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

   [X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934
        For the fiscal year ended December 31, 1997;

                                       OR

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

                          Commission File Number 1-7007


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

                      Iowa                             42-0802143

        (State or other jurisdiction of             (I.R.S. Employer
         incorporation or organization)            Identification No.)

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

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

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


                                                  Name of each exchange
            Title of each class                    on which registered

        Common Stock - $1 Par Value            New York Stock Exchange and
    Class A Common Stock - $1 Par Value           Chicago Stock Exchange

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

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

   Indicate by check mark whether the registrant (1) has filed all reports
   required to be filed by Section 13 or 15(d) of the Securities Exchange Act
   of 1934 during the preceding 12 months (or for such shorter periods that
   the registrant was required to file such reports), and (2) has been
   subject to such filing requirements for the past
   90 days.    Yes [X]    No [ ]

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

        The aggregate market value of the voting stock held by non-affiliates
   of the registrant as of March 13, 1998:  Common Stock, $402,239,896; Class
   A Common Stock (non-voting), $344,687,697; Class B Common Stock,
   $1,700,680.

        The number of shares outstanding of the issuer's classes of common
   stock as of March 13, 1998:  Common Stock, 9,754,548 shares; Class A
   Common Stock, 11,016,393 shares; Class B Common Stock, 2,048,132 shares.

   DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Company's Proxy Statement for the Annual Meeting of the
   Shareholders to be held May 5, 1998 are incorporated by reference in Part
   III.

   <PAGE>

                                     PART I

   ITEM 1.  BUSINESS

                                  Introduction

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

        The Company is engaged in two business segments:  the manufacture and
   sale of precured tread rubber, equipment and supplies for retreading tires
   (the "traditional business") and the sale and maintenance of new and
   retread tires to principally commercial and industrial customers ("TDS").

        As a result of a recapitalization of the Company approved by the
   Company's shareholders on December 30, 1986, and substantially completed
   in February, 1987, the Carver Family (as hereinafter defined) obtained
   absolute voting control of the Company.  As of March 13, 1998, the Carver
   Family beneficially owned shares of Common Stock and Class B Common Stock
   constituting 76% of the votes entitled to be cast in the election of
   directors and other corporate matters.  The "Carver Family" is composed of
   (i) Lucille A. Carver, a director and widow of Roy J. Carver, (ii) the
   lineal descendants of Roy J. Carver and their spouses, and (iii) certain
   trusts and other entitles for the benefit of the Carver Family members.

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

                              Traditional Business

   (a)  General

        The traditional business is engaged primarily in the production and
   sale of precured tread rubber and equipment used by its franchisees for
   the retreading of tires for trucks, buses, light commercial trucks,
   industrial equipment, off-the-road equipment and passenger cars.  Bandag
   specializes in a patented cold-bonding retreading process which it
   introduced to the United States in 1957 (the "Bandag Method").  The Bandag
   Method separates the process of vulcanizing the tread rubber from the
   process of bonding the tread rubber to the tire casing, allowing for
   optimization of temperature and pressure levels at each stage of the
   retreading process.

        The Company and its licensees have 1,419 franchisees worldwide, with
   34% located in the United States and 66% internationally.  The majority of
   Bandag's franchisees are independent operators of full service tire
   distributorships.  The traditional business' revenues primarily come from
   the sale of retread material and equipment to its franchisees.  The
   traditional business' products compete with new tire sales, as well as
   retreads produced using other retread processes.  The Company concentrates
   its marketing efforts on existing franchisees and on expanding their
   respective market penetration.  Due to its strong distribution systems,
   marketing efforts and leading technology, Bandag, through its independent
   franchisee network, has been able to maintain the largest market presence
   in the retreading industry.

        The traditional business competes in the light and heavy truck tire
   replacement market.  Both new tire manufacturers and tread rubber
   suppliers compete in this market.  While the Company has independent
   franchisees in over 121 countries, and competes in all of these geographic
   markets, its largest market is the United States.  Truck tires retreaded
   by the Company's franchisees make up approximately 15% of the U.S. light
   and heavy truck tire replacement market.  The Company's primary
   competitors are new tire manufacturers such as The Goodyear Tire & Rubber
   Company, Bridgestone Corporation and Groupe Michelin.  The Goodyear Tire &
   Rubber Company also competes in the U.S. market as a tread rubber supplier
   to a combination of company owned and independent retreaders and Groupe
   Michelin has announced its plans to enter the retread market in the United
   States.

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

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

   (b)  Markets and Distribution

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

        Trucks and Buses  Tread rubber, equipment, and supplies for
   retreading and repairing truck and bus tires are sold primarily to
   independent franchisees by the Company to use the Bandag Method for that
   purpose.  Bandag has 1,419 franchisees throughout North America, Central
   America, South America, Europe, Africa, Far East, Australia and New
   Zealand.  These franchisees are owned and operated by independent
   franchisees, some with multiple franchises and/or locations.  Of these
   franchisees, 487 are located in the United States.  One hundred
   forty-eight (148) of Bandag's foreign franchisees are franchised by
   licensees of the Company in Australia, and joint ventures in India and Sri
   Lanka.  A limited number of franchisees are trucking companies which
   operate retread shops essentially for their own needs.  A few franchisees
   also offer "hot-cap" retreading and most sell one or more lines of new
   tires.

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

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

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

   (c)  Competition

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

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

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

        For additional information on competition faced by the traditional
   business see the foregoing discussion in "Markets and Distribution"
   herein.

   (d)  Sources of Supply

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

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

        The principal source of natural rubber, used for the Company's
   cushion gum, is the Far East.  The supply of natural rubber has
   historically been adequate for the Company's purposes.  Natural rubber is
   a commodity subject to wide price fluctuations as a result of the forces
   of supply and demand.  Synthetic prices historically have been related to
   the cost of petrochemical feedstocks which were relatively stable prior to
   1995.  A relationship between natural rubber and synthetic rubber prices
   exists, but it is by no means exact.

   (e)  Patents

        The Company owns or has licenses for the use of a number of United
   States and foreign patents covering various elements of the Bandag Method.
   The Company has patents covering improved features, some of which started
   expiring in 1995 and others that will continue to expire through the year
   2011, and the Company has applications pending for additional patents.

        The Company's patent counsel has advised the Company that the United
   States patents are by law presumed valid and that the Company does not
   infringe upon the patent rights of others.  While the outcome of
   litigation can never be predicted with certainty, such counsel has advised
   the Company that, in his opinion, in the event of litigation placing the
   validity of such patents at issue, the Company's United States patent
   position should remain adequate.

        The protection afforded the Bandag Method by foreign patents owned by
   the Company, as well as those under which it is licensed, varies among
   different countries depending mainly upon the extent to which the elements
   of the Bandag Method are covered, the strength of the patent laws and the
   degree to which patent rights are upheld by the courts.  Patent counsel
   for the Company is of the opinion that its patent position in the foreign
   countries in which its principal sales are made is adequate and does not
   infringe upon the rights of others.  The Company has, however, extended
   its foreign market penetration to some countries where little or no patent
   protection exists.

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

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

                                       TDS

   (a)  General

        The five dealerships that were acquired by Tire Distribution Systems,
   Inc., an indirect wholly-owned subsidiary of Bandag, are:  Universal Tire,
   Inc. (Nashville, TN); Southern Tire Mart, Inc. (Columbia, MS); J.W. Brewer
   Tire Co., Inc. (Wheat Ridge, CO): Joe Esco Tire Co. (Oklahoma City, OK);
   and Sound Tire, Inc. (Auburn, WA).  The five dealerships together, which
   provide new and retread tire products and tire management services to
   national, regional and local fleet transportation companies, operate 47
   Bandag franchise and manufacturing locations and 91 commercial, retail and
   wholesale outlets in 18 states.

   (b)  Markets and Distribution

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

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

        TDS markets its products through sales personnel located at each of
   its commercial locations, retread production facilities and retail
   facilities.  TDS' sales people make personal sales calls on existing
   customers to ensure satisfaction and loyalty.  TDS facilities are located
   near major highway arteries, industrial centers and customer locations.
   TDS commercial locations operate as points of sale for retread tires, new
   tires and services.  In addition, the commercial locations operate as a
   home base for mobile service trucks which must be able to provide
   customers with reliable and timely emergency service as well as regularly
   scheduled maintenance service.

        In an effort to fully service its customers, TDS sells new truck
   tires manufactured by Bridgestone/Firestone, Continental/General, Kelley
   Tires, Yokahama, Cooper and other manufacturers.

   (c)  Competition

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

   (d)  Sources of Supply

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

                                   Regulations

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

                                Other Information

        The Company conducts research and development of new products,
   primarily in the traditional business, and the improvement of materials,
   equipment, and  retreading processes. The cost of this research and
   development program was approximately $10,525,000 in 1995, $15,909,000 in
   1996 and $21,113,000 in 1997.

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

        As stated in the Company's 13D filed pursuant to the acquisition of
   the HON INDUSTRIES Inc. common stock, "The shares of Common Stock
   purchased by Bandag have been acquired for investment purposes."  The
   Company purchased the stock in 1987 and 1988 at a cost of $24.4 million
   and sold the same during the fourth quarter of 1997, realizing a before-
   tax gain of $95.1 million.

        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, 1997, the Company had approximately 4,507
   employees.

                      Revenues of Principal Product Groups

        The following table sets forth (in millions of dollars), for each of
   the last three fiscal years, revenues attributable to the Company's
   principal product groups:

                                         1997           1996          1995
    Revenues:
      Tread rubber, cushion gum,
        and retreading supplies         $714.7        $700.7       $688.8
      New tires                           44.7             -            -
      Other products(1)                   50.8          61.0         58.4
      Retread tires                       19.1             -            -
      Corporate(2)                       102.4           7.3          8.1
                                      --------       -------      -------
                              Total     $931.7        $769.0       $755.3

   (1)  Includes retreading equipment and related services.
   (2)  Consists of interest and investment income.

   Financial Information about Business Segments and Foreign and Domestic
   Operations

        Financial Statement "Operations in Different Segments and Different
   Geographic Areas and Sales by Principal Products" follows on pages 9 and
   10.

   <TABLE>

   Operations in Different Segments and
   Different Geographic Areas and Sales by Principal Products

    The Company operates in two business segments:  the manufacture of precured tread rubber, equipment and supplies for
    retreading tires (traditional business), and the sale and maintenance of new and retread tires to principally commercial
    and industrial customers (TDS).  While the Company's traditional business does business throughout the world, its principal
    markets are in the United States and Europe.
    <CAPTION>

    Information concerning operations in different segments:

                                                                Traditional Business                           TDS
                                                            1997         1996         1995          1997       1996      1995
    <S>                                                    <C>          <C>         <C>           <C>         <C>       <C>
    in millions
    Net Sales:
      Net sales to unaffiliated
        customers(1)(2) . . . . . . . . . . . . . . .      $767.2       $756.9      $740.4        $ 55.3
      Transfers between
        segments(3) . . . . . . . . . . . . . . . . .         6.8
                                                           -------------------------------        ----------------------------
      Segment area totals . . . . . . . . . . . . . .       774.0        756.9       740.4        $ 55.3
      Elimination (deduction) . . . . . . . . . . . .
    Total Net Sales . . . . . . . . . . . . . . . . .
    Cost of Products Sold . . . . . . . . . . . . . .      $446.6       $442.1      $442.8        $ 35.8
    Goodwill Amortization . . . . . . . . . . . . . .      $  1.0       $  1.0      $  1.0        $  1.3
    Depreciation Expense  . . . . . . . . . . . . . .      $ 32.7       $ 33.2      $ 33.2        $  1.5
    Earnings (Expenses) . . . . . . . . . . . . . . .
      Operating earnings
        (loss)(4) . . . . . . . . . . . . . . . . . .      $121.1       $134.8      $157.9         $(3.3)
      Interest expense  . . . . . . . . . . . . . . .                                               (0.9)
      General corporate expenses  . . . . . . . . . .
                                                          --------------------------------        -----------------------------
    Earnings Before Income
      Taxes . . . . . . . . . . . . . . . . . . . . .      $121.1       $134.8      $157.9         $(4.2)
    Total Assets at December
      31(5) . . . . . . . . . . . . . . . . . . . . .      $483.8       $472.4      $453.0        $215.5
    Total Liabilities at
      December 31 . . . . . . . . . . . . . . . . . .      $173.1       $162.7      $134.9        $ 40.3
    Capital Expenditures  . . . . . . . . . . . . . .      $ 41.2       $ 34.4      $ 28.4        $  1.0

   <CAPTION>

    Information for operations in Africa, Asia, Australia, Canada and South America is combined for reporting purposes as
    "Other."  Information concerning the Company's operations by segment and by geographic area and sales by principal
    product for the years ended December 31, 1997, 1996 and 1995 is shown below.

    Information concerning operations in different segments:

                                                              Corporate                                Consolidated
                                                    1997         1996         1995                1997         1996        1995
    <S>                                             <C>           <C>           <C>              <C>         <C>          <C>
    in millions
    Net Sales:
      Net sales to unaffiliated
        customers(1)(2) . . . . . . . . . .                                                      $822.5      $756.9       $740.4
      Transfers between
        segments(3) . . . . . . . . . . . .                                                          6.8
                                                   --------------------------------              -------------------------------
      Segment area totals . . . . . . . . .                                                      $829.3      $756.9       $740.4
      Elimination (deduction) . . . . . . .                                                       (6.8)
    Total Net Sales . . . . . . . . . . . .                                                      $822.5      $756.9       $740.4

    Cost of Products Sold . . . . . . . . .                                                      $482.4      $442.1       $442.8
    Goodwill Amortization . . . . . . . . .                                                      $  2.3      $  1.0       $  1.0
    Depreciation Expense  . . . . . . . . .         $   0.4       $   0.4      $   0.4           $ 34.6      $ 33.6       $ 33.6
    Earnings (Expenses) . . . . . . . . . .
      Operating earnings
        (loss)(4) . . . . . . . . . . . . .          $102.4       $   7.3      $   8.1           $220.2      $142.1       $166.0
      Interest expense  . . . . . . . . . .            (2.4)         (1.2)        (2.0)            (3.3)       (1.2)        (2.0)
      General corporate expenses  . . . . .           (14.0)        (10.1)        (8.9)           (14.0)      (10.1)        (8.9)
                                                   -----------------------------------           -------------------------------
    Earnings Before Income
      Taxes . . . . . . . . . . . . . . . .         $  86.0       $ (4.0)      $ (2.8)           $202.9      $130.8       $155.1
    Total Assets at December
      31(5) . . . . . . . . . . . . . . . .          $200.6        $115.9       $101.2           $899.9      $588.3       $554.2
    Total Liabilities at
      December 31 . . . . . . . . . . . . .          $223.1        $ 14.8      $  19.3           $436.5      $177.5       $154.2
    Capital Expenditures  . . . . . . . . .                                                      $ 42.2      $ 34.4       $ 28.4

   <CAPTION>

    Information concerning operations in different geographic areas:

                                                            United States                              Europe
                                                    1997          1996         1995          1997       1996       1995
    <S>                                            <C>            <C>        <C>           <C>        <C>        <C>
    in millions
    Net Sales:
      Net sales to unaffiliated
        customers(1)(2) . . . . . . . . . . .      $533.9         $474.6     $459.6        $123.0     $129.5     $135.9
      Transfers between
        areas(3)                                     42.1           28.8       24.9           0.5        1.1        0.6
                                                   --------------------------------        ----------------------------
      Geographic area totals  . . . . . . . .      $576.0         $503.4     $484.5        $123.5     $130.6     $136.5
      Elimination (deduction) . . . . . . . .
    Total Net Sales . . . . . . . . . . . . .

    Earnings (Expenses)
      Operations(4) . . . . . . . . . . . . .      $ 93.1         $109.3     $121.2        $  4.0     $  9.0     $ 13.6
      Investment income . . . . . . . . . . .
      Interest expense  . . . . . . . . . . .
      General corporate expenses  . . . . . .
    Earnings Before Income
      Taxes . . . . . . . . . . . . . . . . .
    Assets at December 31 . . . . . . . . . .
      Operations  . . . . . . . . . . . . . .      $511.6         $301.4     $290.1        $ 72.9     $ 79.2     $ 84.9
      Corporate(4)  . . . . . . . . . . . . .
    Total Assets  . . . . . . . . . . . . . .
    Liabilities at December 31
      Operations  . . . . . . . . . . . . . .      $142.8         $ 99.6     $ 79.5        $ 26.6     $ 28.5     $ 31.6
      Corporate(5)  . . . . . . . . . . . . .
    Total Liabilities . . . . . . . . . . . .
    Sales Information by
      Principal Product Group
      Retread materials and
        supplies  . . . . . . . . . . . . . .
      New tires . . . . . . . . . . . . . . .
      Retread tires . . . . . . . . . . . . .
      Other . . . . . . . . . . . . . . . . .


   <CAPTION>

    Information concerning operations in different geographic areas:

                                                                  Other                                Consolidated
                                                       1997        1996       1995            1997         1996          1995
    <S>                                               <C>        <C>        <C>              <C>          <C>          <C>
    in millions
    Net Sales:
      Net sales to unaffiliated
        customers(1)(2) . . . . . . . . . .           $165.6     $152.8     $144.9           $822.5       $756.9       $740.4
      Transfers between
        areas(3)                                         3.6        2.0        1.7             46.2         31.9         27.2
                                                      ----------------------------           --------------------------------
      Geographic area totals  . . . . . . .           $169.2     $154.8     $146.6           $868.7       $788.8       $767.6
      Elimination (deduction) . . . . . . .                                                   (46.2)       (31.9)       (27.2)
                                                                                             --------------------------------
    Total Net Sales . . . . . . . . . . . .                                                  $822.5       $756.9       $740.4

    Earnings (Expenses)
      Operations(4) . . . . . . . . . . . .          $  20.7    $  16.5     $ 23.1           $117.8       $134.8       $157.9
      Investment income . . . . . . . . . .                                                   102.4          7.3          8.1
      Interest expense  . . . . . . . . . .                                                    (3.3)        (1.2)        (2.0)
      General corporate expenses  . . . . .                                                   (14.0)       (10.1)        (8.9)
                                                                                             --------------------------------
    Earnings Before Income
      Taxes . . . . . . . . . . . . . . . .                                                  $202.9       $130.8       $155.1
    Assets at December 31 . . . . . . . . .
      Operations  . . . . . . . . . . . . .           $114.8     $ 91.8     $ 78.0           $699.3       $472.4       $453.0
      Corporate(4)  . . . . . . . . . . . .                                                   200.6        115.9        101.2
                                                                                             --------------------------------
    Total Assets  . . . . . . . . . . . . .                                                  $899.9       $588.3       $554.2
    Liabilities at December 31
      Operations  . . . . . . . . . . . . .          $  44.0     $ 34.6     $ 23.8           $213.4       $162.7       $134.9
      Corporate(5)  . . . . . . . . . . . .                                                   223.1         14.8         19.3
                                                                                             --------------------------------
    Total Liabilities . . . . . . . . . . .                                                  $436.5       $177.5       $154.2
    Sales Information by
      Principal Product Group
      Retread materials and
        supplies  . . . . . . . . . . . . .                                                     86%          92%          92%
      New tires . . . . . . . . . . . . . .                                                      6%
      Retread tires . . . . . . . . . . . .                                                      2%
      Other . . . . . . . . . . . . . . . .                                                      6%           8%           8%
                                                                                            ---------------------------------
                                                                                               100%         100%         100%

    (1)  No single customer accounted for 10% or more of the Company's sales to unaffiliated customers in any of the years 1997,
         1996 or 1995.

    (2)  Export sales from the United  States were less than 10% of  sales to unaffiliated customers in each of the  years 1997,
         1996 and 1995.

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

    (4)  Aggregate foreign exchange  gains (losses) included in determining  net earnings amounted to  approximately $1,500,000,
         $1,236,000 and $(1,187,000) in 1997, 1996 and 1995, respectively.

    (5)  Corporate assets  are  principally cash  and cash  equivalents, investments,  corporate office  and related  equipment.
         Corporate liabilities are principally dividends payable, short-term notes payable and long-term obligations.

   </TABLE>

   Executive Officers of the Company

        The following table sets forth the names and ages of all executive
   officers of the Company as of March 13, 1998, the period of service of
   each with the Company, positions and offices with the Company presently
   held by each, and the period during which each officer has served in his
   present office:

                                                                     Period
                                   Period of                           in
                                    Service      Present Position    Present
         Name               Age   with Company       or Office       Office

    Martin G. Carver*       49      19 Yrs.     Chairman of the      17 Yrs.
                                                Board, Chief
                                                Executive Officer
                                                and President

    Lucille A. Carver*      80      40 Yrs.     Treasurer            39 Yrs.

    Nathaniel L. Derby II   55      27 Yrs.     Vice President,       1 Yr.
                                                Manufacturing
                                                Design

    Sam Ferrise II          41      17 Yrs.     Executive Vice        1 Mo.
                                                President, Chief
                                                Operating Officer

    Warren W. Heidbreder    51      16 Yrs.     Vice President,       1 Yr.
                                                Chief Financial
                                                Officer, and
                                                Corporate
                                                Secretary

    Hong Yan Li, Henry      50       2 Yrs.     Vice President,      2 Yrs.
                                                Asian Operations

    Frederico U. Kopittke   54       3 Yrs.     Vice President,       1 Mo.
                                                Latin America

    Patrick K. Robbins      57       7 Yrs.     Vice President       2 Yrs.
                                                and General
                                                Manager, Eastern
                                                Hemisphere
                                                Retread Division
                                                and Southern
                                                Region

    John C. McErlane        44      13 Yrs.     Vice President,       1 Mo.
                                                Marketing and
                                                Sales

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

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

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

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

        Mr. Ferrise joined Bandag in 1981.  In November 1995, he was elected
   to the office of Vice President, Marketing.  In February 1997, he was
   elected to the office of Vice President, Sales and Marketing effective
   January 20, 1997 and served in that position until March 1998 when he was
   elected to his current office of Executive Vice President and Chief
   Operating Officer effective February 16, 1998.

        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. Li joined Bandag in July 1996 as Vice President, Asian Operations
   and was elected to that office in August 1996.  Before joining Bandag, Mr.
   Li was employed for more than 25 years by the Eastman Kodak Company.

        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 his current office of Vice President, Latin America effective
   March 1, 1998.  Before joining Bandag, Mr. Kopittke was employed for more
   than 16 years by Nalco Chemical Company in South America.

        Mr. Robbins joined Bandag in 1991.  He served as General Manager, New
   Zealand from 1991 until August 1996.  In August 1996, he was elected to
   the office of Vice President, Southern Region.  In May 1997, he was
   elected to his current office of Vice President and General Manager,
   Eastern Hemisphere Retread Division and Southern Region effective April 7,
   1997.

        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 March 1998, he was elected to
   his current office of Vice President, Marketing and Sales effective
   February 16, 1998.

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

   ITEM 2.  PROPERTIES

                              Traditional Business

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

        The tread rubber manufacturing plants of the Company are located to
   service principal markets.  The Company operates sixteen of such plants,
   six of which are located in the United States, and the remainder in
   Canada, Belgium, South Africa, Brazil (two plants), New Zealand, Mexico,
   Malaysia, Indonesia and Venezuela.  The plants vary in size from 9,600
   square feet to 194,000 square feet with the first plant being placed into
   production during 1959.  All of the plants are owned in fee except for the
   plants located in New Zealand, Indonesia, Malaysia and Venezuela, which
   are under standard lease contracts.

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

        A new training and conference center is under construction in
   Muscatine, Iowa.  The approximately 83,000 square foot center is scheduled
   to be completed in late 1998.

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

                                 Dealer Business

        TDS currently owns 30 and leases 75 facilities.  Forty-seven contain
   space for TDS' retread production and ninety-one contain space for
   commercial, retail and wholesale operations.  The Company believes that it
   will be able to renew its existing leases as they expire or find suitable
   alternative locations.  The leases generally provide for a base rental, as
   well as charges for real estate taxes, insurance, maintenance and various
   other items.

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

   ITEM 3.  LEGAL PROCEEDINGS

        Treadco, Inc. v. Bandag, Inc., et. al.  On October 27, 1995, Treadco,
   Inc. ("Treadco"), Bandag's largest franchisee, filed a complaint in the
   Sebastian County Chancery Court, Fort Smith, Arkansas, against Bandag
   (Treadco, Inc. v. Bandag, Inc., et al., Case No. 95-1224).  Treadco
   alleges in that action various Arkansas statutory and common law claims
   relating to allegations that Bandag wrongfully induced several Treadco
   employees to terminate their employment with Treadco and begin working for
   Bandag, that Bandag wrongfully induced Treadco customers to switch their
   business to other Bandag franchises, and that Bandag otherwise violated
   its duty of good faith and fair dealing to Treadco.  Treadco seeks an
   unspecified amount of money damages.  On November 8, 1995, Bandag filed an
   action in the United States District Court for the Western District of
   Arkansas to compel the arbitration of Treadco's claims (Bandag, Inc. v.
   Treadco, Inc., Case No. 95-2204).  The Arkansas Chancery Court stayed all
   proceedings pending the federal court's decision on Bandag's petition.
   The federal court has ruled that all claims should be settled at the
   arbitration hearing.

        In addition to its original claims, Treadco has brought an antitrust
   counterclaim in the arbitration matter seeking treble damages and attorney
   fees.  Treadco alleges that Bandag has engaged in conduct intended to
   restrain trade and destroy competition in violation of the Robinson-Patman
   Act.  Discovery and the taking of depositions has been substantially
   completed.  It appears that the earliest time for the arbitration hearing
   to be held is in September 1998.

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

                                     PART II

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

        Information concerning cash dividends declared and market prices of
   the Company's Common Stock and Class A Common Stock for the last three
   fiscal years is as follows:

   <TABLE>

   <CAPTION>

                                                         1997    % Change          1996    % Change       1995
    <S>                                              <C>           <C>         <C>            <C>       <C>
    Cash Dividends Per Share-Declared
         First Quarter                               $0.2500                   $ 0.2250                 $ 0.2000
         Second Quarter                               0.2500                     0.2250                   0.2000

         Third Quarter                                0.2500                     0.2250                   0.2000
         Fourth Quarter                               0.2750                     0.2500                   0.2250
         Total Year                                   1.0250       10.8        $ 0.9250       12.1      $ 0.8250


    Stock Price Comparison (1)
       Common Stock
         First Quarter                               $45.00 - 51.88            $50.25 - 55.88           $57.00 - 62.00
         Second Quarter                               46.38 - 51.75             47.38 - 52.75            56.75 - 64.63

         Third Quarter                                47.94 - 54.13             44.50 - 49.50            52.25 - 65.88
         Fourth Quarter                               48.38 - 55.75             46.13 - 49.38            49.00 - 54.88
         Year-End Closing Price                               53.44                     47.38                    54.13
       Class A Common Stock

         First Quarter                               $45.25 - 50.38            $48.75 - 54.00           $51.50 - 54.88
         Second Quarter                               45.00 - 49.50             46.63 - 51.50            52.25 - 60.50
         Third Quarter                                47.50 - 53.44             43.50 - 48.00            47.75 - 59.75
         Fourth Quarter                               46.38 - 52.00             45.25 - 47.88            47.50 - 53.63
         Year-End Closing Price                               47.88                     45.75                    53.00


   __________
   (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) as reported in The Wall Street Journal.

   </TABLE>

   <PAGE>


        The approximate number of record holders of the Company's Common
   Stock as of March 13, 1998, was 2,429, the number of holders of Class A
   Common Stock was 1,347 and the number of holders of Class B Common Stock
   was 269.  The Common Stock and Class A Common Stock are traded on the New
   York Stock Exchange and the Chicago Stock Exchange.  There is no
   established trading market for the Class B Common Stock.

   Sale of Unregistered Securities

        On November 4, 1997, in connection with the acquisition of Joe Esco
   Tire Co. by Tire Distribution Systems, Inc., the Company issued 10,000
   shares of its Class A Common Stock to four shareholders.  No underwriters
   were engaged in connection with the  foregoing sales.  The issuance of the
   foregoing securities was exempt from registration under the Securities Act
   of 1933 pursuant to Section 4(2) as a transaction not involving a public
   offering.

        On November 4, 1997, the Company issued 20,000 shares of Common Stock
   and 20,000 shares of Class A Common Stock to Martin G. Carver pursuant to
   his exercise of stock options for an aggregate consideration of $925,000.
   No underwriters were engaged in connection with the foregoing sale.  The
   issuance of the foregoing securities were exempt from registration under
   the Securities Act of 1933 pursuant to Section 4(2) as a transaction not
   involving a public offering.

        On December 15, 1997, the Company sold (a) $60,000,000 of 6.41%
   Senior Notes due December 15, 2002 and (b) $40,000,000 of 6.50% Senior
   Notes due December 15, 2007 to a group of financial institutions.  No
   underwriters were engaged in connection with the foregoing sales.  The
   sale of the foregoing debt securities was exempt from registration under
   the Securities Act of 1933 pursuant to Section 4(2) as a transaction not
   involving a public offering.

   ITEM 6.   SELECTED FINANCIAL DATA

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

   <TABLE>

   <CAPTION>
                                                           1997(3)          1996           1995         1994           1993
    (in thousands, except per share data)
    <S>                                                   <C>             <C>            <C>          <C>            <C>
    Net Sales                                             $822,523        $756,925       $740,363     $650,567       $590,199
    Net Earnings(1)                                        121,994          81,604         97,027       93,994         78,734
                                                          -------------------------------------------------------------------
    Total Assets                                          $899,904        $588,342       $554,159     $582,146       $550,731
    Long-term Debt and Other Obligations                   123,195          10,125         11,857       12,252         11,039
        Basic Earnings Per Share(2)                          $5.35           $3.46           3.84        $3.53          $2.90
        Diluted Earnings Per Share(2)                        $5.33           $3.44          $3.82        $3.51          $2.88
    Cash Dividends Per Share-Declared                      $1.0250         $0.9250        $0.8250      $0.7250        $0.6625

   __________
   (1)  Includes in 1997 the effect of a non-recurring gain on the sale of marketable equity securities of $95,087,000 pre-tax,
        or $2.44 per diluted share and non-recurring charges of $16,500,000 pre-tax, $9,900,000 after tax, or $.43 per diluted
        share, related to the closing of a manufacturing facility and exit cost from a rubber recycling venture.
   (2)  Per share and weighted average share outstanding amounts for all periods previously presented have been restated to
        conform with the requirements of Statement of Financial Accounting Standards No. 128, "Earnings per Share," issued in
        February 1997.
   (3)  During 1997 the Company's subsidiary, Tire Distribution Systems, Inc. acquired five tire dealerships whose operations are
        included in the consolidated financial statements from November 1, 1997, the effective date of the acquisitions.

   </TABLE>

   <PAGE>


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

   Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

   The year's results include the operations of both the Company's
   traditional business and beginning on November 1, its newly-formed
   subsidiary, Tire Distribution Systems, Inc. (TDS), which acquired five
   dealerships in November.

   Consolidated net sales in 1997 increased 9% from 1996.  TDS accounted for
   approximately 7% of consolidated net sales or approximately 78% of the
   increase.  The remaining 2% increase was 4% lower than the corresponding
   increase in retread material unit volume because of the 3% lower
   translated value of the Company's foreign-currency-denominated sales
   (primarily the Belgium franc), coupled with 1% lower equipment sales.  The
   Company's seasonal sales pattern, which is tied to trucking industry
   activity, is similar to previous years with the third and fourth quarters
   being the strongest for both sales and earnings.

   Gross profit margin for the Company's traditional business increased by .7
   percentage points due to higher production to support increased sales and
   manufacturing efficiencies.  Raw material costs, on average, remained
   relatively flat.  Inclusion of the TDS operations, which operates at a
   lower gross margin, decreased consolidated gross margin by .2 percentage
   points.

   Consolidated operating and other expenses in 1997 increased 16% from 1996.
   TDS accounted for 8% of these expenses or one-half of the total increase.
   The remaining 8% increase in operating and other expenses was related to
   increased spending for Sales and Marketing staffing and programs, employee
   training, and higher R&D for the traditional business segment.  This 8%
   increase resulted in a net earnings decline for the traditional business
   in 1997 of 3% before non-recurring items.  The Company's consolidated
   effective income tax rate of 39.9% was higher than the previous year's
   rate of 37.6%, principally due to higher state income taxes.

   Consolidated diluted earnings per share were $5.33 in 1997 compared to
   $3.44 in 1996.  The traditional business diluted earnings per share,
   before non-recurring items, was $3.45 compared to $3.44 in 1996.  Non-
   recurring items include a net gain of approximately $55,800,000 after
   taxes, related to the sale of marketable equity securities.  This non-
   recurring gain was partially offset by non-recurring charges which
   included provisions of $2,100,000, net of tax benefits, for the 1998
   closing of a manufacturing facility and $7,800,000, net of tax benefits,
   to cover exit costs from a rubber recycling venture.

   Net sales in the United States for the Company's traditional business were
   2% higher than a year ago but two percentage points below the retread
   material unit volume increase due to lower equipment sales.  Average raw
   material costs for the year were approximately flat with the previous
   year's average but higher production to support higher sales resulted in
   better absorption of fixed manufacturing costs.  As a result, gross margin
   increased by two percentage points compared to the margin in the previous
   year.  Earnings before income taxes in 1997 for the Company's traditional
   business in the United States declined 10% from the previous year due to
   increased operating expenses in support of marketing programs and building
   capabilities within the organization, as part of the Company's commitment
   to building an alliance with our dealers and end-users.

   The Company's foreign operations comprised 37% and 22% of 1997's
   traditional net sales and earnings before income taxes, respectively.
   This represents the same percentage of total revenues as the prior year,
   and an 11 percentage point increase, as a percent of total earnings before
   income taxes, in comparison to the prior year.

   Net sales in Europe declined 5% from 1996.  The decline occurred despite a
   5% increase in unit volume and because of the unfavorable impact of a
   stronger U.S. dollar on the translated value of the Company's foreign-
   currency-denominated sales.  Gross profit margin in 1997 decreased
   approximately two percentage points compared to 1996 due to higher per
   unit manufacturing costs.  Operating expenses increased 19%, due mainly to
   expenses incurred in developing dealer capabilities and adding
   distribution.  As a result of the foregoing, earnings before income taxes
   declined by 55% over the previous year.

   Unit volume for the Company's other combined foreign operations improved
   by 13% over 1996, and net sales increased by 8%.  Gross profit margin
   improved slightly, while operating and other expenses, as a percent of
   sales, decreased approximately two percentage points from the previous
   year.  Earning before income taxes increased by 25% due to both the
   improved gross margins and reduced operating expenses.

   TDS results are included for the two-month period from its formation
   through year-end.  Net sales and net loss for TDS were $55,304,000 and
   $2,996,000, respectively.  See segment information on page 9 for
   additional information.

   Year Ended December 31, 1996 Compared to Year Ended December 31,  1995

   Consolidated net sales in 1996 increased 2% from 1995 matching the unit
   volume growth for retread materials. The translated value of the Company's
   foreign-currency-denominated sales decreased 1% from 1995 but that
   difference was offset by slightly higher equipment sales.  The Company's
   seasonal sales pattern, which is tied to the trucking industry activity,
   is similar to previous years with the third and fourth quarters being the
   strongest for both sales and earnings.

   The Company's consolidated gross profit margin increased by 1.4 percentage
   points from 1995 as a result of raw material cost decreases and
   manufacturing efficiencies resulting from past investments in process
   improvements.  However, this gain was more than offset by higher operating
   expenses.  The increased operating expenses related principally to
   increased spending for Sales and Marketing staffing and programs, employee
   training, distribution replacement, and higher R&D, resulted in a net
   earnings decline in 1996 of 16% from 1995.  The Company's effective income
   tax rate of 37.6% was comparable to the previous year's rate of 37.4%.

   Diluted earnings per share in 1996 of $3.44 were $.38 lower, a 10%
   decrease from 1995.  During 1996, the Company acquired 1,298,000 shares of
   its outstanding Common Stock and Class A Common Stock for $61,691,000, at
   prevailing market prices.

   Domestic net sales in 1996 were 3% higher than a year ago, as was the
   tread volume.  Average raw material costs for the year were approximately
   4% lower than the previous year's average.  As a result, gross margin
   increased by two percentage points compared to a margin decrease
   experienced in the previous year.  Domestic 1996 earnings before income
   taxes declined ten percentage points from the previous year due to
   increased investments in marketing programs and building capabilities
   within the organization, as part of our commitment to building an alliance
   with our dealers and end-users.

   The Company's foreign operations comprised 37% and 20% of 1996's net sales
   and earnings before income taxes, respectively.  This represents a one
   percentage-point decline, as a percent of total revenues and a four
   percentage-point decrease, as a percent of total earnings before income
   taxes, in comparison with the prior year.

   Net sales in Europe declined 5% from 1995.  The decline was the result of
   a 7% decrease in unit volume and a 3% decrease because of the unfavorable
   impact on the translated value of the Company's foreign-currency-
   denominated sales, which was partially offset with price increases of
   approximately 4% to 5%.  Gross profit margin in 1996 increased
   approximately one percentage point compared to 1995 due to lower per unit
   manufacturing costs.  Earnings before income taxes declined by 33% over
   the previous year.

   Unit volume for the Company's other combined foreign operations improved
   by 5% over 1995, and net sales increased by 6%.  Gross profit margin in
   1996 remained the same, but operating and other expenses, as a percent of
   sales, increased by approximately six percentage points from the previous
   year due principally to a provision related to a tax dispute in Brazil and
   the Company's commitment to building a global organizational structure.
   Earnings before income taxes declined by 28% due to the increased
   operating expenses.

   Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

   Consolidated net sales increased 14% from 1994.  Retread unit volume
   increased 3% while the translated value of the Company's foreign-currency-
   denominated sales increased 2%.  The remaining 9% increase was from the
   cumulative increases in selling prices in 1994 and 1995 in response to
   higher raw material costs.  The Company's seasonal sales pattern, which is
   tied to the trucking industry activity, is similar to previous years with
   the third and fourth quarters being the strongest for both sales and
   earnings.

   The Company's consolidated gross profit margin declined by 1.8 percentage
   points from 1994, because of raw material cost increases which were not
   passed on to dealers.  This, combined with increased operating expenses
   related principally to increased spending for marketing programs, resulted
   in net earnings improving only 3% above 1994.  The Company's effective
   income tax rate of 37.4% was comparable to the previous year's rate.

   Diluted earnings per share in 1995 of $3.82 were $.31 higher, a 9%
   increase from 1994.  During the year, the Company acquired 1,946,000
   shares of its outstanding Common Stock and Class A Common Stock for
   $107,964,000, at prevailing market prices.

   Domestic net sales in 1995 were 11% higher than in 1994 due to increased
   selling prices in 1994 and 1995, and higher equipment sales.  Tread volume
   increased only 1%.  Average raw material costs for the year were
   approximately 27% higher than the previous year's average.  Selling prices
   were increased only in the first quarter, as the Company chose to absorb
   further increases during the year.  This resulted in a gross margin
   decline of 3 percentage points.  Domestic 1995 earnings before income
   taxes declined four percentage points over the prior year due to flat
   sales volume and higher raw material costs, as well as increased spending
   for marketing programs.

   The Company's foreign operations comprised 38% and 24% of 1995's net sales
   and earnings before income taxes, respectively.  This represents a
   two percentage-point increase, as a percent of total revenues, and a
   seven percentage-point increase, as a percent of total earnings before
   income taxes, in comparison with the prior year.

   Unit volume in Europe increased 6% over 1994.  Net sales improved by 22%,
   with eight percentage points due to the favorable impact on the translated
   value of the Company's foreign-currency-denominated sales.  Gross profit
   margin in 1995 increased two percentage points compared to 1994 due to
   higher production levels and lower manufacturing spending.  Earnings
   before income taxes improved by 100% over the prior year.

   Unit volume for the Company's other combined foreign operations improved
   by 6% over 1994, with net sales increasing by 16%.  The sales increase
   exceeded the volume increase due to the favorable impact of the higher
   translated value of  foreign-currency-denominated sales coupled with
   selling price increases initiated during the year in response to higher
   raw material costs.  Gross profit margin decreased one percentage point,
   but operating expenses, as a percent of sales, decreased by approximately
   one percentage point from 1994.  Earnings before income taxes increased by
   21% due to the increased sales combined with a 5% increase in other
   income.

   Impact of Inflation and Changing Prices

   It has generally been the Company's practice to adjust its selling prices
   and sales allowances to reflect changes in production and raw material
   costs in order to maintain its gross profit margin.  In the past three
   years costs have remained relatively constant and the Company has not
   found it necessary to implement general price increases.

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

   Capital Resources and Liquidity

   At the end of 1997, current assets exceeded current liabilities by
   $292,452,000.  Cash and cash equivalents totaled $196,400,000 at year-end,
   increasing by $164,947,000 during the year.  The Company invests excess
   funds over various terms, but only instruments with an original maturity
   date of over 90 days are classified as investments.  These investments
   decreased by $514,000 from the prior year.

   The only changes in working capital requirements are for normal business
   growth and to accommodate the needs precipitated by the addition of a new
   wholly-owned subsidiary, TDS.  The Company funds its capital expenditures
   from the cash flow it generates from operations.  During 1997, the Company
   spent $42,223,000 for capital expenditures coupled with $47,659,000 in
   cash payments for purchases of the TDS businesses.  The Company will make
   the remaining cash payments of $87,224,000 for the purchase of the TDS
   businesses early in 1998.  The proceeds on the sale of marketable equity
   securities amounted to $119,558,000 (net after-tax proceeds of
   $80,247,000).

   As of December 31, 1997, the Company  had available uncommitted lines of
   credit totaling $77,000,000 in the United States for working capital
   purposes.  Also, the Company's foreign subsidiaries had approximately
   $34,000,000 in credit and overdraft facilities available to them.  From
   time to time during 1997, the Company borrowed funds to supplement
   operational cash flow needs or to settle intercompany transactions. The
   Company's long-term liabilities totaled $123,195,000 at year end, which
   are approximately 21% of the combined total of long-term liabilities and
   stockholders' equity; this is an increase of $113,070,000.  This increase
   in long-term obligations includes the addition of $100,000,000 in long-
   term debt.  The $100,000,000 proceeds from long-term borrowings and the
   proceeds from the sale of marketable equity securities are being used to
   fund the cash payments for the acquired TDS businesses and for working
   capital purposes.

   During the year, the Company purchased 174,000 shares of its outstanding
   Common Stock and Class A Common Stock for $8,643,000 at prevailing market
   prices and paid cash dividends amounting to $23,395,000.  The Company
   generally funds its dividends and stock repurchases from the cash flow
   generated from its operations.

   Impact of Year 2000

   The Company operates with a combination of purchased and internally
   developed software systems.  Many of the older computer systems were
   written using two digits rather than four to defined the applicable year.
   As a result, those computer programs have time-sensitive software that
   recognize a date using "00" as the year 1900 rather than the year 2000.
   This could cause a system failure or miscalculations causing disruptions
   of operations.  The Company will be required to modify or replace software
   which is not Year 2000 compliant so that its computer systems will
   function properly with respect to dates in the year 2000 and thereafter.

   Purchased software systems account for a significant portion of the
   Company's software environment, especially for date sensitive applications
   such as Payroll and Accounts Receivable.  The Company has performed
   assessments in recent years to identify clearly non-compliant software
   systems and to initiate replacement activities.  Most of those activities
   are completed or well underway.  Such an assessment is presently being
   conducted for the Company's newly-formed TDS subsidiary.

   The Company presently believes that with a combination of actions,
   including modification of existing software, conversion to new versions of
   purchased software and replacement with new systems, the Year 2000 Issue
   will not pose significant operational problems for its computer systems.
   On the other hand, if such modifications and conversions are not made or
   are not completed on a timely basis, the Year 2000 Issue could have a
   material impact on the operations of the Company.

   During 1998 the Company will initiate formal communications with its
   significant suppliers and large customers to determine the extent to which
   the Company's activities would be impacted by those third parties' failure
   to remediate their own Year 2000 Issues.  However, there can be no
   guarantee that the systems of other companies on which the Company relies
   will be corrected on a timely basis and therefore have no adverse effect
   on the Company.

   The Company has assessed its own products to determine if it has exposure
   to contingencies related to the Year 2000 Issue and it believes that any
   such exposure will not be material.

   The Company will utilize both internal and external resources to
   reprogram, or replace and test the software for Year 2000 compliance.  The
   Company anticipates completing the Year 2000 project by mid-1999, giving
   priority to those systems likely to encounter problems and those having
   more significant potential impact to operations.

   The total cost of Year 2000 Issue remediation is difficult to identify
   because many systems with Year 2000 Issue problems would have been
   replaced anyway due to operational issues and changing business needs.
   The Company believes that the costs clearly related to the Year 2000 Issue
   will total approximately $7,000,000 of which $2,400,000 has been spent to
   date.  The majority of this will be expensed as incurred.

   The costs of the project and the date on which the Company believes it
   will complete Year 2000 modifications are based on management's best
   estimates which are based on numerous assumptions of future events,
   including the continued availability of certain resources, third party
   plans and other factors.  There can be no guarantee that these estimates
   will be achieved and actual results could differ materially from those
   anticipated.  Specific factors that might cause such material differences
   include, but are not limited to, the availability and cost of personnel
   trained in this area, the ability to locate and correct all relevant
   computer codes, the complexity of the Year 2000 Issue due to dispersed
   operating units and geographic locations and similar uncertainties.

   ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Not Applicable

   ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   Index to Consolidated Financial Statements

                                                                        Page

    Report of Independent Auditors                                       24

    Consolidated Balance Sheets as of December 31, 1997, 1996 and
    1995                                                                 25

    Consolidated Statements of Earnings for the Years Ended December
    31, 1997, 1996 and 1995                                              26

    Consolidated Statements of Cash Flows for the Years Ended
    December 31, 1997, 1996 and 1995                                     26

    Consolidated Statements of Changes in Stockholders' Equity for
    the Years Ended December 31, 1997, 1996 and 1995                     27

    Notes to Consolidated Financial Statements                           28


   <PAGE>
                         Report of Independent Auditors


   Stockholders and Board of Directors
   Bandag, Incorporated

   We have audited the accompanying consolidated balance sheets of Bandag,
   Incorporated and subsidiaries as of December 31, 1997, 1996 and 1995, and
   the related consolidated statements of earnings, cash flows and changes in
   stockholders' equity for the years then ended.  Our audits also included
   the financial statement schedule listed in the Index at Item 14(a).  These
   financial statements and schedule are the responsibility of the Company's
   management.  Our responsibility is to express an opinion on these
   financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
   standards.  Those standards require that we plan and perform the audit to
   obtain reasonable assurance about whether the financial statements are
   free of material misstatement.  An audit includes examining, on a test
   basis, evidence supporting the amounts and disclosures in the financial
   statements.  An audit also includes assessing the accounting principles
   used and significant estimates made by management as well as evaluating
   the overall financial statement presentation.  We believe that our audits
   provide a reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
   in all material respects, the consolidated financial position of Bandag,
   Incorporated and subsidiaries at December 31, 1997, 1996 and 1995, and the
   consolidated results of their operations and their cash flows for the
   years then ended in conformity with 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.

   /s/ Ernst & Young LLP


   Chicago, Illinois
   February 3, 1998

   <PAGE>

   <TABLE>

   BANDAG, INCORPORATED AND SUBSIDIARIES
   Consolidated Balance Sheets

   <CAPTION>
                                                                                                      December 31
                                                                                     1997                1996            1995
                                                                                                    (In thousands)
   <S>                                                                              <C>                 <C>            <C>
   Assets
   Current Assets
     Cash and cash equivalents                                                      $196,400            $31,453        $31,017
     Investments - Note D                                                              1,575              2,089          9,773
     Accounts receivable, less allowance (1997 - $12,707;
       1996 - $13,320; 1995 - $12,327)                                               231,648            206,732        200,300
     Inventories:
        Finished products                                                             90,228             44,704         40,252
        Material and work in process                                                  17,295             14,228         12,811
                                                                                    --------           --------       --------
                                                                                     107,523             58,932         53,063

     Deferred income tax assets                                                       41,505             29,138         22,451
     Prepaid expenses and other current assets                                        20,343             13,356         11,854
                                                                                    --------           --------       --------
        Total Current Assets                                                         598,994            341,700        328,458
   Property, Plant and Equipment, on the Basis of Cost:
     Land                                                                              8,494              3,671          3,731
     Buildings and improvements                                                       98,769             85,445         84,426
     Machinery and equipment                                                         326,632            292,956        287,771
     Construction and equipment installation in progress                              25,551             12,520          6,327
                                                                                    --------           --------       --------
                                                                                     459,446            394,592        382,255
     Less allowance for depreciation and amortization                               (261,846)          (249,457)      (237,405)
                                                                                    --------           --------       --------
                                                                                     197,600            145,135        144,850
   Marketable Equity Securities - Note D                                                                 79,035         55,684
   Goodwill, less accumulated amortization
     (1997 - $5,516; 1996 - $3,235; 1995 - $2,237)                                    75,627              1,753          2,750
   Other Assets                                                                       27,683             20,719         22,417
                                                                                    --------           --------       --------
        Total Assets                                                                $899,904           $588,342       $554,159
                                                                                    ========           ========       ========

   Liabilities and Stockholders' Equity

   Current Liabilities
     Accounts payable                                                                $52,100           $ 28,744       $ 24,268
     Accrued employee compensation and benefits                                       28,874             23,532         21,604
     Accrued marketing expenses                                                       32,608             32,872         32,485
     Other accrued expenses                                                           66,921             34,076         25,098
     Dividends payable                                                                 6,274              5,731          5,440
     Income taxes payable                                                             20,039             12,254         10,124
     Short-term notes payable and current portion of
       other obligations                                                              99,726              2,005          3,015
                                                                                    --------           --------       --------
        Total Current Liabilities                                                    306,542            139,214        122,034
   Long-term debt and other obligations - Note H                                     123,195             10,125         11,857
   Deferred Income Tax Liabilities                                                     6,753             28,136         20,289
   Stockholders' Equity - Note H
     Common Stock; $1.00 par value, authorized -
        21,500,000 shares; issued and outstanding - 9,751,063 shares in 1997;
        9,842,861 shares in 1996; 10,112,164 shares in 1995;                           9,751              9,843         10,112
     Class A Common Stock; $1.00 par value; authorized-
        50,000,000 shares; issued and outstanding - 11,013,561 shares in 1997;
        11,027,759 shares in 1996; 11,711,344 shares in 1995;                         11,014             11,028         11,711
     Class B Common Stock; $1.00 par value; authorized -
        8,500,000 shares; issued and outstanding - 2,048,785 shares in 1997;
        2,051,984 shares in 1996; 2,355,352 shares in 1995                             2,049              2,052          2,355
     Additional paid-in capital                                                        6,052              4,069          2,493
     Retained earnings                                                               445,887            355,663        355,814
     Unrealized gain on securities available-for-sale, net
        of related tax effect (1996 - $20,765; 1995 - $11,700)                                           33,854         19,568
     Equity adjustment from foreign currency translation                             (11,339)            (5,642)        (2,074)
                                                                                    --------           --------       --------
        Total Stockholders' Equity                                                   463,414            410,867        399,979
                                                                                    --------           --------       --------
          Total Liabilities and Stockholders' Equity                                $899,904           $558,342       $554,159
                                                                                    ========           ========       ========

   See notes to consolidated financial statements.

   <PAGE>


</TABLE>
<TABLE>

   BANDAG, INCORPORATED AND SUBSIDIARIES
   Consolidated Statements of Earnings

   <CAPTION>
                                                                                           Year Ended December 31
                                                                               1997                 1996                 1995
                                                                                    (In thousands, except per share data)
    <S>                                                                    <C>                  <C>                  <C>
    Income:
      Net Sales                                                            $822,523             $756,925             $740,363
      Gain on sale of marketable equity securities - Note D                  95,087
      Other income                                                           14,092               12,074               14,911
                                                                           --------             --------             --------
                                                                            931,702              768,999              755,274
    Costs and expenses:
      Cost of products sold                                                 482,387              442,149              442,837
      Engineering, selling, administrative and other expenses               226,560              194,834              155,362
      Non-recurring charges - Note B                                         16,500
      Interest                                                                3,339                1,236                1,959
                                                                           --------             --------             --------
                                                                            728,786              638,219              600,158
                                                                           --------             --------             --------
       Earnings Before Income Taxes                                         202,916              130,780              155,116
      Income Taxes - Note F                                                  80,922               49,176               58,089
                                                                           --------             --------             --------
       Net Earnings                                                        $121,994             $ 81,604             $ 97,027
                                                                           ========             ========             ========
       Net Earnings Per Share - Note G
        Basic                                                               $  5.35              $  3.46              $  3.84
                                                                            =======              =======              =======
        Diluted                                                             $  5.33              $  3.44              $  3.82
                                                                            =======              =======              =======
    See notes to consolidated financial statements.

    Consolidated Statements of Cash Flows

    Operating Activities
      Net earnings                                                         $121,994             $ 81,604             $ 97,027
      Adjustments to reconcile net earnings to net cash
        provided by operating activities:
       Provisions for depreciation and amortization                          36,857               34,595               34,595
       Change in deferred income taxes                                      (13,375)               1,367               (3,462)
       Gain on sale of marketable equity securities                         (95,087)
       Other                                                                 (9,680)              (5,883)                 443
       Change in operating assets and liabilities, net of effects
         from acquisitions of businesses:
         Accounts receivable                                                 11,863               (9,959)             (19,674)
         Inventories                                                            847               (7,401)              (1,148)
         Prepaid expenses and other current assets                           (6,824)              (1,921)                  94
         Accounts payable and other accrued expenses                         16,577               19,063               11,164
         Income taxes payable                                                 8,130                2,582                  158
                                                                           --------             --------             --------
       Net Cash Provided by Operating Activities                             71,302              114,047              119,197
    Investing Activities
      Additions to property, plant and equipment                            (42,223)             (34,388)             (28,411)
      Net dispositions of property, plant and equipment                       4,117                  506                  724
      Purchases of investments                                               (3,645)             (18,205)             (27,379)
      Maturities of investments                                               4,159               25,889               54,470
      Payments for acquisitions of businesses                               (47,659)
      Sale of marketable equity securities                                  119,558
                                                                           --------             --------             --------
       Net Cash Provided by (Used in) Investing Activities                   34,307              (26,198)                (596)
    Financing Activities
      Proceeds from short-term notes payable                                 11,491               42,902               41,230
      Proceeds from issuance of long-term debt                              100,000
      Principal payments on short-term notes payable and long-
        term obligations                                                    (18,422)             (45,246)             (46,887)
      Cash dividends                                                        (23,395)             (21,785)             (20,651)
      Purchases of Common Stock and Class A Common Stock                     (8,643)             (61,691)            (107,964)
                                                                           --------             --------              -------
       Net Cash Provided by (Used in) Financing Activities                   61,031              (85,820)            (134,272)
    Effect of exchange rate changes on cash and cash equivalents             (1,693)              (1,593)                 169
                                                                           --------             --------              -------
      Increase (Decrease) in Cash and Cash Equivalents                      164,947                  436              (15,502)
    Cash and cash equivalents at beginning of year                           31,453               31,017               46,519
                                                                           --------             --------              -------
      Cash and Cash Equivalents at End of Year                             $196,400             $ 31,453             $ 31,017
                                                                           ========             ========             ========

   See notes to consolidated financial statements.

   </TABLE>

   <PAGE>

   <TABLE>

   BANDAG, INCORPORATED AND SUBSIDIARIES
   Consolidated Statements of Changes in Stockholders' Equity

   <CAPTION>


                                                                    Class Stock               Class A                  Class B
                                                                    Issued and         Common Stock Issued and       Common Stock
                                                                    Outstanding             Outstanding              Issued and
                                                                                                                     Outstanding
     (In thousands, except share data)
                                                                  Shares      Amount      Shares       Amount      Shares   Amount
    <S>                                                        <C>          <C>        <C>          <C>           <C>       <C>
    Balance at January 1, 1995                                 10,788,985   $  10,789  12,976,211   $  12,976     2,357,976 $2,358
      Net earnings for the year
      Other comprehensive income, net of tax:
        Unrealized loss on securities available-for-sale,
          net of deferred income taxes of $3,459
        Adjustment from foreign currency translation
        Other comprehensive income for the year
      Comprehensive income for the year
      Cash Dividends-$.8250 per share
      Conversion of Class B Common Stock to Common
        Stock-Note H                                                2,624           3                            (2,624)        (3)
      Common Stock and Class A Common Stock issued under
        Restricted Stock Grant Plan-Note H                          4,430           4       4,430           4
      Forfeitures of Common Stock and Class A Common
        Stock under Restricted Stock Grant Plan-Note H             (3,817)         (4)     (2,939)         (3)
      Purchases of Common Stock and Class A Common Stock         (680,058)       (680) (1,266,358)     (1,266)
                                                               --------------------------------------------------------------------
    Balance at December 31, 1995                               10,112,164      10,112  11,711,344      11,711  2,355,352    $2,335
      Net earnings for the year
      Other comprehensive income, net of tax:
        Unrealized gain on securities available-for-sale,
          net of deferred income taxes of $9,065
        Adjustment from foreign currency translation
      Other comprehensive income for the year
      Comprehensive income for the year
      Cash dividends-$.9250 per share
      Conversion of Class B Common Stock to Common
        Stock-Note H                                              303,368         303                            (303,368)    (303)
      Common Stock and Class A Common Stock issued under
        Restricted Stock Grant Plan-Note H                          7,610           8       7,610           8
      Forfeitures of Common Stock and Class A Common
        Stock under
        Restricted Stock Grant Plan-Note H                           (110)          0        (110)          0
      Common Stock and Class A Common Stock issued
        under Stock
        Award Program Plan-Note H                                   2,636           3       2,638           2
      Common Stock and Class A Common Stock issued under
        Defined-Contribution Plan-Note I                           10,450          10      10,738          11
      Purchases of Common Stock and Class A Common Stock         (593,257)       (593)   (704,461)       (704)
                                                               -------------------------------------------------------------------
    Balance at December 31, 1996                                9,842,861       9,843  11,027,759      11,028   2,051,984    2,052
      Net earnings for the year
      Other comprehensive income, net of tax:
        Unrealized gain on securities available
        for sale
      Adjustment from foreign currency translation
      Other comprehensive income for the year
      Comprehensive income for the year
      Cash dividends-$1.0250 per share
      Conversion of Class B Common Stock to Common
        Stock-Note H                                                3,199           3                              (3,199)      (3)
      Common Stock and Class A Common Stock issued under
        Restricted Stock Grant Plan-Note H                          6,840           6       6,840           7
      Forfeitures of Common Stock and Class A  Common
        Stock under Restricted Stock Grant Plan-Note H             (2,145)         (2)     (1,765)         (2)
      Common Stock and Class A Common Stock issued
        nder Stock Award Program Plan-Note H                        2,708           3       2,708           3
      Common Stock and Class A Common Stock issued under
        Defined-Contribution Plan-Note I
      Purchase of Common Stock and Class A Common Stock          (122,400)       (122)    (51,981)        (52)
      Stock options exercised                                      20,000          20      20,000          20
      Stock issued in acquisition of businesses - Note C                                   10,000          10
                                                               --------------------------------------------------------------------
    Balance at December 31, 1997                                9,751,063   $   9,751  11,013,561   $  11,014   2,048,785     2,049
                                                               ====================================================================

   <CAPTION>


     (In thousands, except share data)                                                                 Accumulated
                                                                              Additional                  Other
                                                                               Paid-in     Retained   Comprehensive  Comprehensive
                                                                               Capital     Earnings      Income       Income
     <S>                                                                    <C>          <C>          <C>           <C>
     Balance at January 1, 1995                                             $  3,192     $ 384,607    $  20,127
      Net earnings for the year                                                             97,027                  $  97,027
      Other comprehensive income, net of tax:
        Unrealized loss on securities available-for-sale, net of
        deferred income taxes of $3,459                                                                  (4,923)       (4,923)
        Adjustment from foreign currency translation                                                      2,290         2,290
        Other comprehensive income for the year                                                                        (2,633)
      Comprehensive income for the year                                                                              $ 94,394
      Cash Dividends-$.8250 per share                                                     (20,651)
      Conversion of Class B Common Stock to Common Stock-Note H
      Common Stock and Class A Common Stock issued under
        Restricted Stock Grant Plan-Note H                                      436
      Forfeitures of Common Stock and Class A Common Stock under
        Restricted Stock Grant Plan-Note H                                     (287)
      Purchases of Common Stock and Class A Common Stock                       (848)     (105,169)
                                                                            ------------------------------------
    Balance at December 31, 1995                                              2,493       355,814         17,494
      Net earnings for the year                                                            81,604                   $  81,604
      Other comprehensive income, net of tax:
        Unrealized gain on securities available-for-sale, net of
          deferred income taxes of $9,065                                                                 14,286       14,286
        Adjustment from foreign currency translation                                                      (3,568)      (3,568)
      Other comprehensive income for the year                                                                          10,718
      Comprehensive income for the year                                                                             $  92,322
      Cash dividends-$.9250 per share                                                     (21,785)
      Conversion of Class B Common Stock to Common Stock-Note H
      Common Stock and Class A Common Stock issued under
        Restricted Stock Grant Plan-Note H                                      698
      Forfeitures of Common Stock and Class A Common Stock under
        Restricted Stock Grant Plan-Note H                                      (10)
      Common Stock and Class A Common Stock issued under Stock
        Award Program Plan-Note H                                               262
      Common Stock and Class A Common Stock issued under
        Defined-Contribution Plan-Note I                                      1,050
      Purchases of Common Stock and Class A Common Stock                       (424)      (59,970)
                                                                            ------------------------------------
    Balance at December 31, 1996                                              4,069       355,663         28,212
      Net earnings for the year                                                           121,994                  $  121,994
      Other comprehensive income, net of tax:
        Unrealized gain on securities available for sale                                                 (33,854)     (33,854)
        Adjustment from foreign currency translation                                                      (5,697)      (5,697)
      Other comprehensive income for the year                                                                         (39,551)
      Comprehensive income for the year                                                                             $  82,443
      Cash dividends-$1.0250 per share                                                    (23,395)
      Conversion of Class B Common Stock to Common Stock-Note H
      Common Stock and Class A Common Stock issued under
        Restricted Stock Grant Plan-Note H                                      662
      Forfeitures of Common Stock and Class A  Common Stock under
        Restricted Stock Grant Plan-Note H                                     (193)
      Common Stock and Class A Common Stock issued under Stock
        Award Program Plan-Note H                                               245
      Common Stock and Class A Common Stock issued under
        Defined-Contribution Plan-Note I
      Purchase of Common Stock and Class A Common Stock                         (93)       (8,375)
      Stock options exercised                                                   885
      Stock issued in acquisition of businesses - Note C                        477
                                                                            -----------------------------------
    Balance at December 31, 1997                                          $   6,052     $ 445,887  $   (11,339)
                                                                            ===================================



   See notes to consolidated financial statements.

   </TABLE>

   <PAGE>

   Notes to Consolidated Financial Statements

   A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

   Inventories:
   Inventories are valued at the lower of cost or market.  At December 31,
   1997, cost was determined by the last in, first out (LIFO) method for
   approximately 52% of the inventories, and on the first in, first out
   method for the remainder.  At December 31, 1996 and 1995 cost was
   determined by the LIFO method for all inventories.

   The excess of current cost over the amount stated for inventories valued
   by the LIFO method amounted to approximately $22,635,000, $23,111,000 and
   24,479,000 at December 31, 1997, 1996, and 1995, 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    5 to 39 years
    Machinery and equipment  3 to 11 years

   Goodwill:
   Goodwill, which at December 31, 1997, principally represents the cost in
   excess of the fair value of the net assets acquired in the Tire
   Distribution Systems, Inc. business acquisitions (See Note C), is
   amortized using the straight-line method over 10 years.  Goodwill
   amortization approximated $2,281,000, $998,000, and $1,037,000 in 1997,
   1996, and 1995, respectively.

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

   Long Lived Assets:
   In accordance with Statement of Financial Accounting Standards (SFAS) No.
   121, "Accounting for the Impairment of Long-Lived Assets and for Long-
   Lived Assets to be Disposed of", when indicators of impairment are
   present, the Company evaluates the carrying value of property, plant, and
   equipment and intangibles 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 if the sum of the
   expected future cash flows is less than book value.  During the year ended
   December 31, 1997, $13,000,000 was recorded as a nonrecurring charge for
   the impairment related to the Company's decision to exit its investment in
   a rubber recycling venture (See Note B).

   Research and Development:
   Expenditures for research and development, which are expensed as incurred,
   approximated $21,113,000, $15,909,000, and $10,525,000 in 1997, 1996, and
   1995, respectively.

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

   Earnings Per Share:
   In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
   128, "Earnings per Share."  SFAS 128 replaced the calculation of primary
   and fully diluted earnings per share with basic and diluted earnings per
   share (See Note G).  Unlike primary earnings per share, basic earnings per
   share excludes the dilutive effects of stock options and unvested
   restricted stock grants.  Diluted earnings per share is very similar to
   the previously reported fully diluted earnings per share.  All earnings
   per share amounts for all periods have been presented, and where
   appropriate, restated to conform to the SFAS No. 128 requirements.

   Comprehensive Income:
   As of January 1, 1997, the Company adopted SFAS No. 130, "Reporting
   Comprehensive Income."  SFAS 130 establishes new rules for the reporting
   and display of comprehensive income and its components; however, the
   adoption of this Statement had no impact on the Company's net income or
   shareholders' equity.  SFAS 130 requires unrealized gains or losses on the
   Company's available-for-sale securities and the foreign currency
   translation adjustments, which prior to adoption were reported separately
   in the Consolidated Statements of Changes in Shareholders' Equity, to be
   included in other comprehensive income.  Prior year financial statements
   have been reclassified to conform to the requirements of SFAS 130.

   Segment Disclosures:
   In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
   an Enterprise and Related Information", which is effective for years
   beginning after December 15, 1997.  SFAS 131 establishes standards for the
   way that public business enterprises report information about operating
   segments in annual financial statements and requires that those
   enterprises report selected information about operating segments in
   interim financial reports.  It also establishes standards for related
   disclosures about products and services, geographic areas, and major
   customers.  The Company will adopt the new requirements retroactively in
   1998.  Management has not completed its review of SFAS No. 131, but
   anticipates that the adoption of this statement will not have a
   significant effect on the Company's reported segments.

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

   B. NONRECURRING CHARGES

   During the fourth quarter 1997, the Company recorded non-recurring charges
   totaling $16,500,000 or $9,900,000 net of tax benefits.  The non-recurring
   charges include a provision of $13,000,000 to adjust asset carrying
   amounts and to cover exit costs from a rubber recycling venture and
   $3,500,000 for the 1998 closing of a domestic manufacturing facility,
   including attendant personnel reductions.  The net sales and results of
   operations of the rubber recycling venture included in the Company's
   consolidated statements of earnings were not significant during any of the
   years presented.

   C. ACQUISITIONS

   During the fourth quarter 1997, Tire Distribution Systems, Inc. (TDS), the
   Company's newly formed subsidiary, acquired all of the outstanding shares
   of common stock of five tire dealerships (Acquisitions).  These
   dealerships were Bandag franchises at the time of acquisition and are in
   the business of selling and servicing new and retread tires, primarily for
   commercial and industrial vehicles.  The five dealerships:  J.W. Brewer
   Tire Company, Inc. (Wheat Ridge, CO), Joe Esco Tire Co. (Oklahoma City,
   OK), Sound Tire, Inc. (Seattle, WA), Southern Tire Mart, Inc. (Columbia,
   MS), and Universal Tire, Inc. (Nashville, TN) were acquired for a total of
   $158.6 million in cash, short-term notes payable and 10,000 shares of
   Bandag Class A Common Stock.

   The Acquisitions were accounted for using the purchase method of
   accounting.  Accordingly, the purchase price for each acquisition was
   allocated to the respective assets and liabilities based on their
   estimated fair values as of the date of acquisition.  The purchase price
   allocations have been completed on a preliminary basis, subject to
   adjustment should new or additional facts about the businesses become
   known.  The accounts and transactions of the acquired businesses have been
   included in the consolidated financial statements from November 1, 1997,
   the effective date of the acquisitions.

   The following unaudited pro forma information presents a summary of
   consolidated results of operations of the Company and the acquired
   businesses as if the Acquisitions had occurred as of January 1, 1996.  The
   pro forma information is presented for informational purposes only and
   includes certain adjustments, such as additional depreciation expense as a
   result of the write-up to fair value of fixed assets, amortization of
   goodwill, and increased interest expense on acquisition debt.  They do not
   purport to be indicative of the results of operations that actually would
   have been achieved had the Acquisitions been consummated as of January 1,
   1996.

                                                      Year Ended December 31,
    in thousands, except per share data:                 1997        1996

    Net Sales                                         $1,113,300  $1,077,900
    Cost of Products sold                                684,500     671,300
    Net Earnings                                      $  123,700  $   78,600
    Earnings per share:
       Basic                                               $5.43       $3.33
       Diluted                                             $5.40       $3.31


   The following unaudited pro forma information presents the results of the
   acquired businesses as a stand alone entity as if the acquisitions had
   occurred as of January 1, 1996:

                                                   Year Ended December 31,
    in thousands                                      1997          1996

    Net Sales                                       $389,085     $365,969
    Cost of products sold                            287,788      274,048
    Goodwill amortization                              7,779        7,779
    Net Loss                                       $  (1,298)   $  (3,050)

   Certain supplemental non-cash information related to the Company's
   acquisitions of businesses in 1997 is as follows:

    in thousands
    Assets acquired                                  $248,724
    Less liabilities(1)                              (177,387)
    Less stock issued(2)                                 (487)
                                                      -------
    Cash paid                                          70,850
    Less cash acquired                                 23,191
                                                      -------
    Net cash paid for acquisitions                    $47,659
                                                      =======


    (1)  Includes notes payable to sellers of $87,224,000.
    (2)  Represents fair  market value  of Class  A common stock
         issued to sellers.

   D. INVESTMENTS

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

   Marketable equity securities are classified as available-for-sale.
   Available-for-sale securities are carried at fair value with the
   unrealized gains, net of tax, reported as a separate component of
   stockholders' equity.  Realized gains and losses and declines in value
   judged to be other-than-temporary on available-for-sale securities are
   included in investment income.  The cost of securities sold is based on
   the specific identification method.  During the fourth quarter 1997, the
   Company sold its investment in marketable equity securities.  As a result,
   a realized gain of $95,087,000 was included in the Consolidated Statements
   of Earnings for the year ended December 31, 1997.  Dividends on securities
   classified as available-for-sale are included in investment income.

   The following is a summary of securities held-to-maturity and available-
   for-sale:

   <TABLE>

   <CAPTION>


                                                                             Gross Unrealized     Estimated Fair
    in thousands                                              Cost                 Gains              Value
    <S>                                                      <C>              <C>                   <C>
    December 31, 1997
    Securities Held-to-Maturity

    Obligations of states and
      political subdivisions                                 $38,561          $        -            $38,561

    Investment in Eurodollar time
      deposits                                                 2,600                   -              2,600
                                                            --------          ----------          ---------
                                                             $41,161          $        -            $41,161
                                                            ========          ==========          =========

    December 31, 1996
    Securities Held-to-Maturity

    Obligations of states and
      political subdivisions                                 $10,694           $       5            $10,699
    Short-term corporate debt                                  3,350                   -              3,350
    Investment in Eurodollar time
      deposits                                                 3,000                   -              3,000
                                                             -------           ---------           --------
                                                             $17,044           $       5            $17,049
                                                             =======           =========           ========
    Securities Available-for-Sale
    Marketable equity securities                             $24,416             $54,619            $79,035
                                                             =======           =========           ========
    December 31, 1995
    Securities Held-to-Maturity

    Obligations of states and
      political subdivisions                                 $19,028           $       6            $19,034
    Short-term corporate debt                                  4,450                   -              4,450
    Investment in Eurodollar time
      deposits                                                 7,100                   -              7,100
                                                            --------           ---------           --------
                                                             $30,578           $       6            $30,584
                                                            ========           =========           ========
    Securities Available-for-Sale
    Marketable equity securities                             $24,416             $31,268            $55,684
                                                            ========           =========           ========

   </TABLE>

   At December 31, 1997, 1996 and 1995, securities held-to-maturity are due
   in one year or less and include $39,586,000, $14,955,000 and $20,805,000,
   respectively, reported as cash equivalents.

   E.  FINANCING ARRANGEMENTS

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

                                                         December 31,
    in thousands                                   1997       1996     1995

    Total short-term notes payable at year end    $90,628       $43    $261
    Weighted average interest rate at year end        6.4%      6.0%   10.7%
    Weighted average interest rate for the year       6.0%      5.8%    7.9%

   At December 31, 1997, short-term notes payable includes $87,224,000
   payable in January 1998 to the former shareholders of certain of the
   businesses acquired in 1997 (See Note C).

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

    in thousands                   Interest
                                     Rates     1997       1996      1995

    Senior Unsecured Notes
         Payable, maturing
         2002                        6.41%   $ 60,000     $  -      $  -
    Senior Unsecured Notes
         Payable, maturing
         2007                        6.50%     40,000        -         -
                                             -----------------------------
    Total long-term debt                     $100,000        -         -
    Other obligations                          23,195   10,125    11,857
                                             -----------------------------
    Total long-term debt and
    other obligations                        $123,195  $10,125   $11,857
                                             =============================


   The aggregate amount of scheduled annual maturities of long-term debt and
   other obligations for each of the next five years is:  $9,098,000 in 1998;
   $6,476,000 in 1999; $3,662,000 in 2000; $7,206,000 in 2001; $67,385,000 in
   2002; and $38,466,000 thereafter.

   Cash payments for interest on debt were $3,143,000, $1,764,000 and
   $2,231,000 in 1997, 1996, and 1995, 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, 1997, the fair value of the Company's outstanding long-
   term obligations approximate its carrying amount.

   Total available funds under unused lines of credit at December 31, 1997
   amounted to $111,000,000.

   F. INCOME TAXES

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

   <TABLE>

   <CAPTION>

                                                                                      December 31
    in thousands                                                    1997                 1996                1995
    <S>                                                          <C>                  <C>                <C>
    Obligation to provide postretirement benefits                $  2,403             $  2,243           $  2,039
    Marketing programs                                             14,303               14,012             11,148
    Accounts receivable valuation allowances                        2,848                2,696              2,834
    Unremitted earnings of foreign subsidiaries                    (5,625)              (3,488)            (1,999)

    Excess pension funding                                         (4,882)              (3,953)            (3,252)
    Purchased tax benefits                                           (445)              (1,025)            (1,531)
    Unrealized holding gain on marketable
       equity securities                                                -              (20,765)           (11,700)
    Cost to exit rubber recycling venture                           4,980                   -                  -
    Other, net                                                     18,066               11,282              4,623
                                                                  -------             --------           --------
    Net deferred tax assets                                     $  31,648            $   1,002           $  2,162
                                                                  =======             ========           ========

   <CAPTION>

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

                                                                                Year Ended December 31
    in thousands                                                   1997                 1996                1995
    <S>                                                          <C>                  <C>                <C>
    Domestic                                                     $177,066             $102,099           $116,373
    Foreign                                                        25,850               28,681             38,743
                                                                 --------             --------           --------
                                                                 $202,916             $130,780           $155,116
                                                                 ========             ========           ========


   <CAPTION>

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

                                                                               Year Ended December 31
    in thousands                                                    1997                 1996                1995
    <S>                                                          <C>                   <C>                <C>
    Current:
      Federal                                                    $ 68,167              $39,570            $39,513
      State                                                        14,667                4,900              4,900
      Foreign                                                      17,343               11,353             14,010
    Deferred:
      Federal                                                      (9,432)              (4,354)            (1,555)
      State                                                             -                 (486)              (107)
      Foreign                                                      (9,243)              (1,301)             1,768
    Equivalent credit relating to purchased
       income tax benefits                                           (580)                (506)              (440)
                                                                 --------              -------           --------
                                                                  $82,919              $49,176            $58,089
                                                                 ========              =======           ========

   </TABLE>

   No item, other than state income taxes in 1997, 1996, and 1995 affects the
   Company's effective income tax rate by an amount which exceeds 5% of the
   income tax expense computed at the statutory rate.

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

   Income taxes paid amounted to $85,804,000, $52,992,000 and $58,238,000 in
   1997, 1996, and 1995, respectively.

   G.  EARNINGS PER SHARE

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

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


    in thousands, except per share amounts        1997      1996      1995

    Numerator:
      Net Earnings                              $121,994  $ 81,604  $ 97,027

    Denominator:
      Denominator for basic earnings
        per share-weighted-average
        shares                                    22,786    23,613    25,273

    Effect of dilutive securities:
      Non-vested restricted stock                     36        28        30
      Stock options                                   86       105       117
                                                --------   -------   -------
    Dilutive potential common
      shares:                                        122       133       147

      Denominator for diluted
        earnings per share -
        weighted-average
        shares and dilutive
        potential common shares                   22,908    23,746    25,420
                                               =========   =======   =======

    Net Earnings Per Share:
      Basic                                        $5.35     $3.46     $3.84
                                               =========   =======   =======
      Diluted                                      $5.33     $3.44     $3.82
                                               =========   =======   =======

   H. STOCKHOLDERS' EQUITY

   Class A Common Stock and Class B Common Stock have the same rights
   regarding dividends and distributions upon liquidation as Common Stock.
   However, Class A Common Stockholders are not entitled to vote, Class B
   Common Stockholders are entitled to ten votes for each share held and
   Common Stockholders are entitled to one vote for each share held. Transfer
   of shares of Class B Common Stock is substantially restricted and must be
   converted to Common Stock prior to sale. In certain instances, outstanding
   shares of Class B Common Stock will be automatically converted to shares
   of Common Stock. Unless extended for an additional period of five years by
   the Board of Directors, all then-outstanding shares of Class B Common
   Stock will be converted to shares of Common Stock on January 16, 2002.

   Under the terms of the Bandag, Incorporated Restricted Stock Grant Plan,
   the Company is authorized to grant up to an aggregate of 100,000 shares of
   Common Stock and 100,000 shares of Class A Common Stock to certain key
   employees. The shares granted under the Plan will entitle the grantee to
   all dividends and voting rights; however, such shares will not vest until
   seven years after the date of grant. If a grantee's employment is
   terminated prior to the end of the seven-year period for any reason other
   than death, disability or termination of employment after age 60, the
   shares will be forfeited and made available for future grants. A grantee
   who has attained age 60 and whose employment is then terminated prior to
   the end of the seven-year vesting period does not forfeit the non-vested
   shares.  During the years ended December 31, 1997, 1996, and 1995, 6,840
   shares, 7,610 shares and 4,430 shares of Common Stock, respectively, were
   granted under the Plan. During the years ended December 31, 1997, 1996 and
   1995, 6,840 shares, 7,610 shares and 4,430 shares of Class A Common Stock,
   respectively, were also granted under the Plan. The resulting charge to
   earnings amounted to $1,177,000, $1,245,000, and $770,000, in 1997, 1996,
   and 1995, respectively. During the year ended December 31, 1997, 2,145
   shares of Common Stock and 1,765 shares of Class A Common Stock were
   forfeited.  During the year ended December 31, 1996, 110 shares of Common
   Stock and 110 shares of Class A Common Stock were forfeited.  The credit
   to 1997 and 1996 earnings related to the forfeited shares was
   approximately $197,000 and $12,000, respectively.  At December 31, 1997,
   37,460 shares of Common Stock and 46,850 shares of Class A Common Stock
   are available for grant under the Plan.

   Under the terms of the Bandag, Incorporated Nonqualified Stock Option
   Plan, the Company was authorized through November 13, 1997 to grant
   options to purchase up to 500,000 shares of Common Stock and 500,000
   shares of Class A Common Stock to certain key employees at an option price
   equal to the market value of the shares on the date of grant.  No options
   were granted under the Plan in 1997, 1996 or 1995.  During 1997, options
   to purchase 20,000 shares of Common Stock and 20,000 shares of Class A
   Common Stock were exercised.  At December 31, 1997, options to purchase
   80,000 shares of Common Stock and 80,000 shares of Class A Common Stock
   are outstanding and exercisable at $23.458 per share for Common Stock
   options and $22.792 per share for Class A Common Stock options.  Options
   to purchase 20,000 shares of Common Stock and 20,000 shares of Class A
   Common Stock expire on November 13, 1998, and each of the three
   anniversaries thereafter.

   The Company has a stock award program covering substantially all U.S. and
   Canadian employees, except for employees of its subsidiary, TDS, which was
   established to promote employee commitment and ownership in the Company.
   In 1997, 1996 and 1995, $283,000, $250,000 and $284,000, respectively,
   were charged to earnings for the estimated cost of awards to be made under
   the stock award program.

   I. EMPLOYEE PENSION PLANS

   The Company sponsors defined-benefit pension plans covering full-time
   employees directly employed by Bandag, Incorporated, Bandag Licensing
   Corporation, Bandag Canada, Ltd., and certain employees in the Company's
   European operations.  For the year ended December 31, 1997, certain
   employees of TDS are also covered by defined-benefit plans.  Benefits are
   based on years of service and, for salaried employees, the employee's
   average annual compensation for the last five years of employment. The
   Company's funding policy is to contribute annually the maximum amount that
   can be deducted for income tax purposes. Contributions are intended to
   provide for benefits attributed to service to date and those expected to
   be earned in the future.

   Aggregate accumulated benefit obligations, projected benefit obligations,
   as estimated by consulting actuaries, plan net assets and funded status
   are as follows:

                                                      December 31
    in thousands                                1997        1996       1995

    Actuarial present value of
    accumulated benefit obligations:
      Vested                                $ 45,823    $  40,944   $ 33,787
      Non-vested                               2,401        3,145      5,810
                                            --------    ---------   --------
                                            $ 48,224    $  44,089   $ 39,597
                                            ========    =========   ========
    Plan net assets at fair value           $116,304    $  90,775   $ 79,291
    Projected benefit obligations             62,305       58,357     54,496
                                            --------    ---------   --------
    Plan net assets in excess of
      projected benefit obligations           53,999       32,418     24,795
    Unrecognized prior service cost            1,054        1,187      1,278
    Unamortized actuarial net gain           (38,737)    (19,557)   (12,988)
    Unamortized net transition gain           (4,968)     (5,591)    (6,332)
                                            --------   ---------    -------
    Prepaid pension cost included
      in the consolidated balance sheet     $ 11,348   $   8,457   $  6,753
                                            ========   =========   ========

    Assumptions used  in the determination of the actuarial present value of
    the projected benefit obligations and net pension cost are as follows:

                                                          December 31
                                                 1997        1996      1995

    Weighted average discount rate              7.00%       7.00%      7.00%
    Rate of increase in future
      compensation                              4.50%       4.50%      4.75%
    Expected long-term rate of
      return on assets                          8.00%       8.00%      8.00%

    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.

    Pension expense (credit) is composed of the following:


                                               Year Ended December 31
    in thousands                            1997        1996       1995

    Service cost for benefits earned
      during the year                   $  2,420     $  2,193  $   1,929
    Interest cost on projected
      benefit obligations                  3,382        3,153      2,899
    Investment return on plan assets     (25,807)     (12,025)   (14,510)
    Net amortization and deferral          17,610       5,045      8,964
                                         --------     -------    -------
    Net periodic pension expense
      (credit)                            $(2,395)    $(1,634) $    (718)
                                         ========     =======    =======

   The Company also sponsors defined-contribution plans, covering
   substantially all employees in the United States. Annual contributions are
   made in such amounts as determined by the Company's Board of Directors.
   Although employees may contribute up to 15% of their annual compensation
   from the Company, they are generally not required to make contributions in
   order to participate in the plans.  The Company currently provides plans
   with a variety of contribution levels (including employee contribution
   match provisions).  The Company recorded expense for contributions in the
   amount of $3,439,000, $2,796,000, and $3,578,000 in 1997, 1996, and 1995,
   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 1997,
   1996, and 1995.

   J. OTHER POSTRETIREMENT EMPLOYEE BENEFITS

   The Company provides medical benefits under its self-insured health
   benefit plan 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 after direct employment with Bandag,
   Incorporated, Bandag Licensing Corporation, or Kendon Corporation are
   eligible for temporary medical benefits that cease at age 65. The program
   is contributory, with retiree contributions adjusted periodically. The
   program also contains co-insurance provisions, which result in shared
   costs between the Company and the retiree.  The Company's postretirement
   medical obligations are unfunded.

   The following table sets forth amounts recognized in the Company's
   consolidated financial statements:

                                                         December 31
    in thousands                                   1997     1996    1995

    Accumulated postretirement
      benefit obligation:
      Retirees                                    $2,173   $2,146  $2,109
      Fully eligible active plan participants         80      104     111
      Other active plan participants               3,646    3,177   2,754
                                                 -------   ------  ------
    Accumulated postretirement
      benefit obligation                           5,899    5,427   4,974
    Unrecognized net gain and prior
      service cost                                   375      429     351
                                                 -------   ------  ------
    Accrued postretirement benefit cost           $6,274   $5,856  $5,325
                                                 =======   ======  ======

    Net periodic postretirement benefit cost
      includes the following components:
    Service cost                                    $247     $231    $200
    Interest cost on accumulated
      postretirement benefit obligation              375      344     321
    Net amortization and deferral                      3        3      33
                                                 -------   ------  ------
    Net periodic postretirement
      benefit cost                                 $ 625     $578    $554
                                                 =======   ======  ======

   The weighted-average annual assumed rate of increase in the per capita
   cost of covered benefits is 9% for 1998 and is assumed to decrease
   gradually to 6% for 2001 and remain at that level thereafter. Increasing
   the assumed health care cost trend rates by one percentage point in each
   year would increase the accumulated postretirement benefit obligation as
   of December 31, 1997, by $837,000 and the aggregate of the service and
   interest cost components of net periodic postretirement benefit cost for
   1997 by $103,000.  The weighted-average discount rate used in determining
   the accumulated postretirement benefit obligation was 7.0% for 1997, 1996
   and 1995.

   Substantially all United States employees with the Company on and after
   January 1, 1993, excluding the employees of TDS, are covered by the Bandag
   Security Program, which provides fully vested benefits after 5 years of
   service. Benefits under this program are available upon retirement or
   separation for any other reason and may be used in connection with medical
   expense, insurance premiums, or for any other purpose. The periodic cost
   and benefit obligation information for the Bandag Security Program is
   reflected in Note I.

   K.  DERIVATIVE FINANCIAL INSTRUMENTS

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

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

   The Company periodically uses forward foreign exchange contracts to reduce
   its exposure to foreign currency risk from receivables denominated in
   foreign currencies and certain firm purchase commitments.

   For contracts that are designated and effective as hedges, discounts or
   premiums are accreted or amortized to other operating expenses over the
   contract lives using the straight-line method while the realized and
   unrealized gains and losses resulting from changes in the spot exchange
   rate, net of related taxes, are included in the cumulative transaction
   adjustment account in shareholders' equity.  The related amounts due to or
   from counterparties are included in other assets or other liabilities.
   Contract amounts, after considering tax effects, in excess of the carrying
   value of the Company's obligations are marked to market, with changes in
   market value recorded in earnings as foreign exchange gains or losses.

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

   At December 31, 1997, 1996 and 1995, the Company had approximately
   $12,301,000, $23,862,000 and $18,156,000, respectively, in foreign
   currency forward exchange contracts and foreign currency option contracts
   designated and effective as hedges which become due in various amounts and
   at various dates throughout the following year.  The difference between
   the contract amounts and their fair value, in the aggregate, was
   insignificant at December 31, 1997, 1996 and 1995.

   L. BUSINESS INFORMATION BY GEOGRAPHIC AREA

   The information regarding operations in different segments and geographic
   areas is presented on page 10 of this report, and is incorporated herein
   by reference.

   M. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS

   Unaudited quarterly results of operations for the years ended December 31,
   1997 and 1996 are summarized as follows:

   <TABLE>
   <CAPTION>

                                                                   Quarter Ended
    in thousands, except per share data           Mar. 31      Jun. 30       Sep. 30       Dec. 31

    1997:
    <S>                                         <C>           <C>           <C>          <C>
    Net sales                                   $169,518      $195,748      $201,242     $256,015
    Gross profit                                  68,969        80,446        85,230      105,491
    Net earnings                                  13,740        17,560        23,794      $66,900
    Net earnings per share:
       Basic                                       $0.60         $0.77         $1.04        $2.94
       Diluted                                     $0.60         $0.77         $1.04        $2.92
    1996:

    Net sales                                   $170,303      $188,875      $194,086     $203,661
    Gross profit                                  66,295        77,403        85,762       85,316
    Net earnings                                  15,866        20,094        23,945       21,699
    Net earnings per share:
       Basic                                       $0.65         $0.83         $1.03        $0.95
       Diluted                                     $0.65         $0.83         $1.02        $0.94


   </TABLE>

   Earnings per share amounts for 1996 and the first three quarters of 1997
   have been restated to comply with SFAS No. 128, as described in Note A.
   Fourth quarter 1997 net earnings reflect a non-recurring after tax gain of
   $55,800,000 ($2.44 per diluted share) as a result of the sale of
   marketable equity securities which is further described in Note D.  As
   further described in Note B, net earnings for the fourth quarter 1997 also
   reflect non-recurring charges totaling $9,900,000 ($.43 per diluted
   share), relating to costs to exit a rubber recycling venture and closing a
   domestic manufacturing facility.

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

        None.
                                    PART III

   ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information called for by Item 10 (with respect to the directors
   of the registrant) 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, 1997.  In accordance with General Instruction
   G (3) to Form 10-K, the information with respect to executive officers of
   the Company required by Item 10 has been included in Part I hereof.

   ITEM 11.  EXECUTIVE COMPENSATION

        The information called for by Item 11 is incorporated herein by
   reference from the registrant's definitive Proxy Statement involving the
   election of directors filed or to be filed pursuant to Regulation 14A not
   later than 120 days after December 31, 1997.

   ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information called for by Item 12 is incorporated herein by
   reference from the registrant's definitive Proxy Statement involving the
   election of directors filed or to be filed pursuant to Regulation 14A not
   later than 120 days after December 31, 1997.

   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information called for by Item 13 is incorporated herein by
   reference from the registrant's definitive Proxy Statement involving the
   election of directors filed or to be filed pursuant to Regulation 14A not
   later than 120 days after December 31, 1997.


                                     PART IV

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

   (a)(1)    Financial Statements

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

                                                                         Page

        Consolidated Balance Sheets as of December 31, 1997, 1996 and
        1995                                                              25
        Consolidated Statements of Earnings for the Years Ended December
             31, 1997, 1996 and 1995                                      26
        Consolidated Statements of Cash Flows for the Years Ended
             December 31, 1997, 1996 and 1995                             26
        Consolidated Statements of Changes in Stockholders' Equity for
             the Years Ended December 31, 1997, 1996 and 1995             27
        Notes to Consolidated Financial Statements                        28

   (2)  Financial Statement Schedule

        Schedule II - Valuation and qualifying accounts and reserves.

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

   (3)  Exhibits

        Exhibit No.              Description

          3.1          Bylaws:  As amended February 5, 1997 (Incorporated by
                       reference to Exhibit No. 3.1 to the Company's Form 10-
                       K for the year ended December 31, 1996.)
          3.2          Restated Articles of Incorporation, effective December
                       30, 1986.  (Incorporated by reference to Exhibit No.
                       3.2 to the Company's Form 10-K for the year ended
                       December 31, 1992.)
          3.3          Articles of Amendment to Bandag, Incorporated's
                       Articles of Incorporation, effective May 6, 1992.
                       (Incorporated by reference to Exhibit No. 3.3 to the
                       Company's Form 10-K for the year ended December 31,
                       1992.)
          4.1          Instruments defining the rights of security holders.
                       (Incorporated by reference to Exhibit Nos. 3.2 and 3.3
                       to the Company's Form 10-K for the year ended December
                       31, 1992.)
          4.2          Note Purchase Agreement dated December 15, 1997 for
                       $60,000,000 of 6.41% Senior Notes due December 15,
                       2002.
          4.3          Note Purchase Agreement dated December 15, 1997 for
                       $40,000,000 of 6.50% Senior Notes due December 15,
                       2007.
        10.1*          Bandag, Incorporated Restricted Stock Grant Plan, as
                       amended November 12, 1996 (Incorporated by reference
                       to Exhibit No. 10.1 to the Company's Form 10-K for the
                       year ended December 31, 1996.)
        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 is 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.)
        10.3*          Miscellaneous Fringe Benefits for Executives.
                       (Incorporated by reference to Exhibit No. 10.3 to the
                       Company's Form 10-K for the year ended December 31,
                       1996.)
        10.4*          Nonqualified Stock Option Plan, as amended
                       November 12, 1996 (Incorporated by reference to
                       Exhibit No. 10.4 to the Company's Form 10-K for the
                       year ended December 31, 1996.)
        10.5*          Nonqualified Stock Option Agreement of Martin G.
                       Carver dated November 13, 1987, as amended by an
                       Addendum dated June 12, 1992. (Incorporated by
                       reference to Exhibit No. 10.7 to the Company's Form
                       10-K for the year ended December 31, 1992.)
        10.6*          Form of Participation Agreement under the Bandag,
                       Incorporated Restricted Stock Grant Plan.
                       (Incorporated by reference as Exhibit 10.7 to the
                       Company's Form 10-K for the year ended December 31,
                       1994.)
        10.7*          Agreement with William A. Sweatman regarding
                       termination of employment dated May 21, 1997.
        10.8*          Agreement with William D. Herd regarding termination
                       of employment, dated September 12, 1995 (Incorporated
                       by reference to Exhibit 10.8 to the Company's Form 10-
                       K for the year ended December 31, 1995.)
        21             Subsidiaries of Registrant.
        27             Financial Data Schedule (with EDGAR filing only)
        27.1           Revised 1996 Financial Data Schedule (with EDGAR
                       filing only)
        27.2           Revised 1995 Financial Data Schedule (with EDGAR
                       filing only)

   *Represents a management compensatory plan or arrangement.

   (b)  Reports on Form 8-K dated were filed by the Company under date of
        November 26, 1997 and November 12, 1997.

   <PAGE>

   <TABLE>

         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                      BANDAG, INCORPORATED AND SUBSIDIARIES

   <CAPTION>


                                                                         COL. C
                 COL. A                     COL. B                    ADDITIONS                 COL. D             COL. E
                                                                  1               2
                                          Balance at        Charged to     Charged to Other                     Balance at End
                                         Beginning of          Costs and       Accounts -     Deductions -           of
               DESCRIPTION                  Period            Expenses         Describe        Describe            Period
    <S>                                 <C>                <C>                <C>             <C>                <C>
    Year ended December 31, 1997:
     Allowance for doubtful accounts    $13,320,000        $3,491,000                         $4,104,000    (1)  $12,707,000
    Year ended December 31, 1996:

      Allowance for doubtful accounts   $12,327,000        $3,289,000                         $2,296,000    (1)  $13,320,000
    Year ended December 31, 1995:

       Allowance for doubtful accounts  $11,883,000        $1,964,000                         $1,520,000    (1)  $12,327,000

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

   </TABLE>

   <PAGE>

                                   SIGNATURES

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

                                     BANDAG, INCORPORATED


                                      By /s/  Martin G. Carver
                                         Martin G. Carver
                                         Chairman of the Board,
                                         Chief Executive Officer,
                                         President and Director
                                         (Principal Executive Officer)

   Date:   March 27, 1998


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

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

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

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

                                      /s/ R. Stephen Newman
   /s/ Edgar D. Jannotta                  R. Stephen Newman
       Edgar D. Jannotta                  Director
       Director
                                      /s/ Warren W. Heidbreder
   /s/ Martin G. Carver                   Warren W. Heidbreder
       Martin G. Carver                   Vice President,
       Chairman of the Board,             Chief Financial Officer
       Chief Executive Officer,           (Chief Accounting Officer)
       President and Director
       (Principal Executive Officer)  /s/ Charles W. Vesey
                                          Charles W. Vesey
                                          Corporate Controller
                                          (Principal Accounting Officer)

   Date:  March 27, 1998

   <PAGE>

                                  EXHIBIT INDEX

     Exhibit No.  Description

         3.1      Bylaws:  As amended February 5, 1997 (Incorporated by
                  reference to Exhibit No. 3.1 to the Company's Form 10-K
                  for the year ended December 31, 1996.)

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

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

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

         4.2      Note Purchase Agreement dated December 15, 1997 for
                  $60,000,000 of 6.41% Senior Notes due December 15, 2002.

         4.3      Note Purchase Agreement dated December 15, 1997 for
                  $40,000,000 of 6.50% Senior Notes due December 15, 2007.

        10.1      *Bandag, Incorporated Restricted Stock Grant Plan, as
                  amended November 12, 1996.  (Incorporated by reference to
                  Exhibit No. 10.1 to the Company's Form 10-K for the year
                  ended December 31, 1996.)

        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 is 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.)

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

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

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

        10.6      *Form of Participation Agreement under the Bandag,
                  Incorporated Restricted Stock Grant Plan.  (Incorporated
                  by reference to Exhibit No. 10.7 to the Company's Form 10-
                  K for the year ended December 31, 1994.)

        10.7      *Agreement with William A. Sweatman regarding termination
                  of employment dated May 21, 1997.

        10.8      *Agreement with William D. Herd regarding termination of
                  employment dated September 12, 1995 (incorporated by
                  reference to Exhibit 10.8 to the Company's Form 10-K for
                  the year ended December 31, 1995.)

         21       Subsidiaries of Registrant.

         27       Financial Data Schedule (with EDGAR filing only)

         27.1     Revised 1996 Financial Data Schedule (with EDGAR filing
                  only)

         27.2     Revised 1995 Financial Data Schedule (with EDGAR filing
                  only)


   * Represents a management compensatory plan or arrangement.