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# UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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# FORM 10-K

# ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

# For the fiscal year
ended December 31, 2004

# Commission file number  
1-7007

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

|                                                                   |                                               
|------------------------------------------------------------------ | ----------------------------------------------
|Iowa(State of other jurisdiction of incorporation or organization) | 42-0802143(I.R.S. Employer Identification No.)

|                                                                                        
|----------------------------------------------------------------------------------------
|2905 North Highway 61Muscatine, Iowa 52761-5886
(Address of principal executive offices)

Registrant's telephone
number, including area code:   (563) 262-1400

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

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

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

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.    [X]

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).       Yes  X
     No

The aggregate market value of the
voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2004:
Common Stock, $286,830,927, Class A Common Stock (non-voting), $197,703,487, Class B
Common Stock, $701,748.

The number of shares outstanding of
the issuers classes of common stock as of January 31, 2005: Common Stock, 9,116,770
shares; Class A Common Stock, 9,421,307 shares; Class B Common Stock, 918,591 shares.

# DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Companys Proxy
Statement for the Annual Meeting of the Shareholders to be held May 3, 2005 are
incorporated by reference in Part III.

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# Bandag, IncorporatedAnnual Report on Form
10-KYear Ended December
31, 2004

# Table of Contents

|                                                                                                                                                         | Page
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|PART I                                                                                                                                                   | 2   
|Item 1.     Business                                                                                                                                     | 2   
|Item 2.     Properties                                                                                                                                   | 10  
|Item 3.     Legal Proceedings                                                                                                                            | 11  
|Item 4.     Submission of Matters to a Vote of Security Holders                                                                                          | 11  
|                                                                                                                                                         |     
|PART II                                                                                                                                                  | 12  
|Item 5.     Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
                                  Purchases of Equity Security | 12  
|Item 6.     Selected Financial Data                                                                                                                      | 14  
|Item 7.     Management's Discussion and Analysis of Results of Operations and Financial Condition                                                        | 15  
|Item 7A.  Quantitative and Qualitative Disclosures about Market Risk                                                                                     | 28  
|Item 8.     Financial Statements and Supplementary Data                                                                                                  | 29  
|Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                         | 64  
|Item 9A.  Controls and Procedures                                                                                                                        | 64  
|Item 9B.  Other Information                                                                                                                              | 64  
|                                                                                                                                                         |     
|PART III                                                                                                                                                 | 64  
|Item 10.   Directors and Executive Officers of the Registrant                                                                                            | 64  
|Item 11.   Executive Compensation                                                                                                                        | 65  
|Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related
                                  Stockholder Matters              | 65  
|Item 13.   Certain Relationships and Related Transactions                                                                                                | 65  
|Item 14.   Principal Accountant Fees and Services                                                                                                        | 65  
|                                                                                                                                                         |     
|PART IV                                                                                                                                                 
|Item 15.   Exhibits and Financial Statements Schedules                                                                                                   | 65  

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# 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 three reportable
business segments: the manufacture and sale of precured tread rubber, equipment and
supplies for retreading tires (the Traditional Business), 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) and the providing of
quick-service truck lubrication and tire service by its 87.5% owned subsidiary, Speedco,
Inc. (Speedco) through 33 on-highway locations. Refer to Note 15 of the consolidated
financial statements for further details.

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 January 31, 2005, the Carver Family
beneficially owned shares of Common Stock and Class B Common Stock constituting 64% 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 former 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. Shares of Class B
Common Stock have ten (10) votes per share. The Carver Family owns over 98% of the Class B
Common Stock. Shares of Class B Common Stock automatically convert to shares of Common
Stock on January 16, 2007.

On February 13, 2004, the Company
acquired an 87.5% majority interest in Speedco from its founders and Equilon Enterprises,
LLC, a Royal Dutch Shell Group company. In total, Bandag paid approximately $53,716,000,
net of cash received, for its 87.5% interest and to assume and retire $20,079,000 of debt.
The Company recorded $12,127,000 of goodwill and $12,800,000 of other intangible assets.
Speedco generated unaudited revenues of approximately $46,000,000 and unaudited pre-tax
income of approximately $4,800,000 in 2003.

On June 10, 2004, Speedco acquired
the assets of six licensed locations, which were owned and operated by PM Express, Inc.
Speedco paid approximately $15,609,000, net of cash acquired, for these assets. The
Company recorded $5,194,000 of goodwill. These locations generated unaudited revenues of
approximately $10,800,000 and unaudited pre-tax income of approximately $400,000 in 2003.

Reported earnings for fiscal years
1997 through 2002 and the Consolidated Balance Sheets for 1997 through 2003 have been
restated to correct for an accounting error in 1997 and 1998 related to the stock
acquisitions of tire dealerships by TDS. The accounting error was inadvertent and resulted
from a failure to correctly apply certain provisions of SFAS No. 109, Accounting for
Taxes to the 1997 and 1998 acquisitions. The accounting error was not detected until
it surfaced as a result of a review of the Companys deferred tax liability account
and accounting for a 2004 stock acquisition by the Companys tax accounting staff.
For further details, refer to Note 1 of the consolidated financial statements 
Restatement.

# 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 primarily for trucks, but also for buses, light
commercial trucks, industrial equipment, off-the-road equipment and passenger cars. Bandag
specializes in a proprietary cold-bonding retreading process which it introduced to the
United States in 1957 (the Bandag Method). The Bandag Method separates the process of
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.

2

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The Company and its licensees have
985 franchisees worldwide, with 33% located in the United States and 67% internationally.
The majority of Bandags franchisees are independent operators of full service tire
distributorships. The remaining franchises are owned by TDS. The Traditional
Business revenues primarily come from the sale of retread material and equipment to
its franchisees. The Traditional Business products compete in the replacement tire
market with new tire sales, as well as retreads produced using the cold-bonding method and
other retread processes. The Company concentrates its marketing efforts on existing
franchisees and on expanding their respective market penetrations. Due to its strong
distribution system, marketing efforts and leading technology, Bandag, through its
independent franchise network and TDS, has been able to maintain the largest market
presence in the retreading industry.

The Traditional Business in the
United States competes primarily in the medium and wide base commercial truck tire
replacement market. Medium and wide base truck tires are designed for medium trucks
Classes 4 through 6, heavy trucks Classes 7 and 8, as well as trailers and commercial
chassis. Both new tire manufacturers and tread rubber suppliers compete in this market.
While the Company has franchisees in 103 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 23% of the United States medium and wide
base commercial tire replacement market. Other companies who supply to trucking fleets in
the replacement tire market include large new tire manufacturers such as The Goodyear Tire
& Rubber Company (Goodyear), Bridgestone Corporation (Bridgestone) and Groupe Michelin
(Michelin). Goodyear, Michelin and Cooper Tire and Rubber Company also compete in the
United States market as well as in other markets as a tread rubber supplier to a
combination of company-owned and independent retreaders.

The Traditional Business consists of
the franchising of a proprietary 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 and equipment used in connection with this process.

The Traditional Business can be
divided into two main areas: (i) manufacturing the tread rubber and (ii) providing and
supporting the retreading system to bond the tread rubber to the 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 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 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.

(b)  Markets and
Distribution

The principal market categories for
the Traditional Business are medium and wide base commercial truck tires, 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 passenger, light
truck, heavy truck, off-the-road equipment, and industrial 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.

National Account Business. 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 National Accounts). Bandag subcontracts the sales,
maintenance, and service components of the National Accounts to its independent
franchisees and to TDS.

3

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

Franchisees.           Bandag
has 985 franchisees throughout North America, Central America, South           America,
Europe, Africa, Asia, Australia and New Zealand. These franchises are           owned and
operated by franchisees, some with multiple franchises and/or           locations. Of
these franchisees, 324 are located in the United States.           Thirty-two (32) of
Bandags foreign franchisees are franchised by a           licensee of the Company
in Australia. The Company also has joint ventures in           India and Sri Lanka.

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.

(c)  Competition

The Company faces strong competition
in the market for replacement truck tires, the principal retreading market which it
serves. The competition comes not only from the major manufacturers of new tires,
including less expensive tires from Asia, 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.

Bandag retreads often command a
higher price than tires retreaded by the competitors systems. The Company believes
that the superior quality and greater performance of Bandag retreads and expanded service
programs to end-users validate this price differential.

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

The Companys franchise
agreements with its independent franchisees typically terminate after five years unless
extended by mutual consent for an additional five years. In most cases the agreements are
extended. In addition, independent franchisees have the option of terminating the
agreements after three years. Since Michelin entered the United States retread market in
1997, the Company has experienced increasing competition in the United States retread
market. Although Michelin is substantially larger than the Company and has greater
resources, the Company believes that it can effectively compete with Michelin and maintain
the stability of its United States franchise organization.

For additional information on
competition faced by the Traditional Business see the foregoing discussion under
General herein.

(d)  Sources of Supply

The Company manufactures the precured
tread rubber, cushion gum, and related supplies in Company-owned and in leased
manufacturing plants in the United States, Canada, Brazil, Belgium and Mexico. The Company
also participates in joint venture agreements in Sri Lanka and India. The Company also
manufactures pressure chambers, tire casing analyzers, buffers, tire builders,
tire-handling systems, and other items of equipment used in the Bandag Method. Curing
rims, chucks, spreaders, rollers, certain miscellaneous equipment, and various retreading
supplies, 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, including significant price increases throughout 2004, the Company has
not experienced any significant difficulty in obtaining an adequate supply of such
materials. Synthetic prices historically have been related to the cost of petrochemical
feedstocks. However, the effect on operations of future shortages will depend upon their
duration and severity and cannot presently be forecast.

4

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The principal source of natural
rubber, used for the Companys cushion gum, is Asia. 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.

(e)  Patents

The Company owns or has licenses for
the use of a number of United States and international patents covering various elements
of the Bandag Method. The Company has patents covering improved features, some of which
will not expire until 2019. 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

TDS, which provides new and retread
tire products and tire management services to national, regional and local fleet
transportation companies, operates 14 Bandag franchise and manufacturing locations and 41
commercial and retail outlets in 8 states. During 2004, TDS sold or closed 6 retread
plants and 15 commercial and retail outlets, and acquired 2 retread plants and 7
commercial and retail outlets. In 2003, TDS sold or closed 12 retread plants and 32
commercial and retail outlets. In 2002, TDS sold or closed 9 retread plants and 18
commercial and retail outlets.

(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), alignment and 24-hour road service. The tire management services are
provided over a broad geographic area west of the Mississippi in the United States. This
geographic coverage allows TDS to provide consistent, cost-effective programs,
information, products, and services to local, regional and national fleets.

Cost effective tire management
service continues to grow in importance for fleets of all sizes. 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 with 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.

In an effort to fully service its
customers, TDS sells new truck tires manufactured primarily by Bridgestone/Firestone,
Continental/General and Yokohama, and to a lesser extent, other tire manufacturers except
for Michelin.

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

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(c)  Competition

TDS competitors are other tire
dealers which offer competing retread applications, as well as Bandag franchised dealers.
In addition, such tire dealers typically sell and service new tires produced by large new
tire manufacturers and service providers such as those that supply TDS, as well as
Goodyear and Michelin. Goodyear and Michelin also compete in the United States market as
tread rubber suppliers through a combination of company-owned and independent retreaders.

(d)  Sources of Supply

TDS purchases precured tread rubber
and its retreading equipment and supplies from Bandag and purchases new tires from new
tire companies including Bridgestone/Firestone, Yokohama, Continental/General, and other
manufacturers.

# Speedco

(a)  General

On February 13, 2004, the Company
acquired an 87.5% majority interest in Speedco, Inc. from its founders and Equilon
Enterprises, LLC, a Royal Dutch Shell Group company. On June 10, 2004, Speedco, Inc.
acquired the assets of six licensed locations, which were owned and operated by PM
Express, Inc. Speedco provides quick-service truck lubrication and tire service and has 33
company-owned on-highway locations in the United States.

(b)  Markets and
Distribution

Speedco markets its product/service
through its on-highway truck service facility with a nationwide network. The multiple
product/service options can be purchased independently or in combination. These include
the oil change and lubrication service, and tire repair, replacement, and maintenance
service. Both services are built on fast turn-around time, high-quality products and
professional services to owner operators and local, regional and national fleets.

The primary product/service benefit
to the customer is to avoid unscheduled repair and downtime. Customers use this service to
maintain the integrity of their tractor and trailer vehicle and for tire preventative
maintenance.

Speedcos market positioning is
premium product and premium price. Tire customers are divided into two types: Speedco
Direct and Manufacturer National Accounts. Speedco Direct customers purchase tire product
and services per the Manufacturers Suggested Retail Price established by Speedco.
For new tire manufacturers national accounts customers, the tire manufacturer sets
the pricing for the new tire and Speedco earns a delivery commission.

(c)  Competition

Speedco is the only national
on-highway network specializing in quick lubes and tire service for heavy-duty trucks.
Speedco competitors in the quick lube and tire business are truck stop chains and other
tire dealers, including Petro Stopping Centers and Travel Centers of America.
Speedcos tire competitors are other tire dealers that typically sell and service new
and retread tires.

(d)  Sources of Supply

Speedco purchases oils from Shell
Oil, Exxon Mobil, and Chevron and filters from Baldwin, CAT and Fleetguard. Speedco
purchases new tires direct from new tire companies including Goodyear, Michelin and
Yokohama. Bandag retreads are purchased from Bandag franchised dealers.

6

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# Regulations

The Transportation Recall Enhancement
Accountability and Documentation Act (TREAD Act), including the rules adopted thereunder,
applies to tire manufacturers, importers of tires and, with respect to certain provisions,
to retread tire manufacturers. The National Highway Transportation Safety Administration,
the federal agency that oversees certain aspects of the tire industry, has proposed and
may propose additional rules under the TREAD Act that may affect retread tire
manufacturers. There are numerous other federal and state safety and other regulations for
motor vehicles and components, including tires and wheels.

# 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 $7,063,000 in 2004, $7,238,000 in 2003, and $8,109,000 in 2002.

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 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, 2004, the Company
had an estimated 3,384 employees.

# Operating Segment and
Geographic Area Information

Information concerning operating
segment and geographic area information is incorporated by reference to Operating
Segment and Geographic Area Information in Note 15 of the consolidated financial
statements contained in Item 8 of this Annual Report on Form 10-K.

7

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# Executive Officers of
the Registrant

The following table sets forth the
names and ages of all executive officers of the Company as of January 31, 2005, 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/her present office:

|Name                                                      | Age | Period of
Service with Company | Present Position
or Office                     | Period in
Present
Office
|--------------------------------------------------------- | --- | ------------------------------ | ---------------------------------------------- | ------------------------
|Martin G. Carver*                                         | 56  | 25 Years                       | Chairman of the Board, Chief Executive Officer | 23 Years                
|                                                          |     |                                | and President                                  |                         
|Timothy T. Chen                                           | 44  | 13 Years                       | Vice President, Innovation                     | 2 Years                 
|David W. Dahms                                            | 45  | 15 Years                       | Director, Treasury Services and Treasurer      | 10 Months               
|Dennis M. Fox                                             | 48  | 12 Years                       | Vice President, Manufacturing Design           | 10 Months               
|Warren W. Heidbreder                                      | 58  | 22 Years                       | Vice President, Chief Financial Officer and    | 8 Years                 
|                                                          |     |                                | Secretary                                      |                         
|Frederico U. Kopittke                                     | 61  | 10 Years                       | Vice President, International                  | 3 Years                 
|John C. McErlane                                          | 51  | 19 Years                       | Vice President                                 | 3 Years                 
|Jeffrey C. Pattison                                       | 49  | 19 Years                       | Vice President, People Services                | 1 Year                  
|Janet R. Sichterman                                       | 45  | 22 Years                       | Vice President, North American Fleet Sales     | 3 Years                 
|Andrew M. Sisler                                          | 50  | 17 Years                       | Vice President, North American Franchise Sales | 3 Years                 
|Michael A. Tirona                                         | 55  | 19 Years                       | Vice President and General Manager - Europe    | 3 Years                 
|Charles W. Vesey                                          | 62  | 33 Years                       | Vice President and Corporate Controller        | 6 Years                 
|* 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.

Mr.  Chen
joined Bandag in 1991. From 1991 through 1997, he held several positions           with
the Company. In 1997, he was promoted to the position of Manager, Market
          Research and Planning. In 2000, he was promoted to the position of Director of
          Marketing and served in that position until May 2001 when he was promoted to
the           position of Vice President, Marketing. Mr. Chen was elected to his current
          office of Vice President, Innovation on May 14, 2002.

Mr.    Dahms
joined Bandag in 1989. From 1989 through 1997, he held several positions           with
the Company. In March of 1997 he was promoted to Credit Manager of North
          American Sales. In January 1999 he was promoted to Manager, Corporate Credit
and           held that position until January 2004, when he was promoted to Director,
          Treasury Services. In March 2004 he was elected to his current position of
          Director, Treasury Services and Treasurer.

8

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Mr.  Fox
joined Bandag in 1992. From 1992 to 1995 he was Plant Manager, Chino
          Manufacturing Plant. In 1995 he became Plant Manager, Abilene Manufacturing
          Plant. In 1999, he was promoted to Vice President, North American
Manufacturing.           In September 2001, he accepted the position of Vice President,
People Services           and held that position until January 2004, when he was promoted
to the position           of Vice President, Manufacturing Design. Mr Fox was elected to
his current           office of Vice President, Manufacturing Design in March 2004.

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.

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. He served in that position until July 1998 when
          he was elected to the office of Vice President Latin America and South Africa.
          In February 2001, he was elected to his current office of Vice President,
          International, effective March 1, 2001.

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 appointed to the office of Vice
          President, Marketing. In February 1998, he was elected to the office of Vice
          President, Marketing and Sales and served in that position until September
2001,           when he was elected to his current offices of Vice President, Bandag,
          Incorporated and President, Tire Distribution Systems, Inc., Bandags
          distribution subsidiary.

Mr.  Pattison
joined Bandag in 1986. From 1986 through 1990, he held several           positions with
the Company. In 1990, he was promoted to the position of Manager,           Taxes. In
April 1999, he was promoted to Manager, Corporate Accounting. In           October 1999,
he was promoted to Director, Treasury Services and Assistant           Treasurer and
served in that position until August 2002, when he was elected to           the office of
Vice President and Treasurer. In January 2004, Mr. Pattison           transferred from
the Treasury Services department to the People Services           department and assumed
the responsibilities of Vice President, People Services.

Ms.   Sichterman
joined Bandag in 1982. From 1982 through 1999, she held several           positions with
the Company. In 1999, she was promoted to the position of Vice           President,
People Services and served in that position until September 2001,           when she was
promoted to the position of Vice President, North American Fleet           Sales. Ms.
Sichterman was elected to her current office of Vice President, North           American
Fleet Sales on November 13, 2001.

Mr.   Sisler
joined Bandag in 1987. From 1987 through 1997, he held several positions           with
the Company. In 1997, he was promoted to Director of Sales, West. In 1998,           he
was promoted to Vice President, North American Sales and served in that
          position until November 2001, when he was elected to his current office of Vice
          President, North American Franchise Sales on November 13, 2001.

Mr.    Tirona
joined Bandag in 1985. From 1985 through 1995, he held several positions           with
the Company. In 1995, he was promoted to General Manager, P.T. Bandag
          Indonesia. In 1997, he was promoted to Vice President, Tire Management
          Solutions, Inc. and served in that position until September 2001, when he was
          promoted to Vice President and General Manager  Europe. He was elected to
          his current office of Vice President and General Manager  Europe on
          November 13, 2001.

Mr.   Vesey
joined Bandag in 1971. In September 1977, he was named Corporate           Controller. In
May 1997, he was elected to the office of Vice President,           Information Services
and Corporate Controller and served in that position until           October 1998, when
he was elected to his current office of Vice President and           Corporate
Controller.

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.

9

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# Available Information

The Company maintains a website at
http://www.bandag.com. The Company makes available on the website, free of charge, annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports, as soon as is reasonably practicable after such material is
electronically filed with the Securities and Exchange Commission. In addition, (i) the
Companys Global Ethics Policy, (ii) its Code of Ethics for the Chief Executive
Officer and the Senior Financial and Accounting Officers, (iii) charters for the Audit,
Nominating and Corporate Governance and the Management Continuity and Compensation
Committees of the Companys Board of Directors, and (iv) the Companys corporate
governance guidelines are available on the Companys website and available in print
upon written request directed to Warren Heidbreder, Secretary, 2905 N. Highway 61,
Muscatine, IA 52761. The Company is not including the information contained on or
available through its website as a part of, or incorporating such information into, this
Annual Report on Form 10-K.

# 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 nine plants.
However, the Company only operates eight of these plants, three of which are located in
the United States, and the remainder in Canada, Belgium, Brazil (two plants) and Mexico.
The plants vary in size up to 194,000 square feet with the first plant being placed into
production in 1959. All of the plants are owned in fee. 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. Operations in the
Chino, California plant were suspended in the first quarter of 2002. This facility was
sold during the fourth quarter of 2004.

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, in Muscatine the Company
owns a research and development center of approximately 58,400 square feet, an 83,000
square foot training and conference center, and another 26,000 square foot office
facility. Similar training facilities are located in Brazil and Europe. The Company also
owns a 26,000 square foot office and machining facility in Muscatine.

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

# TDS

TDS currently owns 11 and leases 44
facilities. Fourteen (14) contain space for TDS retread production and 41 contain space
for commercial and retail 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, all of
its and TDS properties are maintained in good operating condition and the production
capacity of their 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.

# Speedco

Speedco currently owns 33 locations.
Each location is sited on two or more acres visible from major interstates with easy
access to those interstates. Each facility has a minimum of an 8,500 square foot building
with three pitted service bays. In the opinion of the Company, all of its properties are
maintained in good operating condition and are adequate for the near future.

10

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# Item 3.  LEGAL PROCEEDINGS

General

The Company is a party 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 results of operations. Changes in assumptions, as well as actual
experience, could cause estimates made by management to change.

Yolanda Jackson v. Michael Rouse,
et al. and Audra Smith v. Bandag, Inc., et al.

Bandag has been named as one of
numerous defendants in two wrongful death actions brought in the Circuit Court of Warren
County, Mississippi: Yolanda Jackson v. Michael Rouse, et al. and Audra Smith v.
Bandag, Inc., et al. These cases arise from an explosion or fire which occurred on May
17, 2002, at a rubber recycling plant in Mississippi, operated by Rouse Rubber Co.,
killing five employees and seriously injuring at least seven others. So far, Bandag has
been named in only two of about six pending cases.

The plaintiffs claim that a rubber
recycling machine was dangerously designed or maintained, causing the explosion.
Plaintiffs allege that Bandag may be passively liable as a joint venturer with
the employer, Rouse Rubber Co., an allegation which Bandag believes is without any basis.
To Bandags knowledge, no investigation or discovery has been undertaken to date in
the cases in which Bandag is involved and Bandag is not privy to discovery, if any, in the
other cases. To date, Bandags own investigation has not revealed any evidence of
negligence by Bandag, vicarious or otherwise.

These cases have been in legal limbo
for two years while the parties have been fighting over the defendants attempt to
remove them to federal court. Recently, Bandag was dismissed without prejudice from the
Jackson case for tactical reasons, but Bandag is likely to be renamed in that case
or joined in another case involving the same decedent.

Astec, the manufacturer of the dryer
system that exploded, settled with the plaintiffs in apparently all cases for about $45
million. This settlement will apply as a credit to the remaining defendants.

The Jackson case does not
specify the amount of damages claimed; the Smith case claims compensatory damages
of $40 million and punitive damages of $25 million. However, it is unclear from the
pleadings whether the plaintiffs seek punitive damages against all defendants, including
Bandag, or only from certain defendants, not including Bandag. Bandag considers the claims
against it to be baseless and intends to vigorously defend itself against them.

# Item 4.  SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

None.

11

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# PART II

|Item 5. | MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

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:

|                             | 2004     |   | %      Change | 2003     |   | %      Change | 2002     |   | %      Change
|---------------------------- | -------- | - | ------------- | -------- | - | ------------- | -------- | - | -------------
|Dividends Declared Per Share |          |   |               |          |   |               |          |   |              
|First Quarter                | $  0.325 |   |               | $  0.320 |   |               | $  0.315 |   |              
|Second Quarter               | 0.325    |   |               | 0.320    |   |               | 0.315    |   |              
|Third Quarter                | 0.325    |   |               | 0.320    |   |               | 0.315    |   |              
|Fourth Quarter               | 0.330    |   |               | 0.325    |   |               | 0.320    |   |              
|                             |          |   |               |          |   |               |          |  
|Total Year                   | $  1.305 |   | 1.6           | $  1.285 |   | 1.6           | $  1.265 |   | 2.8          
|                             |          |   |               |          |   |               |          |   |              
|Stock Price Comparison (1)   | Low      |   | High          | Low      |   | High          | Low      |   | High         
|Common Stock                
|First Quarter                | $  40.31 | - | 49.95         | $  28.45 | - | 39.72         | $  33.05 | - | 39.15        
|Second Quarter               | 38.32    | - | 51.30         | 31.28    | - | 39.28         | 27.80    | - | 39.98        
|Third Quarter                | 42.91    | - | 48.20         | 32.85    | - | 38.49         | 26.00    | - | 36.25        
|Fourth Quarter               | 43.22    | - | 50.83         | 33.60    | - | 42.97         | 28.12    | - | 42.01        
|Year-end Closing Price       |          |   | 49.81         |          |   | 41.20         |          |   | 38.68        
|Class A Common Stock        
|First Quarter                | $  39.86 | - | 47.71         | $  25.60 | - | 35.60         | $  27.90 | - | 33.40        
|Second Quarter               | 35.38    | - | 46.98         | 29.80    | - | 36.30         | 24.95    | - | 34.21        
|Third Quarter                | 39.60    | - | 43.68         | 30.19    | - | 35.50         | 23.00    | - | 31.10        
|Fourth Quarter               | 39.10    | - | 46.69         | 30.55    | - | 41.20         | 24.75    | - | 36.98        
|Year-end Closing Price       |          |   | 46.33         |          |   | 40.40         |          |   | 34.59        
|                             |          |   |               |          |   |               |          |   |              

|(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).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The approximate number of record
holders of the Companys Common Stock as of January 31, 2005 was 1,652, the number of
record holders of Class A Common Stock was 945 and the number of record holders of Class B
Common Stock was 191. 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.

12

---

# Issuer Purchases of
Equity Securities(1)

|October 1, 2004 -
December 31, 2004 | Total
Number of
Shares
Purchased | Average Price
Paid per Share | Total Number of
Shares Purchased
as Part of
Publicly
Announced
Programs | Maximum Number of
Shares that May
Yet be Purchased
Under the Program
|----------------------------------- | -------------------------------- | ---------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------------
|Common Stock                        |                                  |                              |                                                                         |                                                                     
|October 1 - October 31              |                                  |                              |                                                                         | --                                                                  
|November 1 - November 30            |                                  |                              |                                                                         | --                                                                  
|December 1 - December 31            |                                  |                              |                                                                         | 455                                                                 
|                                    |                                  |                              |                                                                         |                                                                     
|Total                               |                                  |                              |                                                                         | 455                                                                 
|                                    |                                  |                              |                                                                         |                                                                     
|Class A Common Stock                |                                  |                             
|October 1 - October 31              |                                  |                              |                                                                         | 7,500                                                               
|November 1 - November 30            |                                  |                              |                                                                         | --                                                                  
|December 1 - December 31            |                                  |                              |                                                                         | 1,019                                                               
|                                    |                                  |                              |                                                                         |                                                                     
|Total                               |                                  |                              |                                                                         | 8,519                                                               
|                                    |                                  |                              |                                                                         |                                                                     

|(1) | On
May 2, 2000, the Board of Directors approved a stock purchase program which
               authorized the purchase of up to 2,000,000 shares of outstanding Common
Stock,                Class A Common Stock, and/or Class B Common Stock in the open
market or in                private transactions. The program has no stated expiration
date. No stock                purchase program expired during the period covered by the
above table.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents
the total number of shares of Common Stock, Class A Common                Stock
and/or Class B common Stock remaining to be purchased under the stock
               purchase program.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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# Item 6.  SELECTED
FINANCIAL DATA

The following table sets forth
certain Selected Financial Data for the periods and as of the dates indicated:

|                                      | 2004 |  | 2003
restated(4) |         | 2002
restated(4) |   | 2001
restated(4) |  | 2000
restated(4) |        
|------------------------------------- | ---- |  | ---------------- | ------- | ---------------- | - | ---------------- |  | ---------------- | -------
|(In thousands, except per share data) |      |  |                  |         |                  |   |                  |  |                  |        
|Net sales                             |      |  | $                | 854,193 |                  | $ | 816,397          |  | $                | 900,503
|Earnings before cumulative effect of  |      | 
|accounting change(1)(2)               |      |  |                  | 66,880  |                  |   | 60,200           |  |                  | 50,053 
|                                      |      |  |                  |         |                 
|Total assets(3)                       |      |  | $                | 730,727 |                  | $ | 657,287          |  | $                | 616,128
|Long-term debt and other obligations  |      |  |                  | 29,963  |                  |   | 35,259           |  |                  | 45,373 
|Earnings per share before cumulative  |      | 
|effect of accounting change           |      | 
|Basic                                 |      |  | $                | 3.47    |                  | $ | 3.14             |  | $                | 2.53   
|Diluted                               |      |  | $                | 3.39    |                  | $ | 3.11             |  | $                | 2.52   
|Dividends Declared Per Share          |      |  | $                | 1.305   |                  | $ | 1.285            |  | $                | 1.265  

|(1) | In
2001, includes charges of $3,400 pre-tax, $2,040 after-tax, related to costs
          associated with the closure of a domestic manufacturing facility and other
          non-recurring costs.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
goodwill amortization of $8,350 and $8,246 in 2001 and 2000,           respectively.
Goodwill amortization was discontinued in 2002 due to the adoption           of SFAS 142.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
decrease in total assets in 2002 is primarily due to the $49,607 charge
          reported as a cumulative effect of accounting change, resulting from the
          adoption of SFAS No. 142. Refer to Note 9 of the consolidated financial
          statements for further details.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | For
an explanation of the restatement refer to Note 1 of the consolidated           financial
statements under the caption Restatement.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

14

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# Item 7.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# Year Ended December 31,
2004 Compared to Year Ended December 31, 2003

# OVERVIEW

General

The Company has three reportable
operating segments  its Traditional Business which manufactures and sells precured
tread rubber, equipment and supplies for retreading tires, Tire Distribution Systems, Inc.
(TDS) which sells and maintains retread tires and new tires to principally commercial and
industrial customers and Speedco which provides quick-service truck lubrication and tire
service through 33 company-owned on-highway locations in the United States.

Bandag and its licensees have 985
franchise locations worldwide, with 33% located in the United States and 67%
internationally. The majority of Bandags franchisees are independent operators of
full service tire distributorships and the remaining are owned by TDS. The Traditional
Business revenues primarily come from the sale of retread material and equipment to its
franchisees. TDS offers complete tire management services including the complete line of
Bandag retreads, new tires (commercial, retail and off-the-road), alignment and 24-hour
road service. Speedco provides quick-service truck lubrication and tire service.

Bandag anticipates strengthening
Speedcos success by adding more locations and tire capability while not compromising
Speedcos deserved reputation for convenient, quick, quality service. A major
component of the expansion is to modify all existing locations and build new locations to
include a Bandag designed and developed high-speed tire sales and service capability. All
new locations will be built with a minimum of two high-speed tire lanes. The majority of
the current locations will be modified to include two tire lanes with the exception of
those locations where current sites are not large enough to add two lanes and the
adjoining property is unavailable or cost prohibitive.

Approximately 32% of Bandags
retread material sales in North America come from national account contracts with a
variety of major fleets. The depth of the Companys franchisee network combined with
the quality of its products has allowed Bandag to build a significant national account
business. Significant fleet revenue is important to Bandags franchisees who act with
Bandag as subcontractors to deliver products, information and services to national fleet
customers. Bandags franchise agreements require its franchisees to buy their
precured retreading material and equipment from Bandag, which gives Bandag a secure
revenue stream. Growth in revenue can be achieved by expanding the amount of services that
can be provided to a fleet by Bandag and its franchisees while continuing to provide
value-added retread products. Bandag also generates significant cash flow which has
historically been used to reinvest in the business, make debt payments, pay dividends,
repurchase stock and other corporate purposes.

Despite an aggressive push by
competitors in the Unites States retread business, Bandag has retained its leading
position. In addition to its leading presence in the United States, Bandag also has an
important presence internationally in Europe, Canada, Mexico, Brazil, South Africa and
Australia.

Trucking
Industry

While shippers apply pressure to
fleets from the service side, pressure on fleets from the cost side continues to
intensify. High insurance costs, increased driver wages and higher fuel costs continue to
increase the pressure on fleets to find ways to reduce costs. Also, on August 28, 2003,
the Federal Motor Carrier Safety Administration filed a final rule for hours of service of
drivers, applying to all commercial motor vehicles and mandating how long drivers can
drive, be on-duty, rest, etc. Among other things, the new rule lengthens the allowable
driving time from 10 hours to 11 hours and limits total daily time on duty (which includes
loading, unloading, breaks and breakdown time) to 14 hours. This new regulation went into
effect January 4, 2004.

15

---

The pressure to reduce costs and
still meet shipper demands requires fleets to focus on increasing revenue through better
asset utilization. Fleets are looking for ways to reduce costs and to reduce the assets
that are used to generate revenues. They are focusing, not just on reduction of downtime,
but on better utilization of downtime that is mandated through regulation (e.g. when the
truck is down due to regulated drive rest time, fleets will seek to use that time for
vehicle maintenance). Fleets, particularly truckload carriers, will likely focus more on
preventive maintenance and other services and products, such as those provided by Bandag,
that can provide more reliable utilization of their assets.

New
Tire Retread Pricing and Profitability

The relationship between new tire
pricing and retread unit pricing has been narrowing primarily due to retread unit prices
increasing at a faster rate than new tires and lower-priced imported new tires entering
the market. Generally, a decreasing new tire to retread price ratio will put downward
pressure on retread pricing and tend to increase the use of relatively less expensive new
tires instead of retreads. Increases in imports of low priced new tires and the movement
of major new tire manufacturers to lower their costs by utilizing overseas production has
exacerbated this situation. However, there still remains an inherent value in retreading
to fleets that recognize the need for a well-managed tire program that combines quality
new tires, retreads and tire management services to reduce operating costs.

Acquisitions

On February 13, 2004, the Company
acquired an 87.5% majority interest in Speedco, Inc. from its founders and Equilon
Enterprises, LLC, a Royal Dutch Shell Group company. In total, Bandag paid approximately
$53,716,000, net of cash received, for its 87.5% interest and to assume and retire
$20,079,000 of debt. The Company recorded $12,127,000 of goodwill and $12,800,000 of other
intangible assets. Speedco generated unaudited revenues of approximately $46,000,000 and
unaudited pre-tax income of approximately $4,800,000 in 2003. The Company reports Speedco
as a separate segment.

On June 10, 2004, Speedco, Inc.
acquired the assets of six licensed locations, which were owned and operated by PM
Express, Inc. Speedco paid approximately $15,609,000, net of cash acquired, for these
assets. The Company recorded $5,194,000 of goodwill. These locations generated unaudited
revenues of approximately $10,800,000 and unaudited pre-tax income of approximately
$400,000 in 2003.

During 2004, the Companys TDS
segment acquired seven commercial and retail outlets and two retread plants for
$4,163,000.

Sale
of TDS Locations

Bandags TDS subsidiary sold or
closed 21 locations during 2004, 44 locations during 2003 and 27 locations during 2002.
The Company considers TDS to be essential in order to protect Bandags distribution
where no independent Bandag franchise exists. Bandag will continue to divest TDS locations
where an independent Bandag dealer is willing to buy the location and when it is a
sensible decision for the Company to sell. Bandag will also continue to purchase locations
for TDS if it is necessary to maintain Bandags distribution in an area. In currently
unprofitable locations where TDS must operate to maintain Bandags presence to serve
its fleet customers, the Company intends to continue to improve operational efficiencies
to achieve profitability.

During 2004, the Companys TDS
segment sold 19 locations with a net carrying value of $18,496,000 for cash of $13,407,000
and assumed liabilities of $4,251,000. The assets of these locations consisted primarily
of inventory and property, plant and equipment. The divestitures resulted in a loss before
income taxes, minority interest and cumulative effect of accounting change of $838,000
which was recorded in engineering, selling, administrative and other expenses in the
Consolidated Statements of Earnings. During 2004, TDS also closed two locations.

In conjunction with the divestiture
of certain TDS locations in 2003, Bandag guaranteed a portion of third-party loans to a
dealer. Bandags exposure under these guarantees is $2,463,000. The guarantees are
secured by assets of the dealer. The remaining term of the guarantees is two years. The
fair value of the guarantees, which was originally determined to be $600,000 and is
currently valued at $317,000, is included in long-term debt and other obligations in the
Companys Consolidated Balance Sheet with an offsetting charge of $600,000 included
in engineering, selling, administrative and other expenses on the Consolidated Statements
of Earnings in 2003.

16

---

The divested and closed locations had
net sales and loss before income taxes, minority interest and cumulative effect of
accounting change as follows (in thousands):

|                                            | Year Ended December 31, | 
|------------------------------------------- | ----------------------- | 
|
|Net sales                                   |                         | 
|Loss before income taxes, minority interest |                         | 
|and cumulative effect of accounting change  |                         | 

Outsourcing
Agreement

On May 3, 2004 Bandag announced that
Yellow Roadway Corporation elected on April 30, 2004 not to renew the existing Bandag
outsourcing agreement for Roadway Express tire and wheel services in place since 1999 and,
in accordance with the terms of the agreement, would be repurchasing the tire and wheel
assets from Bandag. On July 9, 2004 Bandag received an initial payment of approximately
$32,243,000 and received a final payment of approximately $1,781,000 on July 29, 2004.
These tire and wheel assets had net carrying values of approximately $33,700,000 and
$31,700,000 as of June 30, 2004 and December 31, 2003, respectively, and were classified
with other current assets in the Companys Condensed Consolidated Balance Sheets.
Bandags annual revenues under the contract in 2003, including revenue derived from
sales of retread materials to dealers performing services under the agreement, were
approximately $27,500,000. Bandag estimates that the agreement contributed approximately
$4,000,000 to consolidated net earnings in 2003, or approximately $0.21 per diluted share.
The foregoing discussion concerning the economic contribution attributable to the Roadway
Express agreement in 2003 overstates the potential financial impact to Bandag on the
termination of the agreement since it does not take into account or reflect the
contribution to earnings which Bandag will recognize upon the investment of the proceeds
derived from the sale of the tires and wheels to Yellow Roadway Corporation.

Sale
of South Africa Operations

Effective December 1, 2004, the
Company sold the business of Bandag in South Africa. Due to the foreign operations
reporting on a one month lag, this transaction will not be recorded until 2005. These
operations represent less than 2% of net sales and total assets of the Company and
contributed approximately $1,500,000 and $600,000 to pre-tax income in 2004 and 2003,
respectively. The purchase price of approximately $3,500,000 consists of a cash payment of
approximately $2,000,000 with the remainder to be paid in equal installments over five
years. The actual payment in U.S. Dollars will depend on the currency fluctuations of the
Euro and the South African Rand over the five year period. In relation to the installment
payments, Bandag is considered the Primary Beneficiary under FASB
Interpretation No. 46, revised December 2003 (FIN 46R), Consolidation of Variable
Interest Entities. Under the guidance of FIN 46R Bandag will continue to consolidate
the South African operations on its financial statements as long as Bandag is considered
to be the Primary Beneficiary. Although determination of Bandag as the Primary Beneficiary
could change based on changes in the capitalization of the South African operations, based
on the current facts, Bandag would be considered the Primary Beneficiary until final
payment has been made. As a result, Bandag must defer recognition of the expected net loss
of approximately $14,000,000 to $17,000,000, or approximately $0.70 to $0.90 diluted
earnings per share, until the earlier of final payment of the five year obligation, which
is expected to be December 1, 2009, or until it is no longer considered the Primary
Beneficiary within the meaning of FIN 46R. The expected loss may fluctuate over the
five-year period depending on the stability of the Euro and the South African Rand. The
expected loss is primarily due to the cumulative translation adjustment of approximately
$14,000,000 that is recorded in the Bandag Consolidated Balance Sheet related to the South
African operation. The expected loss will not affect Bandags cash flow, but rather
will be an accounting entry which will reduce net earnings.

17

---

# RESULTS OF OPERATIONS

Results include the Companys
three reportable operating segments  its Traditional Business, TDS and Speedco.

Net
Sales

Consolidated net sales in 2004
increased $37,796,000, or 5%, from 2003. This included $55,065,000 of net sales provided
by Speedco and an increase of $20,223,000 due to the effect of translating foreign
currency denominated net sales into U.S. dollars. These increases in consolidated net
sales were offset by a $38,932,000 decrease in TDS net sales primarily as a result of the
divestitures and closures in 2004 and 2003. The Companys sales pattern is tied to
the overall performance of the economy and to the level of trucking activity.

Other
Income

Other income in 2004 includes a gain
of approximately $6,000,000 due to the sale of assets.

Gross
Profit Margins

Consolidated gross profit margin for
2004 decreased 0.5 percentage points from 2003. Gross profit margin was negatively
impacted by higher raw material costs in the Traditional Business.

Operating
and Other Expenses

Consolidated operating and other
expenses increased $16,084,000, or 7%, from 2003. The increase in consolidated operating
and other expenses was substantially impacted by $14,943,000 of expenses related to the
Speedco operations in 2004 and a decrease in TDS operating and other expenses of
$13,239,000 which primarily resulted from the divestitures and closures. Consolidated
operating and other expenses were also negatively impacted by higher personnel costs and
the higher translated value of the Euro, Brazilian Real and the South African Rand.

Net
Earnings

Consolidated earnings before income
taxes, minority intererst and cumulative effect of accounting change increased $1,002,000,
or 1%, from 2003. Consolidated net earnings in 2004 were $66,880,000, or $3.39 per diluted
share, as compared to $60,200,000, or $3.11 per diluted share in 2003. Consolidated net
earnings in 2004 includes $3,700,000, or $0.19 per diluted share, due to the sale of
assets. Consolidated net earnings in 2004 were also favorably impacted by $7,200,000, or
$0.37 per diluted share, for the resolution and reassessment of certain tax matters.
Consolidated net earnings in 2003 included favorable tax adjustments of $3,000,000, or
$0.15 per diluted share, due to the resolution of certain tax matters.

# TRADITIONAL BUSINESS

North
America

The Companys Traditional
Business operations located in the United States and Canada, together with Tire Management
Solutions, Inc. (TMS) and Quality Design Systems, Inc. (QDS), are integrated and managed
as one unit, which is referred to internally as North America. North America sells
to independent dealers as well as to TDS and other subsidiaries. Sales to TDS and other
subsidiaries are eliminated in consolidation. Accordingly, as TDS locations are divested
and become unaffiliated Bandag customers, sales to independent dealers should benefit.

The table below depicts the breakout
of North Americas retread product sales between TDS and independent dealers:

|(in thousands)               | Year Ended December 31,
|---------------------------- | -----------------------
|
|Sales to Independent Dealers |                        
|Sales to TDS                 |                        
|                             |                        
|Total Retread Product Sales  |                        
|                             |                        

18

---

Retread product sales to independent dealers
were influenced by several factors, including increased sales to independent dealers that
purchased TDS locations and the positive effect of translating Canadian dollar foreign
currency denominated results to U.S. dollars of approximately $4,021,000. Retread product
sales for 2004 were negatively impacted by a decrease in volume of 1%, a portion of which
is attributed to the loss of the Roadway business. The decrease in retread product sales
to TDS is primarily due to the divestitures and closures of TDS locations. Net sales were
positively impacted by an adjustment of approximately $1,445,000 related to a reassessment
of dealer marketing program accruals. North America other sales decreased $11,004,000,
which is primarily due to the loss of the Roadway business.

Higher raw material costs and lower
volume primarily resulted in a 2.8 percentage point decrease in North Americas gross
profit margin in 2004 as compared to 2003.

North American operating and other
expenses in 2004 were $1,845,000, or 2% higher than 2003 expenses. North America operating
and other expenses were negatively impacted by a $1,100,000 adjustment related to a
reassessment of sales tax accruals. North America other income was positively impacted by
a gain on sale of assets of approximately $6,000,000, which included a gain of $1,937,000
from the sale of certain assets of QDS and a gain of approximately $3,400,000 from the
sale of the Chino, California facility. Lower gross profit margin and increased operating
and other expenses primarily resulted in a decrease for North America of $5,995,000 in
earnings before income taxes, minority interest and cumulative effect of accounting change
for 2004 as compared to 2003.

EMEA

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 EMEA. Net
sales in EMEA increased $7,625,000, or 9%, from 2003, on a 5% decrease in volume. The
increase in net sales is substantially due to the effect of translating foreign currency
denominated net sales to U.S. dollars of approximately $10,960,000. Gross profit margin
increased 1.7 percentage points from 2003, primarily due to price increases targeted to
improve margins.

Operating and other expenses
increased $4,662,000, or 17%, from 2003, primarily due to the higher translated value of
the Euro and higher personnel related costs. Primarily as a result of higher operating
expenses, partially offset by higher net sales and gross margin, EMEA recorded income
before income taxes, minority interest and cumulative effect of accounting change of
$2,789,000 in 2004 as compared to $3,442,000 in 2003.

International

The Companys exports from North
America to markets in the Caribbean, Central America, South America and Asia, along with
operations in Brazil, Mexico, Venezuela and royalties from a licensee in Australia, are
combined under one management group referred to internally as International.
International net sales increased $12,199,000, or 13%, from 2003 on a 4% increase in
volume. Net sales were positively impacted by approximately $5,242,000 due to the effect
of translating foreign currency denominated net sales to U.S. dollars and by price
increases in Brazil. Gross profit margin for 2004 decreased slightly from the prior year.

Operating and other expenses
increased $2,506,000, or 12%, from 2003, primarily due to the higher translated value of
the foreign Brazilian Real and the South African Rand. Primarily as a result of higher net
sales, partially offset by higher operating and other expenses, earnings before income
taxes, minority interest and cumulative effect of accounting change increased $1,784,000
in 2004 as compared to 2003.

# TIRE DISTRIBUTION
SYSTEMS, INC.

TDS net sales decreased $38,932,000,
or 16%, as compared to 2003, primarily due to the divestitures and closures, throughout
2004 and 2003. These divested and closed locations had sales of approximately $60,504,000
and $115,592,000 for 2004 and 2003, respectively. TDS gross profit margin increased 0.4
percentage points from 2003.

19

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Operating and other expenses
decreased $13,239,000, or 21%, primarily due to the divestitures and closures partially
offset by the loss on divestitures of $838,000. TDS recorded earnings before income taxes,
minority interest and cumulative effect of accounting change of $1,506,000 in 2004 as
compared to a loss, on the same basis, of $3,017,000 in 2003.

See OVERVIEW  Sale of TDS
locations hereunder for a discussion of the sale of TDS locations in 2004.

# SPEEDCO, INC.

Speedco, which was acquired February
13, 2004, and its six licensees which were acquired June 10, 2004, had net sales for 2004
of $55,065,000. Speedco recorded earnings before income taxes, minority interest and
cumulative effect of accounting change of $6,249,000 for 2004.

# OTHER

The Companys Other segment
consists of corporate expenses, interest income on invested cash balances and interest
expense on long-term and short-term debt. Corporate expenses were negatively impacted by
increased professional fees and personnel related costs and the higher translated value of
the Euro, Brazilian Real and South African Rand.

# Year Ended December 31,
2003 Compared to Year Ended December 31, 2002

# RESULTS OF OPERATIONS

Results include the Companys
two reportable operating segments  its Traditional Business and TDS.

Net
Sales

Consolidated net sales in 2003
decreased $84,106,000 or 9% from 2002. This included an increase of $22,083,000 or 4% in
the Traditional Business, primarily resulting from $15,838,000 due to the effect of
translating foreign currency denominated net sales into U.S. dollars. The decrease in
consolidated net sales is primarily due to a $125,208,000 decrease in TDS net sales
primarily as a result of the divestitures and closures of 71 locations in 2003 and 2002.
The Companys sales pattern is tied to the overall performance of the economy and to
the level of trucking activity.

Gross
Profit Margins

Consolidated gross profit margin for
2003 increased 0.4 percentage points from 2002. Consolidated gross profit margin was
positively impacted by decreased TDS sales which carry lower margins. Traditional Business
gross profit margin decreased 2.3 percentage points from 2002. The decrease in Traditional
Business gross profit margin is primarily the result of margin erosion in North America.

Operating
and Other Expenses

Consolidated operating and other
expenses decreased $36,145,000 or 13% from 2002. The decrease in consolidated operating
and other expenses primarily resulted from the TDS divestitures and closures coupled with
the absence of several charges recorded in 2002: approximately $10,700,000 of litigation
expenses, $2,700,000 related to impairment charges recorded against the carrying value of
the Companys joint venture in India, and operations in Brazil and Venezuela, and
$2,500,000 of expenses related to converting SystemBandag users to the RoadWare
software system. Interest expense decreased $4,454,000 from 2002, primarily due to a
reduction in debt of approximately $66,000,000 in December 2002.

Net
Earnings

Consolidated earnings before income
taxes and cumulative effect of accounting change increased $12,382,000, or 17%, from 2002.
Consolidated net earnings in 2003 were $60,200,000, or $3.11 per diluted share, as
compared to $446,000, or $0.02 per diluted share in 2002. A cumulative effect of
accounting change of $49,607,000 net of income tax, or $2.50 per diluted share, was
recorded in 2002 in accordance with SFAS 142, Goodwill and Other Intangible
Assets to recognize impairment of goodwill, substantially all of which related to
TDS.

20

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Net income for each of 2003 and 2002
included favorable tax adjustments of approximately $3,000,000, or $0.15 per diluted
share, resulting from the resolution of certain tax matters. Repurchases of 418,371 shares
of Bandag Class A Common Stock and 1,114,746 shares of Bandag Class B Common Stock during
2002 had a favorable impact on diluted earnings per share of $0.08.

# TRADITIONAL BUSINESS

North
America

North America sells to independent
dealers as well as to TDS and other subsidiaries. Sales to TDS and other subsidiaries are
eliminated in consolidation. Accordingly, as TDS locations are divested and become
unaffiliated Bandag customers, sales to independent dealers should benefit.

The table below depicts the breakout
of North Americas retread product sales between TDS and independent dealers:

|(in thousands)               | Year Ended December 31,
|---------------------------- | -----------------------
|
|Sales to Independent Dealers |                        
|Sales to TDS                 |                        
|                             |                        
|Total Retread Product Sales  |                        
|                             |                        

The increase in retread product sales
to independent dealers is due to several factors including (a) increased sales to
independent dealers that purchased TDS locations, (b) the effect of translating Canadian
dollar denominated sales to U.S. dollars of $5,185,000, and (c) the impact of a January 1,
2003 price increase. These factors were partially offset by a 5% decrease in volume. The
decrease in retread product sales to TDS is primarily due to the divestitures and closures
of TDS locations. North Americas 2002 tread rubber orders reflected the impact of
North American dealers buying ahead of the January 2003 price increase. A portion of those
orders were shipped in first quarter 2003. As a result, North American sales backlog at
year end 2003 was approximately $5,000,000 below the previous year level.

Higher raw material costs coupled
with higher manufacturing costs and lower volume primarily resulted in a 5.8 percentage
point decrease in North Americas gross profit margin in 2003 as compared to 2002.

North American operating and other
expenses in 2003 were $4,138,000, or 4% higher than 2002 expenses, primarily due to
$5,800,000 of increased pension expense offset by the absence of approximately $2,500,000
in expense related to converting SystemBandag users to the RoadWare software system
which was recorded in 2002. Lower gross profit margin and increased operating and other
expenses primarily resulted in a decrease for North America of $16,727,000 in earnings
before income taxes, minority interest and cumulative effect of accounting change for 2003
as compared to 2002.

EMEA

Net sales in EMEA increased
$15,888,000, or 24%, from 2002, including a $13,474,000 increase due to the effect of
translating foreign currency denominated net sales to U.S. dollars and a 3% increase in
volume. Gross profit margin increased 4.7 percentage points from 2002, primarily due to
the absence of approximately $3,000,000 of restructuring charges recorded in 2002.

Operating and other expenses
increased $3,550,000, or 15%, from 2002, primarily due to the higher translated value of
the Euro and higher expenses related to securing new fleet contracts. Primarily as a
result of higher net sales and gross margin, partially offset by higher operating and
other expenses, EMEA recorded income before income taxes, minority interest and cumulative
effect of accounting change of $3,442,000 as compared to a loss in 2002 of $1,429,000 on
the same basis.

21

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International

International net sales increased
$5,553,000, or 6%, from 2002 primarily due to price increases in Brazil and South Africa,
partially offset by an 8% decrease in volume. Gross profit margin decreased 2.4 percentage
points from 2002 due mainly to higher raw material costs, partially offset by price
increases.

Operating and other expenses
decreased $5,909,000, or 22%, from 2002, primarily due to the absence of $2,700,000
related to impairment charges recorded in 2002. Primarily as a result of higher net sales
and lower operating and other expenses, earnings before income taxes, minority interest
and cumulative effect of accounting change increased $6,060,000 in 2003 as compared to
2002.

# TIRE DISTRIBUTION
SYSTEMS, INC.

TDS net sales decreased $125,208,000,
or 34%, as compared to 2002, primarily due to the divestitures and closures of 71
locations throughout 2003 and 2002. These divested and closed locations had sales of
approximately $40,982,000 and $164,199,000 for 2003 and 2002, respectively. TDS gross
profit margin increased 1.8 percentage points from 2002. TDS gross profit margin was
positively impacted by increased sales of higher margin product coupled with a decrease in
cost of sales due to reduced inventory shrink and obsolescence.

Operating and other expenses
decreased $32,376,000, or 34%, primarily due to the divestitures and closures partially
offset by the loss on divestitures of $989,000. TDS recorded a loss before income taxes
and cumulative effect of accounting change of $3,017,000 in 2003 as compared to
$11,382,000 in 2002.

# OTHER

Other expenses for 2002 included
expenses related to the Companys litigation with Michelin in the amounts of
$10,700,000. Interest expense decreased by $4,454,000 in 2003 as a result of the Company
paying approximately $66,000,000 of debt in December 2002.

# IMPACT OF INFLATION AND
CHANGING PRICES

Historically, 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.
To soften the impact of higher raw material costs caused by increases in oil prices the
Company increased selling prices in the United States and Canada effective December 1,
2004 and increased selling prices in some foreign locations during the year. The Company
may continue to increase prices if raw material costs rise further; however, due to
competitive pressure and the decreasing difference between the price on a Bandag retread
and a substitute new tire, the Company believes its ability to continue to pass on such
increases may be diminished. The ability of the Company to raise prices does not eliminate
its exposure to pricing risks on its fleet contract business due to the terms of the
agreements.

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.

# FINANCIAL CONDITION

Liquidity
and Capital Resources

As of December 31, 2004, the Company
had cash and cash equivalents of $202,761,000 as compared to $189,976,000 at December 31,
2003. The sale of tire and wheel assets discussed under OVERVIEW  Outsourcing
Agreement contributed $34,023,000 to cash and cash equivalents for 2004. Cash and
cash equivalents was negatively impacted by the Companys use of cash for the
acquisition of Speedco on February 13, 2004 and the acquisition of the six licensees from
PM Express on June 10, 2004. The Companys ratio of total current assets to total
current liabilities was 3.1 to 1 at December 31, 2004 with current assets exceeding
current liabilities by $328,062,000. The Company believes it has an adequate cash balance
for future cash needs.

Net cash provided by operating
activities for the twelve months ended December 31, 2004 was $95,085,000, primarily due to
net earnings and depreciation. The only changes in working capital requirements are for
normal business growth.

22

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The Company typically funds its
capital expenditures from operating cash flows. During 2004, the Company spent $45,150,000
for capital expenditures as compared to $17,563,000 in 2003. The Company anticipates
capital expenditures of $55,000,000 to $70,000,000 in 2005. The increase in capital
expenditures in 2004 and 2005 is primarily due to expenditures made and to be made by
Speedco for new facilities and expansion of existing facilities.

On February 13, 2004, the Company
acquired an 87.5% majority interest in Speedco, Inc. from its founders and Equilon
Enterprises, LLC, a Royal Dutch Shell Group company. In total, Bandag paid $53,716,000 for
its 87.5% interest and to assume and retire $20,079,000 of debt. On June 10, 2004,
Speedco, Inc. acquired the assets of six licensed locations, which were owned and operated
by PM Express, Inc. Speedco paid $15,609,000 for these assets. During 2004, the Company
sold 19 TDS locations for cash proceeds of $13,407,000.

The Company invests excess funds over
various terms, but only instruments with an original maturity date of over 90 days are
classified as investments for balance sheet purposes. The Companys maturities of
investments exceeded purchases by $10,808,000 during 2004, resulting in no investments
with an original maturity date of over 90 days at December 31, 2004.

As of December 31, 2004, the Company
had available uncommitted and committed lines of credit totaling $72,335,000 in the United
States for working capital purposes. Also, the Companys foreign subsidiaries had
approximately $35,748,000 in credit and overdraft facilities available to them. From time
to time during 2004, the Company borrowed funds to supplement operational cash flow needs
or to settle intercompany transactions. The Companys long-term liabilities totaled
$29,963,000 at December 31, 2004, which is approximately 5% of the combined total of
long-term liabilities and shareholders equity; and is a decrease of $5,296,000 from
December 31, 2003.

During the year, the Company paid
$7,368,000 on short-term notes payable and long-term obligations compared to $7,066,000 in
2003.

Cash dividends totaled $25,164,000 in
2004 compared to $24,595,000 in 2003. Cash dividends per share declared were $1.305 in
2004 compared to $1.285 in 2003.

On June 19, 2002, the Company
purchased 1,114,746 shares of Bandag Class B Common Stock and 418,371 shares of Bandag
Class A Common Stock from Lucille A. Carver, widow of the Companys founder, for
approximately $40,184,000.

# OFF BALANCE SHEET
ARRANGEMENTS

In conjunction with the divestiture
of certain TDS locations in 2003, the Company guaranteed a portion of third-party loans to
a dealer. Bandags exposure under these guarantees is $2,463,000. The guarantees are
secured by assets of the dealer. The remaining term of the guarantees is two years.

23

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# CONTRACTUAL OBLIGATIONS
AND COMMERCIAL COMMITMENTS

Following is a summary of the
Companys commitments as of December 31, 2004 (in thousands):

|                                     | Payments Due by Period | 
|------------------------------------ | ---------------------- | 
|
|Long-term debt                       |                        | 
|Interest on long-term debt           |                        | 
|Operating leases                     |                        | 
|Purchase commitments                 |                        | 
|Pension(1)                           |                        | 
|Post retirement medical liability(1) |                        | 
|DMR commitments(2)                   |                        | 
|Other obligations                    |                        | 
|                                     |                        | 
|Total contractual obligations        |                        | 
|                                     |                        | 
|                                     |                        | 

|                             | Total |  | Amount of Commitments Expiration Per Period |       
|---------------------------- | ----- |  | ------------------------------------------- | ------
|
|Standby Letters of Credit(3) |       |  | $                                           | 19,579

|(1) | Future
pension contributions are expected to approximate 2005 estimates of $993.           Post
retirement medical contributions are expected to approximate 2005 estimates           of
$498.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The
Company has entered into various agreements with certain customers and is
          obligated to reimburse those customers an amount based on an increase in sales
          volume. The actual payments will range from $0 to the total obligated amounts.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Standby
letters of credit are provided to the Companys insurance           administrators
to cover costs associated with self insurance liabilities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

# 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 derivative transactions. All derivative
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 derivative 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 European Union euro. The Company regularly enters
into foreign currency contracts primarily using foreign exchange forward contracts and
options to manage the foreign currency risks associated with most of its firm commitment
exposures. The Company also employs foreign exchange forward contracts as well as option
contracts to manage the foreign currency risks associated with approximately 40% 
60% of its anticipated future cash flow transactions within the coming twelve months. The
notional amount of these contracts at December 31, 2004 and 2003 were $4,293,000 and
$5,286,000, respectively. 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 pre-tax earnings from
foreign subsidiaries and affiliates translated into U.S. dollars using a weighted-average
exchange rate was $16,946,000 and $18,046,000 for the years ending December 31, 2004 and
2003, respectively. On that basis, the potential loss in the value of the Companys
pre-tax earnings from foreign subsidiaries resulting from a hypothetical 10% adverse
change in foreign currency exchange rates would have been $1,540,000 in 2004 and
$1,659,000 in 2003.

24

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The Company also has foreign currency
exposure arising from the translation of the Companys net equity investment in its
foreign subsidiaries to U.S. dollars. The Company generally views as long-term its
investments in foreign subsidiaries with functional currencies other than the U.S. dollar.
The primary currencies to which the Company is exposed are the European euro, Brazilian
real, Mexican peso, Canadian dollar and South African rand. A 10% change in foreign
currency exchange rates from balance sheet date levels would have impacted the
Companys net foreign investments by $10,744,000 and $10,651,000 at December 31, 2004
and 2003, respectively.

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, 2004 and 2003, the Company had outstanding debt of $17,143,000 and
$22,857,000, respectively. At December 31, 2004 and 2003, the fair value of the
Companys debt was $17,734,000 and $23,809,000, respectively. In addition, at
December 31, 2004 and 2003, the fair value of securities held for investment was
$148,727,000 and $97,958,000, respectively. 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
rate changes on the fair value of the Companys financial instruments are limited.
Securities held for investment primarily consist of obligations of states and political
subdivisions of a short-term nature.

Commodities
Exposure

Due to the nature of its business,
the Company procures almost all of its synthetic rubber, which is the predominant raw
material used in manufacturing tire tread, at quarterly fixed rates using contracts with
the Companys main suppliers. Historically, the Company increases its selling prices
and sales allowances to reflect significant changes in commodity costs; however, due to
competitive pressures and the decreasing difference between the price on a Bandag retread
and a substitute new tire, the Company believes its ability to continue to pass on such
increases may be diminished. To soften the impact of higher raw material costs caused by
increases in oil prices, the Company increased selling prices in the United States and
Canada effective December 1, 2004 and increased selling prices in some foreign locations
during the year. Therefore, the Companys exposure is limited to the extent selling
price increases fail to offset increases in commodity costs. The ability of the Company to
raise prices does not eliminate its exposure to pricing risks on its fleet contract
business due to the terms of the related agreements.

# CRITICAL ACCOUNTING
POLICIES

Bandags financial statements
are based on the selection and application of significant accounting policies, which
require management to make significant estimates and assumptions. The Company believes
that the following are some of the more critical judgment areas in the application of the
accounting policies that currently affect its financial condition and results of
operations. The Companys senior management has discussed the development and
selection of critical accounting estimates and related managements discussion and
analysis disclosures with the audit committee of the board of directors.

Accounts
Receivable

Bandags global credit policies
are corporately determined and managed through business unit credit and financial
management departments to insure compliance with local laws and to effect proper credit
and collections at the country level.

A significant percentage of the
Companys global accounts receivable are obligations of franchisees. The majority of
these accounts receivable are extended within North America. However, Bandag competes in
the global marketplace and credit is also extended outside of the United States. Bandag
continuously monitors political, social and economic risks to insure sound credit
decisions are made within these foreign markets.

Bandag also extends credit in North
America to customers in the trucking and transportation industry. Credit is extended to
large national and regional customers on a contractual basis through Bandag. Smaller
regional and local trucking customers are provided credit through TDS.

25

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Management evaluates the
collectibility of accounts receivable based on a combination of factors. In circumstances
where management is aware of a specific customers inability to meet its financial
obligations, a specific reserve for bad debts is recorded against amounts due to reduce
the net recognized receivable to the amount management reasonably believes will be
collected. General reserves for bad debts are maintained based upon the length of time the
receivables are past due and upon historical write-off experience by geographic location.
Credit losses have been within managements expectations.

Goodwill
and Trade Name Asset Valuation

The Company reviews the carrying
value of goodwill and trade name assets annually utilizing discounted cash flow models.
Changes in estimates of future cash flows caused by items such as unforeseen events or
changes in market conditions could negatively affect the reporting units goodwill
and trade name assets fair value and result in an impairment charge. The Company
cannot predict the occurrence of events that might adversely affect the reported value of
goodwill and trade name assets that totaled $30,821,000 at December 31, 2004. However, the
current fair values of the Companys reporting units goodwill and trade name
assets are in excess of carrying values, and accordingly management believes that only
significant changes in cash flow assumptions would result in impairment.

Income
Taxes

The Company utilizes the asset and
liability method of accounting for deferred income taxes, which requires that deferred tax
assets and liabilities be recorded to reflect the future tax consequences of temporary
timing differences between the tax and financial statement basis of assets and
liabilities. At December 31, 2004, the Company had net deferred tax assets of $27,838,000.
This balance consists of approximately $33,350,000 of net deferred tax assets primarily
related to the timing of income and deductions for tax versus books, and $5,512,000 of net
deferred tax liabilities primarily related to the unremitted earnings of foreign
subsidiaries. Deferred taxes on the unremitted earnings of foreign subsidiaries are
provided under the assumption that all profits of the foreign subsidiaries will be
repatriated to the United States and all foreign taxes paid will be available to offset
United States taxes. In addition, any deferred tax asset is reviewed annually to determine
the probability of realizing the asset. If it is determined unlikely that the asset will
be fully realized in the future, a valuation allowance is established against the asset.
Refer to Note 12 of the consolidated financial statements for further details.

The Company believes it has a
reasonable basis in the tax law for all of the positions it takes on the various federal,
state and foreign tax returns it files. However, in recognition of the fact that various
taxing authorities may not agree with the Companys position on certain issues, that
the cost of litigation in maintaining the positions that the Company has taken on various
issues might be significant, and that the taxing authorities may prevail in their attempts
to overturn such possibilities, the Company maintains tax reserves. These reserves, the
potential issues they are intended to cover, as well as their adequacy to do so, are
reviewed both internally and with outside tax professionals on a regular and frequent
basis. Periodic adjustments are made to such reserves to reflect the lapsing of statutes
of limitations, closings of ongoing examinations or commencement of new examinations, and
changes in tax law or interpretations of tax law.

The Company has completed a
preliminary analysis of the repatriation provisions provided by the American Jobs Creation
Act (the Act) that was signed into law on October 22, 2004. The Act created a special
one-time tax deduction relating to the repatriation of certain foreign earnings during
either 2004 or 2005. It was determined that the Act provided no benefit to the Company for
any foreign earnings repatriated during the year ended December 31, 2004 and therefore no
amounts have been recognized in the financial statements under the repatriation provision.
Analysis is not yet complete for amounts that may be repatriated during the year ended
December 31, 2005.

Marketing
Programs

Distribution Management Request (DMR)
is a marketing program designed to increase Company market share by enhancing dealer
capability and franchise value. Enhanced dealer capabilities and franchise values are
achieved primarily through Company-provided financial assistance towards the acquisition
of equipment, service vehicles, facility expansions and other items aligned with Company
goals.

26

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Under the DMR Program, the Company
provides financial assistance primarily in the form of DMR promissory notes from the
dealer to Bandag. The proceeds from the promissory notes can only be used by the dealer
toward the acquisition of equipment (including equipment sold by the Company), service
vehicles, facility expansions and other items aligned with Company goals. The notes have a
term of up to five years. However, if the dealer achieves a business objective, typically
purchasing a specified amount of tread rubber each year, then the Company forgives either
part or all of the principal and interest for that year. The Company records a reduction
in sales for the costs of the program as financial assistance is provided. The DMR reserve
at December 31, 2004, 2003 and 2002 was $14,189,000, $15,529,000 and $18,927,000,
respectively. In 2004, 2003 and 2002, DMR costs of $7,830,000, $4,905,000 and $8,628,000,
respectively, were recorded as a reduction of sales. For those DMR agreements that do not
include notes, the Company records expense and a corresponding liability, or discloses
such agreements in accordance with SFAS No. 5, Accounting for
Contingencies.

Pension
Plans

The Company accounts for its defined
benefit pension plans in accordance with SFAS No. 87, Employers Accounting for
Pensions, which requires that amounts recognized in financial statements be
determined on an actuarial basis. A substantial portion of the Companys pension
amounts relate to its defined benefit plans in the United States. The Company has not made
any contributions to any of the United States pension plans since plan year 1997 because
the fully funded status of the plans would preclude a tax deduction. SFAS No. 87 and the
policies used by the Company generally reduce the volatility of pension income or expense
arising from changes in the pension liability discount rates and the performance of the
pension plans assets.

An important element in determining
the Companys pension income or expense in accordance with SFAS No. 87 is the
expected return on assets. The Companys long-term rate of return assumption for its
United States plans remains 7.0% as of December 31, 2004. This assumption is based on
expected marginal returns in the equity markets. The Company has historically had returns
in excess of 7.0%; however; the Company has experienced losses in two of the last five
years. The Company believes the assumption of future returns is reasonable.

Each year, the Company determines the
discount rate to be used to discount plan liabilities. The discount rate reflects the
current rate at which the pension liabilities could be effectively settled at the end of
the year. In estimating this rate, the Company looks to rates of return on high quality,
fixed-income investments. The discount rate for December 31, 2004 was 5.75%.

For the years ended December 31, 2004
and 2003, the Company recognized consolidated pre-tax pension expense of $3,976,000 and
$4,670,000, respectively. The Company estimates pension expense will be approximately
$4,600,000 for 2005. Refer to Note 17 of the consolidated financial statements for further
details.

A 50 basis point increase in the
assumed discount rate would have changed pension and other postretirement benefit
obligations by approximately $9,097,000 at December 31, 2004, and changed pension and
postretirement benefit costs by approximately $857,000. A 50 basis point decrease in the
assumed discount rate would have changed pension and other postretirement benefit
obligations by approximately $10,216,000 at December 31, 2004, and changed pension and
postretirement benefit costs by approximately $937,000. A 50 basis point increase or
decrease in the assumed expected long-term rate of return on plan assets would have
changed pension costs by approximately $478,000 for 2004.

27

---

# NEW ACCOUNTING STANDARDS

On December 16, 2004, the Financial
Accounting Standard Board (FASB) issued FASB Statement No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R)), which is a revision of FASB Statement
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes
APB Opinion No. 125, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. Generally the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R)
requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than July
1, 2005 and early adoption is permitted in periods in which financial statements have not
yet been issued.

The Company adopted the
fair-value-based method of accounting for share-based payments in 1999 using the
modified prospective method described in SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. The Company does not
anticipate that adoption of SFAS No. 123(R) will have a material impact on its results of
operations or its financial position. However, SFAS No. 123(R) also requires that the
benefits of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after the effective date. While the Company cannot
estimate what those amounts will be in the future (because they depend on, among other
things, when employees exercise stock options), the amount of operating cash flows
recognized in prior periods for such excess tax deductions were $1,094,000, $149,000, and
$57,000 in 2004, 2003 and 2002, respectively.

# 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.

28

---

# Item 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

# Index to Consolidated
Financial Statements

|                                                                               | Page
|------------------------------------------------------------------------------ | ----
|Report of Management                                                           | 30  
|Report of Independent Registered Public Accounting Firm - Internal Control    
|Over Financial Reporting                                                       | 31  
|Report of Independent Registered Public Accounting Firm - Consolidated        
|Financial Statements                                                           | 32  
|Consolidated Balance Sheets as of December 31, 2004 and 2003                   | 33  
|Consolidated Statements of Earnings for the years ended December 31,          
|2004, 2003 and 2002                                                            | 35  
|Consolidated Statements of Cash Flows for the years ended December 31,        
|2004, 2003 and 2002                                                            | 36  
|Consolidated Statements of Changes in Shareholders' Equity for the years ended
|December 31, 2004, 2003 and 2002                                               | 37  
|Notes to Consolidated Financial Statements                                     | 39  

29

---

# Report of Management

We are responsible for the
preparation and integrity of the consolidated financial statements appearing in our Annual
Report on Form 10-K. The consolidated financial statements were prepared in conformity
with United States generally accepted accounting principles and include amounts based on
managements estimates and judgments. All other financial information in this report
has been presented on a basis consistent with the information included in the financial
statements.

We are also responsible for
establishing and maintaining adequate internal controls over financial reporting. We
maintain a system of internal controls that is designed to provide reasonable assurance as
to the fair and reliable preparation and presentation of the consolidated financial
statements, as well as to safeguard assets from unauthorized use or disposition.

Our control environment is the
foundation for our system of internal controls over financial reporting and is embodied in
our Business Ethics Policy. It sets the tone of our organization and includes factors such
as integrity and ethical values. Our internal controls over financial reporting are
supported by formal policies and procedures which are reviewed, modified and improved as
changes occur in business conditions and operations.

The Audit Committee of the Board of
Directors, which is composed solely of outside directors, meets periodically with members
of management, the internal auditors and the independent auditors to review and discuss
internal controls over financial reporting and accounting and financial reporting matters.
The independent auditors and internal auditors report to the Audit Committee and
accordingly have full and free access to the Audit Committee at any time.

We conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the framework in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls, testing of
the operating effectiveness of controls and a conclusion on this evaluation. Although
there are inherent limitations in the effectiveness of any system of internal controls
over financial reporting, based on our evaluation, we have concluded that our internal
controls over financial reporting were effective as of December 31, 2004.

Ernst & Young LLP, an independent
registered public accounting firm, has issued an attestation report on managements
assessment of internal control over financial reporting, which is included herein.

|Bandag, Incorporated                  |                                      
|------------------------------------- | -------------------------------------
|/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 and President | Officer (Principal Financial Officer)
|(Principal Executive Officer)        
|/s/ Charles W. Vesey                 
|Charles W. Vesey                     
|Corporate Controller                 
|(Principal Accounting Officer)       

30

---

# Report of Independent
Registered Public Accounting Firm

Shareholders and Board of
DirectorsBandag, Incorporated

We have audited managements
assessment, included in the accompanying Report of Management, that Bandag, Incorporated
maintained effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Bandag, Incorporateds management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the companys
internal control over financial reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

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

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements
assessment that Bandag, Incorporated maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, Bandag, Incorporated maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Bandag, Incorporated as of December 31, 2004 and, as
restated, 2003, and the related consolidated statements of earnings, cash flows and
changes in shareholders equity for each of the three years in the period ended
December 31, 2004 and, as restated, 2003 and 2002, and our report dated February 28, 2005
expressed an unqualified opinion thereon.

/s/Ernst & Young LLP
Chicago, Illinois

February 28, 2005

31

---

# Report of Independent
Registered Public Accounting Firm

Shareholders and Board of
DirectorsBandag, Incorporated

We have audited the accompanying
consolidated balance sheets of Bandag, Incorporated as of December 31, 2004 and, as
restated, 2003, and the related consolidated statements of earnings, cash flows and
changes in shareholders equity for the years ended December 31, 2004 and, as
restated, 2003 and 2002. Our audits also included the financial statement schedule listed
in the Index at Item 15(2). These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 at December 31, 2004 and, and restated, 2003, and the
consolidated results of their operations and their cash flows for each of the years
ended December 31, 2004 and, as restated, 2003 and 2002, in conformity with U.S. generally accepted accounting
principles. 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.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Bandag Incorporateds internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 28, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP Chicago,
Illinois

February 28, 2005

32

---

# Bandag,
IncorporatedConsolidated Balance Sheets

|                                                     | December 31 | 
|---------------------------------------------------- | ----------- | 
|
|Assets                                               |             | 
|Current Assets                                       |             | 
|Cash and cash equivalents                            |             | 
|Investments - Note 7                                 |             | 
|Accounts receivable, less allowance                  |             | 
|(2004 - $14,734; 2003 - $16,350)                     |             | 
|Inventories:                                         |             | 
|Finished products                                    |             | 
|Material and work in process                         |             | 
|                                                     |             | 
|                                                     |             | 
|Deferred income tax assets - Note 12                 |             | 
|Tire and wheel assets - Note 6                       |             | 
|Prepaid expenses and other current assets            |             | 
|                                                     |             | 
|Total Current Assets                                 |             | 
|Property, Plant and Equipment, on the basis of cost: |             | 
|Land                                                 |             | 
|Buildings and improvements                           |             | 
|Machinery and equipment                              |             | 
|Construction and equipment installation in progress  |             | 
|                                                     |             | 
|                                                     |             | 
|Less allowances for depreciation and amortization    |             | 
|                                                     |             | 
|                                                     |             | 
|Goodwill                                             |             | 
|Intangible assets, less accumulated amortization     |             | 
|(2004 - $2,780; 2003 - $8,856)                       |             | 
|Deferred income tax asset - Note 12                  |             | 
|Other assets                                         |             | 
|                                                     |             | 
|Total Assets                                         |             | 
|                                                     |             | 

See notes to
consolidated financial statements.

33

---

# Bandag, IncorporatedConsolidated Balance
Sheets (continued)

|                                                                            | December 31 | 
|--------------------------------------------------------------------------- | ----------- | 
|
|Liabilities and Shareholders' Equity                                        |             | 
|Current Liabilities                                                         |             | 
|Accounts payable                                                            |             | 
|Accrued employee compensation and benefits                                  |             | 
|Accrued marketing expenses                                                  |             | 
|Other accrued expenses                                                      |             | 
|Dividends payable                                                           |             | 
|Income taxes payable                                                        |             | 
|Short-term notes payable and current portion of other obligations           |             | 
|                                                                            |             | 
|Total Current Liabilities                                                   |             | 
|Long-term debt and other obligations - Note 8                               |             | 
|Deferred income tax liabilities                                             |             | 
|Minority interest                                                           |             | 
|Shareholders' Equity - Note 16                                              |             | 
|Common Stock; $1.00 par value; authorized 21,500,000 shares;                |             | 
|Issued and outstanding - 9,117,212 shares in 2004; 9,099,745 shares in 2003 |             | 
|Class A Common Stock; $1.00 par value; authorized 50,000,000 shares;        |             | 
|Issued and outstanding - 9,416,058 shares in 2004; 9,249,756 shares in 2003 |             | 
|Class B Common Stock; $1.00 par value; authorized 8,500,000 shares;         |             | 
|Issued and outstanding - 918,591 shares in 2004, 918,688 shares in 2003     |             | 
|Additional paid-in capital                                                  |             | 
|Retained earnings                                                           |             | 
|Accumulated other comprehensive loss:                                       |             | 
|Minimum pension liability                                                   |             | 
|Foreign currency translation adjustment                                     |             | 
|                                                                            |             | 
|                                                                            |             | 
|                                                                            |             | 
|Total Shareholders' Equity                                                  |             | 
|                                                                            |             | 
|Total Liabilities and Shareholders' Equity                                  |             | 
|                                                                            |             | 

See notes to
consolidated financial statements.

34

---

# Bandag, IncorporatedConsolidated
Statements of Earnings

|                                                                                   | Year Ended December 31 | 
|---------------------------------------------------------------------------------- | ---------------------- | 
|
|Income                                                                             |                        | 
|Net sales                                                                          |                        | 
|Other                                                                              |                        | 
|                                                                                   |                        | 
|                                                                                   |                        | 
|Cost and Expenses                                                                  |                        | 
|Cost of products sold                                                              |                        | 
|Engineering, selling, administrative and other expenses                            |                        | 
|                                                                                   |                        | 
|                                                                                   |                        | 
|Income from Operations                                                             |                        | 
|Interest income                                                                    |                        | 
|Interest expense                                                                   |                        | 
|                                                                                   |                        | 
|Earnings Before Income Taxes, Minority Interest and                                |                        | 
|Cumulative Effect of Accounting Change                                             |                        | 
|Income taxes - Note 12                                                             |                        | 
|Minority interest                                                                  |                        | 
|                                                                                   |                        | 
|Earnings Before Cumulative Effect of Accounting Change                             |                        | 
|Cumulative effect of accounting change (net of income tax benefit       of $3,704) |                        | 
|                                                                                   |                        | 
|Net Earnings                                                                       |                        | 
|                                                                                   |                        | 
|Net Earnings Per Share - Note 13                                                   |                        | 
|Basic earnings per share                                                           |                        | 
|Earnings before cumulative effect of accounting change                             |                        | 
|Cumulative effect of accounting change                                             |                        | 
|                                                                                   |                        | 
|Net Earnings                                                                       |                        | 
|                                                                                   |                        | 
|Diluted earnings per share                                                         |                        | 
|Earnings before cumulative effect of accounting change                             |                        | 
|Cumulative effect of accounting change                                             |                        | 
|                                                                                   |                        | 
|Net Earnings                                                                       |                        | 
|                                                                                   |                        | 

See notes to
consolidated financial statements.

35

---

# Bandag, IncorporatedConsolidated Statements
of Cash Flows

|                                                                             | Year Ended December 31 | 
|---------------------------------------------------------------------------- | ---------------------- | 
|
|Operating Activities                                                         |                        | 
|Net earnings                                                                 |                        | 
|Adjustments to reconcile net earnings to net cash                            |                        | 
|provided by operating activities:                                            |                        | 
|Cumulative effect of accounting change                                       |                        | 
|Provision for depreciation                                                   |                        | 
|Change in deferred income taxes                                              |                        | 
|Stock compensation expense, net of forfeitures                               |                        | 
|Other                                                                        |                        | 
|Change in operating assets and liabilities, net of effects from              |                        | 
|acquisitions and divestitures of businesses:                                 |                        | 
|Accounts receivable                                                          |                        | 
|Inventories                                                                  |                        | 
|Prepaid expenses and other accrued expenses                                  |                        | 
|Other assets                                                                 |                        | 
|Accounts payable and other accrued expenses                                  |                        | 
|Income taxes payable                                                         |                        | 
|                                                                             |                        | 
|Net Cash Provided by Operating Activities                                    |                        | 
|Investing Activities                                                         |                        | 
|Additions to property, plant and equipment                                   |                        | 
|Proceeds from dispositions of property, plant and equipment                  |                        | 
|Purchases of investments                                                     |                        | 
|Maturities of investments                                                    |                        | 
|Payments for acquisitions of businesses                                      |                        | 
|Proceeds from divestitures of businesses                                     |                        | 
|Proceeds from sale of tire and wheel assets                                  |                        | 
|                                                                             |                        | 
|Net Cash Provided by (Used in) Investing Activities                          |                        | 
|Financing Activities                                                         |                        | 
|Principal payments on short-term notes payable and     long-term obligations |                        | 
|Cash dividends                                                               |                        | 
|Purchases of Common, Class A and Class B Stock                               |                        | 
|Stock Options Exercised                                                      |                        | 
|                                                                             |                        | 
|Net Cash Used in Financing Activities                                        |                        | 
|Effect of exchange rate changes on cash and cash equivalents                 |                        | 
|                                                                             |                        | 
|Increase (Decrease) in Cash and Cash Equivalents                             |                        | 
|Cash and cash equivalents at beginning of year                               |                        | 
|                                                                             |                        | 
|Cash and Cash Equivalents at End of Year                                     |                        | 
|                                                                             |                        | 

See notes to
consolidated financial statements.

36

---

# Bandag, IncorporatedConsolidated
Statements of Changes in Shareholders Equity

|In thousands, except share data    | Common Stock
Issued
and Outstanding | Class A
Common Stock
Issued
and Outstanding | Class B
Common Stock Issued
and Outstanding | Additional
Paid-In | Retained | Accumulated
Other
Compre-
hensive | Compre-
hensive
|---------------------------------- | ----------------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------ | -------- | --------------------------------- | ---------------
|
|Balance at December 31, 2001       |                                     |                                             |                                             |                    |          |                                   |                
|Restatement - Note 1               |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Balance at January 1,2002 restated |                                     |                                             |                                             | 9,079,093          |          | $                                 | 9,079          
|Net earnings for the year          |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,        |                                     |                                            
|net of tax - adjustment for        |                                     |                                            
|foreign currency  translation      |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Comprehensive loss for the         |                                     |                                            
|year                               |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Cash dividends - $1.265 per        |                                     |                                            
|share                              |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Conversion of Class B Common       |                                     |                                            
|Stock to Common Stock - Note 16    |                                     |                                             |                                             | 639                |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Forfeitures of Common Stock        |                                     |                                            
|and Class A Common Stock           |                                     |                                            
|under Restricted Stock             |                                     |                                            
|Grant Plan - Note 16               |                                     |                                             |                                             | (1,265             | )        |                                   | (1             
|Class A Common Stock issued        |                                     |                                            
|under Stock Award Plan -           |                                     |                                            
|Note 16                            |                                     |                                             |                                             |                    |          |                                   |                
|Common Stock and Class A           |                                     |                                            
|Common Stock issued under          |                                     |                                            
|Stock Award Program                |                                     |                                            
|Plan - Note 17                     |                                     |                                             |                                             | 2,454              |          |                                   | 2              
|Purchases of Common Stock,         |                                     |                                            
|Class A  Common Stock and          |                                     |                                            
|Class B Common Stock               |                                     |                                             |                                             | (2,123             | )        |                                   | (1             
|Stock options exercised under      |                                     |                                            
|Stock Award Plan - Note 16         |                                     |                                             |                                             |                    |          |                                   |                
|Stock option expense               |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Balance at December 31, 2002       |                                     |                                             |                                             | 9,078,798          |          | $                                 | 9,079          
|Net earnings for the year          |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,        |                                     |                                            
|net of tax - adjustment for        |                                     |                                            
|foreign currency translation       |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,        |                                     |                                            
|net of tax - adjustment for        |                                     |                                            
|minimum pension liability          |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Comprehensive income for theyear   |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Cash dividends - $1.285 per        |                                     |                                            
|share                              |                                     |                                             |                                             |                    |          |                                   |                
|Conversion of Class B Common       |                                     |                                            
|Stock to Common Stock - Note 16    |                                     |                                             |                                             | 3,297              |          |                                   | 3              
|Class A Common Stock issued        |                                     |                                            
|under Stock Award Plan -           |                                     |                                            
|Note 16                            |                                     |                                             |                                             |                    |          |                                   |                
|Common Stock and Class A           |                                     |                                            
|Common Stock issued under          |                                     |                                            
|Stock Award Program                |                                     |                                            
|Plan - Note 17                     |                                     |                                             |                                             | 20,814             |          |                                   | 21             
|Purchases of Common Stock and      |                                     |                                            
|Class A Common Stock               |                                     |                                             |                                             | (3,164             | )        |                                   | (3             
|Stock options exercised under      |                                     |                                            
|Stock Award Plan - Note 16         |                                     |                                             |                                             |                    |          |                                   |                
|Stock option expense               |                                     |                                             |                                             |                    |          |                                   |                
|                                   |                                     |                                             |                                             |                    |          |                                   |                
|Balance at December 31, 2003       |                                     |                                             |                                             | 9,099,745          |          | $                                 | 9,100          
|                                   |                                     |                                             |                                             |                    |          |                                   |                

See notes to
consolidated financial statements.

37

---

# Bandag, IncorporatedConsolidated
Statements of Changes in Shareholders Equity (continued)

|In thousands, except share data  | Common Stock
Issued
and Outstanding | Class A
Common Stock
Issued
and Outstanding | Class B
Common Stock Issued
and Outstanding | Additional
Paid-In | Retained | Accumulated
Other
Compre-
hensive | Compre-
hensive
|-------------------------------- | ----------------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------ | -------- | --------------------------------- | ---------------
|
|Balance at December 31, 2003     |                                     |                                             |                                             | 9,099,745          |          | $                                 | 9,100          
|Net earnings for the year        |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income, -    |                                     |                                            
|adjustment for foreign           |                                     |                                            
|currency translation             |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,      |                                     |                                            
|net of tax - adjustment for      |                                     |                                            
|minimum pension liability        |                                     |                                             |                                             |                    |          |                                   |                
|                                 |                                     |                                             |                                             |                    |          |                                   |                
|Comprehensive income for the     |                                     |                                            
|year                             |                                     |                                             |                                             |                    |          |                                   |                
|                                 |                                     |                                             |                                             |                    |          |                                   |                
|Cash dividends - $1.305 pershare |                                     |                                             |                                             |                    |          |                                   |                
|Conversion of Class B Common     |                                     |                                            
|Stock to Common Stock - Note 16  |                                     |                                             |                                             | 97                 |          |                                   |                
|Forfeitures of Common Stock      |                                     |                                            
|and Class A Common Stock         |                                     |                                            
|under Restricted Stock           |                                     |                                            
|Grant Plan - Note 16             |                                     |                                             |                                             | (950               | )        |                                   | (1             
|Forfeitures of Class A Common    |                                     |                                            
|Stock under Stock Award          |                                     |                                            
|Plan - Note 16                   |                                     |                                             |                                             |                    |          |                                   |                
|Class A Common Stock issued      |                                     |                                            
|under Stock Award Plan,          |                                     |                                            
|including tax benefit of         |                                     |                                            
|$295 - Note 16                   |                                     |                                             |                                             |                    |          |                                   |                
|Common Stock and Class A         |                                     |                                            
|Common Stock issued under        |                                     |                                            
|Stock Award Program              |                                     |                                            
|Plan - Note 17                   |                                     |                                             |                                             | 21,319             |          |                                   | 21             
|Restricted Stock Units and       |                                     |                                            
|Stock Appreciation Rights        |                                     |                                            
|issued under Stock Grant         |                                     |                                            
|& Awards Plan - Note 16          |                                     |                                             |                                             |                    |          |                                   |                
|Purchases of Common Stock and    |                                     |                                            
|Class A Common Stock             |                                     |                                             |                                             | (2,999             | )        |                                   | (3             
|Stock options exercised under    |                                     |                                            
|Stock Award Plan,                |                                     |                                            
|including tax benefit of         |                                     |                                            
|$799 -  Note 16                  |                                     |                                             |                                             |                    |          |                                   |                
|Stock option expense             |                                     |                                             |                                             |                    |          |                                   |                
|                                 |                                     |                                             |                                             |                    |          |                                   |                
|Balance at December 31, 2004     |                                     |                                             |                                             | 9,117,212          |          | $                                 | 9,117          
|                                 |                                     |                                             |                                             |                    |          |                                   |                

See notes to
consolidated financial statements.

38

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Note 1.  Summary of
Significant Accounting Policies

# Principles of
Consolidation:

The consolidated financial statements
include the accounts and transactions of all subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. The Companys
foreign subsidiaries outside North America have November 30 fiscal year-ends to facilitate
inclusion of their financial statements in the December 31 consolidated financial
statements.

# Use of Estimates:

The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States 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 approximate their 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.

# Accounts Receivable and
Allowance for Doubtful Accounts:

The Company carries its accounts
receivable at their face amounts less an allowance for doubtful accounts. On a regular
basis, the Company evaluates its accounts receivable and establishes the allowance for
doubtful accounts based on a combination of specific customer circumstances as well as
credit conditions and based on a history of write-offs and collections. A receivable is
considered past due if payments have not been received within agreed upon invoice terms.
Interest may be charged on notes and is recognized when paid by the debtor, however
interest is not charged on accounts receivables.

# Deferred Taxes:

Deferred taxes on the unremitted
earnings of foreign subsidiaries are provided under the assumption that all profits of the
foreign subsidiaries will be repatriated to the United States and all foreign taxes paid
will be available to offset United States taxes. In addition, any deferred tax asset is
reviewed annually to determine the probability of realizing the asset. If it is determined
unlikely that the asset will be fully realized in the future, a valuation allowance is
established against the asset. Refer to Note 12 of the consolidated financial statements
for further details.

# Inventories:

Inventories are valued at the lower
of cost or market. Inventories held by the Traditional Business segment consist mainly of
synthetic rubber, natural rubber and material and equipment used to retread tires. These
inventories are accounted for under the last in, first out (LIFO) method, except for those
inventories carried by the Brazil and Mexico operations which are accounted for under the
first in, first out (FIFO) method.

Inventories held by the TDS segment
consist primarily of new and retreaded tires. New tires represent approximately 63% of the
total TDS inventory with retread tires comprising a majority of the difference.
Inventories held by the Speedco segment consist primarily of lubricants and supplies. The
TDS and Speedco inventories are accounted for under the FIFO method. The FIFO method is
commonly used within the retail tire industry and Management believes the use of FIFO
allows better comparability to other businesses in the industry.

39

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

Approximately 58% and 52% of year-end
inventory amounts at December 31, 2004 and 2003, respectively, were determined by the LIFO
method. The remainder of year-end inventory amounts are determined by the FIFO method.

The excess of current cost over the
amount stated for inventories valued by the LIFO method amounted to approximately
$20,891,000 and $19,694,000 at December 31, 2004 and 2003, respectively.

During 2004, 2003, and 2002,
inventory quantities were reduced which resulted in a liquidation of LIFO inventory layers
carried at lower costs which prevailed in prior years. The effect of the liquidation was
to decrease cost of goods sold approximately $1,766,000, $1,300,000, and $3,800,000 for
the years ended December 31, 2004, 2003, and 2002, 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

Depreciation expense approximated
$27,182,000, $26,229,000, and $31,208,000 in 2004, 2003, and 2002, respectively.

# Goodwill and Other
Intangible Assets:

In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible
assets are reviewed at least annually for impairment using the discounted cash flow
method. Separable intangible assets that have finite useful lives are amortized over their
useful lives using the straight-line method over 3 to 5 years. An impaired intangible
asset would be written down to fair value, using the discounted cash flow method.
Intangible amortization expense approximated $1,018,000, $950,000, and $1,125,000 in 2004,
2003, and 2002, respectively. Amortization expense is estimated to be $839,000, $665,000,
$84,000, $5,000 and $5,000 for the years 2005, 2006, 2007, 2008 and 2009, 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 transactions 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
United States operations are included in income. Net foreign exchange losses, which are
included in engineering, selling, administrative and other expenses in the Consolidated
Statements of Earnings, were $1,381,000, $1,750,000, and $1,102,000 in 2004, 2003, and
2002, respectively.

# Long-Lived Assets:

In accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, when indicators of impairment are present, the
Company evaluates the carrying value of property, plant, and equipment and finite lived
intangibles 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 $7,063,000, $7,238,000, and
$8,109,000 in 2004, 2003, and 2002, respectively.

40

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Advertising:

The Company expenses all advertising
costs in the year incurred. Advertising expense was $3,668,000, $3,809,000, and $5,146,000
in 2004, 2003, and 2002, respectively.

# Revenue Recognition:

Sales of tread rubber, equipment, new
tires and retread tires and other tire related products are recorded when title and all
risk of ownership are transferred to the dealer or customer upon receipt of goods at the
dealer or customers place of business. Service revenue is recognized upon completion
of the service. Revenue related to the Companys tire management outsourcing services
is recognized on a per mile basis determined on the number of tire miles traveled by the
customers truck fleets in the month of usage. Revenue related to the sale of
computer hardware or software is recognized when it has been installed for the customer.

# Shipping and Handling
Costs:

Shipping and handling costs are
included as part of cost of product sold in the Consolidated Statement of Earnings.

# Marketing Programs:

Distribution Management Request (DMR)
is a marketing program designed to increase Company market share by enhancing dealer
capability and franchise value. Enhanced dealer capabilities and franchise values are
achieved primarily through Company-provided financial assistance towards the acquisition
of equipment, service vehicles, facility expansions and other items aligned with Company
goals.

Under the DMR Program, the Company
provides financial assistance primarily in the form of DMR promissory notes from the
dealer to Bandag. The proceeds from the promissory notes can only be used by the dealer
toward the acquisition of equipment (including equipment sold by the Company), service
vehicles, facility expansions and other items aligned with Company goals. The notes have a
term of up to five years. However, if the dealer achieves a business objective, typically
purchasing a specified amount of tread rubber each year, then the Company forgives either
part or all of the principal and interest for that year. The Company records a reduction
in sales for the costs of the program as financial assistance is provided. The DMR reserve
at December 31, 2004, 2003 and 2002 was $14,189,000, $15,529,000 and $18,927,000,
respectively. In 2004, 2003 and 2002, DMR costs of $7,830,000, $4,905,000 and $8,628,000,
respectively, were recorded as a reduction of sales. For those DMR agreements that do not
include notes, the Company records expense and a corresponding liability, or discloses
such agreements in accordance with SFAS No. 5, Accounting for
Contingencies.
Business:

# National Account Business:

The Company enters into contracts to
supply retreaded tires and other tire-related services through its network of franchised
dealers to large national and regional customers in the North American trucking and
transportation industry. The Company provides various forms of financial incentives to its
dealers to continue the supply of retreaded tires and services on these accounts. In 2004,
2003, and 2002, fleet subsidy expenses of $21,288,000, $25,026,000, and $21,315,000,
respectively, were recorded as a reduction of sales.

# Derivative Instruments
and Hedging Activities:

The Company recognizes all derivative
instruments as either assets or liabilities in the statement of financial position at fair
value. The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the exposure being hedged, as either a
fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

The Company primarily uses foreign
currency forward exchange contracts and foreign currency option contracts to reduce its
exposure to foreign currency risk from its forecasted revenue denominated in foreign
currencies. When the dollar strengthens significantly against the foreign currencies, the
decline in the value of future foreign currency revenue is offset by gains in the value of
the forward contract. Conversely, when the dollar weakens, the increase in the value of
future foreign currency cash flows is offset by losses in the value of the forward
contracts. The Company does not actively trade such instruments, nor does it enter into
such agreements for speculative purposes.

41

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

The fair value of the derivative
instruments was zero at December 31, 2004 and a liability of $107,000, and $347,000 at
December 31, 2003 and 2002, respectively. Changes in the fair values of these instruments
are reflected in engineering, selling, administrative and other expenses in the
Consolidated Statements of Earnings because the Company has not designated these
instruments as accounting hedges.

# Accounting for
Stock-Based Compensation:

Effective January 1, 2002, the
Company adopted the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosures (the Statement). Under the
modified prospective method of adoption selected by the Company under the provisions of
the Statement, compensation cost of $2,641,000, $2,210,000 and $1,571,000 recognized in
2004, 2003 and 2002, respectively, is the same as that which would have been recognized
had the recognition provisions of the Statement been applied from its original effective
date in 1994. Results for prior years have not been restated.

A summary of the status of the
Companys option activity under the Bandag, Incorporated Stock Award Plan is
presented below:

|                               | Class A
Common
Shares |  | Weighted-
Average
Exercise
Price
|------------------------------ | --------------------- |  | --------------------------------
|Outstanding, January 1, 2002   |                       |  |                                 
|Granted                        |                       |  |                                 
|Exercised                      |                       |  |                                 
|Forfeited                      |                       |  |                                 
|                               |                       |  |                                 
|Outstanding, December 31, 2002 |                       |  |                                 
|Granted                        |                       |  |                                 
|Exercised                      |                       |  |                                 
|Forfeited                      |                       |  |                                 
|                               |                       |  |                                 
|Outstanding, December 31, 2003 |                       |  |                                 
|Granted                        |                       |  |                                 
|Exercised                      |                       |  |                                 
|Forfeited                      |                       |  |                                 
|                               |                       |  |                                 
|Outstanding, December 31, 2004 |                       |  |                                 
|                               |                       |  |                                 

42

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

The following summarizes information
about stock options outstanding under the Bandag, Incorporated Stock Award Plan at
December 31, 2004:

|                | Options Outstanding |  | Options Exercisable |          
|--------------- | ------------------- |  | ------------------- | ---------
|
|$18.99 - $23.74 |                     |  |                     | 286,380  
|$23.74 - $28.48 |                     |  |                     | 667,347  
|$28.48 - $33.23 |                     |  |                     | 278,814  
|$33.23 - $37.98 |                     |  |                     | 46,100   
|$42.73 - $47.47 |                     |  |                     | 149,410  
|                |                     |  |                     |          
|$18.99 - $47.47 |                     |  |                     | 1,428,051
|                |                     |  |                     |          

The fair value of each option granted
is estimated on the grant date using the Black-Scholes model. The following
weighted-average assumptions were made in estimating the fair value:

|                        | 2004      | 2003     | 2002    
|----------------------- | --------- | -------- | --------
|Dividend yield          | 3.7%      | 4.7%     | 4.6%    
|Expected volatility     | 33.6%     | 32.3%    | 33.2%   
|Risk-free interest rate | 3.8%      | 4.0%     | 5.1%    
|Expected lives          | 7.7 years | 10 years | 10 years

The weighted-average fair value of
options granted during 2004, 2003, and 2002 was $11.41, $6.41, and $8.52 per option,
respectively.

The number of options exercisable
were 681,382, 495,042, and 281,720 at December 31, 2004, 2003, and 2002, respectively.

# New Accounting Standards:

On December 16, 2004, the Financial
Accounting Standard Board (FASB) issued FASB Statement No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R)), which is a revision of FASB Statement
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes
APB Opinion No. 125, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. Generally the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R)
requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later than July
1, 2005 and early adoption is permitted in periods in which financial statements have not
yet been issued.

The Company adopted the
fair-value-based method of accounting for share-based payments in 1999 using the
modified prospective method described in SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. The Company does not
anticipate that adoption of SFAS No. 123(R) will have a material impact on its results of
operations or its financial position. However, SFAS No. 123(R) also requires that the
benefits of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after the effective date. While the Company cannot
estimate what those amounts will be in the future (because they depend on, among other
things, when employees exercise stock options), the amount of operating cash flows
recognized in prior periods for such excess tax deductions were $1,094,000, $149,000, and
$57,000 in 2004, 2003 and 2002, respectively.

43

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Restatement:

Reported earnings for fiscal years
1997 through 2002 have been restated to correct for an accounting error in 1997 and 1998
related to the stock acquisitions of tire dealerships by TDS. The accounting error was
inadvertent and resulted from a failure to correctly apply certain provisions of SFAS No.
109, Accounting for Taxes to the 1997 and 1998 acquisitions. The accounting
error was not detected until it surfaced as a result of a review of the Companys
deferred tax liability account and accounting for a 2004 stock acquisition by the
Companys tax accounting staff.

The five companies affected by the
error were purchased at a price of $146,500,000 with resulting goodwill of $71,900,000.
Had the Company recorded the deferred tax liability of approximately $4,000,000 related to
the $10,400,000 step-up in value of fixed assets for book purposes, goodwill would have
been increased by $4,000,000. The additional goodwill would have resulted in additional
non-deductible goodwill amortization which would have decreased net earnings by
approximately $100,000 in 1997 and $400,000 per year in 1998 through 2001. In addition,
the cumulative effect of an accounting change recorded as of January 1, 2002 related to
the impairment of goodwill recorded in association with the initial adoption of SFAS No.
142, Goodwill and Other Intangible Assets would have been increased by
approximately $2,300,000, or $0.12 per diluted share. The restatement has no effect on the
2003 or 2004 Consolidated Statements of Earnings and has no effect on cash flows for any
year. The Companys Consolidated Balance Sheets for 1997 through 2003 have been
adjusted to reflect the changes in goodwill, deferred tax assets and shareholders
equity.

Also, retained earnings, deferred tax
assets and other currents assets at the beginning of 2000 have been adjusted to correct an
error related to not recording assets of approximately $1,200,000. The error had an
immaterial effect on net earnings for 2004, 2003 or 2002.

# Reclassification:

Certain prior year amounts have been
reclassified to conform with the current year presentation, including the $31,700,000 of
tire and wheel assets classified as held for sale at December 31, 2003 and sold during the
third quarter of 2004.

# Note 2.  Non-Recurring
Charges

During the fourth quarter 2001, the
Company recorded a non-recurring charge totaling $4,300,000 ($2,580,000 net of tax
benefits) related to the closure of a North American tread rubber manufacturing facility
and certain retirement benefits. Costs include $2,659,000 ($1,595,000 net of tax benefits)
for termination benefits for the reduction of 46 employees, $1,521,000 ($913,000 net of
tax benefits) for early retirement benefits of 19 employees, and other miscellaneous
closure costs. The Company paid $518,000, $93,000 and $1,321,000 in 2004, 2003 and 2002,
respectively, related to the termination of employees. As of December 31, 2004, $952,000
of the charges related to the closure of the North American tread rubber manufacturing
facility remained accrued, which reflects a $126,000 increase in the original provision
due to a revised calculation. The Company estimates that substantially all of the
remaining payments will be made by the end of 2005.

# Note 3.  Restructuring
Charges

In 2002, the Company recorded
restructuring charges totaling $3,500,000 ($2,450,000 net of tax benefits) for termination
benefits covering 39 employees. The Company paid approximately $426,000, $2,428,000 and
$650,000 in 2004, 2003 and 2002, respectively, related to the termination of employees. As
of December 31, 2004, $468,000 of the charges related to the restructuring remained
accrued, which reflects a $472,000 increase in the original provision due to exchange rate
changes. Substantially all of the remaining payments, which are primarily severance pay,
will be made by the end of 2005.

44

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Note 4.  Acquisitions

On February 13, 2004, the Company
acquired an 87.5% majority interest in Speedco, Inc. from its founders and Equilon
Enterprises, LLC, a Royal Dutch Shell Group company. In total, Bandag paid approximately
$53,716,000, net of cash received, for its 87.5% interest and to assume and retire
$20,079,000 of debt. The Company recorded $12,127,000 of goodwill and $12,800,000 of other
intangible assets. Speedco generated unaudited revenues of approximately $46,000,000 and
unaudited pre-tax income of approximately $4,800,000 in 2003.

On June 10, 2004, Speedco, Inc.
acquired the assets of six licensed locations, which were owned and operated by PM
Express, Inc. Speedco paid approximately $15,609,000, net of cash acquired, for these
assets. The Company recorded $5,194,000 of goodwill. These locations generated unaudited
revenues of approximately $10,800,000 and unaudited pre-tax income of approximately
$400,000 in 2003.

During 2004, the Companys TDS
segment acquired seven commercial and retail outlets and two retread plants for
$4,163,000.

Certain supplemental non-cash
information related to the Companys 2004 acquisitions are as follows (in thousands):

|                               | 2004 | 
|------------------------------ | ---- | 
|Assets acquired                |      | 
|Less liabilities               |      | 
|                               |      | 
|Cash paid                      |      | 
|Less cash acquired             |      | 
|                               |      | 
|Net cash paid for acquisitions |      | 
|                               |      | 

On February 14, 2002, the Company
acquired the assets of Open Road Technologies, Inc. (Open Road), and the results of
operations from that point forward are included in the consolidated results. Open Road is
the supplier of RoadWare retread shop management software, which contributed sales
of approximately $7,700,000 and $6,200,000 in 2003 and 2002, respectively. The assets,
which were primarily software, were acquired for $1,951,000, net of cash received. As part
of the purchase agreement additional payments will be made each year for three years
following the purchase, totaling approximately $2,250,000.

# Note 5.  Divestitures

During 2004, the Companys TDS
segment sold 19 locations with a net carrying value of $18,496,000 for cash of $13,407,000
and assumed liabilities of $4,251,000. The assets of these locations consisted primarily
of inventory and property, plant and equipment. The divestitures resulted in a loss before
income taxes, minority interest and cumulative effect of accounting change of $838,000
which was recorded in engineering, selling, administrative and other expenses in the
Consolidated Statements of Earnings. During 2004, TDS also closed two locations. These
divested and closed locations contributed $60,504,000 to net sales and $418,000 of losses
to earnings before income taxes, minority interest and cumulative effect of accounting
change for the year ended December 31, 2004.

During 2003, the Companys TDS
segment sold 41 locations with a net carrying value of $31,213,000 for cash of $21,315,000
and assumed liabilities of $8,909,000. The assets of these locations consisted primarily
of inventory and property, plant and equipment. The divestitures resulted in a loss before
income taxes, minority interest and cumulative effect of accounting change of $989,000
which was recorded in engineering, selling, administrative and other expenses in the
Consolidated Statements of Earnings. During 2003, TDS also closed three locations. These
divested and closed locations contributed $40,982,000 to net sales and $4,118,000 of
losses to earnings before taxes and cumulative effect of accounting change for the year
ended December 31, 2003.

In conjunction with the divestiture
of certain TDS locations in 2003, Bandag guaranteed a portion of third-party loans to a
dealer. Bandags exposure under these guarantees is $2,463,000. The guarantees are
secured by assets of the dealer. The remaining term of the guarantees is two years. The
fair value of the guarantees, which was originally determined to be $600,000 and is
currently valued at $317,000, is included in long-term debt and other obligations in the
Companys Consolidated Balance Sheet with an offsetting charge of $600,000 included
in engineering, selling, administrative and other expenses on the Consolidated Statements
of Earnings in 2003.

45

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

During 2002, the Companys TDS
segment sold 17 locations with a net carrying value of $7,528,000 for cash of $6,608,000,
resulting in a loss of before income taxes, minority interest and cumulative effect of
accounting change of $920,000. These divested locations contributed $29,000,000 to net
sales and $3,000,000 of losses to earnings before taxes and cumulative effect of
accounting change for the year ended December 31, 2002.

The divested and closed locations had
net sales and loss before income taxes, minority interest and cumulative effect of
accounting change as follows (in thousands):

|                                            | Year Ended December 31, | 
|------------------------------------------- | ----------------------- | 
|
|Net sales                                   |                         | 
|Loss before income taxes, minority interest |                         | 
|and cumulative effect of accounting change  |                         | 

During 2004, the Company sold a
portion of the assets of Quality Design Systems, Inc. for a gain of approximately
$1,937,000 which is included in other income in the Consolidated Statement of Earnings.

# Note 6.  Outsourcing
Agreement

On May 3, 2004 Bandag announced that Yellow
Roadway Corporation elected on April 30, 2004 not to renew the existing Bandag outsourcing
agreement for Roadway Express tire and wheel services in place since 1999 and, in
accordance with the terms of the agreement, would be repurchasing the tire and wheel
assets from Bandag. On July 9, 2004 Bandag received an initial payment of approximately
$32,243,000 and received a final payment of approximately $1,781,000 on July 29, 2004.
These tire and wheel assets had net carrying values of approximately $33,700,000 and
$31,700,000 as of June 30, 2004 and December 31, 2003, respectively, and were classified
with other current assets in the Companys Condensed Consolidated Balance Sheets.
Bandags annual revenues under the contract in 2003, including revenue derived from
sales of retread materials to dealers performing services under the agreement, were
approximately $27,500,000.

# Note 7.  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 interest 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.

46

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

The following is a summary of
securities held-to-maturity:

|In thousands                                     | Cost |  | Estimated
Fair
Value |        
|------------------------------------------------ | ---- |  | -------------------- | -------
|December 31, 2004                                |      |  |                      |        
|Obligations of states and political subdivisions |      |  | $                    | 136,115
|Corporate debt                                   |      |  |                      | 12,612 
|                                                 |      |  |                      |        
|                                                 |      |  | $                    | 148,727
|                                                 |      |  |                      |        
|December 31, 2003                                |      | 
|Obligations of states and political subdivisions |      |  | $                    | 85,550 
|Corporate debt                                   |      |  |                      | 9,407  
|Debt securities issued by foreign governments    |      |  |                      | 3,001  
|                                                 |      |  |                      |        
|                                                 |      |  | $                    | 97,958 
|                                                 |      |  |                      |        

At December 31, 2004 and 2003,
securities held-to-maturity include $148,727,000 and $87,150,000, respectively, reported
as cash equivalents.

# Note 8.  Financing
Arrangements

The following is a summary of the
Companys debt and other obligations as of December 31:

|In thousands                                  | Interest
Rates | 2004 |  | 2003 |  
|--------------------------------------------- | -------------- | ---- |  | ---- | -
|Senior Unsecured Notes Payable, maturing 2007 |                |      |  | 6.50 | %
|                                              |                |      |  |      |  
|Total debt                                    |                |      |  |      |  
|Other obligations                             |                |      |  |      |  
|                                              |                |      |  |      |  
|Total debt and other obligations              |                |      |  |      |  
|Current portion of debt and other obligations |                |      |  |      |  
|                                              |                |      |  |      |  
|Long-term debt and other obligations          |                |      |  |      |  
|                                              |                |      |  |      |  

The aggregate amount of scheduled annual
maturities of long-term debt and other obligations is as follows:

|                                   | 
|---------------------------------- | 
|Scheduled maturities, in thousands | 
|2005                               | 
|2006                               | 
|2007                               | 
|2008                               | 
|2009                               | 
|Thereafter                         | 

Other obligations consist primarily
of a postretirement medical liability and miscellaneous other liabilities.

Cash payments for interest on debt
were $2,057,000, $2,428,000, and $6,982,000 in 2004, 2003, and 2002, respectively.

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, 2004 and 2003, the fair value of the Companys
outstanding debt was approximately $17,734,000 and $23,809,000, respectively. Changes in
the market value of the Companys debt does not affect the reported results of
operations unless the Company is retiring such obligations prior to maturity.

47

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

At December 31, 2004, the Company had
uncommitted and committed unused lines of credit arrangements totaling $108,083,000. These
arrangements are available to the Company or certain of its international subsidiaries
through various domestic and international banks at various interest rates and expiration
dates.

# Note 9.  Goodwill

Effective January 1, 2002, the
Company adopted SFAS No. 142, which resulted in a non-cash transition charge of
$49,607,000 (net of tax benefit of $3,704,000), or $2.50 per diluted share, to recognize
impairment of goodwill, substantially all of which related to TDS. The fair value of the
reporting units was estimated using present value of future cash flows. Pursuant to SFAS
No. 142, the $49,607,000 charge was treated as a change in accounting principle. Goodwill
and indefinite-lived intangible assets are no longer amortized but are reviewed at least
annually for impairment. Separable intangible assets that have finite lives continue to be
amortized over their useful lives.

As of December 31, 2004, the Company
tested for impairment of goodwill and non-amortizable intangibles acquired in 2004 using
discounted cash flow models. As a result of these tests, the Company was not required to
recognize any impairment.

# Note 10.  Other Income

Other income includes gain on sale of
assets, lease income, royalties and other miscellaneous items. In 2004 a gain on sale of
assets was recorded for approximately $1,937,000 for the sale of certain assets of QDS and
approximately $3,400,000 for the sale of the Chino, California facility.

# Note 11.  Impairment of
Long-Lived Assets

Long-lived assets related to the
Companys Venezuela and Brazil operations and a joint venture in India were
determined to be impaired in 2002 and a $2,700,000 charge was recorded in engineering,
selling, administrative and other expenses in the International segment. The license
agreement with the Indian joint venture expired and the Company believes that it is
unlikely it will recover the carrying value of the investment and therefore a reserve was
recorded for the full amount of the investment. The equipment assets in Brazil were
determined to be impaired due to an adverse change in the manner in which the assets were
to be used and were written down to fair value based on prices for similar assets. The
assets related to the Venezuelan operations were evaluated considering the current
economic conditions of the country, and the assets were determined to be partially
impaired with a remaining exposure of approximately $200,000.

48

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Note 12.  Income Taxes

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

|                                                                       | December 31 | 
|---------------------------------------------------------------------- | ----------- | 
|
|Deferred tax assets:                                                   |             | 
|Marketing programs                                                     |             | 
|Excess foreign tax credits upon repatriation    of unremitted earnings |             | 
|Insurance and legal reserves                                           |             | 
|Employee benefits                                                      |             | 
|Foreign tax credits(1)                                                 |             | 
|Accounts receivable valuation allowances                               |             | 
|Other nondeductible reserves                                           |             | 
|Plant and equipment reserves                                           |             | 
|Obsolescence and valuation reserves                                    |             | 
|Basis difference in fixed assets                                       |             | 
|Other accruals                                                         |             | 
|                                                                       |             | 
|Total deferred tax assets                                              |             | 
|                                                                       |             | 
|Deferred tax liabilities:                                              |             | 
|Basis difference in fixed assets                                       |             | 
|Excess pension funding                                                 |             | 
|Unremitted earnings of foreign subsidiaries                            |             | 
|Other liabilities                                                      |             | 
|                                                                       |             | 
|                                                                       |             | 
|Valuation allowance(2)                                                 |             | 
|                                                                       |             | 
|Total deferred tax liabilities                                         |             | 
|                                                                       |             | 
|Net deferred tax assets                                                |             | 
|                                                                       |             | 
|Net current deferred tax assets                                        |             | 
|Net non-current deferred tax assets (liabilities)                      |             | 
|                                                                       |             | 
|Net deferred tax assets                                                |             | 
|                                                                       |             | 

|(1) | Majority
expire in 2014.
|--- | ------------------------

|(2) | If
the Company repatriated all of its foreign earnings, the Company would have
          excess foreign tax credits. A valuation allowance was recorded to recognize the
          potential inability to utilize these credits.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

49

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

The components of earnings before
income taxes, minority interest and cumulative effect of accounting change are summarized
as follows:

|                                                    | Year Ended December 31 | 
|--------------------------------------------------- | ---------------------- | 
|
|Domestic                                            |                        | 
|Foreign                                             |                        | 
|                                                    |                        | 
|Earnings before income taxes, minority interest and |                        | 
|cumulative effect of accounting change              |                        | 
|                                                    |                        | 

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

|             | Year Ended December 31 | 
|------------ | ---------------------- | 
|
|Current:     |                        | 
|Federal      |                        | 
|State        |                        | 
|Foreign      |                        | 
|Deferred:    |                        | 
|Federal      |                        | 
|Foreign      |                        | 
|             |                        | 
|Income taxes |                        | 
|             |                        | 

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

|                                                            | Year Ended December 31 | 
|----------------------------------------------------------- | ---------------------- | 
|
|Computed at the expected statutory rate                     |                        | 
|State income tax - net of federal tax benefit               |                        | 
|Research and development credit                             |                        | 
|Audit settlement and prior year accrual changes(1)          |                        | 
|Deferred tax on unremitted earnings of foreign subsidiaries |                        | 
|and foreign tax rate differentials                          |                        | 
|Other                                                       |                        | 
|                                                            |                        | 
|Income tax at the effective rate                            |                        | 
|                                                            |                        | 

|(1) | Decrease
due to $7,200,000 for the resolution and reassessment of certain tax
               matters in 2004 and a decrease of $3,000,000 for the resolution of certain
tax                matters in 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has completed a
preliminary analysis of the repatriation provisions provided by the American Jobs Creation
Act (the Act) that was signed into law on October 22, 2004. The Act created a special
one-time tax deduction relating to the repatriation of certain foreign earnings during
either 2004 or 2005. It was determined that the Act provided no benefit to the Company for
any foreign earnings repatriated during the year ended December 31, 2004 and therefore no
amounts have been recognized in the financial statements under the repatriation provision.
Analysis is not yet complete for amounts that may be repatriated during the year ended
December 31, 2005.

Income taxes paid amounted to
$27,303,000, $25,773,000, and $21,565,000 in 2004, 2003, and 2002, respectively.

50

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Note 13.  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 (restricted stock and stock options)
outstanding during the year.

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

|                                                                  | Year Ended December 31 | 
|----------------------------------------------------------------- | ---------------------- | 
|
|Numerator:                                                        |                        | 
|Earnings before cumulative effect of accounting change            |                        | 
|Denominator:                                                      |                        | 
|Weighted-average shares - Basic                                   |                        | 
|Effect of dilutive:                                               |                        | 
|Restricted stock                                                  |                        | 
|Stock options                                                     |                        | 
|                                                                  |                        | 
|                                                                  |                        | 
|Weighted-average shares - Diluted                                 |                        | 
|                                                                  |                        | 
|Earnings Per Share before cumulative effect of accounting change: |                        | 
|Basic                                                             |                        | 
|                                                                  |                        | 
|Diluted                                                           |                        | 
|                                                                  |                        | 

Options to purchase 46,100 shares of
Class A Common Stock at an option price of $33.875 were outstanding during each of 2003
and 2002, but were not included in the computation of diluted earnings per share because
the effect would have been antidilutive.

Options to purchase 300,187 and
307,100 shares of Class A Common Stock at an option price of $32.53 were outstanding
during 2003 and 2002, respectively, but were not included in the computation of diluted
earnings per share because the effect would have been antidilutive.

Options to purchase 399,550 shares of
Class A Common Stock at an option price of $27.68 were outstanding during 2003, but were
not included in the computation of diluted earnings per share because the effect would
have been antidilutive.

Options to purchase 133,900 shares of
Class A Common Stock at an option price of $44.41 were outstanding during 2004, but were
not included in the computation of diluted earnings per share because the effect would
have been antidilutive.

Options to purchase 9,760 shares of
Class A Common Stock at an option price of $47.47 were outstanding during 2004, but were
not included in the computation of diluted earnings per share because the effect would
have been antidilutive.

51

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Note 14.  Leases

Certain equipment and facilities are
rented under non-cancelable and cancelable operating leases. Total rental expense under
operating leases was $8,504,000, $8,454,000, and $9,351,000 for the years ended December
31, 2004, 2003, and 2002, respectively. At December 31, 2004, future minimum lease
payments under non-cancelable operating leases having initial lease terms in excess of one
year are: $9,433,000 in 2005, $8,351,000 in 2006, $6,119,000 in 2007, $4,040,000 in 2008,
$3,390,000 in 2009, and $21,434,000 in the aggregate for all years after 2009.

# Note 15.  Operating
Segment and Geographic Area Information

# Description of Types of
Products and Services:

The Company has three reportable
operating segments: Traditional Business, TDS and Speedco. 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 evaluated by worldwide
geographic region. For segment reporting purposes, the Companys operations located
in the United States and Canada, along with Tire Management Solutions, Inc. and Quality
Design Systems, Inc. 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. This collection of countries is under
one management group and is referred to internally as EMEA. The Companys
exports from North America to markets in the Caribbean, Central America, South America and
Asia, along with operations in Brazil, Mexico, Venezuela and royalties from a licensee in
Australia, are combined under one management group referred to internally as
International.

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

Speedco provides quick-service truck
lubrication and tire service and has 33 company-owned on-highway locations in the United
States.

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

Other consists of corporate
administrative expenses, net unrealized foreign exchange gains and losses on U.S.
denominated investments, interest income and interest expense. Other assets are
principally cash and cash equivalents, investments, corporate office and related
equipment.

52

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

Information concerning operations
for the Companys three reportable operating segments and different geographic areas
follows:

|                                       | Traditional Business | 
|-------------------------------------- | -------------------- | 
|
|
|Sales by product                       |                      | 
|Retread products                       |                      | 
|New tires                              |                      | 
|Retread tires                          |                      | 
|Equipment                              |                      | 
|Other                                  |                      | 
|                                       |                      | 
|Net sales to unaffiliated customers(1) |                      | 
|                                       |                      | 
|Transfers                              |                      | 
|Gross profit                           |                      | 
|Depreciation expense                   |                      | 
|Corporate expense                      |                      | 
|Litigation related expenses            |                      | 
|Operating earnings (loss)              |                      | 
|Interest revenue                       |                      | 
|Interest expense                       |                      | 
|                                       |                      | 
|Earnings (loss) before income taxes,   |                      | 
|minority interest and cumulative       |                      | 
|effect of accounting change            |                      | 
|Total assets at December 31 restated   |                      | 
|Expenditures for long-lived assets     |                      | 
|Additions to (deductions from) long-   |                      | 
|lived assets due to acquisitions       |                      | 
|(divestitures)                         |                      | 
|Fixed assets                           |                      | 
|Goodwill and intangible assets         |                      | 
|Retained earnings restated             |                      | 

|(1) | No
customer accounted for 10% or more of the Companys sales to
               unaffiliated customers in 2004, 2003 or 2002.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(2) | Export
sales from North America were less than 10% of sales to unaffiliated
               customers in each of the years 2004, 2003 and 2002.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes
$1,800, $1,300, and $3,800 in 2004, 2003, and 2002, respectively, of
               reduced cost of sales due to decreased LIFO inventory levels.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In
2002, includes $3,000 of restructuring charges classified as cost of sales
               and $500 of restructuring charges classified as operating expenses, and
$1,400                of reduced cost of sales due to decreased LIFO inventory levels.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

53

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

|                                       | Traditional Business | 
|-------------------------------------- | -------------------- | 
|
|
|Sales by product                       |                      | 
|Retread products                       |                      | 
|New tires                              |                      | 
|Retread tires                          |                      | 
|Equipment                              |                      | 
|Other                                  |                      | 
|                                       |                      | 
|Net sales to unaffiliated customers(1) |                      | 
|                                       |                      | 
|Transfers                              |                      | 
|Gross profit                           |                      | 
|Depreciation expense                   |                      | 
|Corporate expense                      |                      | 
|Litigation related expenses            |                      | 
|Operating earnings (loss)              |                      | 
|Interest revenue                       |                      | 
|Interest expense                       |                      | 
|                                       |                      | 
|Earnings (loss) before income taxes,   |                      | 
|minority interest and cumulative       |                      | 
|effect of accounting change            |                      | 
|Total assets at December 31 restated   |                      | 
|Expenditures for long-lived assets     |                      | 
|Additions to (deductions from) long-   |                      | 
|lived assets due to acquisitions       |                      | 
|(divestitures)                         |                      | 
|Fixed assets                           |                      | 
|Goodwill and intangible assets         |                      | 
|Retained earnings restated             |                      | 

|(1) | No
customer accounted for 10% or more of the Companys sales to           unaffiliated
customers in 2004, 2003 or 2002.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | In
2002, includes $2,700 of impairment charges recorded against long-lived           assets.
|--- | --------------------------------------------------------------------------------------------

54

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

|                                       | Speedco (2) |  | Other (3) |        
|-------------------------------------- | ----------- |  | --------- | -------
|
|Sales by product                       |             |  |           |        
|Retread products                       |             |  | $         | --     
|New tires                              |             |  |           | 327    
|Retread tires                          |             |  |           | 22     
|Equipment                              |             |  |           | --     
|Other                                  |             |  |           | 54,716 
|                                       |             |  |           |        
|Net sales to unaffiliated customers(1) |             |  | $         | 55,065 
|                                       |             |  |           |        
|Transfers                              |             |  |           | --     
|Gross profit                           |             |  | $         | 20,356 
|Depreciation expense                   |             |  |           | 2,243  
|Corporate expense                      |             |  |           | --     
|Litigation related expenses            |             |  |           | --     
|Operating earnings (loss)              |             |  | $         | 6,249  
|Interest revenue                       |             |  |           | --     
|Interest expense                       |             |  |           | --     
|                                       |             |  |           |        
|Earnings (loss) before income taxes,   |             | 
|minority interest and cumulative       |             | 
|effect of accounting change            |             |  | $         | 6,249  
|Total assets at December 31 restated   |             |  | $         | 104,147
|Expenditures for long-lived assets     |             |  |           | 17,940 
|Additions to (deductions from) long-   |             | 
|lived assets due to acquisitions       |             | 
|(divestitures)                         |             |  |           | 52,581 
|Fixed assets                           |             |  |           | 68,278 
|Goodwill and intangible assets         |             |  |           | 30,230 
|Retained earnings restated             |             |  |           | 2,617  

|(1) | No
customer accounted for 10% or more of the Companys sales to
               unaffiliated customers in 2004.
|--- | --------------------------------------------------------------------------------------------------------------

|(2) | Speedco
was acquired on February 13, 2004.
|--- | ------------------------------------------

|(3) | Other
consists of corporate administrative expenses, net unrealized foreign
               exchange gains and losses on U.S. denominated investments, interest income
and                interest expense. Other assets are principally cash and cash
equivalents,                investments, corporate office and related equipment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

|                                     | Consolidated | 
|------------------------------------ | ------------ | 
|
|Sales by product                     |              | 
|Retread products                     |              | 
|New tires                            |              | 
|Retread tires                        |              | 
|Equipment                            |              | 
|Other                                |              | 
|                                     |              | 
|Net sales to unaffiliated customers  |              | 
|                                     |              | 
|Transfers                            |              | 
|Gross profit                         |              | 
|Depreciation expense                 |              | 
|Corporate expense                    |              | 
|Litigation related expenses          |              | 
|Operating earnings (loss)            |              | 
|Interest revenue                     |              | 
|Interest expense                     |              | 
|                                     |              | 
|Earnings (loss) before income taxes, |              | 
|minority interest and cumulative     |              | 
|effect of accounting change          |              | 
|Total assets at December 31 restated |              | 
|Expenditures for long-lived assets   |              | 
|Additions to (deductions from) long- |              | 
|lived assets due to acquisitions     |              | 
|(divestitures)                       |              | 
|Fixed assets                         |              | 
|Goodwill and intangible assets       |              | 
|Retained earnings restated           |              | 

56

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

The following tables present
information concerning net sales and long-lived assets for countries which exceed 10% of
the respective totals:

|In thousands  | Year Ended December 31 | 
|------------- | ---------------------- | 
|
|United States |                        | 
|Other         |                        | 
|              |                        | 
|Total         |                        | 
|              |                        | 

|In thousands  | December 31 | 
|------------- | ----------- | 
|
|United States |             | 
|Other         |             | 
|              |             | 
|Total         |             | 
|              |             | 

|(1) | Net
sales are attributed to countries based on the location of customers.
|--- | -------------------------------------------------------------------------

|(2) | Corporate
long-lived assets are included in the United States.
|--- | --------------------------------------------------------------

# Note 16.  
Shareholders 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 Shareholders are not entitled to vote, Class B
Common Shareholders are entitled to ten votes for each share held and Common Shareholders
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. All then-outstanding shares of Class B Common Stock
will be converted to shares of Common Stock on January 16, 2007.

In 1999, the Companys Board of
Directors adopted the Bandag, Incorporated Stock Award Plan (the Plan). Under the terms of
the Plan, the Company may award to certain eligible employees and directors incentive
stock options, nonqualified stock options, and restricted stock. Up to 2,400,000 shares of
Class A Common Stock is authorized for issuance under the Plan and as of December 31,
2004, 599,587 shares were available 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. The exercise price of each option is
equal to the market price of the Companys stock on the date of the grant. The
maximum term of the options is 10 years and the maximum vesting period is 5 years.
Restricted stock granted under the Plan vests over a three year period. The Company
records expense related to the Plan on a straight-line basis over the period the grants
vest. During the years ended December 31, 2004, 2003 and 2002, 47,378, 21,400 and 1,782
restricted shares of Class A Common Stock were granted under the Plan and $975,000,
$192,000 and $14,000 of expenses was recorded, respectively. Also during 2004, 2003 and
2002, 152,510, 435,650 and 312,400 options were granted and $2,641,000, $2,210,000 and
$1,572,000 of expense was recorded, respectively. No further grants of options or
restricted stock shall be made under the Plan, except for certain grants of restricted
stock which may be made in 2005, based on the Companys performance in 2004. For
further information see Accounting for Stock-Based Compensation under Note 1.

In 2004, the Companys Board of
Directors adopted the Bandag, Incorporated 2004 Stock Grant and Awards Plan (the 2004
Plan). Under the terms of the 2004 Plan, the Company may award to certain eligible
employees and directors stock options, stock appreciation rights, performance shares,
performance units, restricted stock, restricted stock units, dividend equivalent units and
incentive awards, whether granted alone or in addition to, in tandem with, or in
substitution for any other award. Up to 2,000,000 shares of Class A Common Stock is
authorized for issuance under the 2004 Plan and as of December 31, 2004, 1,992,114 shares
were available for issuance under the 2004 Plan. During the year ended December 31, 2004,
6,200 Stock Appreciation Rights and 1,915 Restricted Stock Units were granted under the
2004 Plan and $36,000 of expense was recorded.

57

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

On June 18, 2002, the Company
executed an agreement to purchase 1,114,746 shares of Bandags Class B Common Stock
and 418,371 shares of Bandags Class A Common Stock from Lucille A. Carver, widow of
the founder of Bandag and a director from 1957 until May 14, 2002. Mrs. Carver is the
mother of Martin G. Carver, Chairman of the Board, President, Chief Executive Officer and
a director of Bandag, and Roy J. Carver, Jr., a director of Bandag. The shares were
purchased on June 19, 2002 at a per share price of $27.04 and $24.00, for the Class B
Common Stock and Class A Common Stock, respectively, which was equal to the composite
closing prices of Bandags Common Stock (in the case of the Class B Common Stock) and
Class A Common Stock on the New York Stock Exchange at the close of business on June 18,
2002, less a discount of 3.5% per share in the case of the Class B common Stock and 4.0%
per share for the Class A Common Stock. The total purchase price was approximately
$40,184,000. As a result of these repurchases the average shares outstanding were reduced
by approximately 4% for 2002 as compared to 2001.

# Note 17.  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 of TDS and in the
Companys European operations. 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,
or Kendon Corporation are eligible for temporary medical benefits that cease at age 65.
The Company uses a September 30 measurement date for the majority of its plans.

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:

|                                         | Pension Benefits |  | Postretirement Benefits |        
|---------------------------------------- | ---------------- |  | ----------------------- | -------
|
|Change in benefit obligations:           |                  |  |                         |        
|Benefit obligations at beginning         |                  | 
|of year                                  |                  |  | $                       | 115,494
|Service cost                             |                  |  |                         | 4,264  
|Interest cost                            |                  |  |                         | 6,784  
|Participants' contributions              |                  |  |                         | 48     
|Exchange rate changes                    |                  |  |                         | 463    
|Benefits paid                            |                  |  |                         | (4,233 
|Actuarial (gain) or loss                 |                  |  |                         | 7,193  
|                                         |                  |  |                         |        
|Benefit obligations at end of year       |                  |  | $                       | 130,013
|                                         |                  |  |                         |        
|Change in plan assets at fair value:     |                  | 
|Fair value of plan assets at             |                  | 
|beginning of year                        |                  |  | $                       | 105,480
|Actual return on plan assets             |                  |  |                         | 12,745 
|Employer contributions                   |                  |  |                         | 673    
|Participants' contributions              |                  |  |                         | 48     
|Benefits paid                            |                  |  |                         | (4,233 
|Exchange rate changes                    |                  |  |                         | 355    
|                                         |                  |  |                         |        
|Fair value of plan assets at end of year |                  |  | $                       | 115,068
|                                         |                  |  |                         |        

58

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

|                                      | Pension Benefits |  | Postretirement Benefits |        
|------------------------------------- | ---------------- |  | ----------------------- | -------
|
|Reconciliation of funded status:      |                  |  |                         |        
|Funded status                         |                  |  | $                       | (14,945
|Unrecognized actuarial (gain) or loss |                  |  |                         | 35,577 
|Unrecognized transition asset         |                  |  |                         | 176    
|Unrecognized prior service cost       |                  |  |                         | 1,210  
|                                      |                  |  |                         |        
|Net amount recognized                 |                  |  | $                       | 22,018 
|                                      |                  |  |                         |        

Amounts recognized in the
consolidated balance sheet as of December 31 consist of:

|                                     | Pension Benefits |  | Postretirement Benefits |       
|------------------------------------ | ---------------- |  | ----------------------- | ------
|
|Prepaid benefit cost                 |                  |  | $                       | 24,357
|Accrued benefit liability            |                  |  |                         | (4,156
|Intangible asset                     |                  |  |                         | 741   
|Accumulated other comprehensive loss |                  |  |                         | 1,076 
|                                     |                  |  |                         |       
|Net amount recognized                |                  |  | $                       | 22,018
|                                     |                  |  |                         |       

The accumulated benefit obligation
for the U.S. defined benefit pension plan was $95,350,000 and $81,787,000 at December 31,
2004 and 2003, respectively.

Information for plans with an
accumulated benefit obligation in excess of plan assets:

|                               | Pension Benefits |  | Postretirement Benefits |       
|------------------------------ | ---------------- |  | ----------------------- | ------
|
|Projected benefit obligation   |                  |  | $                       | 11,063
|Accumulated benefit obligation |                  |  |                         | 9,074 
|Fair value of plan assets      |                  |  |                         | 4,917 

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

|                                                                           | Pension Benefits |  | Postretirement Benefits |       
|-------------------------------------------------------------------------- | ---------------- |  | ----------------------- | ------
|
|Components of net periodic (benefit) cost                                  |                  |  |                         |       
|Service cost                                                               |                  |  | $                       | 4,264 
|Interest cost                                                              |                  |  |                         | 6,782 
|Expected return on plan assets                                             |                  |  |                         | (7,196
|Amortization of prior service cost                                         |                  |  |                         | 129   
|Amortization of transitional assets                                        |                  |  |                         | (647  
|Recognized actuarial (gain) loss                                           |                  |  |                         | 1,172 
|                                                                           |                  |  |                         |       
|Net periodic (benefit) cost                                                |                  |  | $                       | 4,504 
|                                                                           |                  |  |                         |       
|Additional (gain) or loss recognized due to:
     Special Termination Cost |                  |  |                         | --    

59

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

Additional information:

|                                                                                                                          | Pension Benefits |  | Postretirement Benefits |     
|------------------------------------------------------------------------------------------------------------------------- | ---------------- |  | ----------------------- | ----
|
|Increase (decrease) in minimum liability
  included in other comprehensive income net
  of tax (2004 - $208; 2003 - $373) |                  |  | $                       | (106

|                                       | Pension Benefits |  | Postretirement Benefits |    
|-------------------------------------- | ---------------- |  | ----------------------- | ---
|
|Weighted-average assumptions used      |                  |  |                         |    
|to determine net periodic benefit cost |                  | 
|at September 30                        |                  | 
|Discount rate                          |                  |  |                         | 6.0
|Rate of increase in future             |                  | 
|Compensation                           |                  |  |                         | 4.5
|Expected long-term rate of return      |                  | 
|on assets                              |                  |  |                         | 7.0
|Weighted-average assumptions used      |                  | 
|to determine benefit obligation        |                  | 
|at October 1                           |                  | 
|Discount rate                          |                  |  |                         | 5.8
|Rate of increase in future             |                  | 
|Compensation                           |                  |  |                         | 4.5
|Medical trend on pre-Medicare          |                  | 
|charges as of September 30             |                  | 
|Initial trend                          |                  |  |                         | N/A
|Ultimate trend                         |                  |  |                         | N/A
|Medical trend on post-Medicare         |                  | 
|charges as of September 30             |                  | 
|Initial trend                          |                  |  |                         | N/A
|Ultimate trend                         |                  |  |                         | N/A

|*Ultimate
trend rate for 2002 reached in 2009.**Ultimate trend rate for 2003 and 2004 reached in
2011.
|------------------------------------------------------------------------------------------------------

The expected long-term rate of return on
plan assets is based on the aggregate historical returns of the investments that comprise
the defined benefit plan portfolio.

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.

A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:

|In thousands                                            | 1-Percentage-
Point
Increase | 1-Percentage-
Point Decrease
|------------------------------------------------------- | ---------------------------- | ----------------------------
|Effect on total of service and interest cost components |                              |                             
|Effect on postretirement benefit obligation             |                              |                             

60

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# Bandag,
IncorporatedNotes to Consolidated Financial Statements

The Companys weighted-average
asset allocations at September 30, by asset category are as follows:

|                  | Pension Benefits | 
|----------------- | ---------------- | 
|
|Equity securities |                  | 
|Debt securities   |                  | 
|Other             |                  | 
|                  |                  | 
|Total             |                  | 
|                  |                  | 

The Company expects to fund pension plans
approximately $990,000 in 2005. The Company expects to fund its postretirement plan
approximately $500,000 in 2005. The need for further contributions will be based on
changes in the value of plan assets and the movements of interest rates during each year.
The investment strategy is to achieve an asset allocation balance within planned targets
to obtain an average 7.0% annual return for the long-term. Each year, the Company
periodically reviews with its actuaries its investment strategy and funding needs.

The following benefit payments, which
reflect expected future service, as appropriate, are expected to be paid:

|             | Pension
Benefits | Postretirement
Benefits
|------------ | ---------------- | -----------------------
|In thousands |                  |                        
|2005         |                  |                        
|2006         |                  |                        
|2007         |                  |                        
|2008         |                  |                        
|2009         |                  |                        
|2010-2014    |                  |                        

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 and include a potential Company contribution of stock based on earnings per
share. Although employees may contribute up to 75% 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 $3,960,000, $3,835,000, and $5,044,000 in 2004, 2003, and
2002, respectively. During the years ended December 31, 2004, 2003, and 2002, the Company
issued 21,319, 20,814, and 2,454 shares of Common Stock, respectively. During the years
ended December 31, 2004, 2003, and 2002, the Company issued 21,773, 23,140, and 2,454
shares of Class A Common Stock, respectively. The Common Stock and Class A Common Stock
were all accrued for in the previous years. The Company recorded expense under the plan of
$1,200,000, $1,600,000, and $1,100,000 for the years ended December 31, 2004, 2003, and
2002, 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
2004, 2003, and 2002.

61

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Note 18.  Litigation

Certain litigation arising in the
normal course of business is pending. The Company is of the opinion that the resolution of
such litigation will not have a significant effect on the consolidated financial
statements.

Yolanda Jackson v. Michael Rouse,
et al. and Audra Smith v. Bandag, Inc., et al.

Bandag has been named as one of
numerous defendants in two wrongful death actions brought in the Circuit Court of Warren
County, Mississippi: Yolanda Jackson v. Michael Rouse, et al. and Audra Smith v.
Bandag, Inc., et al. These cases arise from an explosion or fire which occurred on May
17, 2002, at a rubber recycling plant in Mississippi, operated by Rouse Rubber Co.,
killing five employees and seriously injuring at least seven others. So far, Bandag has
been named in only two of about six pending cases.

The plaintiffs claim that a rubber
recycling machine was dangerously designed or maintained, causing the explosion.
Plaintiffs allege that Bandag may be passively liable as a joint venturer with
the employer, Rouse Rubber Co., an allegation which Bandag believes is without any basis.
To Bandags knowledge, no investigation or discovery has been undertaken to date in
the cases in which Bandag is involved and Bandag is not privy to discovery, if any, in the
other cases. To date, Bandags own investigation has not revealed any evidence of
negligence by Bandag, vicarious or otherwise.

These cases have been in legal limbo
for two years while the parties have been fighting over the defendants attempt to
remove them to federal court. Recently, Bandag was dismissed without prejudice from the
Jackson case for tactical reasons, but Bandag is likely to be renamed in that case
or joined in another case involving the same decedent.

Astec, the manufacturer of the dryer
system that exploded, settled with the plaintiffs in apparently all cases for about $45
million. This settlement will apply as a credit to the remaining defendants.

The Jackson case does not
specify the amount of damages claimed; the Smith case claims compensatory damages
of $40 million and punitive damages of $25 million. However, it is unclear from the
pleadings whether the plaintiffs seek punitive damages against all defendants, including
Bandag, or only from certain defendants, not including Bandag. Bandag considers the claims
against it to be baseless and intends to vigorously defend itself against them.

62

---

# Bandag,
IncorporatedNotes to Consolidated Financial Statements

# Note 19. Summary of
Unaudited Quarterly Results of Operations

Unaudited quarterly results of
operations for the years ended December 31, 2004 and 2003 are summarized as follows (in
thousands except per share data):

|                        | Quarter Ended 2004 | 
|----------------------- | ------------------ | 
|
|Net sales               |                    | 
|Gross profit            |                    | 
|Net earnings            |                    | 
|Net earnings per share: |                    | 
|Basic                   |                    | 
|Diluted                 |                    | 

|                        | Quarter Ended 2003 | 
|----------------------- | ------------------ | 
|                        | Mar. 31            | 
|Net sales               |                    | 
|Gross profit            |                    | 
|Net earnings            |                    | 
|Net earnings per share: |                    | 
|Basic                   |                    | 
|Diluted                 |                    | 

Fourth quarter 2004 earnings
benefited by $3,700 ($0.19 per diluted share) due to the gain on sale of assets and $6,200
($0.31 per diluted share) due to the resolution and reassessment of certain tax matters.

Fourth quarter 2003 earnings
benefited by $3,000 ($0.15 per diluted share) due to the resolution of certain tax
matters.

# Note 20.  Subsequent Event

Effective December 1, 2004, the
Company sold the business of Bandag in South Africa. Due to the foreign operations
reporting on a one month lag, this transaction will not be recorded until 2005. These
operations represent less than 2% of net sales and total assets of Bandag, Incorporated
and contributed approximately $1,500,000 and $600,000 to pre-tax income in 2004 and 2003,
respectively. The purchase price of approximately $3,500,000 will consist of a cash
payment of approximately $2,000,000 and the remainder to be paid in equal installments
over five years. The actual payment in U.S. Dollars will depend on the currency
fluctuations of the Euro and the South African Rand over the five year period. In relation
to the installment payments, Bandag is considered the Primary Beneficiary
under FASB Interpretation No. 46, revised December 2003 (FIN 46R), Consolidation of
Variable Interest Entities. Under the guidance of FIN 46R Bandag will continue to
consolidate the South African operations on its financial statements as long as Bandag is
considered to be the Primary Beneficiary. Although determination of Bandag as the Primary
Beneficiary could change based on changes in the capitalization of the South African
operations, based on the current facts, Bandag would be considered the Primary Beneficiary
until final payment has been made. As a result, Bandag must defer recognition of the
expected net loss of approximately $14,000,000 to $17,000,000, or approximately $0.70 to
$0.90 diluted earnings per share, until the earlier of final payment of the five year
obligation, which is expected to be December 1, 2009, or until it is no longer considered
the Primary Beneficiary within the meaning of FIN 46R. The expected loss may fluctuate
over the five-year period depending on the stability of the Euro and the South African
Rand. The expected loss is primarily due to the cumulative translation adjustment of
approximately $14,000,000 that is recorded in the Bandag Consolidated Balance Sheet
related to the South African operation. The expected loss will not affect Bandags
cash flow, but rather will be an accounting entry which will reduce net earnings.

63

---

# Item 9.  CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

# Item 9A.  CONTROLS AND
PROCEDURES

Based on an evaluation performed by
the Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the Companys
disclosure controls and procedures, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were
effective as of December 31, 2004. The Company has taken steps to enhance controls so
errors such as the one that caused the restatement will not recur. These enhancements have
taken place over the last several years since the time the transaction was recorded in
error. These enhancements include such things as: hiring an accounting staff with greater
experience, reviews between tax accounting staff and financial reporting accounting staff
of new and changing accounting rules and guidance, compliance checklists, regular
examination of facts and assumptions and multiple levels of sign-offs.

Based on an evaluation performed by
the Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, there were no changes in the Companys
internal control over financial reporting identified in such evaluation that occurred
during the quarter ended December 31, 2004 that has materially affected, or is likely to
materially affect, the Companys internal control over financial reporting.

# Item 9B.  OTHER
INFORMATION

None

# PART III

# Item 10.  DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by Item
401 of Regulation S-K with respect to the directors of the registrant and by Item 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, 2004 (the Proxy Statement) under
the headings Election of Directors and Miscellaneous  Section
16(a) Beneficial Reporting Compliance. In accordance with General Instruction G (3)
to Form 10-K, the information with respect to executive officers of the Company required
by Item 401 of Regulation S-K has been included in Part I hereof.

The information concerning the audit
committee financial expert and the identification of the audit committee members required
pursuant to Items 401(h) and 401(i) of Regulation S-K is incorporated herein by reference
from registrants Proxy Statement under the heading The Board of Directors and
Its Committees.

The information concerning the
Companys code of ethics required by Item 406 of Regulation S-K has been included in
Part I hereof under the heading Available Information.

# Item 11.  EXECUTIVE
COMPENSATION

The information called for by Item 11
is incorporated herein by reference from the registrants Proxy Statement under the
heading Remuneration of Executive Officers and Directors, provided, however,
that the subsection entitled Report of Management Continuity and Compensation
Committee on Executive Compensation shall not be deemed to be incorporated by
reference.

64

---

# Item 12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by Item
201(d) of Regulation S-K is incorporated herein by reference from the registrants
Proxy Statement under the heading Remuneration of Executive Officers and
Directors and the information required under Item 403 of Regulation S-K is
incorporated herein by reference from the registrants Proxy Statement under the
heading Security Ownership.

# Item 13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13
is incorporated herein by reference from the registrants Proxy Statement under the
heading Remuneration of Officers and Directors  Transactions with
Management/Principal Shareholders and Directors.

# Item 14.  PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The information called for by Item 14
is incorporated herein by reference from the registrants Proxy Statement under the
heading Proposal No. 2  Ratification of Selection of Independent
Auditors.

# PART IV

# Item 15.  EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES

| | (1) | Financial
StatementsThe
following consolidated financial statements are included in Part II, Item 8:
| | --- | ----------------------------------------------------------------------------------------------------

| |                                                                                                     | Page
| | --------------------------------------------------------------------------------------------------- | ----
| | Report of Management                                                                                | 30  
| | Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting | 31  
| | Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements         | 32  
| | Consolidated Balance Sheets as of December 31, 2004 and 2003                                        | 33  
| | Consolidated Statements of Earnings for the Years Ended December 31, 2004,                         
| | 2003 and 2002                                                                                       | 35  
| | Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,                       
| | 2003 and 2002                                                                                       | 36  
| | Consolidated Statements of Changes in Shareholders' Equity for the Years Ended                     
| | December 31, 2004, 2003 and 2002                                                                    | 37  
| | Notes to Consolidated Financial Statements                                                          | 39  

| | (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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

65

---

| | (3) | Exhibits
| | --- | --------

| | Exhibit
No.                             Description
| | ---------------------------------------------------

| | 3.1 | Bylaws:
As amended March 9, 2004.  (Incorporated by reference to Exhibit No. 3.1 to the Company's
Form 10-Q                       for the quarter ended March 31, 2004.)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | Amendment
to Bylaws adopted on March 9, 2004.  (Incorporated by reference to Exhibit No. 3.2 to the
                      Company's Form 10-Q for the quarter ended March 31, 2004.)
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 | 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.)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4 | 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.)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.5 | Articles
of Amendment to Bandag, Incorporateds Restated Articles of Incorporation, effective
May 15, 2002. (Incorporated by reference to Exhibit 3(i) to the Companys Form 10-Q
for the quarter ended June 30, 2002.)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 $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. (Incorporated by
reference to Exhibit No. 10.1 to the Companys Form 10-K for the year ended December
31, 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.)
| | ------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2(c) | Form of
Bandag Dealer Franchise Agreement. (Incorporated by reference to           Exhibit
10.2(c) to the Companys Form 10-K for the year ended December 31,           2001.)
| | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2(d) | Form letter
to the Companys U.S. franchisees. (Incorporated by reference           to Exhibit
99.1 to the Companys Form 8-K dated June 14, 2002.)
| | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2(e) | Current Form
of Bandag Dealer Franchise Agreement.
| | ------- | --------------------------------------------------

| | 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, 2001.)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4* | 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.)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5* | 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).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6* | 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).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7* | 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).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8* | 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).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9* | Bandag,
Incorporated Stock Award Plan, as amended March 12, 2002. (Incorporated by reference to
Exhibit 10.9 to the Companys Form 10-K for the year ended December 31, 2001.)
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

66

---

| | 10.10* | Form
of Nonqualified Stock Option Agreement under the Bandag, Incorporated Stock Award Plan
(incorporated by reference to Exhibit 10.15 to the Companys Form 10-K for the
fiscal year ended December 31, 2000).
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11* | Form
of Restricted Stock Award Agreement under the Bandag, Incorporated Stock Award Plan.
(Incorporated by reference to Exhibit 10.11 to the Companys Form 10-K for the year
ended December 31, 2001.)
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12* | Description
of Short-term Compensation Plan.
| | ------ | --------------------------------------------

| | 10.13 | Bandag,
Incorporated 2004 Stock Grant and Awards Plan (incorporated by reference to Appendix A to
the Companys definitive proxy statement for its 2004 annual meeting of shareholders
filed on March 31, 2004).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 | Form
of Stock Appreciation Rights Agreement under the Bandag, Incorporated 2004 Stock Grant
and Awards Plan (incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form S-8, Registration No. 333-115369, filed on May 11, 2004).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 | Form
of Restricted Stock Unit Agreement under the Bandag, Incorporated 2004 Stock Grant and
Awards Plan (incorporated by reference to Exhibit 4.3 to the Companys Registration
Statement on Form S-8, Registration No. 333-115369, filed on May 11, 2004).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Form
of Restricted Stock Award Agreement under the Bandag, Incorporated 2004 Stock Grant and
Awards Plan (incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K filed on February 25, 2005).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 | Form
of Nonqualified Stock Option Award Agreement under the Bandag, Incorporated 2004 Stock
Grant and Awards Plan (incorporated by reference to Exhibit 99.2 to the Companys
Current Report on Form 8-K filed on February 25, 2005).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21 | Subsidiaries
of Registrant.
| | -- | ---------------------------

| | 23 | Consent
of Independent Auditors.
| | -- | --------------------------------

| | 31.1 | Certification
of the Chief Executive Officer.
| | ---- | ---------------------------------------------

| | 31.2 | Certification
of the Chief Financial Officer.
| | ---- | ---------------------------------------------

| | 32.1 | Written
Statement of the Chairman of the Board, Chief Executive Officer and President of
                      Bandag, Incorporated Pursuant to 18 U.S.C.ss.1350.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 | Written
Statement of the Vice President, Chief Financial Officer and Secretary of Bandag,
                      Incorporated Pursuant to 18 U.S.C.ss.1350.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

*Represents a management compensatory
plan or arrangement.

67

---

SCHEDULE II 
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

# BANDAG, INCORPORATED
AND SUBSIDIARIES

|COL. A                          | COL. B | ADDITIONS
COL. C | DEDUCTIONS
COL. D | COL. E    
|------------------------------- | ------ | ---------------- | ----------------- | ----------
|
|Year ended December 31, 2004:   |        |                 
|Allowance for doubtful accounts |        |                  | $                 | 16,350,000
|Year ended December 31, 2003:   |        |                 
|Allowance for doubtful accounts |        |                  | $                 | 13,644,000
|Year ended December 31, 2002:   |        |                 
|Allowance for doubtful accounts |        |                  | $                 | 15,206,000

|(1) | Uncollectible
accounts written off, net of recoveries.
|--- | ------------------------------------------------------

68

---

# 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
|-------------------- | --------------------
|Date:  March 1, 2005 | By:                 
|                     |                     

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.

|                     |                                                                                                             |                       |                                                                                           
|-------------------- | ----------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------------------------------------------------------------
|By:                  | /s/  Robert T. Blanchard                                                                                    | By:                   | /s/  Roy J. Carver, Jr.                                                                   
|                     | Robert T. Blanchard
Director                                                                                |                       | Roy J. Carver, Jr.
Director                                                               
|By:                  | /s/  Gary E. Dewel                                                                                          | By:                   | /s/  James R. Everline                                                                    
|                     | Gary E. Dewel
Director                                                                                      |                       | James R. Everline
Director                                                                
|By:                  | /s/  Phillip J. Hanrahan                                                                                    | By:                   | /s/  Amy P. Hutton                                                                        
|                     | Phillip J. Hanrahan
Director                                                                                |                       | Amy P. Hutton
Director                                                                    
|By:                  | /s/  Edgar D. Jannotta                                                                                      | By:                   | /s/  R. Stephen Newman                                                                    
|                     | Edgar D. Jannotta
Director                                                                                  |                       | R. Stephen Newman
Director                                                                
|                     | /s/  Martin G. Carver                                                                                       |                       | /s/  Warren W. Heidbreder                                                                 
|                     | Martin G. Carver
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer) |                       | Warren W. Heidbreder
Vice President, Chief Financial
Officer (Principal Financial Officer)
|Date:  March 1, 2005 |                                                                                                             | /s/  Charles W. Vesey
|                     |                                                                                                             |                       | Charles W. Vesey
Corporate Controller
(Principal Accounting Officer)                      

69

---

EXHIBIT INDEX

|Exhibit No. | Description
|----------- | -----------

|3.1 | Bylaws:
As amended March 9, 2004.  (Incorporated by reference to Exhibit No. 3.1 to the
                      Company's Form 10-Q for the quarter ended March 31, 2004.)
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 | Amendment
to Bylaws adopted on March 9, 2004.  (Incorporated by reference to Exhibit No. 3.2 to
                      the Company's Form 10-Q for the quarter ended March 31, 2004.)
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3 | 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.)
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.4 | 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.)
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.5 | Articles
of Amendment to Bandag, Incorporateds Restated Articles of Incorporation, effective
May 15, 2002. (Incorporated by reference to Exhibit 3(i) to the Companys Form 10-Q
for the quarter ended June 30, 2002.)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 $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. (Incorporated by
reference to Exhibit No. 10.1 to the Companys Form 10-K for the year ended December
31, 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.)
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2(c) | Form
of Bandag Dealer Franchise Agreement. (Incorporated by reference to           Exhibit
10.2(c) to the Companys Form 10-K for the year ended December 31,           2001.)
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2(d) | Form
letter to the Companys U.S. franchisees. (Incorporated by reference           to
Exhibit 99.1 to the Companys Form 8-K dated June 14, 2002.)
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|10.2(e) | Current
Form of Bandag Dealer Franchise Agreement.
|------- | --------------------------------------------------

|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, 2001.)
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4* | 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.)
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5* | 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).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6* | 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).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7* | 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).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8* | 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).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9* | Bandag,
Incorporated Stock Award Plan, as amended March 12, 2002. (Incorporated by reference to
Exhibit 10.9 to the Companys Form 10-K for the year ended December 31, 2001.)
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

70

---

|10.10* | Form
of Nonqualified Stock Option Agreement under the Bandag, Incorporated Stock Award Plan
(incorporated by reference to Exhibit 10.15 to the Companys Form 10-K for the
fiscal year ended December 31, 2000).
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11* | Form
of Restricted Stock Award Agreement under the Bandag, Incorporated Stock Award Plan.
(Incorporated by reference to Exhibit 10.11 to the Companys Form 10-K for the year
ended December 31, 2001.)
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12* | Description
of Short-term Compensation Plan.
|------ | --------------------------------------------

|10.13 | Bandag,
Incorporated 2004 Stock Grant and Awards Plan (incorporated by reference to Appendix A to
the Companys definitive proxy statement for its 2004 annual meeting of shareholders
filed on March 31, 2004).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 | Form
of Stock Appreciation Rights Agreement under the Bandag, Incorporated 2004 Stock Grant
and Awards Plan (incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form S-8, Registration No. 333-115369, filed on May 11, 2004).
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 | Form
of Restricted Stock Unit Agreement under the Bandag, Incorporated 2004 Stock Grant and
Awards Plan (incorporated by reference to Exhibit 4.3 to the Companys Registration
Statement on Form S-8, Registration No. 333-115369, filed on May 11, 2004).
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 | Form
of Restricted Stock Award Agreement under the Bandag, Incorporated 2004 Stock Grant and
Awards Plan (incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K filed on February 25, 2005).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 | Form
of Nonqualified Stock Option Award Agreement under the Bandag, Incorporated 2004 Stock
Grant and Awards Plan (incorporated by reference to Exhibit 99.2 to the Companys
Current Report on Form 8-K filed on February 25, 2005).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21 | Subsidiaries
of Registrant.
|-- | ---------------------------

|23 | Consent
of Independent Auditors.
|-- | --------------------------------

|31.1 | Certification
of the Chief Executive Officer.
|---- | ---------------------------------------------

|31.2 | Certification
of the Chief Financial Officer.
|---- | ---------------------------------------------

|32.1 | Written
Statement of the Chairman of the Board, Chief Executive Officer and President of
                      Bandag, Incorporated Pursuant to 18 U.S.C.ss.1350.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 | Written
Statement of the Vice President, Chief Financial Officer and Secretary of Bandag,
                      Incorporated Pursuant to 18 U.S.C.ss.1350.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

*Represents a management compensatory
plan or arrangement.

71