		6,443		480		3,144		0		832

Exec-U-Care Reimbursements (a)		2,053		6,507		4,577		424		0

Auto and Parking (b)		4,988		2,953		9,297		3,389		0

Financial Planning Services		15,275		6,711		6,240		6,646		0

Tax Gross Ups (c)		85,896		7,329		4,093		4,585		0

401(k) Contribution		6,963		6,415		6,203		5,692		3,742

Life and Medical Insurance Premiums		11,205		10,649		7,476		11,125		10,544


Total	$	246,275	$	74,278	$	41,030	$	33,102	$	16,546

	(a)		Includes reimbursement for medical expenses not otherwise covered under health insurance offered by Diamond.

	(b)		Includes value of the use of company-owned vehicle for personal reasons.

	(c)		For Mr. Ford, Mr. Halio and Mr. Keiper, the amounts are attributable to gross ups paid in connection with tax obligations associated with financial planning services. For Mr. Mendes, includes gross ups paid in connection with tax obligations associated with the following: $54,726 in gross up for housing reimbursement taxes and $31,170 in gross up for financial planning services income.


(5)		The amounts shown in this column represent compensation expense recognized for financial reporting purposes during fiscal 2007 in accordance with SFAS 123R related to options to purchase common stock granted in fiscal 2006 and 2007. Additional information regarding our SFAS 123R assumptions can be found in “Note 3 of the Notes to Consolidated Financial Statements” on page 33, with the exceptions that the valuation shown here in the Summary Compensation Table assumes no forfeitures for the named executive officers. The options reflected in this column vest over a five-year period from the date of grant.

(6)		The amounts shown in this column represent compensation expense recognized for financial reporting purposes during fiscal 2007 in accordance with SFAS 123R related to options to purchase common stock granted in fiscal 2006 and 2007. Additional information regarding our SFAS 123R assumptions can be found in “Note 3 of the Notes to Consolidated Financial Statements” on page 33, with the, with the exceptions that the valuation shown here in the Summary Compensation Table assumes no forfeitures for the named executive officers. The options reflected in this column vest over a three-year period from the date of grant.

2007 GRANTS OF PLAN-BASED AWARDS


				Estimated Future Payouts Under						Estimated Future Payouts Under
				Non-Equity Incentive Plan						Equity Incentive Plan
				Awards (1)						Awards
																(j)		(k)		(l)
(a)	(b)			(c)		(d)		(e)		(f)		(g)		(h)		All Other
																Option		Exercise
																Awards:		Or Base		Grant
																Number of				Date Fair
																Securities		Price of		Value
																Underlying		Option		Of Option
	Grant			Threshold		Target		Maximum		Threshold		Target		Maximum		Options		Awards		Awards
Name	Date			($)		($)		($)		(#)		(#)		(#)		(#)		($/Sh)		($)

Michael Mendes		N/A			0		383,625		511,500		—		—		—		—		—		—


Gary Ford		N/A			0		144,375		192,500		—		—		—		—		—		—


Seth Halio		N/A			0		132,300		176,400		—		—		—		—		—		—


Sam Keiper		N/A			0		69,563		92,750		—		—		—		—		—		—


Andrew Burke		N/A			0		86,275		115,033		—		—		—		—		—		—
		3/15/07	(2)								—		—		—		15,000		15.83		10,603


(1)		Reflects potential payouts of amounts that could have been earned with respect to fiscal 2007 threshold, target and maximum levels under the Diamond Foods Annual Bonus Program. Targets for non-equity incentive plan awards are based on 75% of maximum, which has been our practice for senior executives. Actual amounts earned for fiscal 2007 have been reported in “Summary Compensation Table” as Non-Equity Incentive Plan Compensation, which provides actual payments made in December 2006. The “Maximum” amounts are based on percentages of salaries in effect as of December 2006, prorated to four months, and September 2007, prorated to eight months. The maximum bonus percentages of salary are: Chief Executive Officer — 100%; Chief Operating Officer — 70%; Chief Financial Officer — 70%; Vice President Corporate Affairs and Human Resources — 50%; Senior Vice President Marketing — 50%. Mr. Burke was promoted from Vice President, Marketing to Senior Vice President, Marketing in April 2007, and his maximum non-equity incentive plan award was increased from 45% of salary. Under the Annual Bonus Program, named executive officers could receive no payment if performance objectives are not met. Accordingly, the “Threshold” amounts are $0.

(2)		This stock option award was granted under the 2005 Equity Incentive Plan. The option incrementally vest as to one-third of the shares subject to the options on the first anniversary of grant and thereafter vest in monthly pro-rata increments over the following twenty-four months. The options have a maximum term of ten years subject to earlier termination upon cessation of service to Diamond. The exercise price of each option may be paid in cash or in shares of common stock valued at the closing price on the exercise date or may be paid with the proceeds from a same-day sale of the purchased shares. Amounts shown in this column represent the grant date fair value under FAS 123R of the stock options without giving effect to any forfeiture rate.

2007 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END


Option Awards													Stock Awards
(a)	(b)			(c)			(d)		(e)		(f)		(g)			(h)			(i)		(j)
																			Equity		Equity
							Equity												Incentive		Incentive
							Incentive									Market			Plan Awards:		Plan Awards:
							Plan Awards:									Value of			Number of		Market or
	Number of						Number of						Number of			Shares or			Unearned		Payout Value
	Securities			Number of			Securities						Shares or			Units of			Shares, Units		of Unearned
	Underlying			Securities			Underlying						Units of			Stock			or Other		Shares, Units or
	Unexercised			Underlying			Unexercised		Option				Stock That			That			Rights That		Other Rights
	Options (#)			Unexercised			Unearned		Exercise		Option		Have Not			Have Not			Have Not		That Have
	Exercisable			Options (#)			Options		Price		Expiration		Vested			Vested			Vested		Not Vested
Name	(1)			Unexercisable			(#)		($)		Date		(#)(2)			($)(3)			(#)		($)

Michael Mendes		168,888	(4)		84,445	(4)		—		17.00		7/20/15		84,444	(5)		1,387,415	(5)		—		—
		78,750	(6)		146,250	(6)		—		17.07		10/25/15		14,067	(8)		231,121	(8)		—		—
		21,096	(7)		42,192	(7)		—		21.00		1/10/16		—			—			—		—

Gary Ford		63,333	(4)		31,667	(4)		—		17.00		7/20/15		31,666	(5)		520,272	(5)		—		—
		5,972	(7)		11,943	(7)		—		21.00		1/10/16		3,978	(8)		65,359	(8)		—		—

Seth Halio		63,333	(4)		31,667	(4)		—		17.00		7/20/15		27,444	(5)		450,905	(5)		—		—
		5,450	(7)		10,899	(7)		—		21.00		1/10/16		3,636	(8)		59,739	(8)		—		—

Sam Keiper		21,111	(4)		10,556	(4)		—		17.00		7/20/15		10,555	(5)		173,419	(5)		—		—
		2,597	(7)		5,193	(7)		—		21.00		1/10/16		1,728	(8)		28,391	(8)		—		—

Andrew Burke		5,000	(9)		10,000	(9)		—		14.93		6/19/16		10,000	(10)		164,300	(10)		—		—
		0	(11)		15,000	(11)		—		15,83		3/14/17		—			—			—		—


(1)		All options set forth in the table have a ten-year term. The unvested portion of an option will expire prior to its stated expiration date in the event of the optionee’s termination of employment.

(2)		The shares set forth in column g are grants of restricted stock that vest subject to continued employment with Diamond.

(3)		The market value of the unvested restricted shares was computed using $16.43, which was the closing share price of Diamond stock on July 31, 2007.

(4)		These options were granted on July 20, 2005 in connection with Diamond’s initial public offering. One-third of the options vested on July 20, 2006, and the remaining options vest in eight equal installments each calendar quarter after July 20, 2006 such that the options will be fully vested on July 20, 2008.

(5)		These shares of restricted stock were granted on July 20, 2005 in connection with Diamond’s initial public offering. One-third of the restricted shares vested on July 20, 2006, an additional third vested on July 20, 2007 and the remaining restricted shares will vest on July 20, 2008.

(6)		From 2001 until October 2005, Mr. Mendes was the beneficiary of a Long Term Incentive Compensation program (“LTIC”), pursuant to which Diamond agreed to provide Mr. Mendes with annual cash benefits over a ten year period, with payments to begin as early as Mr. Mendes’ 50th birthday, under certain circumstances. To better align Mr. Mendes’ interests with those of our stockholders, on October 25, 2005, the Board approved terminating the LTIC and granted Mr. Mendes an option to purchase 225,000 shares of our common stock, which are the options reflected in the table above. The option vests over five years, with options to purchase 20% of the shares vesting on October 25, 2006, and the remainder vesting on a pro rata basis on each quarterly anniversary thereafter over the next four years. The option will be fully vested on October 25, 2010.

(7)		These options were granted on January 10, 2006. One-third of the options vested on January 10, 2007, and the remaining options vest in eight equal installments each calendar quarter after January 10, 2006 such that the options will be fully vested on January 10, 2009.

(8)		These shares of restricted stock were granted on January 10, 2006. One-third of the restricted shares vested on January 10, 2007, an addition third will vest on January 10, 2008, and the remaining restricted shares will vest on January 10, 2009.

(9)		These options were granted on June 19, 2006 in connection with commencement of Mr. Burke’s employment with Diamond. One-third of the options vested on June 19, 2007, and the remaining options vest in eight equal installments each calendar quarter after June 19, 2007 such that the options will be fully vested on June 19, 2009.

(10)		These shares of restricted stock were granted on June 19, 2006 in connection with commencement of Mr. Burke’s employment with Diamond. One-third of the restricted shares vested on June 19, 2007, an addition third will vest on June 19, 2008, and the remaining shares will vest on June 19, 2009.

(11)		These options were granted on March 14, 2007 in connection with commencement of Mr. Burke’s promotion from Vice President, Marketing to Senior Vice President, Marketing. One-third of the options will vest on March 14, 2008, and the remaining options will vest in eight equal installments each calendar quarter after March 14, 2008 such that the options will be fully vested on March 14, 2010.

2007 OPTION EXERCISES AND STOCK VESTED


	Option Awards				Stock Awards
(a)	(b)		(c)		(d)		(e)
	Number of Shares		Value Realized		Number of Shares		Value Realized on
	Acquired on Exercise		on Exercise		Acquired on Vesting		Vesting
Name	(#)		($)		(#) (1)		($)(2)
Michael Mendes		—		—		91,478		1,560,965
Gary Ford		—		—		33,656		574,037
Seth Halio		—		—		29,262		499,132
Sam Keiper		—		—		11,420		194,863
Andrew Burke		—		—		5,000		87,450


(1)		Represents shares of restricted stock that vested during fiscal 2007.

(2)		The market price used in determining the value realized was calculated using the closing share price on the date of vesting.

PENSION BENEFITS

Prior to November 17, 2006, we maintained the Diamond Foods, Inc. Pension Plan, which was a qualified defined benefit plan covering administrative employees including named executive officers. On November 17, 2006, we froze the pension plan such that all pension benefits ceased accruing on that date. Effective December 1, 2006, we terminated the pension plan. In connection with the termination of the plan, employees had the option of receiving a settlement of their accrued pension plan benefits by taking an immediate monthly life annuity or a lump sum equal to the actuarial equivalent of the accrued benefit. The lump sum amount was calculated using the required lump sum basis, including the average 30-year Treasury bond rate for the month two months prior to the month of distribution, and the mortality table published by the IRS in Revenue Ruling 2001-62. The lump sum value calculation included discounting with interest each future benefit payment over the employee’s expected lifetime.

We continue to maintain the Diamond Walnut Growers Retirement Restoration Plan, which provides unfunded, non-qualified benefits. Our Chief Executive Officer is the sole remaining participant in the plan. The rules governing eligibility under this plan are the same under the terminated Pension Plan, which required that an employee either complete 1,000 hours of service in the first twelve months of employment or complete 1,000 hours of service in any plan year (August 1 to July 31) beginning after the date of hire. Our Chief Executive Officer is eligible for participation under the Retirement Restoration Plan.

The normal retirement benefit provided under the Retirement Restoration Plan is payable as an annuity beginning at age 60. The benefit is the amount by which the monthly target benefit under the plan exceeds the monthly benefit paid under the Diamond Foods, Inc. Pension Plan. The target benefit under the Retirement Restoration Plan is the amount resulting from the formula below that produces the higher benefit:

	•		2% of the annual average compensation multiplied by years of credited service. Once this amount is calculated, subtract 1% multiplied by the social security benefit payable multiplied by the years of credited service (not to exceed 40 years).

	•		3% of the annual average compensation multiplied by years of credited service (not to exceed 15 years). Once this amount is calculated, add 1/2% of the annual average compensation multiplied by the years of credited service that exceed 15 years. Once this amount is added, subtract 3-1/3% of the social security benefit payable multiplied by the years of credited service (not to exceed 15 years).

For the purposes of these calculations, annual average compensation is the highest average of annual compensation over five consecutive years out of the ten years preceding the date of termination of employment. Compensation includes base salary and bonus.

The rules governing early retirement eligibility under the Retirement Restoration Plan are the same as were defined in the terminated Pension Plan:

	•		Early retirement is available on the first day of any month that coincides with or immediately follows the 50^th birthday, but not before reaching ten years of service with Diamond.

	•		Benefits may start at any time between age 50 and 60.

The amount of the early retirement benefit is the amount that would have otherwise been payable upon normal retirement beginning at age 60, minus 1/3% per month for each month early retirement precedes the age 60 normal retirement date.

The Retirement Restoration Plan allows the participant to choose from a number of methods to receive accrued benefits, which include the following:

•

Single life annuity— A single life annuity provides a monthly benefit until death. This option also includes an alternative allowing for 3% annual benefit increases for inflation protection (in which case the starting benefit is lower).

	•		Life annuity with 5 or 10 years certain— Under this form, the participant receives a monthly benefit for life. If death occurs before the end of the 5 or 10 years, the designated beneficiary will receive the same monthly benefit for the remainder of the 5 or 10 year period.

	•		Joint and survivor annuity— Under this form, the participant receives a monthly benefit paid for life. If the participant dies before their beneficiary, the beneficiary receives the selected percentage (50%, 66-²/₃%, 75%, or 100%) of that monthly benefit for the rest of his or her life. A 75% joint and survivor annuity is also available with 3% annual benefit increases for inflation protection (in which case the starting benefit is lower).

	•		Social Security adjustment option— Under this option, the single life annuity amount is adjusted to provide a higher benefit prior to age 65 and a lower benefit thereafter (anticipating that the participant might commence social security benefits at age 65).

	•		Immediate annuity— If a participant is not yet eligible for early retirement but their original hire date was before August 1, 2000, the participant is eligible to receive a reduced annuity payable immediately upon termination. If the participant is single, the benefit is paid in the “single life annuity” form of payment, described above, and if married, the benefit is paid as a “50% joint and survivor” annuity. This annuity is actuarially reduced to be payable at the age at termination.

	•		Lump sum payment— Under this form, the participant receives a single cash payment (lump sum) equal to the actuarial present value of the vested benefit. The lump sum amount is determined based on the required basis set forth in the General Agreement on Tariffs and Trade – Retirement Protection Act of 1994 (“GATT”), utilizing the average 30-year T-bond rate for the month two months prior to the month of distribution. The higher the interest rate, the lower the lump sum, and vice versa.

Determination of Value

The amounts shown are based on retirement at age 60, which is the earliest age at which an unreduced retirement benefit is payable under the Retirement Restoration Plan. Other key assumptions used to determine the amounts are as follows:

	•		An interest rate of 6.40%, the Statement of Financial Accounting Standards No. 87,Employers’ Accounting for Pensions(“SFAS 87”) discount rate as of July 31, 2007. The discount rate as of July 31, 2006 was 5.85%.

	•		The value of benefits under the SERP have been determined assuming the benefit is received as a lump sum, with the conversion based on a 6% interest rate (was 5.5% at July 31, 2006) and the unisex Revenue Ruling 2001-62 mortality table.

The table below shows for our Chief Executive Officer the number of years of credited service, present value of accumulated benefit and payments during the last fiscal year under the Retirement Restoration Plan. The years of credited service are years of service while employed by us, and no additional years of credited service have been granted.

2007 Pension Benefits


(a)	(b)	(c)	(d)	(e)
			Present Value of	Payments
		Number of Years	Accumulated	During Last
		Credited Service	Benefit	Fiscal Year
Name	Plan Name	(#)	($)	($)(1)

Michael Mendes	Retirement Restoration Plan	14.8	1,690,901	—

Michael Mendes	Diamond Foods, Inc. Pension Plan	—	—	253,367


(1)		In connection with the termination of the Diamond Foods, Inc. Pension Plan, employees had the option of receiving a settlement of their accrued pension plan benefits by taking an immediate monthly life annuity or a lump sum equal to the actuarial equivalent of the accrued benefit. The lump sum amount was calculated using the required lump sum basis, including the average 30-year Treasury bond rate for the month two months prior to the month of distribution, and the mortality table published by the IRS in Revenue Ruling 2001-62. The lump sum value calculation included discounting with interest each future benefit payment over the employee’s expected lifetime. Mr. Mendes elected to receive the lump sum amount, which is the value reflected in the table above.

Potential Payments upon Employment Termination and Change-of-Control Events

We have entered into change-of-control agreements with our executive officers. Under these agreements, if we sell all or substantially all of our assets, complete a merger after which our stockholders before the merger do not own more than 50% of the surviving or successor entity’s outstanding voting securities after the merger, or any person or entity acquires 50% or more of our outstanding voting securities, and then after such change of control the successor entity terminates the executive officer without cause (as defined below) or the executive officer terminates his employment for good reason (as defined below), then the vesting of the executive officer’s restricted stock and stock options will accelerate and the executive will become entitled to receive severance payments equal to a multiple of his current yearly salary and maximum bonus. The multiple is three times for Mr. Mendes, Mr. Ford and Mr. Keiper, two times for Mr. Halio and one time for Mr. Burke. In addition, if an executive officers elects to continue medical and/or dental coverage after termination, he will receive a monthly payment equal to the premium(s) for the coverage elected for himself and his dependents.

Under these agreements, the term “cause” means termination of employment due to the officer’s willful and continued failure to perform his or her duties to the Company or its successor after we (or our successor or the surviving entity) deliver a written demand for substantial performance to the officer provided that this demand specifically identifies how we (or our successor or the surviving entity) believe that the officer has not substantially performed his or her or her duties, or the officer’s conviction of or plea of guilty ornolo contendereto felony criminal conduct.

Under these agreements, the term “good reason” means in each case without the officer’s consent or waiver: a material diminution of the officer’s duties or authority with Diamond, or the assignment of duties and responsibilities inconsistent with his or her status at Diamond, as of the date of the change of control; a reduction in base salary or material reduction in benefits as of the date of the change in control without the express written consent of the officer; any breach by us of any of our material obligations under our agreements with the officer; or a reassignment that requires the officer to move his or her principal work location more than 50 miles.

In addition, in connection with commencement of his employment as Chief Executive Officer, we agreed to provide Mr. Mendes with termination benefits independent of a change of control transaction. If we terminate Mr. Mendes’ employment for any reason other than due to his willful breach of duty, habitual neglect of duty or continued incapacity to perform, he is entitled to continuation of his salary and health, dental and vision insurance benefits for up to 12 months, and we have agreed to provide him with up to $10,000 in outplacement services.

The tables below present estimated payments and benefits that would have been provided to each of our named executive officers assuming their respective terminations as of July 31, 2007 pursuant to their change of control agreements, with respect to all of the named executive officers, and pursuant to the employment letter agreement, with respect to Mr. Mendes. As a condition of receiving any severance benefits in connection with the change of control agreements, a named executive officer must execute a full waiver and release of all claims in our favor and agree to abide by certain covenants regarding confidentiality, non-solicitation of employees, non-interference with our business relationships and non-competition. In addition to the benefits described in the tables below, upon termination of employment the named executive officers may also be eligible for other benefits that are generally available to all salaried employees, such as life insurance, long-term disability, and 401(k) benefits.


	Michael Mendes		Gary Ford		Seth Halio		Sam Keiper		Andrew Burke
Termination after Change of Control:
Severance – Multiple of Base Salary and Maximum Annual Bonus Program Award	$	3,118,500	$	1,402,500	$	856,800	$	834,750	$	357,000
Post-termination COBRA reimbursement for 18 months		22,451		22,451		15,469		22,451		22,451


	Michael Mendes		Gary Ford		Seth Halio		Sam Keiper		Andrew Burke
Acceleration of unvested restricted stock as of July 31, 2007 (1)		1,618,536		585,631		510,644		201,810		164,300
Acceleration of unvested options as of July 31, 2007 (2)		—		—		—		—		24,000

Total		4,759,487		2,010,582		1,382,913		1,059,011		567,751

Voluntary Retirement:
Payment under Retirement Restoration Plan (3)		1,690,901		—		—		—		—

Involuntary Termination:
Post-termination outplacement services		10,000		—		—		—		—
Post-termination base salary, health and welfare benefit continuation (12 months) (4)		534,717		—		—		—		—

Total		544,717		—		—		—		—


(1)		Amounts shown represent acceleration of vesting triggered by termination event after a change of control based on $16.43 per share, which was the closing price of our stock on July 31, 2007.

(2)		Amounts shown represent acceleration of vesting triggered by termination event after a change of control based on $16.43 per share, which was the closing price of Diamond’s stock on July 31, 2007. The exercise prices of unvested options for Mr. Mendes, Mr. Ford, Mr. Halio and Mr. Keiper exceeded $16.43.

(3)		Amounts reflect estimated lump-sum present value of non-qualified retirement plan benefits.

(4)		Amounts reflect 12 months of base salary and COBRA reimbursements as of July 31, 2007.

DIRECTOR COMPENSATION

The following table shows the compensation earned in fiscal 2007 by members of our Board of Directors:


	Fees Earned or
	Paid in Cash		Stock Awards		Option Awards		Total
Name	($) (1)		($) (2)		($) (3)		($)
(a)	(b)		(c)		(d)		(h)
Larry Baer		32,500		39,993		49,823		122,316
Jack Gilbert		37,000		39,993		49,823		126,816
Bob Lea		32,000		39,993		49,823		122,316
Dennis Mussell		34,500		39,993		49,823		124,316
Steve Neil		37,500		39,993		49,823		127,316
Joe Silveira		34,000		39,993		49,823		123,816
Glen Warren		31,000		39,993		49,823		120,816
Bob Zollars		35,000		39,993		49,823		124,816


(1)		Our non-employee directors receive annual retainer and meeting fees. The annual retainer is $18,000 and meeting fees are $2,000 for each board meeting attended. In addition, the chairman of the Board of Directors and the chairman of the audit committee each receive an additional annual retainer of $5,000, while the compensation committee chair and nominating and governance committee chair each receive an additional annual retainer of $2,500. Committee members receive a meeting fees of $500 for each board committee meeting attended. All of our directors are reimbursed for their reasonable expenses in attending board and board committee meetings.

(2)		Upon their initial appointment or election to our Board of Directors, each non-employee director receives an automatic grant of restricted stock under our 2005 Equity Incentive Plan. The number of shares is equal to $120,000 divided by the closing price of our stock on the date of grant. Each such automatic stock grant is restricted, meaning that we retain the right to repurchase the shares for the nominal purchase price until they are vested. The restricted shares vests in three equal annual installments, commencing with the first anniversary of the date of grant, provided the director remains in continuous service as a director through that date. Prior to vesting, the director is entitled to vote and receive dividends with respect to such shares, but not to transfer them. Each award will become fully vested if we are acquired prior to or at the time of the director’s termination of service. The amounts shown in this column represent compensation expense recognized for financial reporting purposes during fiscal 2007 in accordance with SFAS 123R related to the awards of restricted shares granted in fiscal 2005. Additional information regarding our SFAS 123R assumptions can be found in “Note 3 of the Notes to Consolidated Financial Statements” on page 33.

(3)		Under our 2005 Equity Incentive Plan, each non-employee director receives an automatic grant of an option to purchase 10,000 shares of our common stock upon first joining the Board of Directors. The option will have an exercise price equal to the fair market value on the date of grant. Non-employee directors who were members of the board on the date of our initial public offering on July 20, 2005, received their initial, automatic grant on such date, with an exercise price equal to our initial public offering price of $17.00 per share.

		Our 2005 Equity Incentive Plan also provides that each non-employee director will receive an automatic grant of an option to purchase 10,000 shares of our common stock on each anniversary of the date of grant of the initial option. Accordingly, on July 20, 2007, each non-employee director received this automatic grant with an exercise price equal to $17.03 per share, which was the closing price of our stock on such date. These automatic option grants have ten-year terms and will terminate six months following the date the director ceases to be one of our directors or consultants or 12 months following that date, if the termination is due to death or disability. Each automatic grant of options vests and becomes exercisable on the one-year anniversary of the date of grant, provided the director remains in continuous service as a director through that date. In addition, each option award will become fully vested and exercisable if we are acquired prior to or at the time of the director’s termination of service.

		The amounts shown in this column represent compensation expense recognized for financial reporting purposes during fiscal 2007 in accordance with SFAS 123R related to options to purchase common stock granted in fiscal years 2006 and 2007. Additional information regarding our SFAS 123R assumptions can be found in “Note 3 of the Notes to Consolidated Financial Statements” on page 33.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee currently consists of Laurence Baer, Glen Warren and Robert Zollars, none of whom has any interlocking relationships as defined by the Securities and Exchange Commission.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

The following table sets forth information as of July 31, 2007 regarding equity awards under our 2005 Equity Incentive Plan and 2005 Employee Stock Purchase Plan:

Equity Compensation Plan Information Table

(a)

(b)

(c)

Weighted

Number of securities

average exercise

available for future

to be issued upon

price of

issuance under equity

exercise of

outstanding

compensation plans

outstanding options,

options, warrants

(excluding securities

warrants and rights

and rights

reflected in column (a))

Equity compensation plans approved by security holders

1,621,170

17.37

948,936

(1)

Equity compensation plans not approved by security holders

—

Total

1,621,170

17.37

948,936

(1)


(1)		Of these shares, 445,072 shares remain available for purchase under our 2005 Employee Stock Purchase Plan and 503,864 shares remain available for purchase under our 2005 Equity Incentive Plan. All of the shares available for grant under the 2005 Equity Incentive Plan may be issued in the form of stock options, restricted stock, stock bonuses, stock appreciation rights or restricted stock units. Under the terms of our 2005 Equity Incentive Plan, on the first business day of each of the fiscal years 2006 through 2014, the aggregate number of shares reserved and available for grant and issuance pursuant to the plan is automatically increased by a number of shares equal to 2% of the total outstanding shares as of the immediately preceding July 31, or a lesser number of shares determined by our Board of Directors, provided that no more than 25,000,000 shares may be issued pursuant to the exercise of incentive stock options. Under the terms of our 2005 Employee Stock Purchase Plan, beginning in fiscal 2007, on the first business day of each fiscal year the aggregate number of shares reserved for issuance under the plan is automatically increased by a number of shares equal to 1% of the total outstanding shares as of the last day of the immediately preceding fiscal year, or a lesser number of shares determined by our Board of Directors, provided that the aggregate number of shares issued over the term of the plan shall not exceed 4,000,000 shares.

STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

The following table presents certain information regarding the beneficial ownership of our common stock as of November 14, 2007 by each of our directors, each of our named executive officers, all of our directors and executive officers as a group and each stockholder known to us owning more than 5% of our common stock.

The percentage of beneficial ownership for the table is based on 16,110,070 shares of our common stock outstanding as of November 14, 2007. To our knowledge, except under community property laws or as otherwise noted, the persons and entities named in the table have sole voting and sole investment power over their shares of our common stock.

The number of shares beneficially owned by each stockholder is determined under the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, beneficial ownership includes those shares over which the stockholder has or shares voting or investment control and includes those shares that the stockholder has the right to acquire within 60 days after November 14, 2007 through the exercise of any stock option. The “Percentage of Common Stock” column treats as outstanding all shares underlying such options held by the stockholder, but not shares underlying options held by other stockholders.


	Number of Shares		% of
Name of Beneficial Owner	of Common Stock		Common Stock (1)
Directors and Officers:
Michael J. Mendes (2)		655,757		4.0	%
Gary K. Ford (3)		206,436		1.3
Seth Halio (4)		162,402		1.0
John J. Gilbert (5)(6)		101,426		*
Joseph P. Silveira (5)(7)		60,455		*
Samuel J. Keiper (8)		63,615		*
Andrew Burke (9)		37,351		*
Robert M. Lea (5)		49,336		*
Laurence M. Baer (5)		24,558		*
Dennis Mussell (5)		24,558		*
Steven M. Neil (5)		24,558		*
Glen C. Warren, Jr. (5)		34,558		*
Robert J. Zollars (5)		24,558		*
All 12 current directors and executive officers as a group (2) – (9)		1,469,568		8.8	%
Other 5% Stockholders:
KDI Capital Partners, LLC (10)		878,527		5.5	%
Vardon Capital Management, LLC (11)		1,103,883		6.9	%
Massachusetts Financial Services Company (12)		957,572		5.9	%
FMR Corp. (13)		1,830,299		11.4	%


*		Less than one percent.

(1)		Percentage is based on 16,110, 070 shares of common stock outstanding as of November 14, 2007.

(2)		Includes 171,651 shares that may be acquired upon exercise of stock options. Also includes 14,654 shares purchased by Mr. Mendes in the open market for an aggregate purchase price of $248,760.

(3)		Pursuant to Rule 13d-3(d)(1) of the Exchange Act, includes 45,555 shares subject to stock options exercisable in the next 60 days.

(4)		Includes 45,033 shares that may be acquired upon exercise of stock options.

(5)		Includes 4,167 shares that may be acquired upon exercise of stock options.

(6)		Includes 42,833 shares in the name of Gilbert Orchards and 20,076 shares in the name of Rio Oso Groves, Inc. Mr. Gilbert is an owner and executive officer of Rio Oso Groves, Inc. and Gilbert Orchards. Mr. Gilbert has sole voting and dispositive control over the shares owned by Rio Oso Groves, Inc. Mr. Gilbert and William H. Gilbert have shared voting and dispositive control over the shares owned by Gilbert Orchards. Also includes 11,144 shares in the name of The John and Sandra Gilbert Trust DTD 3/6/2000. Mr. Gilbert is a co-trustee of the trust.

(7)		Includes 25,548 shares in the name of John Hancock Life Insurance Company, 1,047 shares in the name of John Hancock Variable Life Insurance Company, 3,561 shares in the name of Texas Municipal Plans Consortium and 2,913 shares in the name of Goose Pond Ag. Inc. Mr. Silveira provides farm management services for each of these entities. Mr. Silveira disclaims beneficial ownership of these shares. Also includes 2,828 shares owned by Mr. Silveira directly.

(8)		Includes 15,791 shares that may be acquired upon exercise of stock options.

(9)		Includes 7,500 shares that may be acquired upon exercise of stock options


(10)		We obtained this ownership information for KDI Capital Partners, L.L.C. et al. (“KDI”) from a Schedule 13G filed with the SEC by KDI and certain individuals who are partners in KDI, reporting ownership as of July 23, 2007. KDI and its partners share voting power as to 874,733 shares and dispositive power as to 876,777 shares. The address of KDI is 5151 Glenwood Avenue, Raleigh, North Carolina 27612.

(11)		We obtained this ownership information for Vardon Capital Management, LLC (“Vardon”) from a Schedule 13G filed with the SEC reporting ownership as of December 29, 2006. Vardon and its partners share voting and dispositive power over 1,103,883 shares. The address of Vardon is 120 W. 45^th Street, 17^th Floor, New York, New York 10036.

(12)		We obtained this ownership information for Massachusetts Financial Services Company (“MFS”) from a Schedule 13G filed with the SEC reporting ownership as of December 31, 2006. MFS has sole voting and dispositive power over 957,572 shares. The address of MFS is 500 Boylston Street, Boston, Massachusetts, 02116.

(13)		We obtained this ownership information for FMR Corp. (“FMR”) from a Schedule 13G filed with the SEC reporting ownership as of December 31, 2006. FMR has sole voting power over 553,210 shares and sole dispositive power over 1,830,299 shares. The address of FMR is 82 Devonshire Street, Boston, Massachusetts, 02109.

Item 13. Certain Relationships and Related Transactions, and Director Independence

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Any related party transactions must be reviewed and approved by the audit committee or another independent body of the Board of Directors in accordance with the written Audit Committee Charter.

Other than the employment and severance agreements described in “Corporate Governance and Board of Directors Matters – Director Compensation,” “Executive Compensation” and the transactions described below, since August 1, 2006 there has not been, and there currently is not proposed, any transaction or series of similar transactions to which we were or will be a party:

•

in which the amount involved exceeded or exceeds $120,000; and

•

in which any director, executive officer, holder of more than 5% of any class of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

Grower Payments

We have paid each member of our Board of Directors who is currently a grower from whom we purchase walnuts, or an affiliate of a such a grower, for walnut products we received from them in the ordinary course of our business. The following table shows the payments received by the directors who also sold walnuts to us in fiscal 2007 and fiscal 2008 through November 15, 2007:


	Fiscal		Grower
Name	Year		Payments
John J. Gilbert(1)		2008	$	1,456,127
		2007	$	1,935,591
Robert M. Lea		2008	$	530,662
		2007	$	519,745


(1)		Represents amounts paid to Rio Oso Groves, Inc., of which Mr. Gilbert is an owner and executive officer, and to Gilbert Orchards, a corporation of which Mr. Gilbert is an owner and executive officer.

Indemnification of Directors and Executive Officers and Limitation of Liability

Our certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages resulting from breach of fiduciary duty as directors, except for liability:

•

for any breach of the director’s duty of loyalty to our company or our stockholders;

	•		for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

	•		under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or

	•		for any transaction from which the director derived an improper personal benefit.

Our bylaws provide that we:

	•		must indemnify its directors and executive officers to the fullest extent permitted by Delaware law, subject to limited exceptions;

	•		may indemnify our other employees and agents to the same extent that we indemnified our directors and executive officers, unless otherwise required by law, our certificate of incorporation, bylaws or agreements; and

	•		must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to limited exceptions.

We have entered into indemnification agreements with each of our directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification provided in our certificate of incorporation and bylaws and to provide additional procedural protections. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

We maintain liability insurance for our directors and officers and have obtained a rider to this coverage for securities matters.

Item 14. Principal Accounting Fees and Services

Audit Fees

The following table presents information regarding the fees estimated and billed by Deloitte & Touche LLP and affiliated entities (collectively, “Deloitte & Touche”) for the 2007 and 2006 fiscal years.


	For the year ended July 31,
	(in thousands)
Nature of Services	2007		2006
Audit Fees	$	902	$	1,197
Audit-Related Fees		—		—
Tax Fees		14		12
All Other Fees		—		—

Total Fees	$	916	$	1,209

Audit Fees. This category includes services provided in connection with the audit of our annual, consolidated financial statements, the review of our unaudited, quarterly consolidated financial statements, and review of our periodic and current reports filed with the securities exchange commission. For fiscal 2007 and 2006, Audit Fees also includes fees for Deloitte & Touche’s evaluation of the internal controls over our financial reporting and audit activities associated with an acquisition of assets.

Audit-Related Fees. We did not incur anyAudit-Related Feesduring fiscal 2007 or fiscal 2006.

Tax Fees. This category consists of tax compliance, tax planning, tax return preparation and tax advice with respect to our operations in Europe.

All Other Fees. We did not incur anyOther Feesduring fiscal 2007 or fiscal 2006.

Audit Committee Pre-Approval Policies and Procedures

Our audit committee charter provides that the audit committee will approve the fees and other significant compensation to be paid to our independent auditors, and pre-approve all audit services and all non-audit services of independent auditors permitted under applicable law. The charter also provides that the audit committee may establish other pre-approval policies and procedures for the engagement of independent auditors to render services to us, including without limitation policies that would allow the delegation of pre-approval authority to one or more members of the audit committee, provided that any pre-approval decision is reported to the audit committee at its next scheduled meeting. The audit committee and the Board of Directors has delegated pre-approval authority for up to $25,000 in expenses to the chairman of the audit committee. The chairman or the audit committee has approved all Audit and Tax Fees. All fees listed above paid to our independent auditors during fiscal 2006 and 2007 was for work performed by the independent auditors’ full-time, permanent employees.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as part of this report:

1. Financial Statements.

(a) Report of Independent Registered Public Accounting Firm

(b) Consolidated Balance Sheets at July 31, 2007 and 2006

(d) Consolidated Statements of Stockholders’/Members’ Equity for the years ended July 31, 2007, 2006 and 2005

(e) Consolidated Statements of Cash Flows for the years ended July 31, 2007, 2006 and 2005

(f) Notes to the Consolidated Financial Statements

2. Financial Statement Schedules.

All schedules are omitted because the required information is included with the Consolidated Financial Statements.

3. Exhibits.

The following exhibits are filed as part of this report or are incorporated by reference to exhibits previously filed with the SEC.


		Filed with	Incorporated by Reference
Number	Exhibit Title	This 10-K	Form	File No.	Date Filed
2.01	Form of Amended and Restated Agreement and Plan of Conversion		Form S-1	333-123576	July 18, 2005

2.02	Asset Purchase and Sale Agreement, dated May 9, 2006, by and among Diamond Foods, Inc., GSH Holdings, Inc., Harmony Foods Corporation and SPC Partners II, L.P.		Form 8-K/A	000-51439	September 8, 2006

3.01	Certificate of Incorporation, as amended		Form S-1	333-123576	July 15, 2005


		Filed with	Incorporated by Reference
Number	Exhibit Title	This 10-K	Form	File No.	Date Filed
3.02	Restated Bylaws		Form S-1	333-123576	March 25, 2005

4.01	Form of Certificate for common stock		Form S-1	333-123576	July 18, 2005

10.01	Form of Indemnity Agreement between Registrant and each of its directors and executive officers		Form S-1	333-123576	March 25, 2005

10.02*	2005 Equity Incentive Plan and forms of stock option agreement, stock option exercise agreement and restricted stock purchase agreement		Form S-1	333-123576	March 25, 2005

10.03*	2005 Employee Stock Purchase Plan and form of subscription agreement		Form S-1	333-123576	March 25, 2005

10.04*	Diamond Walnut Growers, Inc. 401(k) Plan		Form S-1	333-123576	March 25, 2005

10.05*	Diamond Foods, Inc. Annual Bonus Program		Form 8-K	000-51439	October 25, 2005

10.06*	Diamond Walnut Growers, Inc. Retirement Restoration Plan		Form S-1	333-123576	March 25, 2005

10.07*	Diamond of California Management Pension Plan		Form S-1	333-123576	March 25, 2005

10.08	Diamond Walnut Growers, Inc. Pension Plan, as restated		Form S-1	333-123576	March 25, 2005

10.09*	Employment Agreement, dated March 25, 1997, between Registrant and Michael J. Mendes		Form S-1	333-123576	March 25, 2005

10.10*	Description of Compensation Arrangement for Gary K. Ford		Form S-1	333-123576	March 25, 2005

10.11*	Offer Letter, dated October 11, 2004, for Seth Halio		Form S-1	333-123576	March 25, 2005

10.12*	Description of Compensation Arrangement for Samuel J. Keiper		Form S-1	333-123576	March 25, 2005

10.13*	Description of Director Compensation Arrangements		Form S-1	333-123576	March 25, 2005

10.14	Preferred Securities Purchase Agreement and accompanying agreements, dated August 20, 1998, between Registrant, DW Capital Trust I and The Prudential Insurance Company of America, as amended		Form S-1	333-123576	March 25, 2005

10.15	Note Purchase Agreement, dated July 17, 2001, between Registrant, Teachers Insurance and Annuity Association of America and Connecticut General Life Insurance Company, as amended		Form S-1	333-123576	March 25, 2005

10.16	Intercreditor Agreement, dated September 11, 2002, between Bank of the West and CoBank, ACB		Form S-1	333-123576	March 25, 2005

10.17	Master Loan Agreement, dated February 23, 2004, between Registrant and CoBank, ACB, as amended		Form S-1	333-123576	March 25, 2005

10.18	Credit Agreement, dated December 2, 2004, between Registrant and Bank of the West		Form S-1	333-123576	March 25, 2005

10.19	Form of Walnut Purchase Agreement		Form S-1	333-123576	May 3, 2005

10.20	Trademark Agreement, dated July 1, 2002, between Registrant and Blue Diamond Growers		Form S-1	333-123576	March 25, 2005

10.21	Rights Agreement, dated as of April 29, 2005, by and between Registrant and EquiServe Trust Company, N.A		Form S-1	333-123576	May 3, 2005

10.22	Second Amendment to Note Purchase Agreement, dated April 8, 2005, between Registrant, Teachers Insurance and Annuity Association of America and Pru & Co.		Form S-1	333-123576	May 3, 2005

10.23	Consent of Bank of the West, dated March 17, 2005, relating to Credit Agreement, dated December 2, 2004, between Registrant and Bank of the West		Form S-1	333-123576	May 3, 2005

10.24*	Form of Change of Control and Retention Agreement between Registrant and each of its executive officers		Form S-1	333-123576	May 3, 2005


		Filed with	Incorporated by Reference
Number	Exhibit Title	This 10-K	Form	File No.	Date Filed
10.25	Waiver regarding 7.20% Cumulative Recourse Offered Preferred Securities, dated as of June 1, 2005, by Wilmington Trust Co., as Property Trustee and Delaware Trustee of the DW Capital Trust I, The Prudential Insurance Company of America and Diamond Walnut Growers, Inc.		Form S-1	333-123576	July 15, 2005

10.26	Amendment of Credit Agreement dated December 2, 2004 between Registrant and Bank of the West		Form 8-K	000-51439	September 8, 2006

10.27	Amendment to Diamond Foods, Inc. Pension Plan		Form 8-K	000-51439	September 20, 2006

10.28*	Form of Tax Withholding Agreement		Form 8-K	000-51439	July 20, 2007

10.29	Amended Supplements to Master Loan Agreement between Diamond Foods, Inc. and CoBank, ACB		Form 8-K	000-51439	March 16, 2007

10.30	Amendment to Master Loan Agreement, dated as of March 19, 2007, between Diamond Foods, Inc. and CoBank, ACB		Form 8-K	000-51439	March 16, 2007

10.31	Third Amendment to Credit Agreement, dated as of March 19, 2007, between Diamond Foods, Inc. and Bank of the West		Form 8-K	000-51439	March 16, 2007

10.32	Third Amendment to Note Purchase Agreement, dated as of March 19, 2007 between Diamond Foods, Inc. on the one hand, and Teachers Insurance and Annuity Association of America and Pru & Co. on the other hand.		Form 8-K	000-51439	March 16, 2007

10.33*	Form of Stock Withholding Agreement		Form 8-K	000-51439	January 10, 2007

21.01	List of Subsidiaries		Form S-1	333-123576	March 25, 2005

23.01	Consent of Independent Registered Public Accounting Firm	X

23.02	Consent of Curcio Webb	X

31.01	Certification of Chief Executive Officer	X

31.02	Certification of Chief Financial Officer	X

32.01	Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer	X


*		Indicates management contract or compensatory plan or arrangement

All other schedules, which are included in the applicable accounting regulations of the Securities and Exchange Commission, are not required here because they are not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to the annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.


		DIAMOND FOODS, INC.
	By:	/s/ Seth Halio
		Seth Halio
		Chief Financial Officer

Date: November 28, 2007

EXHIBIT INDEX


Exhibit
Number		Exhibit Description
23.01		Consent of Independent Registered Public Accounting Firm
23.02		Consent of Curcio Webb
31.01		Certification of Chief Executive Officer
31.02		Certification of Chief Financial Officer
32.01		Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

Diamond Foods (DMND) Inactive 10-K/A2007 FY Annual report (amended)