SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[X]  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 For the fiscal year ended December 31, 1999;

                                       OR

[ ]  Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

                          Commission File Number 1-7007
                                                 ------

                              BANDAG, INCORPORATED
                              --------------------
             (Exact name of registrant as specified in its charter)

                     Iowa                                   42-0802143
----------------------------------------------     ----------------------------
        (State or other jurisdiction of                  (I.R.S. Employer
        incorporation or organization)                  Identification No.)
    2905 North Highway 61, Muscatine, Iowa                  52761-5886
----------------------------------------------     ----------------------------
   (Address of principal executive offices)                  (Zip Code)

        Registrant's telephone number, including area code: 319/262-1400

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

        Title of each class                         Name of each exchange
                                                    on which registered
-------------------------------------      ------------------------------------
     Common Stock - $1 Par Value             New York Stock Exchange and Chicago
 Class A Common Stock - $1 Par Value                  Stock Exchange

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

                       Class B Common Stock - $1 Par Value
                    ----------------------------------------
                                (Title of class)

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  periods that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|

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 this
Form 10-K. |_|

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  as of March 13, 2000:  Common  Stock,  $150,878,977;  Class A Common
Stock (non-voting), $110,392,503; Class B Common Stock, $634,008.

The number of shares  outstanding of the issuer's  classes of common stock as of
March 13,2000:  Common Stock,  9,089,156 shares; Class A Common Stock, 9,637,754
shares; Class B Common Stock, 2,045,075 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the  Company's  Proxy  Statement  for  the  Annual  Meeting  of the
Shareholders to be held May 2, 2000 are incorporated by reference in Part III.
<PAGE>

                                     PART I
                                     ------

ITEM 1.  BUSINESS
------   --------
                                  Introduction
                                  ------------

         All  references  herein to the  "Company" or "Bandag"  refer to Bandag,
Incorporated and its subsidiaries unless the context indicates otherwise.

         The Company has two reportable  business segments:  the manufacture and
sale of precured tread rubber,  equipment and supplies for retreading tires (the
"Traditional Business") and the sale and maintenance of new and retread tires to
principally   commercial  and  industrial  customers  through  its  wholly-owned
subsidiary Tire Distribution Systems, Inc. ("TDS").

         As a  result  of a  recapitalization  of the  Company  approved  by the
Company's  shareholders  on December 30, 1986,  and  substantially  completed in
February  1987, the Carver Family (as  hereinafter  defined)  obtained  absolute
voting  control  of the  Company.  As of  March  13,  2000,  the  Carver  Family
beneficially  owned shares of Common Stock and Class B Common Stock constituting
77% of the votes  entitled  to be cast in the  election of  directors  and other
corporate  matters.  The "Carver Family" is composed of (i) Lucille A. Carver, a
director  and widow of Roy J.  Carver,  (ii) the  lineal  descendants  of Roy J.
Carver and their  spouses,  and (iii) certain  trusts and other entitles for the
benefit of the Carver Family members.

         Effective as of November 1, 1997, the Company  acquired five franchised
dealerships  through TDS. The aggregate  purchase price of the  transactions was
approximately  $158.6  million,  which  includes the fair market value of 10,000
shares of the Company's Class A Common Stock.  Since the original  acquisitions,
TDS has acquired 11 additional smaller dealerships. TDS is operated through Tire
Distribution Systems, Inc. See "TDS" herein.

         On  February  5, 1999,  Tire  Management  Solutions,  Inc.  ("TMS"),  a
wholly-owned  subsidiary of the Company,  entered into its first tire management
outsourcing  contract.  The  contract is with Roadway  Express.  Pursuant to the
contract,  the entire  fleet tire  management  program  of Roadway  Express  was
outsourced to TMS. TMS, in turn,  subcontracts  with over 160 individual  Bandag
franchises  across the  country to provide the  outsourced  tire  services.  TMS
anticipates  that  additional  tire  management  outsourcing  contracts  will be
obtained in the future.

                              Traditional Business
                              --------------------

(a) General
    -------

         The  Traditional  Business is engaged  primarily in the  production and
sale of precured  tread rubber and  equipment  used by its  franchisees  for the
retreading  of tires for trucks,  buses,  light  commercial  trucks,  industrial
equipment,  off-the-road  equipment and passenger cars. Bandag  specializes in a
patented  cold-bonding  retreading  process  which it  introduced  to the United
States in 1957 (the "Bandag Method"). The Bandag Method separates the process of


                                      -2-
<PAGE>

vulcanizing the tread rubber from the process of bonding the tread rubber to the
tire casing,  allowing for  optimization  of temperature  and pressure levels at
each stage of the retreading process.

         The Company and its licensees have 1,295  franchisees  worldwide,  with
31%  located  in the United  States and 69%  internationally.  The  majority  of
Bandag's   franchisees   are   independent   operators   of  full  service  tire
distributorships.  The Traditional  Business'  revenues  primarily come from the
sale of retread  material and  equipment  to its  franchisees.  The  Traditional
Business'  products  compete with new tire sales,  as well as retreads  produced
using other retread processes. The Company concentrates its marketing efforts on
existing  franchisees and on expanding their respective market penetration.  Due
to its strong  distribution  systems,  marketing efforts and leading technology,
Bandag,  through its independent  franchisee network,  has been able to maintain
the largest market presence in the retreading industry.

         The  Traditional  Business  competes  primarily  in the light and heavy
truck tire  replacement  market.  Both new tire  manufacturers  and tread rubber
suppliers compete in this market. While the Company has independent  franchisees
in over 109  countries,  and competes in all of these  geographic  markets,  its
largest  market is the United  States.  Truck tires  retreaded by the  Company's
franchisees  make up  approximately  15% of the U.S.  light and heavy truck tire
replacement market. The Company's primary competitors are new tire manufacturers
such as The Goodyear Tire & Rubber Company,  Bridgestone  Corporation and Groupe
Michelin. The Goodyear Tire & Rubber Company also competes in the U.S. market as
well as in other markets as a tread rubber  supplier to a combination of company
owned and independent  retreaders,  and Groupe Michelin  competes in the retread
market in the United States and in other markets.

         The  Traditional  Business  consists of the  franchising  of a patented
process  for  the  retreading  of  tires  primarily  for  trucks,  buses,  light
commercial  trucks,  and the  production  and sale of precured  tread rubber and
related products used in connection with this process.

         The  Traditional  Business  can be  divided  into two main  areas:  (i)
manufacturing  the tread  rubber and (ii)  bonding  the tread to a tire  casing.
Bandag   manufactures  over  500  separate  tread  designs  and  sizes,   treads
specifically  designed  for various  applications,  allowing  fleet  managers to
fine-tune  their tire  programs.  Bandag  tread  rubber is  vulcanized  prior to
shipment to its independent franchisees. The Bandag franchisee prepares the tire
casing for retreading  and performs the retreading  process of bonding the cured
tread to the prepared tire casing.  This two-step process allows  utilization of
the optimum  temperature  and pressure  levels at each step.  Lower  temperature
levels during the bonding  process result in a more  consistent,  higher quality
finished retread with less damage to the casing.  Bandag has developed a totally
integrated   retreading   system  with  the  materials,   bonding   process  and
manufacturing equipment specifically designed to work together as a whole.


                                      -3-
<PAGE>

(b)  Markets and Distribution
     ------------------------

         The principal market categories for the Traditional  Business are truck
and bus,  with more than 90% of the tread rubber sold by the Company used in the
retreading of these tires.  Additionally,  the Company  markets tread rubber for
the  retreading  of  off-the-road  equipment,  industrial  and light  commercial
vehicle and passenger car tires;  however,  historically,  sales of tread rubber
for these applications have not contributed  materially to the Company's results
of operations.

         Trucks and Buses Tread rubber,  equipment,  and supplies for retreading
and  repairing  truck  and bus  tires  are  sold  by the  Company  primarily  to
independent  franchisees  and TDS which use the Bandag  Method for that purpose.
Bandag has 1,295  independent  franchisees  throughout  North  America,  Central
America,  South America,  Europe,  Africa, Far East,  Australia and New Zealand.
These franchisees are owned and operated by independent  franchisees,  some with
multiple franchises and/or locations.  Of these franchisees,  395 are located in
the United States. One hundred fifty nine (159) of Bandag's foreign  franchisees
are franchised by a licensee of the Company in Australia,  and joint ventures in
India and Sri Lanka.  A limited number of  franchisees  are trucking  companies,
which operate  retread shops  primarily for their own needs.  A few  franchisees
also offer "hot-cap" retreading and most sell one or more lines of new tires.

         The  current  franchise  agreement  offered by the  Company  grants the
franchisee  the  non-exclusive  retread  manufacturing  rights to use the Bandag
Method for one or more  applications  and the Bandag  trademarks  in  connection
therewith  within a specified  territory,  but the  franchisee is free to market
Bandag  retreads  outside the territory.  No initial  franchise fee is paid by a
franchisee for its franchise.

         Direct  Sales to  Transportation  Fleets The Company  has entered  into
contracts with  companies  pursuant to which Bandag agrees to sell retread tires
directly to transportation  fleets of such companies and provide maintenance and
service  for  the  retread   tires  (the  "Direct  Sales   Contracts").   Bandag
subcontracts the sales, maintenance,  and service components of the Direct Sales
Contracts to its independent franchisees and to TDS.

         Other  Applications The Company  continues to manufacture and supply to
its  franchisees  a  limited  amount  of tread  for  off-the-road  (OTR)  tires,
industrial tires,  including solid and pneumatic,  passenger car tires and light
commercial tires for light trucks and recreational vehicles.

(c) Competition
    -----------

         The Company  faces  strong  competition  in the market for  replacement
truck and bus tires,  the  principal  retreading  market,  which it serves.  The
competition  comes not only from the major  manufacturers of new tires, but also
from  manufacturers of retreading  materials.  Competitors  include producers of
"camelback," "strip stock," and "slab stock" for "hot-cap"  retreading,  as well
as a number of producers of precured tread rubber.  Various  methods for bonding
precured tread rubber to tire casings are used by competitors.


                                      -4-
<PAGE>

         Bandag  retreads are often sold at a higher price than tires  retreaded
by the  "hot-cap"  process as well as retreads sold using  competitive  precured
systems.  The Company  believes that the superior quality and greater mileage of
Bandag  retreads and expanded  service  programs to  franchisees  and  end-users
outweigh any price differential.

         Bandag  franchisees  compete with many new-tire  dealers and retreading
operators of varying  sizes,  which include shops operated by the major new-tire
manufacturers,  large independent  retread companies,  retreading  operations of
large trucking companies, and smaller commercial tire dealers.

         For  additional  information on  competition  faced by the  Traditional
Business see the foregoing discussion in "General" herein.

(d) Sources of Supply
    -----------------

         The Company  manufactures  the precured tread rubber,  cushion gum, and
related supplies in Company-owned and leased  manufacturing plants in the United
States, Canada, Brazil,  Belgium, South Africa, Mexico,  Malaysia and Venezuela.
The Company has entered into joint  venture  agreements  in India and Sri Lanka.
The Company also manufactures pressure chambers, tire casing analyzers, buffers,
tire builders,  tire-handling  systems, and other items of equipment used in the
Bandag retreading  method.  Curing rims,  chucks,  spreaders,  rollers,  certain
miscellaneous equipment, and various retreading supplies, such as repair patches
sold by the Company, are purchased from others.

         The Company  purchases rubber and other materials for the production of
tread rubber and other rubber  products from a number of  suppliers.  The rubber
for tread is primarily  synthetic and obtained  principally from sources,  which
most  conveniently  serve the respective areas in which the Company's plants are
located.  Although  synthetic  rubber  and  other  petrochemical  products  have
periodically  been in short supply and significant cost  fluctuations  have been
experienced  in  previous  years,  the Company to date has not  experienced  any
significant  difficulty  in  obtaining  an  adequate  supply of such  materials.
However,  the effect on  operations of future  shortages  will depend upon their
duration and severity and cannot presently be forecast.

         The principal source of natural rubber,  used for the Company's cushion
gum,  is the Far East.  The  supply of  natural  rubber  has  historically  been
adequate for the Company's  purposes.  Natural rubber is a commodity  subject to
wide  price  fluctuations  as a result  of the  forces  of  supply  and  demand.
Synthetic  prices  historically  have been related to the cost of  petrochemical
feedstocks.

(e) Patents
    -------

         The  Company  owns or has  licenses  for the use of a number  of United
States and foreign patents covering  various elements of the Bandag Method.  The
Company has patents covering improved  features,  some of which started expiring
in 1995 and others that will continue to


                                      -5-
<PAGE>

expire  through  the year 2011,  and the Company  has  applications  pending for
additional patents.

         The Company does not  consider  that patent  protection  is the primary
factor in its successful retreading operation,  but rather, that its proprietary
technical "know-how," product quality, franchisee support programs and effective
marketing programs are more important to its success.

         The Company has secured  registrations  for its  trademark  and service
mark BANDAG, as well as other trademarks and service marks, in the United States
and most of the other important commercial countries.

                                       TDS
                                       ----
(a) General
    -------

         The five  dealerships  that were  acquired in November  1997 by TDS, an
indirect  wholly-owned  subsidiary of the Company,  were:  Universal  Tire, Inc.
(Nashville,  TN); Southern Tire Mart, Inc. (Columbia, MS); J.W. Brewer Tire Co.,
Inc. (Wheat Ridge,  CO): Joe Esco Tire Co.  (Oklahoma City, OK); and Sound Tire,
Inc.  (Auburn,  WA).  Since  the  original  acquisitions,  TDS has  acquired  11
additional  smaller  dealerships.  As of December 31, 1999,  all of the acquired
dealerships  were merged into TDS.  TDS,  which  provides  new and retread  tire
products  and tire  management  services to  national,  regional and local fleet
transportation  companies,   operates  44  Bandag  franchise  and  manufacturing
locations and 109 commercial, retail and wholesale outlets in 17 states.

(b) Markets and Distribution
    ------------------------

         TDS offers complete tire management  services  including:  the complete
line of  Bandag  retreads,  new tires  (commercial,  retail  and  off-the-road),
24-hour road service and alignment.  The tire  management  services are provided
over a broad  geographic  area including the northwest and all across the south.
This  geographic  coverage  allows  TDS to  provide  consistent,  cost-effective
programs,  information,  products,  and services to local, regional and national
fleets.

         A  cost  effective  tire  management   service  continues  to  grow  in
importance  for  fleets  of  all  sizes.  The  trucking  industry  continues  to
consolidate.  Trucking fleets are under intense  pressure to be cost competitive
and reliable in their services.  Tire related costs are one of the top operating
expenses for trucking fleets.  Bandag and its dealer alliance network (including
TDS)  are able to  provide  trucking  companies  comprehensive  tire  management
services  which result in lower tire  operating  costs for the trucking  company
while at the same  time  helping  the  trucking  company  increase  its  service
reliability through the same tire management programs.

         TDS markets its products through sales personnel located at each of its
commercial locations, retread production facilities and retail facilities. TDS's
sales  people  make  personal  sales  calls  on  existing  customers  to  ensure
satisfaction  and  loyalty.  TDS  facilities  are  generally


                                      -6-
<PAGE>

located near major highway arteries, industrial centers, and customer locations.
TDS commercial  locations operate as points of sale for retread tires, new tires
and services.  In addition,  the commercial locations operate as a home base for
mobile service trucks which must be able to provide  customers with reliable and
timely emergency service as well as regularly scheduled maintenance service.

         In an effort to fully service its customers,  TDS sells new truck tires
manufactured  by  Bridgestone  Corporation,  Continental/General,  Kelly  Tires,
Yokahama,  Cooper,  and other  manufacturers  except for The  Goodyear  Tire and
Rubber Company and Groupe Michelin.

(c)  Competition
     -----------

         TDS competitors are other tire dealers,  which offer competing  retread
applications, as well as those which are Bandag franchised dealers. In addition,
such tire  dealers  typically  sell and service  new tires  produced by new tire
manufacturers  and  service  providers  such as The  Goodyear  Tire  and  Rubber
Company,  Bridgestone  Corporation  and Groupe  Michelin.  The Goodyear Tire and
Rubber  Company  and Groupe  Michelin  compete  in the U.S.  market and in other
markets  as a tread  rubber  supplier  to a  combination  of  company  owned and
independent retreaders.

(d) Sources of Supply
    -----------------

         TDS purchases  retread rubber and most of its retreading  equipment and
supplies from Bandag and purchases new tires from new tire  companies  including
Bridgestone Corporation, Yokahama, Continental/General, Cooper and Kelly. Groupe
Michelin and The Goodyear Tire and Rubber Company have  terminated  their dealer
relationships  with TDS dealers and will not sell new tires to TDS dealers.  TDS
has not experienced any material adverse effects from such  terminations and has
been   successful   in  obtaining  and  utilizing  new  tires  from  other  tire
manufacturers in its business.

                                   Regulations
                                   -----------

         Various  federal and state  authorities  have adopted  safety and other
regulations with respect to motor vehicles and components,  including tires, and
various states and the Federal Trade Commission  enforce statutes or regulations
imposing obligations on franchisors, primarily a duty to disclose material facts
concerning a franchise to prospective franchisees.  Management is unaware of any
present or proposed  regulations or statutes which would have a material adverse
effect  upon its  businesses,  but  cannot  predict  what other  regulations  or
statutes might be adopted or what their effect on the Company's businesses might
be.

                                Other Information
                                -----------------

         The  Company  conducts   research  and  development  of  new  products,
primarily  in the  Traditional  Business,  and  the  improvement  of  materials,
equipment,  and retreading processes.  The cost of this research and development
program  was  approximately  $16,159,000  in  1997,  $18,342,000  in  1998,  and
$12,325,000 in 1999.


                                      -7-
<PAGE>

         The Company's business has seasonal characteristics, which are tied not
only to the overall  performance of the economy,  but more  specifically  to the
level of activity in the trucking industry.  Tire demand does, however,  lag the
seasonality of the trucking  industry.  The Company's  third and fourth quarters
have historically been the strongest in terms of sales volume and earnings.

         The Company has sought to comply with all statutory and  administrative
requirements  concerning  environmental  quality.  The Company has made and will
continue to make necessary capital expenditures for environmental protection. It
is not anticipated that such  expenditures  will materially affect the Company's
earnings or competitive position.

         As of December 31, 1999, the Company had approximately 4,441 employees.

     Financial Information about Business Segments and Foreign and Domestic
     ----------------------------------------------------------------------
              Operations and Revenues of Principal Product Groups
              ---------------------------------------------------

         Financial Statement "Operating Segment and Geographic Area Information"
follows on page 9.




                                      -8-
<PAGE>

Operating Segment and Geographic Area Information

The Company has two reportable  operating segments:  the manufacture of precured
tread rubber, equipment and supplies for retreading tires (Traditional Business)
and the sales and maintenance of new and retread tires to principally commercial
and industrial customers (TDS).

Information  concerning  operations for the Company's two  reportable  operating
segments  and  different  geographic  areas  follows  (see  Note L to  Notes  to
<PAGE>

Consolidated Financial Statements):
<TABLE>
<CAPTION>
                                                               Traditional Business
                               ----------------------------------------------------------------------------------------------------
                                    North America(4)(5)          Europe(6)                Latin America(4)        Asia(4)(7)
                               --------------------------  -----------------------  ------------------------  ---------------------
In millions:                       1999    1998    1997     1999    1998    1997     1999    1998     1997     1999    1998   1997
<S>                            <C>       <C>     <C>      <C>     <C>     <C>       <C>    <C>      <C>       <C>     <C>    <C>
Net Sales
  Net sales to unaffiliated
    customers (1)(2)             $373.8  $422.0  $483.4   $103.7  $110.9  $123.0    $99.2  $122.2   $118.1    $25.5   $28.0  $42.7
  Transfers between
    segments                       72.5    65.7    24.1      0.8     1.0     0.5        -       -        -        -       -      -
                               --------------------------  -----------------------  ------------------------  ---------------------
  Segment area totals            $446.3  $487.7  $507.5   $104.5  $111.9  $123.5    $99.2  $122.2   $118.1    $25.5   $28.0  $42.7
  Eliminations (deduction)

Total Net Sales
Gross Profit                     $214.5  $219.1  $217.9    $46.0   $49.6   $53.8    $36.3   $43.8    $41.4     $8.8    $9.1  $13.0
Intangible Amortization             0.2     0.6     1.0        -       -       -        -       -        -        -       -      -
Depreciation Expense               21.5    19.8    19.5      4.9     6.1     6.7      5.1     5.9      5.1      0.6     1.1    1.4
Earnings (Expenses)
  Operating earnings (loss)(3)    $95.2   $98.8   $89.3    $11.4    $4.9    $8.8    $13.4   $15.5    $18.9     $4.6   $(1.4)  $3.2
  Gain on sale of stock               -       -       -        -       -       -        -       -        -        -       -      -
  Interest revenue                    -       -       -        -       -       -        -       -        -        -       -      -
  Interest expense                    -       -       -        -       -       -        -       -        -        -       -      -
  Corporate expenses                  -       -       -        -       -       -        -       -        -        -       -      -
                               --------------------------  -----------------------  ------------------------  ---------------------
Earnings (Loss) Before
  Income Taxes                    $95.2   $98.8   $89.3    $11.4    $4.9    $8.8    $13.4   $15.5    $18.9     $4.6   $(1.4)  $3.2
Total Assets at
  December 31                    $281.1  $321.8  $312.6    $52.4   $67.1   $73.9    $64.6   $80.4    $74.4    $12.1   $15.1  $21.2
Expenditures for
  Long-Lived Assets                20.0    33.3    15.8      3.0     4.3     7.5      4.7    10.0     15.1      0.9     1.3    1.0
Additions to Long-Lived
  Assets due to Acquisitions          -     0.9       -        -       -       -      -         -        -        -       -      -
Long-Lived Assets                  89.6    90.8    86.6     11.4    15.2    16.3     32.0    43.6     40.4      2.9     3.2    5.1
Sales by Product
  Retread products               $360.1  $404.5  $462.5   $101.8  $104.4  $110.5    $95.8  $117.0   $111.4    $15.3   $15.4  $24.2
  New tires                           -       -       -        -       -       -        -       -        -      3.0     4.8    8.2
  Retread tires                       -       -       -        -       -       -        -       -        -      6.4     5.9    7.5
  Other                            13.7    17.5    20.9      1.9     6.5    12.5      3.4     5.2      6.7      0.8     1.9    2.8
</TABLE>

<TABLE>
<CAPTION>
                                          TDS                    Other (4)                  Consolidated
                               --------------------------  ----------------------  ---------------------------
In millions:                       1999    1998    1997     1999    1998    1997      1999      1998       1997
<S>                              <C>     <C>     <C>      <C>     <C>    <C>      <C>       <C>          <C>
Net Sales
  Net sales to unaffiliated
    customers (1)(2)             $393.1  $376.6   $55.3    $17.4       -       -  $1,012.7  $1,059.7     $822.5
  Transfers between
    segments                          -       -       -        -       -       -      73.3      66.7       24.6
                               --------------------------  ----------------------  ---------------------------
  Segment area totals            $393.1  $376.6   $55.3    $17.4       -       -  $1,086.0  $1,126.4     $847.1
  Eliminations (deduction)                                                           (73.3)    (66.7)     (24.6)
                                                                                  -----------------------------
Total Net Sales                                                                   $1,012.7  $1,059.7     $822.5
Gross Profit                      $92.1   $84.8   $14.0    $(5.0)     $-      $-    $392.7    $406.4     $340.1
Intangible Amortization             9.7     8.0     1.3        -       -       -       9.9       8.6        2.3
Depreciation Expense               11.0     9.4     1.5      0.8     0.5     0.4      43.9      42.8       34.6
Earnings (Expenses)
  Operating earnings (loss)(3)    $(2.5)   $2.5   $(2.0)  $(11.4   $(5.7)  $(1.4)   $110.7    $114.6     $116.8
  Gain on sale of stock               -       -       -        -       -    95.1         -         -       95.1
  Interest revenue                    -       -       -      6.1     9.0     7.5       6.1       9.0        7.5
  Interest expense                    -       -       -     (9.7)  (10.8)   (3.3)     (9.7)    (10.8)      (3.3
  Corporate expenses                  -       -       -    (15.0)  (13.3)  (13.2)    (15.0)    (13.3)     (13.2
                               --------------------------  ----------------------  ---------------------------
Earnings (Loss) Before
  Income Taxes                    $(2.5)   $2.5   $(2.0)  $(30.0  $(20.8)  $84.7     $92.1     $99.5     $202.9
Total Assets at
  December 31                    $243.2  $217.2  $217.9    $69.0   $54.1  $199.9    $722.4    $755.7     $899.9
Expenditures for
  Long-Lived Assets                10.8    15.6     1.0      2.5     0.9     1.8      41.9      65.4       42.2
Additions to Long-Lived
  Assets due to Acquisitions        4.4    12.9   125.1        -       -       -       4.4      13.8      125.1
Long-Lived Assets                 125.8   133.9   123.2      3.6     1.9     1.6     265.3     288.6      273.2
Sales by Product
  Retread products                   $-      $-      $-       $-       -       -    $573.0    $641.3     $708.6
  New tires                       218.2   214.1    36.5        -       -       -     221.2     218.9       44.7
  Retread tires                    96.9    86.6    11.6        -       -       -     103.3      92.5       19.1
  Other                            78.0    75.9     7.2     17.4       -       -     115.2     107.0       50.1

</TABLE>
<PAGE>

(1)  No  customer   accounted  for  10%  or  more  of  the  Company's  sales  to
     unaffiliated customers in 1999, 1998, or 1997.
(2)  Export sales from North America were less than 10% of sales to unaffiliated
     customers in each of the years 1999, 1998, and 1997.
(3)  Aggregate  foreign  exchange  gains (losses)  included in  determining  net
     earnings amounted to approximately $800,000, $(3,200,000) and $1,500,000 in
     1999, 1998 and 1997 respectively.
(4)  For segment  reporting  purposes,  Mexico and South Africa  operations  are
     included  in the  Latin  America  segment  and New  Zealand  and  Australia
     operations are included in the Asia segment,  consistent with  management's
     groupings for internal purposes. Other includes Corporate activities and in
     1999 and 1998, the Tire Management Solutions pilot initiative.
(5)  Includes  in 1999  non-recurring  charges of  $12,800,000  related to costs
     associated with the closure of a domestic  manufacturing facility and other
     non-recurring costs.  Includes in 1997 non-recurring charges of $16,500,000
     related to the closure of a domestic  manufacturing facility and exit costs
     from a rubber recycling venture.
(6)  Includes  in  1999  non-recurring   charges  of  $700,000  for  termination
     benefits.   Includes  in  1998  non-recurring  charges  of  $4,176,000  for
     termination benefits.
(7)  Includes  in 1998 net  non-recurring  charges of  $29,000  related to costs
     associated with the closure of foreign  manufacturing  facilities and other
     non-recurring  costs.  The  net  non-recurring  charges  include  a gain of
     $3,297,000  consisting  of  the  non-taxable   recognition  of  accumulated
     translation gains due to the exit of operations in Indonesia.


                                      -9-

<PAGE>
Executive Officers of the Company

         The  following  table  sets  forth the names and ages of all  executive
officers of the Company as of March 13, 2000, the period of service of each with
the Company,  positions and offices with the Company presently held by each, and
the period during which each officer has served in his present office:
<TABLE>
<CAPTION>
                               Period of                                                   Period in
                                Service                 Present Position                    Present
        Name             Age  with Company                  or Office                        Office
        ----             ---  ------------                  ---------                        ------
<S>                       <C>   <C>             <C>                                         <C>
Martin G. Carver*         51    21 Yrs.         Chairman of the Board, Chief                19 Yrs.
                                                Executive Officer and President

Lucille A. Carver*        82    42 Yrs.         Treasurer                                   41 Yrs.

Nathaniel L. Derby II     57    29 Yrs.         Vice President, Manufacturing Design         3 Yrs.

Warren W. Heidbreder      53    18 Yrs.         Vice President, Chief Financial              3 Yrs.
                                                Officer and Secretary

Frederico U. Kopittke     56     5 Yrs.         Vice President, Latin America and            1 Yr.
                                                South Africa

John C. McErlane          46    15 Yrs.         Vice President, Marketing and Sales          2 Yr.
</TABLE>

*  Denotes that officer is also a director of the Company.

         Mr. Martin G. Carver was elected  Chairman of the Board  effective June
23,  1981,  Chief  Executive  Officer  effective  May 18,  1982,  and  President
effective May 25, 1983. Prior to his present position,  Mr. Carver was also Vice
Chairman of the Board from January 5, 1981 to June 23, 1981.

         Mrs.  Carver has,  for more than five years,  served as a Director  and
Treasurer of the Company.

         Mr. Derby joined Bandag in 1971.  In December  1985, he was promoted to
Vice  President,  Engineering and served in that position until August 1996 when
he was elected to the office of Vice President,  Engineering.  He served in that
office  until  May  1997,  when he was  elected  to his  current  office of Vice
President, Manufacturing Design effective April 28, 1997.

         Mr.  Heidbreder  joined  Bandag in 1982.  In 1986 he was elected to the
office  of Vice  President,  Legal and Tax  Administration,  and  Secretary.  In
November  1996, he was elected to his current  office of Vice  President,  Chief
Financial Officer, and Secretary effective as of January 1, 1997.


                                      -10-
<PAGE>

         Mr. Kopittke joined Bandag in July 1994 as Company Manager of Bandag do
Brasil Ltda. He served in that position  until March 1998 when he was elected to
the office of Vice President,  Latin America.  In August 1998, he was elected to
his current office of Vice President  Latin America and South Africa,  effective
July 13, 1998. Before joining Bandag, Mr. Kopittke was employed for more than 16
years by Nalco Chemical Company in South America.

         Mr.  McErlane  joined  Bandag in 1985.  From 1985 through 1995, he held
several managerial  positions with the Company.  In 1996, he was promoted to the
position of Director,  Marketing. In January 1997, he was promoted to the office
of Vice President,  Marketing and served in that position until March 1998, when
he was  elected to his current  office of Vice  President,  Marketing  and Sales
effective February 16, 1998.

         All of the  above-named  executive  officers  have been  elected by the
Board of Directors and serve at the pleasure of the Board of Directors.

ITEM 2.  PROPERTIES
------   ----------
                              Traditional Business
                              --------------------

         The  general  offices of the  Company  are  located in a  company-owned
56,000 square foot office building in Muscatine, Iowa.

         The tread  rubber  manufacturing  plants of the  Company are located to
service principal  markets.  The Company owns thirteen of such plants.  However,
the Company only operates  twelve of these plants,  four of which are located in
the United States, and the remainder in Canada,  Belgium,  South Africa,  Brazil
(two plants),  Mexico,  Malaysia, and Venezuela.  Operations in one tread rubber
manufacturing  plant located in the United  States were  suspended in the fourth
quarter of 1999 but the facility remains viable for general corporate  purposes.
The plants vary in size from 9,600  square feet to 194,000  square feet with the
first plant being  placed into  production  during  1959.  All of the plants are
owned in fee except for the plants located in Malaysia and Venezuela,  which are
under standard lease contracts.

         Retreading equipment is manufactured at Company-owned plants located in
Muscatine,  Iowa and Campinas, S.P., Brazil, of approximately 60,000 square feet
and 10,000 square feet,  respectively.  In addition, the Company owns a research
and development  center in Muscatine of  approximately  58,400 square feet and a
26,000  square  foot  facility  used  primarily  for  training  franchisees  and
franchisee personnel.  Similar training facilities are located in Brazil, Mexico
(leased  facility),  South  Africa and Europe.  The  Company  also owns a 26,000
square foot office and machining facility in Muscatine.

         Construction of a new 83,000 square foot training and conference center
was completed in early 1999 in Muscatine, Iowa.

         In addition,  the Company  mixes  rubber and  produces  cushion gum and
envelopes  at a  Company-owned  168,000  square  foot plant in  California.  The
Company owns its European  headquarters facility in Belgium and a 129,000 square
foot warehouse in the Netherlands.


                                      -11-
<PAGE>
                                  TDS Business
                                  ------------

         TDS  currently  owns 45 and leases 91  facilities.  Forty-four  contain
space for TDS's retread production and 109 contain space for commercial,  retail
and wholesale operations. The Company believes that it will be able to renew its
existing  leases as they  expire or find  suitable  alternative  locations.  The
leases generally  provide for a base rental,  as well as charges for real estate
taxes, insurance, maintenance and various other items.

         In the opinion of the Company,  its  properties  are maintained in good
operating  condition and the  production  capacity of its plants is adequate for
the near future.  Because of the nature of the activities  conducted,  necessary
additions can be made within a reasonable period of time.

ITEM 3.  LEGAL PROCEEDINGS
------   -----------------

General
-------

         The Company is a part to a number of lawsuits and claims arising out of
the  normal  course  of  business.  While the  results  of such  litigation  are
uncertain,  management  believes that the final  outcome of any such  litigation
will not have a material adverse effect on the Company's  consolidated financial
position or the result of operations.  Changes in assumptions, as well as actual
experience, could cause estimates made by management to change.

Bandag, Incorporated vs. Michelin Technologies, Inc. and Michelin North America,
-------------------------------------------------------------------------------
Inc.
---
         On September 16, 1999, the Company filed a lawsuit in the U.S. District
Court for the Eastern District of Iowa against Michelin North America,  Inc. and
Michelin Retread Technologies,  Inc. (collectively "Michelin"),  subsidiaries of
Compagnie  Generale des  Etablissements  Michelin,  a French based  company with
global distribution.  According to the suit, Michelin has attempted to eliminate
the  Company  as a  competitor  in the  U.S.  replacement  tire  market  for the
commercial  trucking  industry by  undermining  the  Company's  dealer  network,
interfering with the Company's  contractual and business  relationships with its
dealers  and  fleet  customers,  and  engaging  in  unfair  competition,   false
advertising,  and violating U.S. anti-trust laws. On November 17, 1999, Michelin
filed a counterclaim against the Company,  primarily alleging various violations
of  the  U.S.  anti-trust  laws.  Both  the  Company's  lawsuit  and  Michelin's
counterclaim seek compensatory and injunctive  relief.  While the results of the
Company's suit and Michelin's counterclaim cannot be predicted with certainty, a
victory on Michelin's  counterclaim  could have a material adverse effect on the
Company's consolidated financial position and results of operations. Management,
however,  believes that its claims  against  Michelin are  meritorious  and that
Michelin's  counterclaim  is completely  without merit.  The Company  intends to
vigorously defend its position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
         None.



                                      -12-
<PAGE>

                                    PART II
                                    -------

ITEM 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
--------------------------------------------------------------------------------
MATTERS.
-------

         Information concerning cash dividends declared and market prices of the
Company's  Common Stock and Class A Common Stock for the last three fiscal years
is as follows:
<TABLE>
<CAPTION>
                                         1999       % Change           1998       % Change        1997
                                         ----       --------           ----       --------        ----
   Cash Dividends Per Share-
   Declared
<S>                                     <C>         <C>              <C>          <C>            <C>
   First Quarter                        $ 0.2850                     $ 0.2750                    $ 0.2500
   Second Quarter                         0.2850                       0.2750                      0.2500
   Third Quarter                          0.2850                       0.2750                      0.2500
   Fourth Quarter                         0.2950                       0.2850                      0.2750
                                     ------------------------------------------------------------------------
   Total Year                             1.1500        3.6            1.1100        8.3         $ 1.0250

   Stock Price Comparison (1)
      Common Stock
   First Quarter                          $28.13    -  41.63           $53.31     -  59.13       $45.00   - 51.88
   Second Quarter                          28.38    -  37.25            39.00     -  59.75        46.38   - 51.75
   Third Quarter                           28.25    -  36.25            29.88     -  42.06        47.94   - 54.13
   Fourth Quarter                          23.50    -  31.75            28.31     -  39.94        48.38   - 55.75
   Year-end Closing Price                              24.88                         39.94                  53.44
      Class A Common Stock
   First Quarter                          $23.38    -  37.75           $48.00     -  54.38       $45.25   - 50.38
   Second Quarter                          23.88    -  32.13            34.50     -  54.00        45.00   - 49.50
   Third Quarter                           22.50    -  29.56            28.44     -  39.50        47.50   - 53.44
   Fourth Quarter                          19.94    -  24.50            27.38     -  35.13        46.38   - 52.00
   Year-end Closing Price                              21.06                         34.88                  47.88

(1)      High and low composite  prices in trading on the New York and Chicago Stock Exchanges  (ticker symbol
         BDG for Common Stock and BDGA for Class A Common Stock).
</TABLE>

         The approximate  number of record holders of the Company's Common Stock
as of March 13, 2000,  was 2,179,  the number of holders of Class A Common Stock
was 1,200 and the number of holders of Class B Common  Stock was 231. The Common
Stock and Class A Common Stock are traded on the New York Stock Exchange and the
Chicago Stock Exchange.  There is no established  trading market for the Class B
Common Stock.

Sale of Unregistered Securities

         On November 11, 1999,  the Company issued 20,000 shares of Common Stock
to Martin G. Carver  pursuant to his exercise of stock  options for an aggregate
consideration of $469,000.  No underwriters  were engaged in connection with the
foregoing  sale.  The  issuance  of the  foregoing  securities  was exempt  from
registration  under the  Securities  Act of 1933  pursuant to Section  4(2) as a
transaction not involving a public offering.


                                      -13-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
------   ------------------------

         The following table sets forth certain Selected  Financial Data for the
periods and as of the dates indicated:
<TABLE>
<CAPTION>
                                                    1999           1998        1997(2)        1996           1995
                                               ------------------------------------------------------------------------
(In thousands, except per share data)
<S>                                               <C>            <C>            <C>           <C>            <C>
Net Sales                                         $1,012,665     $1,059,669     $822,523      $756,925       $740,363
Net Earnings(1)                                       52,330         59,319      121,994        81,604         97,027
                                               ------------------------------------------------------------------------

Total Assets                                        $722,421       $755,729     $899,904      $588,342       $554,159
Long-term Debt and Other Obligations                 111,151        109,757      123,195        10,125         11,857
Net Earnings Per Share:
    Basic Earnings Per Share                           $2.41          $2.64        $5.35         $3.46          $3.84
    Diluted Earnings Per Share                         $2.40          $2.63        $5.33         $3.44          $3.82
Cash Dividends Per Share-Declared                    $1.1500        $1.1100      $1.0250       $0.9250        $0.8250


(1)      Includes in 1999 the effect of non-recurring charges of $13,500,000 pre-tax,  $7,671,000 after-tax, or $.35 per
         diluted share,  related to costs  associated  with the closure of a domestic  manufacturing  facility and other
         non-recurring costs.

         Includes in 1998 the effect of net non-recurring charges of $4,205,000 pre-tax,  $1,174,000 after-tax,  or $.05
         per diluted share, related to costs associated with the closure of foreign  manufacturing  facilities and other
         non-recurring costs.

         Includes in 1997 the effect of a non-recurring  gain on the sale of marketable equity securities of $95,087,000
         pre-tax,  $55,800,000 after-tax,  or $2.44 per diluted share, and non-recurring charges of $16,500,000 pre-tax,
         $9,900,000  after-tax,  or $.43 per diluted share, related to the closing of a manufacturing  facility and exit
         cost from a rubber recycling venture.

(2)      During  1997  the  Company's  subsidiary,  Tire  Distribution  Systems,  Inc.,  commenced  operations  with the
         acquisition of five tire dealerships  whose operations are included in the  consolidated  financial  statements
         from November 1, 1997, the effective date of the acquisitions.
</TABLE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
------   -------------------------------------------------------------
         AND FINANCIAL CONDITION
         -----------------------

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

GENERAL

Results include the Company's Traditional  Business,  Tire Distribution Systems,
Inc. (TDS),  and Tire Management  Solutions,  Inc., a pilot operation (TMS). The
comparability   of  operating   results  between  years  is  affected  by  TDS's
acquisition  of tire  dealerships  in each of the  years  1999  and  1998 and by
certain non-recurring items.

Consolidated  net sales in 1999 decreased 4% from 1998. This included a decrease
of 10% in the  Traditional  Business.  Of this  Traditional  Business  decrease,
approximately 4 percentage points were a result of the lower translated value of
the  Company's   foreign-currency-


                                      -14-
<PAGE>

denominated  sales. The remaining  decrease  resulted from lower equipment sales
and a 6% decline in retread  material  unit  volume  from 1998.  The  decline in
Traditional  Business  sales was  primarily  due to  competitive  pressures  and
industry  consolidation in the United States, which is expected to continue into
2000 and beyond. In addition, the Company experienced some dealer separations in
the  United  States  which  negatively   impacted  sales  volume.   The  Company
anticipates  that future sales volume may continue to be negatively  impacted by
additional  dealer  separations.  The Company has not  received  any  additional
notices  of  separations  that  would  have a  significant  impact on  operating
results.  The decline in Traditional  Business sales was offset by a 4% increase
in TDS  sales  over 1998 and sales  for TMS.  The  increase  in TDS net sales is
principally  attributable  to  dealership  acquisitions  during  the  year.  The
Company's  seasonal  sales  pattern,  which is tied to  trucking  activity,  was
similar to previous years with the third and fourth quarters being the strongest
for both sales and earnings. All segments were similarly affected.

Gross profit margin for the  Traditional  Business  increased by 2.4  percentage
points over 1998 mainly due to lower raw  material  costs in the United  States.
Consolidated gross profit margin for 1999 increased by .5 percentage points over
1998, a lower  increase than seen in the  Traditional  Business  margin due to a
higher portion of consolidated  sales coming from TDS, which operates at a lower
gross margin, and the inclusion of TMS.

Consolidated operating and other expenses in 1999 decreased 3% from 1998. Before
non-recurring  items,  operating and other expenses of the Traditional  Business
decreased  15% from 1998.  This  decrease  was offset by a 15%  increase  in TDS
operating and other expenses over 1998 due to acquisitions.  Earnings  benefited
from  progress in efforts to return  operating  expenses  to a more  traditional
level, but with the decline in unit volume,  net earnings  declined 1% from 1998
before non-recurring items. The Company's consolidated effective income tax rate
of  43.2%  was  higher  than  the  1998  rate  of  40.4%  principally  due  to a
non-recurring  loss on the exit from a rubber recycling  venture and non-taxable
recognition of accumulated translation gains in 1998.

The lower earnings resulted in diluted earnings per share of $2.40 for the year,
down from diluted earnings per share of $2.63 in 1998. Earnings in 1999 included
the effect of non-recurring charges of $7,671,000,  net of tax benefits, or $.35
per  diluted  share.  The prior year  included  the effect of net  non-recurring
charges of $1,174,000,  net of tax benefits, or $.05 per diluted share. Refer to
Note B of the notes to the consolidated  financial  statements for discussion of
the non-recurring charges.

Non-recurring  charges  in  1999  relate  to the  closure  of a  North  American
manufacturing facility, along with the elimination of certain  non-manufacturing
positions.  These  measures  were taken to address a  fundamental  change in the
nature of our business as it moves from a product-driven organization to a fully
integrated provider of tire management products and services. As a result of the
actions  taken in 1999,  the  Company  expects  savings  in 2000 to  approximate
$14,000,000.



                                      -15-
<PAGE>

TRADITIONAL BUSINESS

The Company's  Traditional  Business operations located in the United States and
Canada are integrated  and managed as one unit,  which is referred to internally
as North America. Net sales in North America were 9% below 1998 primarily due to
7% lower retread material unit volume.  Net sales were also negatively  impacted
by a 29% decline in equipment sales. The North American sales decline was due to
competitive pressures and industry  consolidation in the United States, which is
expected to continue into 2000 and beyond, as well as some dealer separations in
the United States. A 5% decrease in average raw material costs from 1998 yielded
a  3.2-percentage-point  improvement in North America's gross profit margin over
1998.  North  American  operating  expenses,   which  included   $12,800,000  of
non-recurring  charges,  were 8% lower than 1998.  However,  operating  expenses
exclusive  of  non-recurring  charges  decreased  by 18% due to decreases in R&D
projects, marketing programs, promotional expenses, and personnel-related costs.
Earnings before income taxes for 1999 decreased 4% from 1998.

The  Company's  operations  located  in Europe  principally  service  markets in
European  countries,  but also export to certain  other  countries in the Middle
East and Northern and Central Africa.  This collection of countries is under one
management  group and is referred to internally  as Europe.  Net sales in Europe
declined  7% from 1998 on a 5% retread  material  unit  volume  decrease.  The 2
percentage  point spread between the net sales decrease and the retread material
unit volume decrease is due to the lower  translated value of the Belgium franc.
Gross  profit  margin  decreased  .4  percentage  points  from  1998  due to the
inclusion of lower margin service revenue. Operating expenses decreased 21% from
1998  due to  lower  personnel  and  marketing  costs  in the  current  year and
non-recurring  costs  included in 1998.  The increase in earnings  before income
taxes over 1998 reflected the decline in operating expenses.

The Company's  exports from North America to markets in the  Caribbean,  Central
America and South America,  along with operations in Brazil,  Mexico,  Venezuela
and South Africa are combined under one management  group referred to internally
as  Latin  America.   In  general,   Latin  American   operating   results  were
significantly  affected by the  devaluation of the Brazilian  real. Net sales in
Latin America  declined 19% from 1998 on a retread material unit volume decrease
of 3% and lower  translated  value of  foreign-currency-denominated  sales.  The
decline in retread  material  unit volume was driven by fewer exports from North
America  coupled  with lower  shipments  in South  Africa  due to South  African
economic  constraints  and  increased  competition.   The  gross  profit  margin
increased  by .7  percentage  points over 1998 due to price  increases  in South
Africa  and lower  production  costs and  higher  margins  on  locally  produced
products in Mexico. Operating expense levels for each country were comparable to
1998 relative to the respective change in unit volume,  except for Mexico, which
experienced lower operating expenses in 1999 due to higher severance,  bad debt,
and  staffing  expense  incurred in 1998.  Primarily as a result of lower sales,
earnings before income taxes were 13% below 1998.

The Company's  exports from North America to markets in Asian  countries,  along
with  operations  in New  Zealand,  Indonesia  and  Malaysia  and a licensee  in
Australia,  are combined  under one  management  group referred to internally as
Asia.  Net sales in Asia  declined  9% as a result of a 4%  decrease  in retread
material unit volume, lower exported equipment sales, and


                                      -16-
<PAGE>

reduced  new tire  sales in New  Zealand.  Lower raw  material  costs and higher
margins on export shipments in Malaysia were partially offset by the higher cost
of   imported   retread    materials   in   New   Zealand,    resulting   in   a
2.1-percentage-point  increase in the gross profit  margin over 1998.  Operating
expenses  for the year  declined  54% from 1998 mainly due to the  non-recurring
charges  in 1998  which  reduced  personnel-related  costs  and  managerial  and
administrative  support  costs.  Earnings  before  income  taxes for 1999 showed
significant improvement principally due to lower operating expenses.

TIRE DISTRIBUTION SYSTEMS, INC.

Excluding  the effect of  acquisitions,  TDS sales  declined 2% from 1998,  from
$376,557,000 to $369,944,000, due primarily to discontinuing the sale of certain
off-the-road  tires.  From  an  operating  perspective,  TDS  continued  to make
progress in  integrating  the  dealerships  it has  acquired  since 1997.  TDS's
operating  expenses were 15% above 1998.  Operating  expenses  were  unfavorably
impacted in 1999 by the integration of new acquisitions and the consolidation of
the Central Division office into the Eastern Division headquarters. In 1999, TDS
recorded a loss before  interest  and taxes of  $2,510,000  compared to earnings
before interest and taxes of $2,517,000 in 1998. The decrease in earnings before
interest  and taxes from 1998  reflect the  unfavorable  impact of current  year
acquisitions and the cost of consolidating certain operations.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

GENERAL

Results   include  both  the  Company's   Traditional   Business  and  TDS.  The
comparability  of  operating  results  between  years is affected by TDS,  which
commenced  operations  effective  November 1, 1997 with the  acquisition of five
tire dealerships and which acquired several  additional  dealerships  throughout
1998, and also by certain non-recurring items.

Consolidated net sales in 1998 increased 29% from 1997. This increase was solely
attributable  to the TDS operations,  as Traditional  Business net sales were 5%
below 1997. Of this 5% decrease, approximately 2 percentage points were a result
of lower translated value of the Company's  foreign-currency-denominated  sales.
The remaining  3-percentage-point  decrease resulted from lower equipment sales.
The  Company's  seasonal  sales  pattern was similar to previous  years and both
business segments were similarly affected.

Gross profit  margin for the  Company's  Traditional  Business  increased by 1.7
percentage points due to lower raw material costs in the U.S. and Mexico.  Gross
profit margins in Europe, Brazil and South Africa remained steady.  Inclusion of
the  TDS  operations,   which  operate  at  a  lower  gross  margin,   decreased
consolidated gross margin by 3.1 percentage points.

Consolidated  operating  and other  expenses in 1998  increased 30% from 1997. A
full year of TDS operating and other expenses accounted for 27 percentage points
of this  increase.  The remaining  3-percentage-point  increase in operating and
other  expenses was  attributable  to continued  business  development,  and the
rationalization  of unnecessary  infrastructure  to


                                      -17-
<PAGE>

improve  profitability.  The  additional  business  development  spending was to
improve  capabilities  to further  build the dealer  alliance and to prepare the
Company for the  introduction of tire management  outsourcing in early 1999. The
lower Traditional Business sales and the higher operating expenses resulted in a
net earnings  decline of 20% in 1998 before  non-recurring  items. The Company's
consolidated effective income tax rate of 40.4% was higher than the 1997 rate of
39.9% principally due to the impact of a full year of nondeductible TDS goodwill
amortization.

Diluted earnings per share were $2.63 in 1998 compared to $5.33 in 1997. Diluted
earnings per share in 1997  included the effect of a  non-recurring  gain on the
sale of  marketable  equity  securities of  $55,800,000  after tax, or $2.44 per
diluted share, and non-recurring charges of $9,900,000,  net of tax benefits, or
$.43 per diluted share,  related to the closing of a manufacturing  facility and
exit costs from a rubber  recycling  venture.  Fourth quarter and full year 1998
diluted  earnings per share benefited by $.12 per diluted share as a result of a
lower effective tax rate in the fourth quarter compared to 1997. Refer to Note B
of  the  notes  to the  consolidated  financial  statements  for  discussion  of
non-recurring items.

Non-recurring  charges in 1998  relate to the  closure of foreign  manufacturing
facilities,  employee  reductions  and other exit  costs.  In 1998,  the Company
closed  manufacturing  facilities  in  Indonesia  and New Zealand and a regional
office in Hong Kong,  all in response to the  economic  crisis in the area.  The
Company  also took actions in Europe to bring  expenses  more in line with lower
sales volume expectations.

TRADITIONAL BUSINESS

Net sales in North America were 4% below 1997 due to 1% lower  retread  material
unit volume, 2% from the absence of sales from the rubber recycling venture, and
1% attributable to product mix. Gross profit margin improved 2 percentage points
because average raw material costs were lower than 1997's  average.  As a result
of the higher gross profit  margin and lower  expenses,  earnings  before income
taxes in 1998 increased 11% from 1997.

Net sales in Europe declined 9% from 1997,  despite a slight increase in retread
material  unit  volume.  Four  percentage  points of the decline were due to the
lower translated  value of the Belgian franc.  The remaining  5-percentage-point
decline resulted mainly from lower equipment sales.  Gross profit margin in 1998
increased 1 percentage  point from  1997,resulting  from decreased  lower-margin
equipment  sales and  lower-per-unit-capacity  costs  due to higher  production.
Operating  expenses  decreased 1% from 1997 due to the lower translated value of
the Belgian franc. In local currency,  1998 operating expenses were 3% over 1997
due to  non-recurring  costs and additional  bad debt expense.  Principally as a
result of the lower sales,  earnings  before  income taxes  declined by 45% from
1997.

Latin America  exceeded 1997 retread  material unit volume by 11%, but net sales
increased only 3% due to lower  equipment  sales in Brazil,  Mexico,  the Andean
area and South  Africa and the lower  translated  value of  foreign  currencies.
Gross profit  margin  increased  by 1  percentage  point over 1997 mainly due to
lower raw material costs and higher  production in Mexico.  The other areas were
basically  even with 1997.  The volume  growth in Brazil and


                                      -18-
<PAGE>

Mexico drove a 25% increase over 1997 in operating  expenses.  Also contributing
to the operating  expense  increase were severance and higher staffing  expense.
Principally  because of the higher  operating  expenses,  earnings before income
taxes were 18% below 1997.

Net sales declined 34% in Asia as a result of a 17% decline in retread  material
unit volume,  lower equipment  sales in Malaysia,  reduced new tire sales in New
Zealand and the devaluation of currencies  throughout  Asia. Gross profit margin
increased  2  percentage  points  over 1997 due to the  absence of  lower-margin
equipment sales in Malaysia,  increased higher-margin export sales from Malaysia
and higher production in Indonesia.  Operating  expenses increased slightly over
1997 with the  inclusion  of  non-recurring  charges  in 1998.  The  decline  in
earnings  before  income  taxes from 1997  reflect the  significant  drop in net
sales.

TIRE DISTRIBUTION SYSTEMS, INC.

TDS  operating  results  reflect a full year for  1998.  Net sales and  earnings
before  income  taxes and  interest for TDS were  $376,557,000  and  $2,517,000,
respectively.  TDS had to replace two major new tire brands during the year, but
same store-sales  were down only slightly.  From an operating  perspective,  TDS
continued to make  progress in  integrating  the acquired  dealerships.  The TDS
integration  strategy  calls for the sale of  acquired  retail or  manufacturing
locations  in markets  more  appropriately  served by other  independent  Bandag
dealers. For this reason, during 1998 several locations were sold to independent
Bandag dealers. In addition,  a wholesale business was closed and several retail
locations were consolidated.

IMPACT OF INFLATION AND CHANGING PRICES

It has generally  been the Company's  practice to adjust its selling  prices and
sales  allowances  to reflect  changes in production  and raw material  costs in
order to maintain its gross profit margin.  In the past three years,  costs have
remained  relatively  constant  and the  Company has not found it  necessary  to
implement general price increases.  However,  the Company foresees a rise in raw
material  costs in 2000 due to increasing oil prices.  Accordingly,  the Company
may adjust prices in the near future. The Company's gross profit margin could be
negatively  impacted if  resulting  price  adjustments  fail to fully offset any
increase in raw material costs.

Replacement  of fixed  assets  requires a greater  investment  than the original
asset cost due to the impact of general  price level  increases  over the useful
lives of plant and equipment.  This increased capital investment would result in
higher  depreciation  charges  affecting both  inventories  and cost of products
sold.

CAPITAL RESOURCES AND LIQUIDITY

At the end of 1999, current assets exceeded current liabilities by $274,065,000.
Cash and cash equivalents totaled  $50,633,000 at December 31, 1999,  increasing
by $12,721,000  during the year.  The Company  invests excess funds over various
terms, but only  instruments with an original  maturity date of over 90 days are
classified as investments. These investments decreased by $260,000 from 1998.


                                      -19-
<PAGE>

The only changes in working capital requirements are for normal business growth.
The Company funds its capital  expenditures from the cash flow it generates from
operations. During 1999, the Company spent $41,903,000 for capital expenditures.
The Company believes that spending in recent years is  representative  of future
capital  spending  needs.  In  addition,  the Company  made  $6,899,000  in cash
payments in 1999 for acquisitions of TDS businesses.

As of December 31, 1999, the Company had available  uncommitted  lines of credit
totaling  $71,924,000 in the United States for working capital  purposes.  Also,
the Company's foreign  subsidiaries had approximately  $34,343,000 in credit and
overdraft  facilities  available  to them.  From time to time during  1999,  the
Company  borrowed funds to supplement  operational  cash flow needs or to settle
intercompany   transactions.   The  Company's   long-term   liabilities  totaled
$111,151,000 at December 31, 1999,  which is  approximately  20% of the combined
total of long-term  liabilities and stockholders' equity; this is an increase of
$1,394,000 from December 31, 1998.

During the year,  the  Company  purchased  1,214,000  shares of its  outstanding
Common  Stock and Class A Common  Stock for  $25,082,000  at  prevailing  market
prices and paid cash dividends  amounting to $25,001,000.  The Company generally
funds its dividends and stock  repurchases from the cash flow generated from its
operations.  Historically, the Company has utilized excess funds to purchase its
own shares.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Risk Management

The Company is exposed to market risk from  changes in interest  rates,  foreign
exchange rates, and commodity prices. To mitigate such risks, the Company enters
into various hedging  transactions.  All hedging transactions are authorized and
executed  pursuant to clearly  defined Company  policies and  procedures,  which
strictly  prohibit  the  use of  financial  instruments  for  trading  purposes.
Analytical  techniques and selective  hedging  instruments are applied to manage
and monitor such market exposures.

Foreign Currency Exposure

Foreign  currency  exposures  arising from cash flow  transactions  include firm
commitments and anticipatory transactions.  Translation exposure is also part of
the overall foreign  exchange risk. The Company's  exposure to foreign  currency
risks exists primarily with the Brazilian real,  Canadian dollar,  Mexican peso,
Japanese yen and major European  currencies.  The Company  regularly enters into
foreign currency  contracts  primarily using foreign exchange forward  contracts
and options to hedge most of its firm  commitment  exposures.  The Company  also
employs foreign exchange forward  contracts as well as option contracts to hedge
approximately 40% - 60% of its anticipated  future cash flow transactions over a
period of one year. The notional amount of these contracts at December 31, 1999,
was  $7,688,000.  The  Company  also  limits its  exposure  to foreign  currency
fluctuations  by entering into  offsetting  asset or liability  positions and by
establishing and monitoring limits on unmatched positions.  The Company's


                                      -20-
<PAGE>

pretax earnings from foreign  subsidiaries  and affiliates  translated into U.S.
dollars  using a weighted  average  exchange rate was  $42,904,000  for the year
ending December 31, 1999. On that basis,  the potential loss in the value of the
Company's   pretax   earnings  from  foreign   subsidiaries   resulting  from  a
hypothetical 10% adverse change in quoted foreign currency  exchange rates would
amount to $3,522,000.

Interest Rate Exposure

In order to mitigate the impact of fluctuations in the general level of interest
rates, the Company generally maintains a large portion of its debt as fixed rate
in nature by borrowing on a long-term  basis.  At December 31, 1999, the Company
had no outstanding  short-term  debt. The total  outstanding  long-term debt was
$100,000,000.  At year-end,  the fair value of the Company's  long-term debt was
$98,170,000.  In addition,  at December 31, 1999,  the fair value of  securities
held for  investment  was  $11,440,000.  The fair value of the  Company's  total
long-term  debt and its securities  held for investment  would not be materially
affected by a hypothetical 10% adverse change in interest rates. Therefore,  the
effects of interest  rates changes in the fair value of the Company's  financial
instruments are limited.

Commodities Exposure

Due to the  nature of its  business,  the  Company  procures  almost  all of its
synthetic rubber used in manufacturing tire tread at quarterly fixed rates using
contracts with the Company's main suppliers.  Therefore,  the Company's exposure
to changes in commodity prices is insignificant.

IMPACT OF YEAR 2000

The Company completed all Year 2000 readiness work by December 31, 1999, and, as
a result,  experienced no significant  problems  during,  and subsequent to, the
change to the new calendar year. The Company does not expect to have any further
exposure to the Year 2000 issue.

The cumulative amount spent related to the Year 2000 issue totaled  $11,266,000.
Of this total,  $6,665,000  was recorded as expense in the year incurred and the
remaining  $4,601,000,  which was spent to replace  hardware  and  software  and
upgrade existing hardware, was capitalized.  The Company does not expect to have
significant expenditures in the future relating to the Year 2000 issue.

EURO CONVERSION

On January 1, 1999,  eleven member  countries of the European Union  established
fixed conversion rates between their existing  currencies  ("legal  currencies")
and one common currency, the euro. The euro is now trading on currency exchanges
and may be used in certain transactions such as electronic  payments.  Beginning
in January 2002, new euro-denominated  notes and coins will be issued, and legal
currencies  will be withdrawn from  circulation.  The conversion to the euro has
eliminated  currency  exchange  rate risk for  transactions  between  the member


                                      -21-
<PAGE>

countries,  which  for the  Company  primarily  consists  of  sales  to  certain
customers and payments to certain suppliers.

The Company has  addressed  the issues  involved  with the new  currency,  which
include converting  information  technology  systems and recalculating  currency
risk, and revised its processes for preparing accounting and taxation records.

FORWARD-LOOKING STATEMENTS

This  Annual  Report on Form 10-K  includes  forward-looking  statements.  These
forward-looking  statements can be identified as such because the context of the
statement  includes  phrases such as "is expected,"  "the Company  anticipates,"
"the Company  expects," "the Company  foresees,"  "the Company  believes,"  "the
Company  does  not  expect,"  or  other  words  of  similar  import.  Similarly,
statements  that describe  future plans or strategies  are also  forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could  cause  actual  results  to  differ   materially   from  those   currently
anticipated.  Factors  which could affect actual  results  include the effect of
currency exchange rates; the devaluation of foreign currencies, particularly the
Brazilian  real;  the  effectiveness  of  the  Company's   hedging   techniques;
additional  dealer  separations;  and the increase in raw material costs.  These
factors should be considered in evaluating the forward-looking  statements,  and
undue  reliance  should not be placed on such  statements.  The  forward-looking
statements  included  herein  are  made  as  of  the  date  hereof  and  Bandag,
Incorporated  undertakes  no obligation  to update  publicly such  statements to
reflect subsequent events or circumstances.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------   ----------------------------------------------------------

See the discussion under the caption  "Quantitative and Qualitative  Disclosures
About Market  Risk" in Item 7 of this Form 10-K,  "Management's  Discussion  and
Analysis of Operations and Financial Condition," which is incorporated herein by
reference.



                                      -22-
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------   -------------------------------------------

                   Index to Consolidated Financial Statements
                   ------------------------------------------
                                                                            Page
                                                                            ----

Report of Independent Auditors                                               24

Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997           25

Consolidated  Statements of Earnings for the Years Ended
 December 31, 1999, 1998 and 1997                                            26

Consolidated  Statements  of Cash Flows for the Years Ended
  December  31, 1999, 1998 and 1997                                          27

Consolidated  Statements of Changes in Stockholders'  Equity
 for the Years Ended December 31, 1999, 1998 and 1997                        28

Notes to Consolidated Financial Statements                                   30




                                      -23-
<PAGE>

                         Report of Independent Auditors


Stockholders and Board of Directors
Bandag, Incorporated

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Bandag,
Incorporated  and  subsidiaries as of December 31, 1999, 1998, and 1997, and the
related  consolidated   statements  of  earnings,  cash  flows  and  changes  in
stockholders'  equity for the years then  ended.  Our audits also  included  the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management  as well  as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial  position  of  Bandag,
Incorporated  and  subsidiaries  at December 31, 1999,  1998,  and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting  principles generally accepted in the United
States.  Also, in our opinion,  the related financial statement  schedule,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.


/s/ Ernst & Young LLP
Chicago, Illinois

January 27, 2000



                                      -24
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets                                                                         December 31
In thousands                                                                            1999          1998          1997
                                                                                     -----------   -----------   -----------
Assets
Current Assets
<S>                                                                                  <C>           <C>           <C>
  Cash and cash equivalents                                                          $    50,633   $    37,912   $   196,400
  Investments - Note D                                                                     9,461         9,721         1,575
  Accounts receivable, less allowance
  (1999 - $20,761; 1998 - $18,724; 1997 - $12,707)                                       199,710       217,299       231,648
  Inventories:
    Finished products                                                                     94,278        96,889        90,228
    Material and work in process                                                          16,244        14,845        17,295
                                                                                     -----------   -----------   -----------
                                                                                         110,522       111,734       107,523
  Deferred income tax assets                                                              46,804        48,097        41,505
  Prepaid expenses and other current assets                                               10,988        14,361        20,343
                                                                                     -----------   -----------   -----------
      Total Current Assets                                                               428,118       439,124       598,994

Property, Plant, and Equipment, on the basis of cost:
  Land                                                                                    12,651        12,444         8,494
  Buildings and improvements                                                             119,157       107,240        98,769
  Machinery and equipment                                                                357,906       351,949       326,632
  Construction and equipment installation in progress                                     13,073        32,112        25,551
                                                                                     -----------   -----------   -----------
                                                                                         502,787       503,745       459,446
  Less allowances for depreciation and amortization                                     (304,802)     (290,699)     (261,846)
                                                                                     -----------   -----------   -----------
                                                                                         197,985       213,046       197,600
Intangible Assets, less accumulated amortization
(1999 - $24,071; 1998 - $14,157; 1997 - $5,516)                                           67,331        75,539        75,627
Other Assets                                                                              28,987        28,020        27,683
                                                                                     ===========   ===========   ===========
    Total Assets                                                                     $   722,421   $   755,729   $   899,904
                                                                                     ===========   ===========   ===========

Liabilities and Stockholders' Equity
Current Liabilities
  Accounts payable                                                                   $    33,472   $    38,286   $    52,100
  Accrued employee compensation and benefits                                              25,530        27,498        28,874
  Accrued marketing expenses                                                              27,190        37,044        32,608
  Other accrued expenses                                                                  39,696        40,623        66,921
  Dividends payable                                                                        6,127         6,257         6,274
  Income taxes payable                                                                    18,998        13,704        20,039
  Short-term notes payable and current portion of other obligations                        3,040        11,497        99,726
                                                                                     -----------   -----------   -----------
    Total Current Liabilities                                                            154,053       174,909       306,542
</TABLE>

<TABLE>
<CAPTION>
<S>                                                                                  <C>           <C>           <C>
Long-Term Debt and Other Obligations - Note E                                            111,151       109,757       123,195
Deferred Income Tax Liabilities                                                            3,142         3,766         6,753
Stockholders' Equity - Note I
  Common Stock;  $1.00 par value; authorized - 21,500,000 shares;
    issued and outstanding - 9,088,403 shares in 1999; 9,083,797 shares
    in 1998; 9,751,063 shares in 1997                                                      9,088         9,084         9,751
  Class A Common Stock; $1.00 par value; authorized - 50,000,000 shares;
    issued and outstanding - 9,637,187 shares in 1999; 10,824,974 shares
    in 1998; 11,013,561 shares in 1997                                                     9,637        10,825        11,014
  Class B Common Stock; $1.00 par value; authorized - 8,500,000 shares;
    issued and outstanding - 2,045,251 shares in 1999; 2,046,577 shares
    in 1998; 2,048,785 shares in 1997                                                      2,045         2,047         2,049
  Additional paid-in capital                                                               7,476         7,287         6,052
  Retained earnings                                                                      456,247       452,274       445,887
  Accumulated other comprehensive income                                                (30,418)       (14,220)      (11,339)
                                                                                     -----------   -----------   -----------
    Total Stockholders' Equity                                                           454,075       467,297       463,414
                                                                                     ===========   ===========   ===========
      Total Liabilities and Stockholders' Equity                                     $   722,421   $   755,729   $   899,904
                                                                                     ===========   ===========   ===========
</TABLE>

See notes to consolidated financial statements.

                                      -25-
<PAGE>

<TABLE>
<CAPTION>
Consolidated Statements of Earnings                                                           Year Ended December 31
In thousands, except per share data                                                     1999          1998          1997
                                                                                     -----------   -----------   -----------
Income
<S>                                                                                  <C>         <C>             <C>
  Net sales                                                                          $ 1,012,665 $   1,059,669   $   822,523
  Gain on sale of marketable equity securities - Note D                                        -             -        95,087
  Other income                                                                            15,213        19,829        14,092
                                                                                     -----------   -----------   -----------
                                                                                       1,027,878     1,079,498       931,702

Costs and Expenses
  Cost of products sold                                                                  619,926       653,301       482,387
  Engineering, selling, administrative and other expenses                                292,635       311,707       226,560
  Non-recurring charges - Note B                                                          13,500         4,205        16,500
  Interest expense                                                                         9,727        10,772         3,339
                                                                                     -----------   -----------   -----------
                                                                                         935,788       979,985       728,786
                                                                                     -----------   -----------   -----------
    Earnings Before Income Taxes                                                          92,090        99,513       202,916
  Income Taxes - Note F                                                                   39,760        40,194        80,922
                                                                                     ===========   ===========   ===========
    Net Earnings                                                                     $    52,330   $    59,319   $   121,994
                                                                                     ===========   ===========   ===========
    Net Earnings Per Share - Note G:

      Basic                                                                          $      2.41   $      2.64   $      5.35
                                                                                     ===========   ===========   ===========

      Diluted                                                                        $      2.40   $      2.63   $      5.33
                                                                                     ===========   ===========   ===========
</TABLE>

See notes to consolidated financial statements.


                                      -26-
<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Cash Flows                                                          Year Ended December 31
In thousands                                                                            1999          1998          1997
                                                                                     -----------   -----------   -----------
Operating Activities
<S>                                                                                  <C>           <C>           <C>
  Net earnings                                                                       $    52,330   $    59,319   $   121,994
  Adjustments to reconcile net earnings to net cash provided by operating
  activities:
    Provisions for depreciation and amortization                                          53,764        51,410        36,857
    Change in deferred income taxes                                                          579        (9,758)      (13,375)
    Gain on sale of marketable equity securities                                               -             -       (95,087)
    Other                                                                                 (4,173)       (2,306)       (9,680)
    Change in operating assets and liabilities, net of effects from
     acquisitions of businesses:
      Accounts receivable                                                                 13,481        16,964        11,863
      Inventories                                                                         (2,007)       (1,378)          847
      Prepaid expenses and other current assets                                            1,466         4,771        (6,824)
      Accounts payable and other accrued expenses                                         (9,284)      (26,246)       16,577
      Income taxes payable                                                                 6,263        (6,168)         8,130
                                                                                     -----------   -----------   -----------
    Net Cash Provided by Operating Activities                                            112,419        86,608        71,302

Investing Activities
  Additions to property, plant and equipment                                             (41,903)      (65,375)      (42,223)
  Proceeds from dispositions of property, plant, and equipment                             3,503         4,128         4,117
  Purchases of investments                                                               (11,784)      (20,941)       (3,645)
  Maturities of investments                                                               12,044        12,795         4,159
  Payments for acquisitions of businesses                                                 (6,899)      (17,542)      (47,659)
  Sale of marketable equity securities                                                         -             -       119,558
                                                                                     -----------   -----------   -----------
    Net Cash Provided by (Used in) Investing Activities                                  (45,039)      (86,935)       34,307

Financing Activities
  Proceeds from short-term notes payable                                                     538        48,590        11,491
  Proceeds from issuance of long-term debt                                                     -             -       100,000
  Principal payments on short-term notes payable and long-term obligations                (2,717)     (151,328)      (18,422)
  Cash dividends                                                                         (25,001)      (24,867)      (23,395)
  Purchases of Common Stock and Class A Common Stock                                     (25,082)      (29,353)       (8,643)
                                                                                     -----------   -----------   -----------
    Net Cash Provided by (Used in) Financing Activities                                  (52,262)     (156,958)       61,031

Effect of exchange rate changes on cash and cash equivalents                              (2,397)       (1,203)       (1,693)
                                                                                     -----------   -----------   -----------
    Increase (Decrease) in Cash and Cash Equivalents                                      12,721      (158,488)      164,947
Cash and cash equivalents at beginning of year                                            37,912       196,400        31,453
                                                                                     ===========   ===========   ===========
    Cash and Cash Equivalents at End of Year                                         $    50,633   $    37,912   $   196,400
                                                                                     ===========   ===========   ===========
</TABLE>

See notes to consolidated financial statements.


                                      -27-
<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
                                 Common Stock    Class A Common      Class B Common                      Accumulated
                                  Issued and      Stock Issued       Stock Issued     Additional            Other
In thousands, except per         Outstanding     and Outstanding     and Outstanding  Paid-In   Retained Comprehensive Comprehensive
 share data                    Shares    Amount     Shares   Amount   Shares   Amount  Capital  Earnings   Income         Income
                              ---------- ------  ---------- -------  --------- ------ --------- -------- ------------- -------------
<S>                            <C>       <C>     <C>        <C>      <C>       <C>      <C>     <C>         <C>          <C>
Balance at January 1, 1997     9,842,861 $9,843  11,027,759 $11,028  2,051,984 $2,052   $4,069  $355,663    $28,212

  Net earnings for the year                                                                      121,994                 $121,994
  Other comprehensive income,
   net of tax:
    Unrealized gain on
     securities available-
     for-sale                                                                                               (33,854)      (33,854)
    Adjustment from foreign
     currency translation                                                                                    (5,697)       (5,697)
                                                                                                                        ---------
  Other comprehensive income
   for the year                                                                                                           (39,551)
                                                                                                                        ---------
  Comprehensive income for
   the year                                                                                                               $82,443
                                                                                                                        =========
  Cash dividends - $1.0250
   per share                                                                                     (23,395)
  Conversion of Class B
   Common Stock to
     Common Stock - Note I         3,199      3                         (3,199)    (3)
  Common Stock and Class A
   Common Stock issued under
   Restricted Stock Grant
     Plan - Note I                 6,840      6       6,840       7                        663
  Forfeitures of Common Stock
   and Class A Common Stock
   under Restricted Stock
     Grant Plan - Note I          (2,145)    (2)     (1,765)     (2)                      (193)
  Common Stock and Class A
   Common Stock issued under
   Stock Award Program
     Plan - Note I                 2,708      3       2,708       3                        245
  Purchases of Common Stock
   and Class A Common Stock     (122,400)  (122)    (51,981)    (52)                       (94)   (8,375)
  Stock options exercised -
   Note I                         20,000     20      20,000      20                        885
  Stock issued in acquisition
    of businesses - Note C                           10,000      10                        477
                               --------- ------ ----------- -------  --------- ------   ------  --------  ---------
Balance at December 31, 1997   9,751,063 $9,751  11,013,561 $11,014  2,048,785 $2,049   $6,052  $445,887   $(11,339)

Net earnings for the year                                                                         59,319                  $59,319
  Other comprehensive income,
   net of tax -
    Adjustment from foreign
     currency translation                                                                                    (2,881)       (2,881)
                                                                                                                          -------
  Comprehensive income for
   the year                                                                                                               $56,438
                                                                                                                          =======
  Cash dividends - $1.1100
   per share                                                                                     (24,867)
  Conversion of Class B
   Common Stock to Common
    Stock - Note I                 2,208      2                         (2,208)    (2)
  Common Stock and Class A
   Common Stock issued under
   Restricted Stock Grant
     Plan - Note I                10,635     11      10,635      10                        753
  Forfeitures of Common Stock
   and Class A Common Stock
   under Restricted Stock
     Grant Plan - Note I          (3,865)    (4)     (2,685)     (3)                      (330)
  Common Stock and Class A
   Common Stock issued under
    Stock Award Program
     Plan - Note I                 2,838      3       2,838       3                        297
  Purchases of Common Stock
   and Class A Common Stock     (699,082)  (699)   (219,375)   (219)                      (370)  (28,065)
  Stock options exercised
   - Note I                       20,000     20      20,000      20                        885
                               --------- ------  ---------- -------  --------- ------   ------  --------   --------
Balance at December 31, 1998   9,083,797 $9,084  10,824,974 $10,825  2,046,577 $2,047   $7,287  $452,274   $(14,220)
</TABLE>

                                             -28-
<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity (continued)
<CAPTION>

                                 Common Stock    Class A Common      Class B Common                      Accumulated
                                  Issued and      Stock Issued       Stock Issued     Additional            Other
In thousands, except per         Outstanding     and Outstanding     and Outstanding  Paid-In   Retained Comprehensive Comprehensive
 share data                    Shares    Amount     Shares   Amount   Shares   Amount  Capital  Earnings   Income         Income
                              ---------- ------  ---------- -------  --------- ------ --------- -------- ------------- -------------
<S>                            <C>       <C>     <C>        <C>      <C>       <C>      <C>     <C>         <C>          <C>
Net earnings for the year                                                                         52,330                  $52,330
  Other comprehensive income,
   net of tax -
    Adjustment from foreign
     currency translation                                                                                   (16,198)      (16,198)
                                                                                                                         --------
  Comprehensive income for
   the year                                                                                                               $36,132
                                                                                                                         ========
  Cash dividends - $1.1500
   per share                                                                                     (24,871)
  Conversion of Class B Common
   Stock to Common Stock -
    Note J                         1,326      1                         (1,326)    (2)
  Common Stock and Class A
   Common Stock issued under
   Restricted Stock Grant
     Plan - Note J                 5,115      5       5,115       5                        218
  Forfeitures of Common Stock
   and Class A Common Stock
   under Restricted Stock
     Grant Plan - Note J          (3,720)    (4)     (3,180)     (3)                      (305)
  Common Stock and Class A
   Common Stock issued under
    Stock Award Program Plan-
     Note J                        3,018      3       3,018       3                        209
  Purchases of Common Stock
   and Class A Common Stock      (21,133)   (21) (1,192,740) (1,193)                      (382)  (23,486)
  Stock options exercised
   - Note I                       20,000     20                                            449
                              ---------- ------  ----------  ------  --------- ------   ------  --------   --------
Balance at December 31, 1999   9,088,403 $9,088   9,637,187  $9,637  2,045,251 $2,045   $7,476  $456,247   $(30,418)
                              ========== ======   =========  ======  ========= ======   ======  ========   ========
</TABLE>

See notes to consolidated financial statements.


                                        -29-
<PAGE>

Notes to Consolidated Financial Statements

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:
The consolidated  financial  statements include the accounts and transactions of
all subsidiaries.  Significant  intercompany accounts and transactions have been
eliminated in consolidation.

Use of Estimates:
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

Cash Equivalents:
The Company  considers  all highly liquid  investments  with a maturity of three
months or less when  purchased  to be cash  equivalents.  The  carrying  amounts
reported  in the  consolidated  balance  sheets  for cash  and cash  equivalents
approximates its fair value.

Accounts Receivable and Concentrations of Credit Risk:
Concentrations  of credit risk with respect to accounts  receivable  are limited
due to the number of customers the Company has and their geographic  dispersion.
The Company  maintains  close  working  relationships  with these  customers and
performs  ongoing  credit  evaluations  of  their  financial  condition.  No one
customer is large enough to pose a  significant  financial  risk to the Company.
The  Company   maintains  an  allowance  for  losses  based  upon  the  expected
collectibility   of  accounts   receivable.   Credit  losses  have  been  within
management's expectations.

Inventories:
Inventories  are valued at the lower of cost or market.  Approximately  43%, 47%
and 52% of year end  inventory  amounts at  December  31,  1999,  1998 and 1997,
respectively, were determined by the last in, first out (LIFO) method and on the
first in, first out method for the remainder.

The excess of current cost over the amount stated for inventories  valued by the
LIFO method amounted to approximately $20,138,000, $21,932,000, and $22,635,000,
at December 31, 1999, 1998, and 1997, respectively.

Property, Plant, and Equipment:
Provisions   for   depreciation   of  plant  and  equipment  is  computed  using
straight-line and declining-balance methods, over the following estimated useful
lives:

Buildings                                5 to 50 years
Building Improvements                    3 to 40 years
Machinery and Equipment                  3 to 15 years


                                      -30-
<PAGE>

Depreciation expense approximated $43,850,000,  $42,769,000,  and $34,576,000 in
1999, 1998, and 1997, respectively.

Intangible Assets:
Intangible  assets,  which principally  represent the cost in excess of the fair
value of the net assets acquired in  acquisitions  of businesses,  are amortized
using the  straight-line  method over 10 years. At December 31, 1999,  1998, and
1997,  net  goodwill  amounted to  $64,621,000,  $72,161,000,  and  $74,600,000,
respectively.  Amortization expense  approximated  $9,914,000,  $8,641,000,  and
$2,281,000 in 1999, 1998, and 1997, respectively.

Foreign Currency Translation:
Assets and  liabilities of foreign  subsidiaries  are translated at the year end
exchange  rate and items of income and  expense  are  translated  at the average
exchange rate for the year.  Exchange gains and losses arising from translations
denominated  in a currency  other than the  functional  currency  of the foreign
subsidiary and  translation  adjustments  in countries with highly  inflationary
economies  or in which  operations  are directly  and  integrally  linked to the
Company's U.S. operations are included in income.

Long Lived Assets:
In accordance with Statement of Financial  Accounting  Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  Of",  when  indicators  of  impairment  are  present,  the Company
evaluates the carrying value of property,  plant, and equipment and intangibles,
including  goodwill,  in  relation  to  the  operating  performance  and  future
undiscounted  cash flows of the underlying  businesses.  The Company adjusts the
net book value of the underlying assets to fair value if the sum of the expected
future cash flows is less than book value.

Research and Development:
Expenditures  for  research  and  development,  which are  expensed as incurred,
approximated   $12,325,000,   $18,342,000,   and  $16,159,000,   which  includes
$1,050,000,  $5,709,000,  and $1,407,000  relating to costs  associated with the
conceptual design of Tire Management  Solutions,  Inc. (TMS) business processes,
in 1999, 1998, and 1997, respectively.

Advertising:
The Company  expenses all  advertising  costs in the year incurred.  Advertising
expense was $5,305,000,  $9,057,000,  and  $10,931,000 in 1999,  1998, and 1997,
respectively.

Revenue Recognition:
Sales and associated costs are recognized at the time of delivery of products or
performance of services.

Derivative Instruments and Hedging Activities:
In June 1998, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
133, "Accounting for Derivative  Instruments and Hedging  Activities",  which is
effective for fiscal


                                      -31-
<PAGE>

years  beginning  after June 15, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value.  Derivatives  that
are not  hedges  must  be  adjusted  to  fair  value  through  earnings.  If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivatives  will either be offset against the change in fair value
of the hedged  assets,  liabilities,  or firm  commitments  through  earnings or
recognized in other comprehensive  income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately  recognized in earnings.  The Company does not  anticipate  that the
effect of SFAS No. 133 on the earnings and the financial position of the Company
will be significant.

Stock Based Compensation:
SFAS No. 123, "Accounting for Stock-Based  Compensation,"  encourages,  but does
not require,  companies to record  compensation  cost for  stock-based  employee
compensation  plans at fair  value.  The  Company  has  chosen  to  account  for
stock-based   compensation  using  the  intrinsic  value  method  prescribed  in
Accounting  Principles Board Opinion (APB) No. 25,  "Accounting for Stock Issued
to Employees," and related  Interpretations.  Accordingly,  compensation expense
for stock options is measured as the excess,  if any, of the quoted market price
of the company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.

Reclassification:
Certain  prior year amounts have been  reclassified  to conform with the current
year presentation.

B. NONRECURRING CHARGES
During the fourth  quarter  1999,  the Company  recorded  non-recurring  charges
totaling $13,500,000  ($7,671,000 net of tax benefits) for termination benefits.
These  termination  benefits cover the  company-wide  reduction of 175 employees
through a combination  of voluntary  early  retirements,  the closing of a North
American tread rubber manufacturing facility and other position eliminations. Of
the total number of employees affected, benefit payments of $2,161,000 have been
made during the year for 56 employees.  Further  employee  termination  costs of
$6,433,000 are accrued at December 31, 1999. The majority of these payments will
be made in 2000.  No  charge  related  to the  manufacturing  facility  has been
expensed  as the Company  expects to use the  facility in the future for general
Corporate purposes.

The early  retirement  program  announced in the fourth  quarter of 1999 offered
unreduced  retirement  benefits  to  employees  over  the age of 55 and who have
accumulated  65 points (points = age + years of service).  The early  retirement
program charges primarily represent a $4,906,000 increase in the pension benefit
obligation which resulted when 62 employees elected this program.


During 1998, the Company recorded net non-recurring  charges totaling $4,205,000
($1,174,000  net of tax  benefits).  The net  non-recurring  charges  included a
provision of


                                      -32-
<PAGE>
$7,502,000  ($4,471,000  net of tax benefits) for facility  closures,  personnel
reductions,  and other exit costs.  Additionally,  the net non-recurring charges
include  a gain of  $3,297,000  consisting  of the  non-taxable  recognition  of
accumulated  translation  gains  due to the  exit of  operations  in  Indonesia.
Included  in the  non-recurring  charges  is  $4,845,000  related  to  personnel
reductions.  In 1998, the Company paid $1,035,000  related to the termination of
13 employees. In 1999, the Company paid $2,950,000 related to the termination of
99 employees and reduced the original provision by $159,000.  Remaining employee
termination  costs of $701,000 have been accrued at December 31, 1999.  Included
in the  non-recurring  charge is $2,657,000 for facility  closure and other exit
costs which contains $642,000 for the write down of assets. In 1999, the Company
paid $905,000 for facility closure and other exit costs and reduced the original
provision by $192,000 due to costs lower than original estimates.  The Company's
remaining  obligation  to be paid in 2000 for  facility  closure  and other exit
costs as of December 31, 1999 is $918,000.

During the fourth quarter of 1997, the Company  recorded  non-recurring  charges
totaling $16,500,000 ($9,900,000 net of tax benefits). The non-recurring charges
include a  provision  of  $13,000,000  to adjust the asset  carrying  amounts of
$9,733,000 and to cover exit costs from a rubber recycling venture. During 1998,
the  Company  completed  the  sale of its  investment  in the  rubber  recycling
venture. There were no significant adjustments related to the sale. During 1997,
$3,500,000  was  recorded  for the  1998  closing  of a  domestic  manufacturing
facility, including attendant personnel reductions. As of December 31, 1998, the
Company had paid $2,270,000 related to the closure of the facility. In 1999, the
Company  paid  $662,000 to complete  the closure of the  domestic  manufacturing
facility.  The remainder of $568,000 was adjusted to income due to reduced costs
on the  demolition  and disposal of the  building.  The net sales and results of
operations  of  the  rubber   recycling   venture   included  in  the  Company's
consolidated statements of earnings in 1998 and 1997 were not significant.

C. ACQUISITIONS
During 1999, the Company  acquired four tire dealerships that are a part of Tire
Distribution Systems, Inc. (TDS), a wholly-owned  subsidiary of the Company. The
dealerships  were  acquired for a total of $7.1  million in cash and  short-term
payables.  During  1998,  the Company  acquired  five tire  dealerships  and two
retread tire facilities  that are a part of TDS. The  dealerships  were acquired
for a total of $20.5 million in cash and short-term  payables.  Also, during the
fourth quarter of 1997, TDS acquired five tire dealerships for a total of $158.6
million in cash,  short-term  notes  payable and 10,000 shares of Bandag Class A
Common Stock. All of these  dealerships  were Bandag  franchisees at the time of
acquisition  and are in the  business of selling and  servicing  new and retread
tires, primarily for commercial and industrial vehicles.

The  acquisitions  were  accounted for using the purchase  method of accounting.
Accordingly,  the  purchase  price for each  acquisition  was  allocated  to the
respective assets and liabilities based on their estimated fair values as of the
date of acquisition.  The accounts and  transactions of the acquired  businesses
have been included in the consolidated  financial statements from the respective
effective dates of the acquisitions.


                                      -33-
<PAGE>

Pro forma  results  of  operations  for 1999 and  1998,  assuming  the  purchase
transaction  occurred as of January 1, 1998,  would not differ  materially  from
reported amounts.

Certain supplemental non-cash information related to the Company's  acquisitions
of businesses are as follows:

In thousands                           1999           1998           1997
                                  ---------------------------------------------
Assets acquired                        $7,413        $22,187       $248,724
Less liabilities (1)                     (514)        (4,630)      (177,387)
Less stock issued (2)                       -              -           (487)
                                  ------------------------------------------
Cash paid                               6,899         17,557         70,850
Less cash acquired                          -            (15)       (23,191)
                                  ==========================================
Net cash paid for acquisitions         $6,899         $17,542      $ 47,659
                                  ==========================================

(1)  Includes  short-term  payables  to  sellers  of  $160,000,  $2,960,000  and
$87,224,000 in 1999, 1998, and 1997, respectively.
(2) Represents fair market value of Class A Common Stock issued to sellers.

NOTE D. INVESTMENTS

Debt  securities  are  classified  as  held-to-maturity  based upon the positive
intent  and  ability  of  the  Company  to  hold  the  securities  to  maturity.
Held-to-maturity   securities  are  stated  at  amortized  cost,   adjusted  for
amortization   of  premiums  and  accretion  of  discounts  to  maturity.   Such
amortization  and  accretion  is  included  in  investment  income.  Interest on
securities  classified as held-to-maturity is included in investment income. The
cost of securities sold is based on the specific identification method.

During the fourth  quarter 1997,  the Company sold its  investment in marketable
equity  securities.  As a result, a realized gain of $95,087,000 was included in
the  Consolidated  Statements  of Earnings  for 1997.  Dividends  on  securities
classified as available-for-sale are included in investment income.

The following is a summary of securities held-to-maturity:
<TABLE>
<CAPTION>
                                                                  Gross        Gross     Estimated
                                                               Unrealized   Unrealized    Fair
In thousands                                         Cost         Gains      (Losses)     Value
                                                    ---------------------------------------------
December 31, 1999
<S>                                                   <C>          <C>        <C>        <C>
Securities Held-to-Maturity
Obligations of states and political subdivisions      $11,461      $ 1        $(22)      $11,440
                                                    =============================================

December 31, 1998
Securities Held-to-Maturity
Obligations of states and political subdivisions      $21,221      $15           -       $21,236
                                                    =============================================
</TABLE>


                                      -34-
<PAGE>
<TABLE>
<CAPTION>

December 31, 1997
<S>                                                   <C>          <C>        <C>        <C>
Securities Held-to-Maturity
Obligations of states and political subdivisions      $38,561        -           -       $38,561
Investment in Eurodollar time deposits                  2,600        -           -         2,600
                                                    =============================================
                                                      $41,161        -           -       $41,161
                                                    =============================================
</TABLE>

At December 31, 1999, 1998 and 1997, securities  held-to-maturity are due in one
year or less and include $2,000,000, $11,500,000, and $39,586,000, respectively,
reported as cash equivalents.

NOTE E. FINANCING ARRANGEMENTS

The following summarizes  information  concerning the Company's short-term notes
payable:

                             Year Ended December 31
In thousands                                      1999         1998        1997
                                                --------------------------------
Total short-term notes payable at year end        $  -       $2,091     $90,628
Weighted average interest rate at year end           -         3.6%        6.4%
Weighted average interest rate for the year        3.9%        5.0%        6.0%

At December 31, 1997,  short-term notes payable includes  $87,224,000 related to
the businesses acquired in 1997 (See Note C).

The following is a summary of the Company's long-term debt and other obligations
as of December 31:

                                          Interest
In thousands                               Rates     1999      1998      1997
                                          --------------------------------------
Senior Unsecured Notes Payable, maturing
  2002                                       6.41% $ 60,000  $ 60,000  $ 60,000
Senior Unsecured Notes Payable, maturing
  2007                                       6.50%   40,000    40,000    40,000
                                                  ------------------------------
Total long-term debt                                100,000   100,000   100,000
Other obligations                                    11,151     9,757    23,195
                                                  ==============================
Total long-term debt and other obligations         $111,151  $109,757  $123,195
                                                  ==============================

The aggregate amount of scheduled annual  maturities of long-term debt and other
obligations for each of the next five years is:  $3,040,000 in 2000,  $6,713,000
in 2001,  $66,594,000  in 2002,  $6,138,000  in 2003,  $5,930,000  in 2004,  and
$25,776,000 thereafter.

Cash payments for interest on debt were $9,189,000,  $10,869,000, and $3,143,000
in 1999, 1998, and 1997, respectively.


                                      -35-
<PAGE>

The fair values of the Company's  financing  arrangements  were estimated  using
discounted  cash  flow  analyses,  based on the  Company's  current  incremental
borrowing  rates for similar  types of borrowing  arrangements.  At December 31,
1999, 1998 and 1997, the fair value of the Company's  outstanding long-term debt
was approximately $98,170,00, $105,656,000, and $100,673,000, respectively.

Total available funds under unused lines of credit at December 31, 1999 amounted
to $106,267,000.

NOTE F. INCOME TAXES

Significant  components  of the  Company's  deferred  tax  assets  (liabilities)
reflecting  the net tax  effects of  temporary  differences  are  summarized  as
follows:

                                                      December 31
In thousands                                 1999        1998         1997
                                            -----------------------------------

Employee benefits                              $ 4,977    $ 4,698      $ 2,749
Marketing programs                              20,381     24,916       15,174
Accounts receivable valuation allowances         3,957      3,746        3,111
Unremitted earnings of foreign subsidiaries     (9,909)    (6,776)      (5,625)
Excess pension funding                          (7,248)    (6,297)      (4,482)
Purchased tax benefits                               -          -         (445)
Cost to exit rubber recycling venture              115        766        4,980
Basis difference in fixed assets                 4,085        523       (1,527)
Other nondeductible reserves                     4,906      4,984        4,583
Obsolescence and valuation reserves              2,105      2,820        2,824
Insurance and legal reserves                     3,412      2,647        3,387
Foreign tax credits and net operating loss
  carryforwards                                  6,844      3,126            -
Equipment and plant reserves                        52        496        2,707
Other, net                                       9,985      8,682        7,316
                                            ===================================
Net deferred tax assets                        $43,662    $44,331      $34,752
                                            ===================================

The components of earnings before income taxes are summarized as follows:

                                                Year Ended December 31
In thousands                                 1999         1998         1997
                                        ---------------------------------------

Domestic                                      $49,186     $69,341     $167,126
Foreign                                        42,904      30,172       35,790
                                        =======================================
Earnings before income taxes                  $92,090     $99,513     $202,916
                                        =======================================


                                      -36-
<PAGE>

Significant  components  of the  provision  for income tax expense  (credit) are
summarized as follows:

                                               Year Ended December 31
In thousands                                 1999         1998         1997
                                         --------------------------------------
Current:
  Federal                                    $20,640      $38,071     $70,354
  State                                        2,894        4,526      14,667
  Foreign                                      9,240        7,176       8,886
Deferred:
  Federal                                      6,238       (8,844)    (11,619)
  State                                            -            -           -
  Foreign                                        748         (290)       (786)
Equivalent credit relating to
  purchased income tax benefits                    -         (445)       (580)
                                         ======================================
Income taxes                                 $39,760      $40,194     $80,922
                                         ======================================

A reconciliation of income tax at the statutory rate to the Company's  effective
rate is as follows:

                                                      Year Ended December 31
                                                  1999        1998        1997
                                                 ------------------------------
Computed at the expected statutory rate            35.0%     35.0%       35.0%
State income tax - net of federal tax benefit       1.8%      2.9%        4.7%
Amortization of goodwill not deductible             2.7%      2.5%          -%
Deferred tax on unremitted earnings of foreign
  subsidiaries                                      2.8%      1.1%        0.3%
Other                                               0.9%     (1.1)%      (0.1)%
                                                 =============================
Income tax at the effective rate                   43.2%     40.4%       39.9%
                                                 =============================

Undistributed  earnings of  subsidiaries on which deferred income taxes have not
been provided are not significant.

Income taxes paid amounted to $33,197,000, $56,108,000, and $86,122,000 in 1999,
1998, and 1997, respectively.

NOTE G. EARNINGS PER SHARE

Earnings per share amounts are based on the weighted average number of shares of
Common Stock,  Class A Common Stock, Class B Common Stock and dilutive potential
common shares (non-vested restricted stock and stock options) outstanding during
the year.

The following table sets forth the computation of basic and diluted earnings per
share:


                                      -37-
<PAGE>

                                                 Year Ended December 31
In thousands , except per share data        1999          1998         1997
                                         --------------------------------------
Numerator -
  Net Earnings                             $52,330      $59,319      $121,994

Denominator:
  Weighted-average shares - Basic           21,707       22,471        22,786

  Effect of dilutive:
    Non-vested restricted stock                 40           34            36
    Stock options                               17           54            86
                                         -------------------------------------
                                                57           88           122

  Weighted-average shares - Diluted         21,764       22,559        22,908
                                         =====================================

Net Earnings Per Share:
  Basic                                      $2.41        $2.64         $5.35
                                         =====================================
  Diluted                                    $2.40        $2.63         $5.33
                                         =====================================

Options to purchase  60,200 shares of Class A Common Stock at an option price of
$33.875 were outstanding during 1999 but were not included in the computation of
diluted  earnings  per share  because the  exercise  price was greater  than the
average market price of the common shares and, therefore,  the effect would have
been antidilutive.


NOTE H. LEASES

Certain equipment and operating  properties are rented under  non-cancelable and
cancelable  operating  leases.  Total rental expense under operating  leases was
$14,049,000,  $12,508,000, and $8,303,000 for the years ended December 31, 1999,
1998 and 1997, respectively. At December 31, 1999, future minimum lease payments
under  operating  leases  having  initial lease terms in excess of one year are:
$8,000,000 in 2000,  $5,199,000 in 2001, $3,727,000 in 2002, $2,390,000 in 2003,
$1,629,000 in 2004, and $5,639,000 thereafter

NOTE I. STOCKHOLDERS' EQUITY

Class A Common  Stock and Class B Common  Stock have the same  rights  regarding
dividends and distributions upon liquidation as Common Stock.  However,  Class A
Common  Stockholders are not entitled to vote,  Class B Common  Stockholders are
entitled to ten votes for each share held and Common  Stockholders  are entitled
to one vote for each share held.  Transfer of shares of Class B Common  Stock is
substantially restricted and must be converted to Common Stock prior to sale. In
certain  instances,   outstanding  shares  of  Class  B  Common  Stock  will  be
automatically  converted  to shares  of Common  Stock.  Unless  extended  for an


                                      -38-
<PAGE>

additional period of five years by the Board of Directors,  all then-outstanding
shares of Class B Common  Stock will be  converted  to shares of Common Stock on
January 16, 2002.

Under the terms of the Bandag,  Incorporated  Restricted  Stock Grant Plan,  the
Company is  authorized  to grant up to an aggregate of 100,000  shares of Common
Stock and 100,000 shares of Class A Common Stock to certain key  employees.  The
shares  granted  under the Plan will  entitle the grantee to all  dividends  and
voting  rights;  however,  such shares will not vest until seven years after the
date of grant. If a grantee's  employment is terminated  prior to the end of the
seven-year period for any reason other than death,  disability or termination of
employment  after age 60, the shares will be forfeited  and made  available  for
future  grants.  A grantee who has attained age 60 and whose  employment is then
terminated  prior to the end of the  seven-year  vesting period does not forfeit
the non-vested shares. During the years ended December 31, 1999, 1998, and 1997,
5,115 shares, 10,635 shares and 6,840 shares of Common Stock, respectively, were
granted under the Plan. During the years ended December 31, 1999, 1998 and 1997,
5,115  shares,  10,635  shares  and  6,840  shares  of  Class  A  Common  Stock,
respectively, were also granted under the Plan. The resulting charge to earnings
amounted to $385,000,  $1,300,000,  and  $1,177,000,  in 1999,  1998,  and 1997,
respectively.  During the year ended  December 31, 1999,  3,720 shares of Common
Stock and 3,180 shares of Class A Common Stock were  forfeited.  During the year
ended December 31, 1998,  3,865 shares of Common Stock and 2,685 shares of Class
A Common Stock were  forfeited.  During the year ended December 31, 1997,  2,145
shares of Common Stock and 1,765 shares of Class A Common Stock were  forfeited.
The credit to 1999, 1998 and 1997 earnings  related to the shares  forfeited was
approximately $312,000,  $337,000, and $197,000,  respectively.  At December 31,
1999,  29,295  shares of Common Stock and 36,965  shares of Class A Common Stock
are available for grant under the Plan.

Under the terms of the Bandag,  Incorporated Nonqualified Stock Option Plan, the
Company was authorized through November 13, 1997 to grant options to purchase up
to 500,000  shares of Common Stock and 500,000 shares of Class A Common Stock to
certain key employees at an option price equal to the market value of the shares
on the date of grant.  During 1999,  options to purchase 20,000 shares of Common
Stock were exercised and during each of 1998 and 1997 options to purchase 20,000
shares of Common Stock and 20,000 shares of Class A Common Stock were exercised.
At December  31,  1999,  options to purchase  40,000  shares of Common Stock and
40,000  shares of Class A Common  Stock  were  outstanding  and  exercisable  at
$23.458  per share for Common  Stock  options  and $22.792 per share for Class A
Common  Stock  options.  Options to purchase  20,000  shares of Common Stock and
20,000 shares of Class A Common Stock expire on November 13, 2000,  and November
13, 2001.

Under the terms of the Bandag,  Incorporated  Stock Award Plan,  the Company may
award to certain  eligible  employees and  directors  incentive  stock  options,
nonqualified stock options,  and restricted stock. Up to 900,000 shares of Class
A Common Stock is  authorized  for  issuance  under the Plan.  All  employees of
Bandag and its  subsidiaries  and  directors of Bandag who are not  employees of
Bandag or its subsidiaries are eligible to participate in the Plan. In 1999, the
Company  granted  options to purchase  60,200  shares of Class A Common Stock to


                                      -39-
<PAGE>

certain  key  employees  at an option  price of $33.875  per share.  The options
granted  under  this plan vest  over five  years and have an option  term of ten
years.  As of December 31, 1999,  options to purchase  60,200  shares of Class A
Common Stock were outstanding at an average exercise price of $33.875 per share.
No options  issued under this plan were  exercisable  at December 31, 1999.  The
fair  value of the  options  granted  is  estimated  on the grant date using the
Black-Scholes  model.  The estimated fair value of the options granted assumes a
dividend yield of 2.15%,  a risk free interest rate of 4.9%, an expected  option
life of 10 years,  and a stock  price  volatility  of 20.67%.  The fair value of
options  granted during 1999 is $9.96 per option.  The Company did not award any
restricted Class A Common Stock under this Plan during the year.

The  Company has a stock  award  program  covering  substantially  all U.S.  and
Canadian  Traditional   Business,   corporate,   and  TMS  employees  which  was
established  to promote  employee  commitment  and ownership in the Company.  In
1999,  1998, and 1997,  $120,000,  $225,000,  and $283,000,  respectively,  were
charged to earnings for the estimated  cost of awards to be made under the stock
award program.

NOTE J. RETIREMENT BENEFIT PLANS

The Company sponsors  defined-benefit pension plans covering full-time employees
directly employed by Bandag,  Incorporated,  Bandag Licensing Corporation (BLC),
Bandag Canada Ltd., and certain employees in the Company's European  operations.
Certain employees of TDS are also covered by defined-benefit  plans. In addition
to providing  pension  benefits,  the Company  provides  certain  postretirement
medical  benefits to certain  individuals  who retired  from  employment  before
January 1, 1993.  Employees who retire after  December 31, 1992 and are at least
age 62 with 15 years of service of direct employment with Bandag,  Incorporated,
BLC, and Kendon are eligible for  temporary  medical  benefits that cease at age
65.

The reconciliations of the benefit obligations,  the reconciliations of the fair
value of plan assets, and the  reconciliations of funded status of the plans, as
determined by consulting actuaries are as follows:



                                      -40-
<PAGE>
<TABLE>
<CAPTION>

                                                         Pension Benefits             Postretirement Benefits
In thousands                                        1999       1998       1997       1999       1998       1997
                                                 ------------------------------------------------------------------
Change in benefit obligations:
<S>                                                <C>        <C>        <C>         <C>        <C>        <C>
Benefit obligations at the beginning of the year   $ 73,603    $62,305    $58,357     $4,432     $5,899     $5,427
  Service cost                                        3,796      3,117      2,420        213        264        247
  Interest cost                                       4,785      4,326      3,382        283        407        375
  Participants' contributions                            51         40         46          -          -          -
  Plan amendments                                       347          -       (539)         -          -          -
  Plan merger                                             -          -      2,204          -          -          -
  Exchange rate changes                                 164       (180)       (96)         -          -          -
  Curtailment gain                                     (459)         -          -          -          -          -
  Settlement loss                                       190          -          -          -          -          -
  Special termination benefits                        5,629          -          -          -          -          -
  Settlement payments                                 (898)          -          -          -          -          -
  Benefits paid                                      (2,125)    (2,232)    (1,637)       (67)       (85)      (306)
  Actuarial (gain) or loss                          (11,445)     6,227     (1,832)      (735)    (2,053)       156
                                                 ==================================================================
Benefit obligations at end of year                 $ 73,638    $73,603    $62,305     $4,126     $4,432     $5,899
                                                 ==================================================================

Change in plan assets at fair value:
Fair value of plan assets at beginning of year     $115,347   $116,304   $ 90,775        $ -        $ -        $ -
  Actual return on plan assets                       18,378        966     23,582          -          -          -
  Plan merger                                             -          -      2,798          -          -          -
  Employer contributions                                100        477        859         67         85        306
  Participants' contributions                            51         40         46          -          -          -
  Benefits paid                                      (2,125)    (2,232)    (1,637)       (67)       (85)      (306)
  Settlement payments                                  (898)         -          -          -          -          -
  Exchange rate changes                                 171       (208)      (119)         -          -          -
                                                 ==================================================================
Fair value of plan assets at end of year           $131,024   $115,347   $116,304        $ -        $ -        $ -
                                                 ==================================================================

Reconciliation of funded status:
  Funded status                                    $ 57,386   $ 41,744   $ 53,999    $(4,126)   $(4,432)   $(5,899)
  Unrecognized actuarial gain                       (41,026)   (22,119)   (38,737)    (3,099)    (2,386)      (334)
  Unrecognized transition asset                      (3,509)    (4,171)    (4,968)         -          -          -
  Unrecognized prior service cost                       748        413      1,054         51         54         58
                                                 ==================================================================
  Prepaid (accrued) benefit cost                   $ 13,599   $ 15,867   $ 11,348    $(7,174)   $(6,764)   $(6,175)
                                                 ==================================================================

Weighted average assumptions:
  Discount rate                                        7.5%       6.5%       7.0%       7.5%       6.5%       7.0%
  Rate of increase in future compensation              4.0%       4.5%       4.5%        N/A        N/A        N/A
  Expected long-term rate of return on assets          8.0%       8.0%       8.0%        N/A        N/A        N/A

</TABLE>

Assets of the plans are principally invested in U.S. domestic common stocks, and
short term notes and bonds (fixed income  securities) with maturities under five
years.

Net periodic (benefit) cost is composed of the following:


                                      -41-
<PAGE>

<TABLE>
<CAPTION>

                                                         Pension Benefits             Postretirement Benefits
In thousands                                        1999        1998       1997       1999       1998       1997
                                                 ------------------------------------------------------------------
Components of net periodic (benefit) cost:
<S>                                                  <C>        <C>        <C>          <C>        <C>        <C>
  Service cost                                       $3,796     $3,117     $2,420       $213       $264       $247
  Interest cost                                       4,785      4,326      3,382        283        407        375
  Expected return on plan assets                     (9,262)    (9,421)    (6,950)         -          -          -
  Amortization of prior service cost                    110         88        123          3          3          3
  Amortization of transitional assets                  (820)      (749)      (748)         -          -          -
  Recognized actuarial gain                            (617)    (1,547)      (622)      (112)         -          -
                                                 ==================================================================
  Net periodic (benefit) cost                       $(2,008)   $(4,186)   $(2,395)      $387       $674       $625
                                                 ==================================================================

Additional (gain) or loss recognized due to:
  Curtailment                                        $5,090          -          -          -          -          -
  Settlement                                           (184)         -          -          -          -          -
</TABLE>

The  assumed  health  care  cost  trend  rate is 7% for 2000 and is  assumed  to
decrease to 6% in 2001. A one-percentage-point change in the assumed health care
cost trend rates would have the following effects:

                                               1-Percentage-       1-Percentage-
                                              Point Increase      Point Decrease
                                             -----------------   ---------------
In thousands
                                             -----------------   ---------------
Effect on total of service and interest
 cost components                                      $71               $(59)
Effect on postretirement benefit obligation          $508              $(435)


The Company also sponsors defined-contribution plans, covering substantially all
employees in the United States. Annual contributions are made in such amounts as
determined  by  the  Company's  Board  of  Directors.   Although  employees  may
contribute  up to 15% of their annual  compensation  from the Company,  they are
generally  not required to make  contributions  in order to  participate  in the
plans.  The  Company  currently  provides  plans with a variety of  contribution
levels (including employee contribution match provisions).  The Company recorded
expense  for  contributions  in  the  amount  of  $4,132,000,   $4,626,000,  and
$3,439,000 in 1999, 1998, and 1997, respectively.

Employees in most foreign  countries are covered by various  retirement  benefit
arrangements  generally  sponsored  by the foreign  governments.  The  Company's
contributions to foreign plans were not significant in 1999, 1998, and 1997.

NOTE K. DERIVATIVE FINANCIAL INSTRUMENTS

The Company enters into agreements  (derivative financial instruments) to manage
the risks associated with certain aspects of its business, but does not actively
trade such instruments nor enter into such agreements for speculative  purposes.
The Company principally utilizes foreign currency forward exchange contracts and
foreign currency option contracts.


                                      -42-
<PAGE>

Option  contracts  that are  designated  as hedges  are  marked  to market  with
realized and unrealized  gains and losses deferred and recognized in earnings as
an  adjustment  to sales when the future  sales occur (the  deferral  accounting
method).  Realized  and  unrealized  gains and  losses on  options  that are not
designated as hedges,  that fail to be effective hedges, or that relate to sales
that are no longer  probable of occurring would be included in income as foreign
exchange gains or losses.  The unrealized gains and losses are included in other
assets and liabilities.

The Company  periodically  uses foreign currency  forward exchange  contracts to
reduce its exposure to foreign  currency risk from  receivables  denominated  in
foreign currencies and certain firm purchase commitments. For contracts that are
designated  and  effective  as hedges,  discounts  or premiums  are  accreted or
amortized to other operating expenses over the contract lives using the straight
line method while the realized and  unrealized  gains and losses  resulting from
changes in the spot exchange  rate,  net of related  taxes,  are included in the
cumulative  translation  adjustment account in stockholders' equity. The related
amounts due to or from  counterparties  are  included  in other  assets or other
liabilities.  Contract amounts,  after considering tax effects, in excess of the
carrying value of the Company's  obligations are marked to market,  with changes
in market value recorded in earnings as foreign exchange gains or losses.

Realized and  unrealized  gains or losses at the time of maturity,  termination,
sale or repayment of a derivative  contract or designated item are recorded in a
manner consistent with the original designation of the derivative in view of the
nature of the termination,  sale, or repayment  transaction.  Amounts arising at
the  settlement  of  currency  forward  or option  contracts  require no special
accounting  because  such  amounts  are  periodically  recorded.   Realized  and
unrealized  changes in fair value of derivatives  designated  with items that no
longer exist or are no longer  probable of occurring are recorded as a component
of the gain or loss arising from the disposition of the designated item.

At December 31, 1999, 1998 and 1997, the Company had  approximately  $7,688,000,
$4,781,000, and $12,301,000,  respectively, in foreign currency forward exchange
contracts and foreign  currency  option  contracts  designated  and effective as
hedges  which  become due in various  amounts and at various  dates  through the
following  year.  The  difference  between the  contract  amounts and their fair
value, in the aggregate, was insignificant at December 31, 1999, 1998 and 1997.

NOTE L. OPERATING SEGMENT AND GEOGRAPHIC AREA INFORMATION

Description of Types of Products and Services:
The Company has two reportable operating segments:  the Traditional Business and
TDS.

The  Traditional  Business  manufactures  precured  tread rubber,  equipment and
supplies for retreading  tires and operates on a worldwide  basis.  SFAS No. 131
requires segment  information to be reported based on how management  internally
evaluates the operating  performance of their business units.  The operations of
the Traditional  Business segment are


                                      -43-
<PAGE>
evaluated by worldwide  geographic region. For segment reporting  purposes,  the
Company's  operations located in the United States and Canada are integrated and
managed as one unit,  which is referred to  internally  as "North  America." The
Company's  operations  located  in Europe  principally  service  those  European
countries,  but also export to certain  other  countries  in the Middle East and
Northern  and  Central  Africa.  Exports  from  North  America to markets in the
Caribbean,  Central America and South America,  along with operations in Brazil,
Mexico,  Venezuela  and South Africa are  combined  under one  management  group
referred to internally as "Latin America." Exports from North America to markets
in Asian countries, along with operations in New Zealand, Indonesia and Malaysia
and a licensee in Australia are combined under one management  group referred to
internally as "Asia."

TDS operates retreading locations and commercial,  retail, and wholesale outlets
throughout  the United  States for the sale and  maintenance  of new and retread
tires to principally commercial and industrial customers.

Measurement of Segment Profit and Loss and Segment Assets:
The Company  evaluates  performance  and allocates  resources based primarily on
profit or loss before interest and income taxes. The accounting  policies of the
reportable  segments  are  the  same  as  those  described  in  the  summary  of
significant accounting policies.

Intersegment  sales and  transfers  are  recorded  at fair  market  value less a
discount  between  geographic  areas  within the  Traditional  Business  and for
transactions between the Traditional Business and TDS at a value consistent with
that to unaffiliated customers.

Other segment assets are  principally  cash and cash  equivalents,  investments,
corporate office and related equipment, and assets relating to TMS operations.

The information regarding segment operations and other geographic information is
presented on page 9 of this report, and is incorporated herein by reference.

The following  tables  present  information  concerning net sales and long-lived
assets for countries which exceed 5% of the respective totals:

Net Sales (a)                              Year Ended December 31
(In thousands)                    1999               1998                1997
                              --------------------------------------------------
United States                    $727,030         $762,549            $499,043
Brazil                             54,935           73,488              67,470
Other                             230,700          223,632             256,010
                              =================================================
Consolidated                   $1,012,665       $1,059,669            $822,523
                              =================================================


                                      -44-
<PAGE>

Long-lived Assets (b)                               December 31
(In thousands)                        1999           1998              1997
                                 ----------------------------------------------
United States                       $216,896        $224,277          $208,598
Brazil                                17,434          27,030            26,324
Other                                 30,986          37,278            38,305
                                 ----------------------------------------------
Consolidated                        $265,316        $288,585          $273,227
                                 ==============================================
(a)     Revenues are attributed to countries based on the location of customers.
(b)     Corporate long-lived assets are included in the United States.

NOTE M. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS

Unaudited  quarterly results of operations for the years ended December 31, 1999
and 1998 are summarized as follows:

                                                  Quarter Ended 1999
In thousands, except per share data   Mar. 31    Jun. 30    Sep. 30      Dec. 31
                                     -------------------------------------------
 Net sales                           $224,138   $252,120    $273,240    $263,167
 Gross profit                          88,940     98,792     103,118     101,889
 Net earnings                          10,037     16,126      18,056       8,111
 Net earnings per share:
   Basic                                $0.46      $0.74       $0.83       $0.38
   Diluted                              $0.46      $0.73       $0.82       $0.38

                                                      Quarter Ended 1998
In thousands, except per share data    Mar. 31    Jun. 30     Sep. 30    Dec. 31
                                     -------------------------------------------
 Net sales                            $235,931   $266,127     $282,636  $274,975
 Gross profit                           90,747    102,571      109,137   103,913
 Net earnings                            9,150     14,168       17,456    18,545
 Net earnings per share:
   Basic                                 $0.40      $0.62        $0.78     $0.84
   Diluted                               $0.40      $0.62        $0.77     $0.84

Fourth  quarter  1999  earnings  reflect  a  non-recurring  after-tax  charge of
$7,671,000  ($.35 per  diluted  share) as a result of a  restructuring  of North
American  operations  which includes a company-wide  reduction in jobs through a
combination  of voluntary  early  retirements,  the closure of a North  American
tread rubber manufacturing  facility, and other position eliminations.  See Note
B.

Third  quarter  1998  earnings  reflect  a  non-recurring  after-tax  charge  of
$2,491,000  ($.11 per diluted share) and fourth quarter 1998 earnings  reflect a
net  non-recurring  after-tax gain of $1,317,000  ($.06 per diluted share).  The
non-recurring  items in the  third and  fourth  quarters  of 1998  relate to the
closure of two manufacturing facilities,  the elimination of employee positions,
and other exit costs. See Note B.


                                      -45-
<PAGE>

ITEM 9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
-------  ----------------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

         None.

                                    PART III
                                    --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------  --------------------------------------------------

         The information called for by Item 10 (with respect to the directors of
the  registrant  and with  respect to the  information  required to be furnished
under Rule 405 of Regulation S-K) is  incorporated  herein by reference from the
registrant's  definitive  Proxy  Statement  involving  the election of directors
filed or to be filed  pursuant to  Regulation  14A not later than 120 days after
December 31, 1999.  In accordance  with General  Instruction G (3) to Form 10-K,
the information  with respect to executive  officers of the Company  required by
Item 10 has been included in Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION
-------  ----------------------

         The  information  called  for by  Item  11 is  incorporated  herein  by
reference  from  the  registrant's  definitive  Proxy  Statement  involving  the
election of directors  filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------  --------------------------------------------------------------

         The  information  called  for by  Item  12 is  incorporated  herein  by
reference  from  the  registrant's  definitive  Proxy  Statement  involving  the
election of directors  filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------  ----------------------------------------------

         The  information  called  for by  Item  13 is  incorporated  herein  by
reference  from  the  registrant's  definitive  Proxy  Statement  involving  the
election of directors  filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1999.


                                      -46-
<PAGE>

                                    PART IV
                                    -------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-------  ----------------------------------------------------------------

(a)(1)   Financial Statements

         The following  consolidated  financial  statements are included in Part
II, Item 8:

                                                                           Page
                                                                           ----
         Consolidated Balance Sheets as of December 31, 1999,
           1998 and 1997....................................25

         Consolidated Statements of Earnings for the Years
          Ended December 31, 1999, 1998 and 1997.............................26

         Consolidated Statements of Cash Flows for the Years
          Ended December 31, 1999, 1998 and 1997 ............................27

         Consolidated Statements of Changes in Stockholders'
          Equity for the Years Ended December 31, 1999, 1998 and
          1997...............................................................28

         Notes to Consolidated Financial Statements..........................30

(2)      Financial Statement Schedule

         Schedule II - Valuation and qualifying accounts and reserves.

         All other  schedules  for  which  provision  is made in the  applicable
         accounting regulation of the Securities and Exchange Commission are not
         required  under  the  related  instructions  or are  inapplicable,  and
         therefore have been omitted.

(3)      Exhibits

         Exhibit No.                Description

         3.1      Bylaws: As amended August 24, 1999

         3.2      Restated  Articles of  Incorporation,  effective  December 30,
                  1986.  (Incorporated  by  reference  to Exhibit No. 3.2 to the
                  Company's Form 10-K for the year ended December 31, 1992.)

         3.3      Articles of  Amendment to Bandag,  Incorporated's  Articles of
                  Incorporation,   effective  May  6,  1992.   (Incorporated  by
                  reference  to Exhibit No. 3.3 to the  Company's  Form 10-K for
                  the year ended December 31, 1992.)

         4.1      Instruments   defining   the  rights  of   security   holders.
                  (Incorporated  by reference to Exhibit Nos. 3.2 and 3.3 to the
                  Company's Form 10-K for the year ended December 31, 1992.)


                                      -47-
<PAGE>


         4.2      Note   Purchase   Agreement   dated   December  15,  1997  for
                  $60,000,000  of 6.41%  Senior  Notes due  December  15,  2002.
                  (Incorporated  by  reference  to Exhibit 4.2 to the  Company's
                  Form 10-K for the year ended December 31, 1997.)

         4.3      Note   Purchase   Agreement   dated   December  15,  1997  for
                  $40,000,000  of 6.50%  Senior  Notes due  December  15,  2007.
                  (Incorporated  by  reference  to Exhibit 4.3 to the  Company's
                  Form 10-K for the year ended December 31, 1997.)

         10.1*    Bandag,  Incorporated  Restricted Stock Grant Plan, as amended
                  August 24, 1999.

         10.2     U.S.  Bandag System  Franchise  Agreement Truck and Bus Tires.
                  (Incorporated   by  reference  to  Exhibit  No.  10.2  to  the
                  Company's Form 10-K for the year ended December 31, 1993.)

         10.2(a)  U.S. Bandag System Franchise Agreement Truck and Bus Tires, as
                  revised April 1996.  (Incorporated by reference to Exhibit No.
                  10.2(a) to the Company's Form 10-K for the year ended December
                  31, 1996.)

         10.2(b)  Bandag System  Franchise  Agreement,  as revised November 1998
                  (Incorporated by reference to Exhibit 10.2(a) to the Company's
                  form 10-K for the year ended December 31, 1998.)

         10.3*    Miscellaneous Fringe Benefits for Executives. (Incorporated by
                  reference to Exhibit No. 10.3 to the  Company's  Form 10-K for
                  the year ended December 31, 1996.)

         10.4*    Nonqualified  Stock Option Plan, as amended  November 12, 1996
                  (Incorporated   by  reference  to  Exhibit  No.  10.4  to  the
                  Company's Form 10-K for the year ended December 31, 1996.)

         10.5*    Nonqualified  Stock Option Agreement of Martin G. Carver dated
                  November  13, 1987,  as amended by an Addendum  dated June 12,
                  1992.  (Incorporated  by  reference to Exhibit No. 10.7 to the
                  Company's Form 10-K for the year ended December 31, 1992.)

         10.6*    Form of Participation Agreement under the Bandag, Incorporated
                  Restricted  Stock Grant Plan.  (Incorporated  by  reference as
                  Exhibit  10.7 to the  Company's  Form 10-K for the year  ended
                  December 31, 1994.)

         10.7*    Separation  and Release  Agreement  with Henry H. Li regarding
                  termination   of   employment,   effective   July  31,   1998.
                  (Incorporated   by  reference  to  Exhibit  No.  10.7  to  the
                  Company's Form 10-K for the year ended December 31, 1998).

         10.8*    Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated  and Martin G. Carver  (incorporated  by
                  reference to Exhibit 10.1 to the Company's Form 10-Q/A for the
                  quarter ended June 30, 1999).

                                      -48-
<PAGE>

         10.9*    Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated and Nathaniel L. Derby, II (incorporated
                  by reference to Exhibit 10.2 to the Company's  Form 10-Q/A for
                  the quarter ended June 30, 1999).

         10.10*   Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated  and Sam  Ferrise  II  (incorporated  by
                  reference to Exhibit 10.3 to the Company's Form 10-Q/A for the
                  quarter ended June 30, 1999).

         10.11*   Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag, Incorporated and Warren W. Heidbreder (incorporated by
                  reference to Exhibit 10.4 to the Company's Form 10-Q/A for the
                  quarter ended June 30, 1999).

         10.12*   Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated  and John C. McErlane  (incorporated  by
                  reference to Exhibit 10.5 to the Company's Form 10-Q/A for the
                  quarter  ended June 30,  1999).

         10.13*   Bandag,  Incorporated  Stock Award Plan, as amended August 24,
                  1999.

         21       Subsidiaries of Registrant.

         27       Financial Data Schedule (with EDGAR filing only)

         27.1     Revised  December 1998 Financial  Data Schedule  (EDGAR filing
                  only)

*Represents a management compensatory plan or arrangement.

(b)      Reports on Form 8-K

         A Current  Report on Form 8-K was filed on October 21,  1999  reporting
         under  Item  5.  The  Current  Report  included   unaudited   condensed
         consolidated  balance  sheets for the quarter ended  September 30, 1999
         and the year ended December 31, 1998, unaudited condensed  consolidated
         statements  of  earnings  for the three and nine  month  periods  ended
         September  30, 1999 and 1998,  respectively,  and  unaudited  condensed
         consolidated statements of cash flows for the nine months periods ended
         September 30, 1999 and 1998.


                                      -49-
<PAGE>
<TABLE>

                                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                            BANDAG, INCORPORATED AND SUBSIDIARIES
<CAPTION>

                                                         COL. C
COL. A                                   COL. B          ADDITIONS                          COL. D            COL. E
-------------------------------------------------------------------------------------------------------------------------
                                                               1                2
                                        Balance at     Charged to     Charged to Other                       Balance at
                                        Beginning       Costs and        Accounts -        Deductions -        End of
              DESCRIPTION               of Period       Expenses          Describe           Describe          Period
                                      -----------------------------------------------------------------------------------
Year ended December 31, 1999:
<S>                                      <C>             <C>              <C>               <C>               <C>
  Allowance for doubtful accounts        $18,724,000     $9,286,000                         $7,249,000(1)     $20,761,000
Year ended December 31, 1998:
  Allowance for doubtful accounts        $12,707,000     $8,460,000                         $2,443,000(1)     $18,724,000
Year ended December 31, 1997:
  Allowance for doubtful accounts        $13,320,000     $3,491,000                         $4,104,000(1)     $12,707,000

(1) - Uncollectible accounts written off, net of recoveries and foreign exchange fluctuations.
</TABLE>


                                      -50-
<PAGE>



                                   SIGNATURES

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

                                           BANDAG, INCORPORATED
                                           By /s/ Martin G. Carver
                                              --------------------------------
                                              Martin G. Carver
                                              Chairman of the Board,
                                              Chief Executive Officer,
                                              President and Director
                                              (Principal Executive Officer)
Date:    March 28, 2000

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ Robert T. Blanchard
--------------------------------         ---------------------------------------
    Robert T. Blanchard                     Lucille A. Carver
    Director                                Director


/s/ Roy J. Carver, Jr.                  /s/ Gary E. Dewel
--------------------------------         ---------------------------------------
    Roy J. Carver, Jr.                      Gary E. Dewel
    Director                                Director


/s/ James R. Everline                   /s/ Phillip J. Hanrahan
--------------------------------         ---------------------------------------
    James R. Everline                       Phillip J. Hanrahan
    Director                                Director


/s/ Edgar D. Jannotta                   /s/ R. Stephen Newman
--------------------------------         ---------------------------------------
    Edgar D. Jannotta                       R. Stephen Newman
    Director                                Director


/s/ Martin G. Carver                    /s/ Warren W. Heidbreder
--------------------------------         ---------------------------------------
    Martin G. Carver                        Warren W. Heidbreder
    Chairman of the Board,                  Vice President, Chief Financial
    Chief Executive Officer,                Officer(Principal Financial Officer)
    President and Director
(Principal Executive Officer)           /s/ Charles W. Vesey
                                         ---------------------------------------
                                            Charles W. Vesey
                                            Corporate Controller
                                            (Principal Accounting Officer)
Date:  March 28, 2000


                                      -51-
<PAGE>
                                  EXHIBIT INDEX
                                  -------------

         Exhibit No.                        Description

         3.1      Bylaws: As amended August 24, 1999
         3.2      Restated  Articles of  Incorporation,  effective  December 30,
                  1986.  (Incorporated  by  reference  to Exhibit No. 3.2 to the
                  Company's Form 10-K for the year ended December 31, 1992.)
         3.3      Articles of  Amendment to Bandag,  Incorporated's  Articles of
                  Incorporation,   effective  May  6,  1992.   (Incorporated  by
                  reference  to Exhibit No. 3.3 to the  Company's  Form 10-K for
                  the year ended December 31, 1992.)
         4.1      Instruments   defining   the  rights  of   security   holders.
                  (Incorporated  by reference to Exhibit Nos. 3.2 and 3.3 to the
                  Company's Form 10-K for the year ended December 31, 1992.)

         4.2      Note   Purchase   Agreement   dated   December  15,  1997  for
                  $60,000,000  of 6.41%  Senior  Notes due  December  15,  2002.
                  (Incorporated  by  reference  to Exhibit 4.2 to the  Company's
                  Form 10-K for the year ended December 31, 1997.)
         4.3      Note   Purchase   Agreement   dated   December  15,  1997  for
                  $40,000,000  of 6.50%  Senior  Notes due  December  15,  2007.
                  (Incorporated  by  reference  to Exhibit 4.3 to the  Company's
                  Form 10-K for the year ended December 31, 1997.)
         10.1*    Bandag,  Incorporated  Restricted Stock Grant Plan, as amended
                  August 24, 1999.
         10.2     U.S.  Bandag System  Franchise  Agreement Truck and Bus Tires.
                  (Incorporated   by  reference  to  Exhibit  No.  10.2  to  the
                  Company's Form 10-K for the year ended December 31, 1993.)
         10.2(a)  U.S. Bandag System Franchise Agreement Truck and Bus Tires, as
                  revised April 1996.  (Incorporated by reference to Exhibit No.
                  10.2(a) to the Company's Form 10-K for the year ended December
                  31, 1996.)
         10.2(b)  Bandag System  Franchise  Agreement,  as revised November 1998
                  (Incorporated by reference to Exhibit 10.2(a) tot he Company's
                  form 10-K for the year ended December 31, 1998.)
         10.3*    Miscellaneous Fringe Benefits for Executives. (Incorporated by
                  reference to Exhibit No. 10.3 to the  Company's  Form 10-K for
                  the year ended December 31, 1996.)
         10.4*    Nonqualified  Stock Option Plan, as amended  November 12, 1996
                  (Incorporated   by  reference  to  Exhibit  No.  10.4  to  the
                  Company's Form 10-K for the year ended December 31, 1996.)
         10.5*    Nonqualified  Stock Option Agreement of Martin G. Carver dated
                  November  13, 1987,  as amended by an Addendum  dated June 12,
                  1992.  (Incorporated  by  reference to Exhibit No. 10.7 to the
                  Company's Form 10-K for the year ended December 31, 1992.)


                                      -52-
<PAGE>

         10.6*    Form of Participation Agreement under the Bandag, Incorporated
                  Restricted  Stock Grant Plan.  (Incorporated  by  reference as
                  Exhibit  10.7 to the  Company's  Form 10-K for the year  ended
                  December 31, 1994.)
         10.7*    Separation  and Release  Agreement  with Henry H. Li regarding
                  termination   of   employment,   effective   July  31,   1998.
                  (Incorporated   by  reference  to  Exhibit  No.  10.7  to  the
                  Company's Form 10-K for the year ended December 31, 1998).
         10.8*    Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated  and Martin G. Carver  (incorporated  by
                  reference to Exhibit 10.1 to the Company's Form 10-Q/A for the
                  quarter ended June 30, 1999).
         10.9*    Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated and Nathaniel L. Derby, II (incorporated
                  by reference to Exhibit 10.2 to the Company's  Form 10-Q/A for
                  the quarter ended June 30, 1999).
         10.10*   Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated  and Sam  Ferrise  II  (incorporated  by
                  reference to Exhibit 10.3 to the Company's Form 10-Q/A for the
                  quarter ended June 30, 1999).
         10.11*   Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag, Incorporated and Warren W. Heidbreder (incorporated by
                  reference to Exhibit 10.4 to the Company's Form 10-Q/A for the
                  quarter ended June 30, 1999).
         10.12*   Severance  Agreement,  dated as of May 4, 1999, by and between
                  Bandag,  Incorporated  and John C. McErlane  (incorporated  by
                  reference to Exhibit 10.5 to the Company's Form 10-Q/A for the
                  quarter ended June 30, 1999).
         10.13*   Bandag,  Incorporated  Stock Award Plan, as amended August 24,
                  1999.
         21       Subsidiaries of Registrant.
         27       Financial Data Schedule (with EDGAR filing only)
         27.1     Revised  December 1998 Financial  Data Schedule  (EDGAR filing
                  only)

*Represents a management compensatory plan or arrangement.


                                      -53-