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PART I

NOTE REGARDING DOLLAR AMOUNTS

In this annual report, all amounts related to U.S. and foreign currency and to the number of Nordson Corporation’s Common Shares, except for per share earnings and dividend amounts, are expressed in thousands.

Item 1. Business

General Description of Business

Nordson products are used around the world in the appliance, automotive, bookbinding, container, converting, electronics, food and beverage, furniture, life sciences, medical, metal finishing, nonwovens, packaging, semiconductor and other diverse industries.

The company’s strategy for long-term growth is based on a customer-driven focus that is global in scope. Reaching out from its corporate headquarters in Westlake, Ohio, Nordson markets its products through a network of direct operations in 30 countries. Consistent with this strategy, approximately two-thirds of the Company’s revenues are generated outside the United States.

Nordson has more than 3,800 employees worldwide, including employees added as a result of the acquisition of Dage Holdings Limited in fiscal 2007. Principal manufacturing facilities are located in Alabama, California, Florida, Georgia, Ohio, Pennsylvania and Rhode Island in the United States, as well as in China, Germany, India, The Netherlands and the United Kingdom.

Corporate Purpose and Goals

Nordson operates for the purpose of creating balanced, long-term benefits for all of our constituencies: customers, employees, shareholders and communities.

Our corporate goal for growth is to double the value of the Company over a five-year period, with the primary measure of value set by the market for the Company’s Common Shares.

While external factors may impact value, the achievement of this goal will rest with earnings growth, capital and human resource efficiency and positioning for the future.

Nordson does not expect every quarter to produce increased sales, earnings and earnings per share, or to exceed the comparative prior year’s quarter. We do expect to produce long-term gains. When short-term swings occur, we do not intend to alter our basic objectives in efforts to mitigate the impact of these natural occurrences.

Growth is achieved by seizing opportunities with existing products and markets, investing in systems to maximize productivity and pursuing growth markets. This strategy is augmented through product line additions, engineering, research and development, and acquisition of companies that can serve multinational industrial markets.

We create benefits for our customers through a Package of Values^®, which includes carefully engineered, durable products; strong service support; the backing of a well-established worldwide company with financial and technical strengths; and a corporate commitment to deliver what was promised.

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We strive to provide genuine customer satisfaction; it is the foundation upon which we continue to build our business.

Complementing our business strategy is the objective to provide opportunities for employee self-fulfillment, growth, security, recognition and equitable compensation. This goal is met through Human Resources’ facilitation of employee training and leadership training and the creation of on-the-job growth opportunities. The result is a highly qualified and professional management team capable of meeting corporate objectives.

We recognize the value of employee participation in the planning process. Strategic and operating plans are developed by all business units and divisions, resulting in a sense of ownership and commitment on the part of employees in accomplishing Company objectives.

Nordson Corporation is an equal opportunity employer.

Nordson is committed to contributing an average of 5 percent of domestic pretax earnings to human services, education and other charitable activities, particularly in communities where the Company has major facilities.

Financial Information About Operating Segments, Foreign and Domestic Operations and Export Sales

Principal Products and Uses

Nordson markets its products in the United States and 57 other countries, primarily through a direct sales force and also through qualified distributors and sales representatives. Nordson has built a worldwide reputation for its creativity and expertise in the design and engineering of high-technology application equipment that meets the specific needs of its customers.

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The following is a summary of the products produced and markets served by the Company’s various businesses:

1. Adhesive Dispensing Systems

2. Advanced Technology Systems

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Manufacturing and Raw Materials

Principal materials used to make Nordson products are metals and plastics, typically in sheets, bar stock, castings, forgings and tubing. Nordson also purchases many electrical and electronic components, fabricated metal parts, high-pressure fluid hoses, packings, seals and other items integral to its products. Suppliers are competitively selected based on cost, quality and service. All significant raw materials that Nordson uses are available through multiple sources.

Nordson’s senior operating executives supervise an extensive quality control program for Nordson equipment, machinery and systems.

Natural gas and other fuels are primary energy sources for Nordson. However, standby capacity for alternative sources is available if needed.

Intellectual Property

Seasonal Variation in Business

Working Capital Practices

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Customers

Backlog

Government Contracts

Competitive Conditions

Many factors influence the Company’s competitive position, including pricing, product quality and service. Nordson enjoys a leadership position in the competitive industrial application systems business by delivering high-quality, innovative products and technologies, as well as after-the-sale service and technical support. Working with customers to understand their processes and developing the application solutions that help them meet their production requirements also contributes to Nordson’s leadership position. Nordson’s worldwide network of direct sales and technical resources also is a competitive advantage.

Research and Development

Environmental Compliance

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We believe that we operate in compliance, in all material respects, with applicable environmental laws and regulations. Compliance with environmental laws and regulations requires continuing management effort and expenditures. We have incurred, and will continue to incur, costs and capital expenditures to comply with these laws and regulations and to obtain and maintain the necessary permits and licenses. We believe that the cost of complying with environmental laws and regulations will not have a material affect on our earnings, liquidity or competitive position, but we cannot assure that material compliance-related costs and expenses may not arise in the future. For example, future adoption of new or amended environmental laws, regulations or requirements or newly discovered contamination or other circumstances that require a response on our part may require us to incur costs and expenses that we cannot presently anticipate.

We believe that we have properly designed our policies, practices and procedures to prevent unreasonable risk of material environmental damage arising from our operations. We accrue for estimated environmental liabilities with charges to expense. We believe our environmental accrual is adequate to provide for our portion of the costs of all such known environmental liabilities. Except for the disclosure in Item 3, Legal Proceedings, compliance with federal, state and local environmental protection laws during fiscal 2006 had no material effect on the Company’s capital expenditures, earnings or competitive position. Based upon consideration of currently available information, we believe liabilities for environmental matters will not have a material adverse affect on our financial position, operating results or liquidity, but we cannot assure that material environmental liabilities may not arise in the future.

Employees

Available Information

Item 1A. Risk Factors

In an enterprise as diverse and complex as Nordson’s, a wide range of factors could affect future performance. We discuss in this section some of the risk factors that, if they actually occurred, could materially and adversely affect the Company’s business, financial condition, value and results of operations. You should consider these risk factors in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results and financial condition to differ materially from those projected in forward-looking statements. The risks that we highlight below are not the only ones that we face. Additional risks and uncertainties that the Company does not presently know about or that the Company currently believes will be immaterial may also affect the Company’s business.

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The inability to continue to develop new products could limit the Company’s revenue and profitability.

Our growth strategy includes acquisitions, and we may not be able to make acquisitions of suitable candidates or integrate acquisitions successfully.

The success of any acquisition is subject to other risks and uncertainties, including:

In addition, an acquisition could adversely impact the Company’s results of operations by causing the Company to incur debt or requiring the amortization of acquisition expenses and acquired assets.

We may also face liability with respect to acquired businesses for violations under environmental laws occurring prior to the date of our acquisition, and some or all of these liabilities may not be covered by environmental insurance secured to mitigate the risk or by indemnification from the sellers from which we acquired these businesses. We could incur significant costs, including cleanup costs, natural resources damages, civil or criminal fines and sanctions and third-party claims, as a result of past or future violations of, or liabilities under, environmental laws.

Significant movements in foreign currency exchange rates or change in monetary policy may harm our financial results.

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The majority of our consolidated revenues in 2006 were generated in currencies other than the U.S. dollar, which is our reporting currency. We recognize foreign currency transaction gains and losses arising from our operations in the period incurred. As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business have caused and will continue to cause foreign currency transaction gains and losses, which historically have been material and could continue to be material. We cannot predict the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. We take actions to manage our foreign currency exposure, such as entering into hedging transactions, where available, but we cannot assure that our strategies will adequately protect our consolidated operating results from the effects of exchange rate fluctuations.

We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations diminish the value of funds denominated in the currency of the country instituting the devaluation and, if they occur or continue for significant periods, could adversely affect our earnings or cash flow.

Inability to access capital could impede growth.

Our existing credit facilities contain restrictive covenants that limit our ability to, among other things:

In addition, our credit facilities require us to meet financial ratios, including debt to consolidated EBITDA (as defined in the credit facility) and consolidated EBITDA (as defined in the credit facility) to interest expense.

These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs and could otherwise restrict our financing activities.

Our ability to comply with the covenants and other terms of our credit facilities will depend on our future operating performance. If we fail to comply with such covenants and terms, we will be in default and the maturity of the related debt could be accelerated and become immediately due and payable. We may be required to obtain waivers from our lenders in order to maintain compliance under our credit facilities, including waivers with respect to our compliance with certain financial covenants. If we are unable to obtain any necessary waivers and the debt under our credit facilities is accelerated, our financial condition would be adversely affected.

We may need new or additional financing in the future to expand our business or refinance existing indebtedness. If we are unable to access capital on satisfactory terms and conditions, we may not be able to expand our business or meet our payment requirements under our existing credit facilities. Our ability to obtain new or additional financing will depend on a variety of factors, many of which are beyond our control. We may not be able to obtain new or additional financing because we have substantial debt or because we may not have sufficient cash flow to service or repay our existing or future debt. In addition, depending on market conditions and our financial performance, equity financing may not be available on satisfactory terms or at all.

We could be adversely affected if our debt is downgraded.

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We could be adversely affected by rapid changes in interest rates.

Our inability to protect our intellectual property rights could adversely affect product sales and financial performance.

Litigation has been and may continue to be necessary to enforce the Company’s intellectual property rights, to protect the Company’s trade secrets and to determine the validity and scope of the Company’s proprietary rights. In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If litigation that we initiate is unsuccessful, we may not be able to protect the value of some of our intellectual property. In the event a claim of infringement against us is successful, we may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that we have been using or we may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable time. If we are unable to obtain licenses on reasonable terms, we may be forced to cease selling or using any of our products that incorporate the challenged intellectual property, or to redesign or, in the case of trademark claims, rename our products to avoid infringing the intellectual property rights of third parties, which may not be possible and, if possible, may be time consuming. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and diversions of some of our resources. Our intellectual property rights may not have the value we believe them to have, which could result in a competitive disadvantage or adversely affect our business and financial performance.

This Form 10-K, particularly “Management’s Discussion and Analysis,” contains forward-looking statements within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, income, earnings, cash flows, changes in operations, operating improvements, businesses in which Nordson Corporation operates and the U.S. and global economies. Statements in this 10-K that are not historical are hereby identified as “forward-looking statements” and may be indicated by words or phrases such as “anticipates,” “supports,” “plans,” “projects,” “expects,” “believes,” “should,” “would,” “could,” “hope,” “forecast,” “management is of the opinion,” use of the future tense and similar words or phrases.

In light of these risks and uncertainties, actual events and results may vary significantly from those included in or contemplated or implied by such statements. Readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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The Company may, from time to time, post financial or other information on its Web site, http://www.nordson.com/ Investors/. The Internet address is for informational purposes only and is not intended for use as a hyperlink. The Company is not incorporating any material on its Web site into this Report.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

The following table summarizes the Company’s principal properties as of its fiscal 2006 year end.

Business Segment — Property Identification Legend

The facilities listed above have adequate, suitable and sufficient capacity (production and nonproduction) to meet present and foreseeable demand for the Company’s products.

Other properties at international subsidiary locations and at branch locations within the United States are leased. Lease terms do not exceed 25 years and generally contain a provision for cancellation with some penalty at an earlier date.

In addition, the Company leases equipment under various operating and capitalized leases. Information about leases is reported in Note 8 of Notes to Consolidated Financial Statements that can be found in Part II, Item 8 of this document.

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Item 3. Legal Proceedings

Environmental — The Company has voluntarily agreed with the City of New Richmond, Wisconsin, and other Potentially Responsible Parties (“PRP”) to share costs associated with (1) a feasibility study and remedial investigation (“FS/ RI”) for remediation of the City of New Richmond municipal landfill (the “Site”) and (2) providing clean drinking water to the affected residential properties down gradient of the Site. The PRP group has agreed to an allocation that sets the Company’s share of the cost of remediation at 56.35 percent. The Company has committed and paid $943 towards completing the FS/ RI phase of the project.

The FS/ RI was completed and submitted to the Wisconsin Department of Natural Resources (“WDNR”) in July 2006. The total cost of the Company’s share for remediation efforts (Site and clean drinking water) will not be ascertainable until a remediation plan is approved by the WDNR. Approval is not anticipated to occur before the second quarter of fiscal 2007. However, based upon the range of viable alternatives for Site remediation and providing clean drinking water to residences down gradient of the Site submitted as part of the Feasibility Study, the Company accrued $2,835 of expense in the third quarter of 2006, its best estimate of its obligation with respect to remediation of the Site and providing clean drinking water to residences down gradient of the Site. This amount is recorded in selling and administrative expenses.

The third quarter accrual brought the total liability balance to $2,970. Approximately $2,150 of the liability is classified as long-term, and is expected to be disbursed over the next 10 years. The remaining portion is included in accrued liabilities. If the Site remediation takes longer than expected and clean drinking water must be provided to more residences than expected, the Company has estimated that it could incur additional obligations of up to $2,600.

The liability for environmental remediation represents management’s best estimate of the probable and reasonably estimable undiscounted costs related to known remediation obligations. The accuracy of the Company’s estimate of environmental liability is affected by several uncertainties, such as additional requirements, which may be identified in connection with remedial activities, the complexity and evolution of environmental laws and regulations, and the identification of presently unknown remediation requirements. Consequently, the Company’s liability could be greater than its current estimate. However, the Company does not expect that the costs associated with remediation will have a material adverse effect on its financial condition or results of operations.

The European Union (“EU”) has adopted two Directives to facilitate the recycling of electrical and electronic equipment sold in the EU. The first of these is the Waste Electrical and Electronic Equipment (“WEEE”) Directive, which directs EU Member States to enact laws, regulations and administrative provisions to ensure that producers of electrical and electronic equipment provide for the financing of the collection, treatment, recovery and environmentally sound disposal of WEEE from products placed on the market after August 13, 2005, and from products in use prior to that date that are being replaced. In accordance with the WEEE directive, the Company has identified and labeled its products that are affected by the regulations adopted by Member States. The Company also has developed a strategy to support recycling of the electrical and electronic equipment and has created a section on its Web site to provide customers with information on how to return WEEE-labeled products for proper recycling — http://www.nordson.com/ Corporate/ Recycling/.

The second of these Directives is the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”). The RoHS Directive addresses the restriction on use of certain hazardous substances, such as mercury, lead, cadmium and hexavalent cadmium in electrical and electronic equipment placed on the market after July 1, 2006. The Company has committed to design its future products to meet the standards established by the RoHS Directive.

Costs incurred in 2006 related to these Directives were not material.

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In this annual report, all amounts related to U.S. and foreign currency and to the number of shares of Nordson Corporation Common Shares, except for per share earnings and dividend amounts, are expressed in thousands.

Amounts in the consolidated financial statements as of and for the years ended October 30, 2005, and October 31, 2004, have been reclassified to conform to the presentation used in 2006. See Note 3, “Discontinued Operations,” to the consolidated financial statements for further information regarding the reclassification of financial information for discontinued operations.

Critical Accounting Policies and Estimates

Certain accounting policies that require significant management estimates and are deemed critical to the Company’s results of operations or financial position are discussed below. On a regular basis, the Company reviews critical accounting policies with the Audit Committee of the board of directors.

Revenue Recognition — Most of the Company’s revenues are recognized upon shipment, provided that persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectibility is reasonably assured, and title and risk of loss have passed to the customer. Revenues from contracts with multiple element arrangements, such as those including installation or other services, are recognized as each element is earned based on objective evidence of the relative fair value of each element. If the installation or other services are inconsequential to the functionality of the delivered product, the entire amount of revenue is recognized upon transfer of ownership. Inconsequential installation or other services are those that can generally be completed in a short period of time, at insignificant cost, and the skills required to complete these installations are not unique to the Company. If installation or other services are essential to the functionality of the delivered product, revenues attributable to these obligations are deferred until completed. Amounts received in excess of revenue recognized are included as deferred revenue in the accompanying balance sheets. Revenues deferred in 2006, 2005 and 2004 were not material. A limited number of the Company’s large engineered systems sales contracts were accounted for using the percentage-of-completion method. The amount of revenue recognized in any accounting period was based on the ratio of actual costs incurred through the end of the period to total estimated costs at completion. Cost estimates were updated on a quarterly basis. During 2006, no revenues were recognized under the percentage-of-completion method. During 2005 and 2004, the Company recognized revenue of approximately $5,000 and $7,000, respectively, under this method. These revenues have been reclassified to discontinued operations.

Goodwill — Goodwill represents the excess of purchase price over the fair value of tangible and identifiable intangible net assets acquired. At October 31, 2006, and October 30, 2005, goodwill represented 40 percent and 42 percent, respectively, of the Company’s total assets. The majority of the goodwill resulted from the acquisition of EFD Inc. in fiscal 2001. In accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but is tested for impairment annually at the reporting unit level, or more often if indications of impairment exist. The estimated fair value of a reporting unit is determined by applying appropriate discount rates to estimated future cash flows and terminal value amounts for the reporting units. The results of the Company’s analyses indicated that no reduction of goodwill is required.

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Inventories — Inventories are valued at the lower of cost or market. Cost has been determined using the last-in, first-out (LIFO) method for 37 percent of the Company’s consolidated inventories at October 31, 2006, and 35 percent at October 30, 2005, with the first-in, first-out (FIFO) method used for the remaining inventory. On an ongoing basis, the Company tests its inventory for technical obsolescence, as well as for future demand and changes in market conditions. The Company has historically maintained inventory reserves to reflect those conditions when the cost of inventory is not expected to be recovered. The Company also maintains inventory reserves for inventory used for demonstration purposes. Amounts expensed related to inventory reserves were $2,210, $2,896 and $4,421 in 2006, 2005 and 2004, respectively. The reserve balance was $7,499, $7,126 and $7,139 at the end of 2006, 2005 and 2004, respectively.

Pension Plans and Postretirement Medical Plan — The measurement of liabilities related to the Company’s pension plans and postretirement medical plan is based on management’s assumptions related to future factors, including interest rates, return on pension plan assets, compensation increases, mortality and turnover assumptions and health care cost trend rates.

The weighted-average discount rate used to determine the present value of the Company’s domestic pension plan obligations was 6.0 percent at October 31, 2006, compared to 5.8 percent at October 30, 2005. The discount rate for these plans, which comprised 79 percent of the worldwide pension obligations at October 31, 2006, was based on quality fixed income investments with a duration period approximately equal to the period over which pension obligations are expected to be settled. The weighted-average discount rate used to determine the present value of the Company’s various international pension plan obligations was 4.3 percent at October 31, 2006, compared to 4.2 percent at October 30, 2005. The discount rates used for the international plans were determined by using quality fixed income investments.

In determining the expected return on plan assets, the Company considers both historical performance and an estimate of future long-term rates of return on assets similar to those in the Company’s plans. The Company consults with and considers the opinions of financial and other professionals in developing appropriate return assumptions. The expected rate of return (long-term investment rate) on domestic pension assets was 8.5 percent in both 2006 and 2005. The average expected rate of return on international pension assets decreased to 5.4 percent in 2006 from 5.7 percent in 2005.

The assumed rate of compensation increases for domestic employees was 3.3 percent in 2006, the same as 2005. The assumed rate of compensation increases for international employees was 3.1 percent in 2006, also the same as 2005.

Annual expense amounts are determined based on the discount rate used at the end of the prior year. Differences between actual and assumed investment returns on pension plan assets result in actuarial gains or losses that are amortized into expense over a period of years.

With respect to the domestic postretirement medical plan, the discount rate used to value the benefit obligation increased from 5.8 percent at October 30, 2005, to 6.0 percent at October 31, 2006. The annual rate of increase in the per capita cost of covered benefits (the health care cost trend rate) is assumed to be 9 percent in 2007, decreasing gradually to 5 percent in 2011. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a one-percentage point change in the assumed health care cost trend rate would have the following effects:

Employees hired after January 1, 2002, are not eligible to participate in the domestic postretirement medical plan.

The Company expects that pension and postretirement expenses in fiscal 2007 will be approximately $1,000 lower than fiscal 2006, primarily reflecting changes in actuarial assumptions.

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Sales of the discontinued operations were $5,919, $6,983 and $22,094 for 2006, 2005 and 2004, respectively. The net loss from operations was $9,882, $6,172 and $4,973 for 2006, 2005 and 2004, respectively. Included in the 2006 loss from discontinued operations was severance expense of $699 related to 27 employees of the Fiber Systems Group that were not hired by Saurer Ltd. Also, included in the 2006 loss from discontinued operations is the recognition of an impairment of an intangible asset of $2,630. A gain of $2,813 was recognized on the sale of the business. The net tax benefit of $1,872 on disposal is the result of $2,867 tax expense on one-time gains resulting from the disposal, offset by $4,739 tax benefit resulting from an excess of tax basis over book basis in Fiber Systems Group assets.

Fiscal Years 2006 and 2005

The Company is organized into three business segments: Adhesive Dispensing Systems, Advanced Technology Systems and Finishing and Coating Systems. All three reported higher sales volume in 2006 compared to 2005. Sales of the adhesive segment were $507,959 in 2006, an increase of $13,277, or 2.7 percent, from 2005. Sales volume was up 4.5 percent, while currency effects reduced reported sales by 1.8 percent. All businesses in this segment, with the exception of automotive, reported higher sales volume. Sales of the advanced technology segment were $239,258 in 2006, an increase of $39,451, or 19.7 percent from 2005. Sales volume increased 20.1 percent, while currency effects reduced sales by 0.4 percent. Within this segment, the Asymtek business was especially strong, with EFD and UV Curing sales volume also increasing significantly. Finishing and coating segment sales in 2006 were $145,004, an increase of $7,314, or 5.3 percent, from the prior year. This increase can be traced to a volume increase of 6.4 percent offset by negative currency effects of 1.1 percent. Volume increases were seen in all businesses within this segment, with liquid system sales being particularly strong. It is estimated that the effect of pricing on total revenue was neutral relative to the prior year.

Nordson’s sales outside the United States accounted for 67.4 percent of total 2006 sales, up slightly from 66.5 percent in 2005. Sales volume in 2006 exceeded that of 2005 in all five geographic regions, with the largest increase generated in the Asia Pacific region, where sales volume increased 27.4 percent. Sales volume was up 4.4 percent in the United States, 6.8 percent in the Americas, 7.6 percent in Europe and 3.8 percent in Japan. These increases can be traced largely to the advanced technology segment.

Operating profit — Cost of sales in 2006 was $379,800, up 4.7 percent from 2005, due primarily to a volume increase of 5.5 percent, offset by currency effects that reduced cost of sales by 0.8 percent. Gross margins, expressed as a percent of sales, increased to 57.4 percent in 2006 from 56.4 percent in 2005. The increase was driven by favorable product mix and productivity improvements. Currency effects reduced the margin rate by approximately 0.3 percent.

Selling and administrative expenses were $362,179 in 2006, an increase of $24,397, or 7.2 percent, from 2005. The increase is primarily due to compensation increases and higher employee benefit costs. Other charges, totaling $6,510 for stock option expense and for remediation costs related to a Wisconsin landfill, also impacted 2006 selling and administrative expenses. Selling and administrative expenses were 40.6 percent of sales in both 2006 and 2005, reflecting ongoing Lean efforts and revenue increases that were supported by existing capacity. Currency effects reduced selling and administrative expenses by 1.0 percent.

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Effective in 2006, the Company adopted the fair value recognition provisions of FAS 123(R) using the modified prospective transition method, resulting in stock option expenses of $3,675 for the year. Under the modified prospective transition method, compensation costs in 2006 include cost for options granted prior to but not vested as of October 31, 2005, and unvested options granted in 2006. Compensation expense is being recognized in selling and administrative expenses on a straight-line basis over the total requisite service period of each option grant. Prior to 2006, the Company accounted for its stock options under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” No stock option expense was reflected in net income, as all options granted under these plans had an exercise price equal to the fair market value of the underlying Common Shares on the date of grant. Results for prior periods have not been restated. As of October 31 2006, there was $5,553 of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be amortized over a weighted average period of approximately 1.4 years.

The Company has voluntarily agreed with the City of New Richmond, Wisconsin, and other Potentially Responsible Parties (“PRP”) to share costs associated with (1) a feasibility study and remedial investigation (“FS/RI”) for remediation of the City of New Richmond municipal landfill (the “Site”) and (2) providing clean drinking water to the affected residential properties down gradient of the Site. The PRP group has agreed to an allocation that sets the Company’s share of the cost of remediation at 56.35 percent.

The FS/ RI was completed and submitted to the Wisconsin Department of Natural Resources (“WDNR”) in July 2006. The total cost of the Company’s share for remediation efforts (Site and clean drinking water) will not be ascertainable until a remediation plan is approved by the WDNR. Approval is not anticipated to occur before the second quarter of fiscal 2007. However, based upon the range of viable alternatives for Site remediation and providing clean drinking water to residences down gradient of the Site submitted as part of the Feasibility Study, the Company recorded $2,835 of expense in the third quarter of 2006, its best estimate of its obligation with respect to remediation of the Site and providing clean drinking water to residences down gradient of the Site. If the Site remediation takes longer than expected and clean drinking water must be provided to more residences than expected, the Company has estimated that it could incur additional obligations of up to $2,600.

Operating profit margins, expressed as a percent of sales, were 16.5 percent in 2006 compared to 15.7 percent in 2005. Segment operating profit margins in 2006 and 2005 were as follows:

Operating capacity for each of our segments can support increases or decreases in order activity without significant changes in operating costs. Also, currency translation affects reported operating margins. Operating margins for each of our segments were negatively impacted from a stronger dollar during the year.

During the second quarter of 2006, the Company realigned the management of its adhesive dispensing segment, which resulted in the elimination of nine positions. These actions better positioned the segment to achieve its growth objectives. Total costs attributed to the position eliminations were $429, of which $398 was paid in 2006. The remaining $31 will be paid in 2007.

Sales volume of the advanced technology segment improved at a rate greater than operating costs, resulting in an increase in the operating profit percentage. As a result of a slowdown in customer demand in the UV Curing business within the advanced technology segment, the Company eliminated 13 positions in the second half of 2006. Total severance costs of $380 were paid in 2006.

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The improvement in the finishing and coating segment operating profit is primarily due to sales volume increasing at a rate greater than operating costs. In addition, during the fourth quarter of 2005, the Company announced a number of restructuring actions to improve performance and reduce costs in its finishing and coating segment. These actions, which included operational consolidations and approximately 60 personnel reductions, were completed in the fourth quarter of fiscal 2006. As a result of these actions, resources are more effectively aligned with shifting patterns of global demands, enabling the segment to operate both with lower costs and better capability to serve customers in the faster growing emerging markets. Total restructuring costs were $2,693, of which $875 was recorded in the fourth quarter of 2005, and the remainder was recorded in 2006. Substantially all of the $2,693 of expense was associated with cash expenditures for severance payments to terminated employees. Cash of $4 was paid during the fourth quarter of 2005, and $2,640 was paid in 2006. The remaining $49 will be paid in 2007.

Interest and other — Interest expense in 2006 was $12,017, a decrease of 13.1 percent from 2005 due to lower borrowing levels. Interest and investment income in 2006 was $1,867, up from $1,826 in the prior year. Interest income of $898 on an income tax refund in 2006 was offset by lower interest income from cash equivalents and marketable securities. Other expense was $1,031 in 2006, as opposed to other income of $1,586 in 2005. Included in these amounts were currency losses of $1,796 in 2006, and $705 in 2005.

Net income — The Company’s effective income tax rate on continuing operations was 28.4 percent in 2006, down from 29.7 percent in 2005. The 2006 rate reflects the approval by the Joint Committee on Taxation of an income tax refund of approximately $3,100, which was treated as a discrete event in the third quarter. The 2005 tax rate was impacted by the reversal of a valuation allowance on foreign tax credits of $7,367, offset somewhat by a lower extraterritorial income exclusion and a higher state income tax provision. Net income from continuing operations was $97,667, or $2.86 per diluted share in 2006. This compares to net income from continuing operations of $84,510, or $2.31 per diluted share in 2005. This represents a 15.6 percent increase in income from continuing operations and a 23.8 percent increase in earnings per share from continuing operations. The per-share increase was impacted by the repurchase of approximately 10 percent of the Company’s outstanding common shares in September 2005.

Accounting changes — In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, “Inventory Costs.” No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company adopted No. 151 at the beginning of fiscal 2006. The adoption did not impact the Company’s consolidated financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123(R) (revised 2004), “Share-Based Payment.” This Statement replaced FASB Statement No. 123 and superseded APB Opinion No. 25. No. 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic method currently used by the Company. No. 123(R) requires such transactions be accounted for using a fair-value-based method that would result in expense being recognized in the Company’s financial statements. As discussed in Note 13, the Company adopted No. 123(R) at the beginning of fiscal 2006.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” This interpretation states that the term “conditional asset retirement obligation,” as used in paragraph A23 of SFAS No. 143, refers to a legal obligation to perform an asset retirement in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement obligation is unconditional even though uncertainty exists about the timing and (or) method of settlement. The Company adopted Interpretation No. 47 at the beginning of fiscal 2006. The adoption did not impact the Company’s consolidated financial position or results of operations.

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In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections.” No. 154 replaces Accounting Principles Board Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the accounting for and reporting of a change in accounting principle. The Statement applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when specific transition provisions are not provided. The Statement requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine the period specific or cumulative effect of the change. The Company must adopt this Statement in fiscal 2007.

In June 2005, the FASB issued FSP FAS No. 143-1, “Accounting for Electronic Equipment Waste Obligations,” which addresses the accounting for obligations associated with Directive 2002/96/ EC, Waste Electrical and Electronic Equipment (the “Directive”), which was adopted by the European Union. FSP FAS No. 143-1 provides guidance on how to account for the effects of the Directive with respect to historical waste, which is defined as waste associated with products placed on the market on or before August 13, 2005. FSP FAS No. 143-1 is required to be applied to the later of the first reporting period ending after June 8, 2005, or the date of the adoption of the law by the applicable European Union Member State. The adoption of FSP FAS No. 143-1 did not have a material effect on the Company’s consolidated results of operations or financial condition.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertain income tax positions that are recognized in a company’s financial statements. FIN 48 also provides guidance on financial statement classification, accounting for interest and penalties, accounting for interim periods and new disclosure requirements. The Company must adopt FIN 48 in fiscal 2008 and has not yet determined the impact of adoption of FIN 48 on its financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” This statement provides a common definition of fair value and establishes a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. It also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. The statement is effective for the Company’s 2008 fiscal year, although early adoption is permitted. The Company has not yet determined the impact of adoption on its consolidated financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an entity 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 in other comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements are effective for the Company beginning in fiscal 2007. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company already complies with this requirement. As of October 31, 2006, the required adjustment to the Company’s balance sheet would increase the liability for pension and postretirement benefits and increase accumulated other comprehensive loss by approximately $27,000.

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In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” (SAB 108). SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 must be implemented by the end of the Company’s 2007 fiscal year.

Fiscal Years 2005 and 2004

Sales of the adhesive segment were $494,682 in 2005, an increase of $19,077, or 4.0 percent, from 2004. Currency effects added 2.6 percent to reported sales, with the remainder of the increase due to a sales volume increase of 1.4 percent. Within this segment, lower nonwoven system sales were partially offset by increases in the core packaging and product assembly businesses. Sales of the advanced technology segment were $199,807 in 2005, an increase of $34,906, or 21.2 percent from 2004. Substantially all of the increase was the result of volume gains. Within this segment, the Asymtek and March Plasma businesses were especially strong, with volume up more than 33 percent in the aggregate from 2004. EFD sales volume also increased. Finishing and coating segment sales in 2005 were $137,690, compared with $130,944 in the prior year. The 5.2 percent increase can be traced to a volume increase of 3.1 percent combined with currency effects of 2.1 percent. The volume increase was due to strong container system sales across all geographic regions, partially offset by a decrease in liquid system sales. It is estimated that the effect of pricing on total revenue was neutral relative to the prior year.

Nordson’s sales outside the United States accounted for 66.5 percent of total 2005 sales, up slightly from 65.7 percent in 2004. Sales volume was up 5.4 percent in the United States, 18.7 percent in Asia Pacific, 16.2 percent in the Americas and 6.6 percent in Japan. These increases can be traced largely to the advanced technology segment. European sales volume was flat compared to 2004.

Operating profit — Cost of sales in 2005 was $362,824, up 8.5 percent from 2004, due primarily to a volume increase of 7.2 percent and currency effects that added 1.3 percent. Gross margins, expressed as a percent of sales, decreased to 56.4 percent in 2005 from 56.7 percent in 2004. Selling and administrative expenses were $337,782 in 2005, an increase of $19,220, or 6.0 percent, from 2004. The increase is due to currency translation effects of 1.9 percent and to compensation increases and higher employee benefit costs. As a percent of sales, these costs decreased to 40.6 percent in 2005, from 41.3 percent in 2004.

Operating profit margins, expressed as a percent of sales, were 15.7 percent in 2005, compared to 15.4 percent in 2004. Segment operating profit margins in 2005 and 2004 were as follows:

Operating capacity for each of our segments can support increases or decreases in order activity without significant changes in operating costs. Also, currency translation affects reported operating margins. Operating margins for each of our segments benefited from a weaker dollar during the year.

Sales volume of the advanced technology segment improved at a rate greater than operating costs, resulting in an increase in the operating profit percentage.

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The finishing and coating segment experienced improved sales volume, but also higher operating costs due in part to restructuring activity. During the fourth quarter of 2005, the Company announced a number of restructuring actions to improve performance and reduce costs in its finishing and coating segment. As a result of these actions, resources are more effectively aligned with shifting patterns of global demands, enabling the segment to operate both with lower costs and better capability to serve customers in the faster growing emerging markets. Costs of $875 were recorded in the fourth quarter of 2005.

Interest and other — Interest expense in 2005 was $13,825, a decrease of 10.4 percent from 2004, due to lower borrowing levels. Interest and investment income in 2005 was $1,826, up from $1,192 in the prior year, due to higher levels of cash and cash equivalents and marketable securities. Other income was $1,586 in 2005, as opposed to other expense of $2,685 in 2004. Included in these amounts were currency losses of $705 in 2005, and $326 in 2004. In 2004, other expenses included a loss of $3,288 on the disposition of a minority equity investment.

Net income — The Company’s effective income tax rate on continuing operations was 29.7 percent in 2005, down from 32.8 percent in 2004. The decrease was primarily due to the reversal of a valuation allowance on foreign tax credits of $7,367, offset somewhat by a lower extraterritorial income exclusion and a higher state income tax provision. Net income from continuing operations was $84,510, or $2.31 per diluted share, in 2005. This compares to net income from continuing operations of $68,307, or $1.87 per diluted share, in 2004. This represents a 24 percent increase in both income and earnings per share from continuing operations.

Liquidity, Capital Expenditures and Sources of Capital

Cash generated by operations in 2006 was $120,024, up from $118,458 last year. The increase was due to higher net income offset by changes in operating assets and liabilities. The increase in year-end receivables is traced to higher sales in the fourth quarter of 2006 compared to 2005. The 2006 year-end receivable balance also included approximately $4,000 related to an income tax refund and related interest. An increase in accrued liabilities accounted for $6,801 of cash provided by operations and was largely due to higher incentive compensation and donation accruals. The reduction in current deferred taxes in 2006 related primarily to employee benefit accruals, and the increase in long-term deferred tax assets related primarily to employee benefit accruals and to accruals not currently deductible, offset by amortization of goodwill. Other noncurrent assets increased due to the funding of a deferred compensation obligation. Within long-term liabilities, pension and retirement obligations decreased as a result of plan funding, and other liabilities increased primarily due to higher deferred compensation. In addition, there was a $9,074 use of cash from operations traced to a change in the presentation of tax benefits from the exercise of stock options, whereby prior to the adoption of FAS 123(R), the Company presented the tax benefit of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. FAS 123(R) requires the reclassification of the benefit associated with capital in excess of stated value as financing cash flows.

Cash used by investing activities was $7,195 in 2006, compared to cash provided by investing activities of $33,565 in 2005. The change was due to the sale of auction rate and variable rate demand obligation securities in 2005. Capital expenditures, which were concentrated on information systems and production equipment, were $13,610. Cash of $5,411 was generated from the sale of the Fiber Systems Group.

Cash used for financing activities in 2006 was $77,968. Principal uses of cash were $54,004 for scheduled repayments of long-term debt, $22,521 for the repurchase of the Company’s Common Shares and $22,372 for dividend payments to shareholders. Total dividend payments decreased $1,006 from 2005 due to a lower number of shares outstanding. The per-share amount increased 3.9 percent from 2005. Issuance of Common Shares related to the exercise of stock options generated $21,535 of cash.

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Outlook

Effects of Foreign Currency

In 2006 compared with 2005, the U.S. dollar was generally stronger against foreign currencies. If 2005 exchange rates had been in effect during 2006, sales would have been approximately $11,161 higher and third-party costs would have been approximately $6,535 higher. In 2005 compared with 2004, the U.S. dollar was generally weaker against foreign currencies. If 2004 exchange rates had been in effect during 2005, sales would have been approximately $16,510 lower and third-party costs would have been approximately $10,618 lower. These effects on reported sales do not include the impact of local price adjustments made in response to changes in currency exchange rates.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company operates internationally and enters into transactions denominated in foreign currencies. Consequently, the Company is subject to market risk arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. Nordson regularly uses foreign exchange contracts to reduce its risks related to most of these transactions. These contracts, primarily Euro and Yen, usually have maturities of 90 days or less, and generally require the Company to exchange foreign currencies for U.S. dollars at maturity, at rates stated in the contracts. Gains and losses from changes in the market value of these contracts offset foreign exchange losses and gains, respectively, on the underlying transactions. The balance of transactions denominated in foreign currencies are designated as hedges of the Company’s net investments in foreign subsidiaries or are intercompany transactions of a long-term investment nature. As a result of the Company’s use of foreign exchange contracts on a routine basis to reduce the risks related to nearly all of the Company’s transactions denominated in foreign currencies as of October 31, 2006, the Company did not have a material foreign currency risk related to its derivatives or other financial instruments.

Note 11 to the financial statements contains additional information about the Company’s foreign currency transactions and the methods and assumptions used by the Company to record these transactions.

The Company finances a portion of its operations with short-term and long-term borrowings and is subject to market risk arising from changes in interest rates for its long-term debt.

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Item 8. Financial Statements and Supplementary Data

Consolidated Statements of Income

The accompanying notes are an integral part of the consolidated financial statements.

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Consolidated Statements of Shareholders’ Equity

Years ended October 31, 2006, October 30, 2005 and October 31, 2004