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

# FORM 10-K

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

# For the fiscal year
ended December 31, 2003

# Commission file number  
1-7007

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

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

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

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

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

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

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|           |            
|---------- | -----------
|Yes    [X] | No    [   ]

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

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

|           |            
|---------- | -----------
|Yes    [X] | No    [   ]

Aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant as of June 30,
2003Common Stock, $239,454,831, Class A
Common Stock (non-voting), $170,149,325, Class B Common Stock, $632,062

Number of shares issued and
outstanding of each of the registrants classes of common stock as of January 31, 2004:  Common Stock, 9,099,745
shares; Class A Common Stock, 9,262,660 shares; Class B Common Stock, 918,688 shares

# DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Company's Proxy Statement for the Annual Meeting of the Shareholders to be held May 11, 2004 are
incorporated by reference in Part III.

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# Bandag, IncorporatedAnnual Report on Form
10-KYear Ended December
31, 2003

# Table of Contents

Page

|                                                                                                                                            |   
|------------------------------------------------------------------------------------------------------------------------------------------- | --
|PART I                                                                                                                                      | 2 
|Item 1.     Business                                                                                                                        | 2 
|Item 2.     Properties                                                                                                                      | 9 
|Item 3.     Legal Proceedings                                                                                                               | 10
|Item 4.     Submission of Matters to a Vote of Security Holders                                                                             | 10
|                                                                                                                                            |   
|PART II                                                                                                                                     | 11
|Item 5.     Market for the Registrant's Common Equity and Related Shareholder Matters                                                       | 11
|Item 6.     Selected Financial Data                                                                                                         | 12
|Item 7.     Management's Discussion and Analysis of Results of Operations and Financial Condition                                           | 13
|Item 7A.  Quantitative and Qualitative Disclosures about Market Risk                                                                        | 25
|Item 8.     Financial Statements and Supplementary Data                                                                                     | 25
|Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                            | 57
|Item 9A.  Controls and Procedures                                                                                                           | 57
|                                                                                                                                            |   
|PART III                                                                                                                                    | 57
|Item 10.   Directors and Executive Officers of the Registrant                                                                               | 57
|Item 11.   Executive Compensation                                                                                                           | 57
|Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related
                                  Stockholder Matters | 57
|Item 13.   Certain Relationships and Related Transactions                                                                                   | 58
|Item 14.   Principal Accountant Fees and Services                                                                                           | 58
|                                                                                                                                            |   
|PART IV                                                                                                                                    
|Item 15.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                                                 | 58

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# PART I

# Item 1.  BUSINESS

# Introduction

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

The Company has two reportable
business segments: the manufacture and sale of precured tread rubber, equipment and
supplies for retreading tires (the Traditional Business) and the sale and
maintenance of new and retread tires to principally commercial and industrial customers
through its wholly-owned subsidiary, Tire Distribution Systems, Inc. (TDS).
Refer to Note 14 of the consolidated financial statements for further details.

As a result of a recapitalization of
the Company approved by the Companys shareholders on December 30, 1986, and
substantially completed in February 1987, the Carver Family (as hereinafter defined)
obtained absolute voting control of the Company. As of January 31, 2004, the Carver Family
beneficially owned shares of Common Stock and Class B Common Stock constituting 64% of the
votes entitled to be cast in the election of directors and other corporate matters. The
Carver Family is composed of (i) Lucille A. Carver, a former director and widow of Roy J.
Carver, (ii) the lineal descendants of Roy J. Carver and their spouses, and (iii) certain
trusts and other entitles for the benefit of the Carver Family members. Shares of Class B
Common Stock have ten (10) votes per share. The Carver Family owns over 98% of the Class B
Common Stock. Shares of Class B Common Stock automatically convert to shares of Common
Stock on January 16, 2007.

On February 13, 2004, the Company
announced the acquisition of an 87.5% majority interest in Speedco, Inc. from its founders
and Equilon Enterprises, LLC, a Royal Dutch Shell Group company. Speedco provides
quick-service truck lubrication nationwide through 26 company-owned and six licensed
on-highway locations. In total, Bandag paid approximately $56,000,000 for its 87.5%
interest and to assume and retire $20,100,000 of debt. Speedco generated unaudited
revenues of approximately $46,000,000 and unaudited pre-tax income of approximately
$4,800,000 in 2003.

# Traditional Business

|(a) | General
|--- | -------

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

The Company and its licensees have
1,020 franchisees worldwide, with 33% located in the United States and 67%
internationally. The majority of Bandags franchisees are independent operators of
full service tire distributorships. The remaining franchises are owned by TDS. The
Traditional Business revenues primarily come from the sale of retread material and
equipment to its franchisees. The Traditional Business products compete in the
replacement tire market with new tire sales, as well as retreads produced using the
cold-bonding method and other retread processes. The Company concentrates its marketing
efforts on existing franchisees and on expanding their respective market penetrations. Due
to its strong distribution system, marketing efforts and leading technology, Bandag,
through its independent franchise network and TDS, has been able to maintain the largest
market presence in the retreading industry.

2

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The Traditional Business in the
United States competes primarily in the medium and wide base commercial truck tire
replacement market. Medium and wide base truck tires are designed for medium trucks
Classes 4 through 6, heavy trucks Classes 7 and 8, as well as trailers and commercial
chassis. Both new tire manufacturers and tread rubber suppliers compete in this market.
While the Company has franchisees in 107 countries, and competes in all of these
geographic markets, its largest market is the United States. Truck tires retreaded by the
Companys franchisees make up approximately 23% of the United States medium and wide
base commercial tire replacement market. The Companys competitors in the replacement
tire market include large new tire manufacturers such as The Goodyear Tire & Rubber
Company (Goodyear), Bridgestone Corporation (Bridgestone) and Groupe Michelin (Michelin).
Goodyear, Michelin and Cooper Tire and Rubber Company also compete in the United States
market as well as in other markets as a tread rubber supplier to a combination of
company-owned and independent retreaders.

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

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

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

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

Trucks and Buses. Tread
rubber, equipment, and supplies for retreading and repairing truck and bus tires are sold
by the Company primarily to independent franchisees and TDS which use the Bandag Method
for that purpose.

National Account Business. The
Company has entered into contracts with companies pursuant to which Bandag agrees to sell
retread tires directly to transportation fleets of such companies and provide maintenance
and service for the retread tires (the National Accounts). Bandag subcontracts
the sales, maintenance, and service components of the National Accounts to its independent
franchisees and to TDS.

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

Franchisees.              Bandag
has 1,020 franchisees throughout North America, Central America, South           America,
Europe, Africa, Asia, Australia and New Zealand. These franchises are           owned and
operated by franchisees, some with multiple franchises and/or           locations. Of
these franchisees, 338 are located in the United States.           Thirty-one (31) of
Bandags foreign franchisees are franchised by a           licensee of the Company
in Australia. The Company also has joint ventures in           India and Sri Lanka. A
limited number of franchisees are trucking companies,           which operate retread
shops primarily for their own needs. A few franchisees           also offer hot-cap retreading
and most sell one or more lines of new           tires.

The current franchise agreement
offered by the Company grants the franchisee the non-exclusive retread manufacturing
rights to use the Bandag Method for one or more applications and the Bandag trademarks in
connection therewith within a specified territory, but the franchisee is free to market
Bandag retreads outside the territory.

3

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

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

Bandag retreads 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 performance of Bandag retreads and expanded service programs to franchisees
and end-users validate this price differential.

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

The Companys franchise
agreements with its independent franchisees typically terminate after five years unless
extended by mutual consent for an additional five years. In most cases the agreements are
extended. In addition, independent franchisees have the option of terminating the
agreements after three years. In some cases, the Company does not extend a franchise or
the franchisee declines to extend and, instead, signs with another retread manufacturer
including, among others, Goodyear and Michelin. Since Michelin entered the United States
retread market in 1997, the Company has experienced increasing competition in the United
States retread market. Although Michelin is substantially larger than the Company and has
greater resources, the Company believes that it can effectively compete with Michelin and
maintain the stability of its United States franchise organization.

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

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

The Company manufactures the precured
tread rubber, cushion gum, and related supplies in Company-owned and in leased
manufacturing plants in the United States, Canada, Brazil, Belgium, South Africa and
Mexico. The Company has entered into a joint venture agreement in 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 Method. Curing
rims, chucks, spreaders, rollers, certain miscellaneous equipment, and various retreading
supplies, sold by the Company, are purchased from others.

The Company purchases rubber and
other materials for the production of tread rubber and other rubber products from a number
of suppliers. The rubber for tread is primarily synthetic and obtained principally from
sources which most conveniently serve the respective areas in which the Companys
plants are located. Although synthetic rubber and other petrochemical products have
periodically been in short supply and significant cost fluctuations have been experienced
in previous years, including significant price increases in the fourth quarter of 2002,
the Company has not experienced any significant difficulty in obtaining an adequate supply
of such materials. Synthetic prices historically have been related to the cost of
petrochemical feedstocks. However, the effect on operations of future shortages will
depend upon their duration and severity and cannot presently be forecast.

The principal source of natural
rubber, used for the Companys cushion gum, is Asia. The supply of natural rubber has
historically been adequate for the Companys purposes. Natural rubber is a commodity
subject to wide price fluctuations as a result of the forces of supply and demand.

4

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|(e) | Patents
|--- | -------

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

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

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

# TDS

|(a) | General
|--- | -------

In November 1997, five dealerships
were acquired by TDS. Since the original acquisitions, TDS has acquired 13 additional
smaller dealerships. In 2002, TDS sold or closed nine retread plants and 18 commercial and
retail outlets. During 2003, TDS sold or closed 12 retread plants and 32 commercial and
retail outlets. TDS, which provides new and retread tire products and tire management
services to national, regional and local fleet transportation companies, operates 19
Bandag franchise and manufacturing locations and 48 commercial and retail outlets in 10
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), alignment and 24-hour road service. The tire management services are
provided over a broad geographic area west of the Mississippi in the United States. This
geographic coverage allows TDS to provide consistent, cost-effective programs,
information, products, and services to local, regional and national fleets.

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

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

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

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

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

5

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

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

# Regulations

Various federal and state authorities
have adopted safety and other regulations with respect to motor vehicles and components,
including tires. The Federal Trade Commission and various states enforce statutes or
regulations imposing obligations on franchisors, primarily a duty to disclose material
facts concerning a franchise to prospective franchisees. Several of the state statutes or
regulations also govern certain aspects of the franchise relationship, such as the
franchisors right to terminate the franchise agreement. 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 $7,238,000 in 2003, $8,109,000 in 2002, and $10,255,000 in 2001.

The Companys business has
seasonal characteristics, which are tied not only to the overall performance of the
economy but, more specifically, to the level of activity in the trucking industry. Tire
demand does, however, lag the seasonality of the trucking industry.

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

As of December 31, 2003, the Company
had an estimated 3,002 employees.

# Operating Segment and
Geographic Area Information

Information concerning operating
segment and geographic area information is incorporated by reference to Operating
Segment and Geographic Area Information in Note 14 of the consolidated financial
statements contained in Item 8 of this Annual Report on Form 10-K.

6

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# Executive Officers of
the Registrant

The following table sets forth the
names and ages of all executive officers of the Company as of January 31, 2004, the period
of service of each with the Company, positions and offices with the Company presently held
by each, and the period during which each officer has served in his/her present office:

|Name                                                      | Age | Period of
Service with Company | Present Position
or Office                                         | Period in
Present
Office
|--------------------------------------------------------- | --- | ------------------------------ | ------------------------------------------------------------------ | ------------------------
|Martin G. Carver*                                         | 55  | 25 Years                       | Chairman of the Board, Chief Executive 
     Officer and President | 23 Years                
|Timothy T. Chen                                           | 43  | 12 Years                       | Vice President, Innovation                                         | 2 Years                 
|Nathaniel L. Derby II                                     | 61  | 32 Years                       | Vice President, Manufacturing Design                               | 7 Years                 
|Warren W. Heidbreder                                      | 57  | 22 Years                       | Vice President, Chief Financial Officer and
 Secretary             | 7 Years                 
|Frederico U. Kopittke                                     | 60  | 9 Years                        | Vice President, International                                      | 3 Years                 
|John C. McErlane                                          | 50  | 19 Years                       | Vice President                                                     | 2 Years                 
|Jeffrey C. Pattison                                       | 48  | 18 Years                       | Vice President, Treasurer                                          | 2 Years                 
|Janet R. Sichterman                                       | 43  | 22 Years                       | Vice President, North American Fleet Sales                         | 2 Years                 
|Andrew M. Sisler                                          | 49  | 16 Years                       | Vice President, North American Franchise Sales                     | 2 Years                 
|Michael A. Tirona                                         | 54  | 18 Years                       | Vice President and General Manager - Europe                        | 2 Years                 
|Charles W. Vesey                                          | 61  | 32 Years                       | Vice President and Corporate Controller                            | 5 Years                 
|* Denotes that officer is also a
director of the Company.

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

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

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

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

7

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Mr.              Kopittke
joined Bandag in July 1994 as Company Manager of Bandag do Brasil Ltda.           He
served in that position until March 1998 when he was elected to the office of
          Vice President, Latin America. He served in that position until July 1998 when
          he was elected to the office of Vice President Latin America and South Africa.
          In February 2001, he was elected to his current office of Vice President,
          International, effective March 1, 2001.

Mr.              McErlane
joined Bandag in 1985. From 1985 through 1995, he held several           managerial
positions with the Company. In 1996, he was promoted to the position           of
Director, Marketing. In January 1997, he was appointed to the office of Vice
          President, Marketing. In February 1998, he was elected to the office of Vice
          President, Marketing and Sales and served in that position until September
2001,           when he was elected to his current offices of Vice President, Bandag,
          Incorporated and President, Tire Distribution Systems, Inc., Bandags
          distribution subsidiary.

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

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

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

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

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

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

# Available Information

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

8

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# Item 2.  PROPERTIES

# Traditional Business

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

The tread rubber manufacturing plants
of the Company are located to service principal markets. The Company owns eleven plants.
However, the Company only operates nine of these plants, three of which are located in the
United States, and the remainder in Canada, Belgium, South Africa, Brazil (two plants) and
Mexico. The plants vary in size up to 194,000 square feet with the first plant being
placed into production in 1959. All of the plants are owned in fee. Operations in one
tread rubber manufacturing plant located in the United States were suspended in the fourth
quarter of 1999 but the facility remains viable for general corporate purposes. Operations
in the Chino, California plant were suspended in the first quarter of 2002. The equipment
has been removed and the facility is for sale.

Retreading equipment is manufactured
at Company-owned plants located in Muscatine, Iowa and Campinas, S.P., Brazil, of
approximately 60,000 square feet and 10,000 square feet, respectively.

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

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

# TDS

TDS currently owns 11 and leases 42
facilities. Nineteen (19) contain space for TDSs retread production and 48 contain
space for commercial and retail operations. The Company believes that it will be able to
renew its existing leases as they expire or find suitable alternative locations. The
leases generally provide for a base rental, as well as charges for real estate taxes,
insurance, maintenance and various other items.

In the opinion of the Company, all of
its 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.

9

---

# Item 3.  LEGAL PROCEEDINGS

General

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

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

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

Although these cases have been
pending for some time, little discovery has been undertaken because the cases have been
stayed by the pendency of motions to remand the cases from federal to state court and
proceedings in bankruptcy court involving Rouse Rubber Co. Bandag has been named in the
cases based on its majority ownership of Rouse prior to 1995. Bandag did not manufacture,
operate or repair the equipment in question. Bandag had only limited involvement with the
equipment in question while it had an ownership interest in Rouse. Plaintiffs allege that
Bandag may be passively liable as a joint venturer with the employer, Rouse
Rubber Co., an allegation which Bandag believes is without any basis.

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

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

None.

10

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# PART II

|Item 5. | MARKET
FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 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:

|                             | 2003   |    | % Change | 2002   |    | % Change | 2001   |    |      
|---------------------------- | ------ | -- | -------- | ------ | -- | -------- | ------ | -- | -----
|Dividends Declared Per Share |        |    |          |        |    |          |        |    |      
|First Quarter                | $0.320 |    |          | $0.315 |    |          | $0.305 |    |      
|Second Quarter               | 0.320  |    |          | 0.315  |    |          | 0.305  |    |      
|Third Quarter                | 0.320  |    |          | 0.315  |    |          | 0.305  |    |      
|Fourth Quarter               | 0.325  |    |          | 0.320  |    |          | 0.315  |    |      
|                             |        |    |          |        |    |          |        |    |      
|Total Year                   | $1.285 |    | 1.6      | $1.265 |    | 2.8      | $1.230 |   
|Stock Price Comparison(1)    | Low    |    | High     | Low    |    | High     | Low    |    | High 
|Common Stock                
|First Quarter                | $28.45 | -- | 39.72    | $33.05 | -- | 39.15    | $26.30 | -- | 46.75
|Second Quarter               | 31.28  | -- | 39.28    | 27.80  | -- | 39.98    | 25.70  | -- | 31.00
|Third Quarter                | 32.85  | -- | 38.49    | 26.00  | -- | 36.25    | 25.01  | -- | 32.90
|Fourth Quarter               | 33.60  | -- | 42.97    | 28.12  | -- | 42.01    | 25.71  | -- | 35.60
|Year-end Closing Price       |        |    | 41.20    |        |    | 38.68    |        |    | 34.76
|Class A Common Stock        
|First Quarter                | $25.60 | -- | 35.60    | $27.90 | -- | 33.40    | $20.90 | -- | 38.69
|Second Quarter               | 29.80  | -- | 36.30    | 24.95  | -- | 34.21    | 21.60  | -- | 24.85
|Third Quarter                | 30.19  | -- | 35.50    | 23.00  | -- | 31.10    | 22.70  | -- | 28.02
|Fourth Quarter               | 30.55  | -- | 41.20    | 24.75  | -- | 36.98    | 22.30  | -- | 30.04
|Year-end Closing Price       |        |    | 40.40    |        |    | 34.59    |        |    | 30.00

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

The approximate number of record
holders of the Companys Common Stock as of January 31, 2004 was 1,745, the number of
record holders of Class A Common Stock was 974 and the number of record holders of Class B
Common Stock was 190. 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.

11

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# Item 6.  SELECTED
FINANCIAL DATA

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

|                                      | 2003 | 2002 | 2001 | 2000    | 1999
|------------------------------------- | ---- | ---- | ---- | ------- | ----
|(In thousands, except per share data) |      |      |      |         |     
|Net sales                             |      |      | $    | 816,397 |     
|Earnings before cumulative effect of  |      |     
|accounting change(1)(2)               |      |      |      | 60,200  |     
|                                      |      |      |      |         |     
|Total assets(3)                       |      |      | $    | 658,861 |     
|Long-term debt and other obligations  |      |      |      | 35,259  |     
|Earnings per share before cumulative  |      |     
|effect of accounting change           |      |     
|Basic                                 |      |      | $    | 3.14    |     
|Diluted                               |      |      | $    | 3.11    |     
|Dividends Declared Per Share          |      |      | $    | 1.285   |     

|(1) | In
2001, includes charges of $3,400 pre-tax, $2,040 after-tax, related to costs
          associated with the closure of a domestic manufacturing facility and other
          non-recurring costs. In 1999, includes charges of $13,500 pre-tax, $7,671
          after-tax, related to costs associated with the closure of a domestic
          manufacturing facility and other related actions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
goodwill amortization of $7,952, $7,848, and $7,604 in 2001, 2000, and           1999,
respectively. Goodwill amortization was discontinued in 2002 due to the
          adoption of SFAS 142.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
decrease in total assets in 2002 is primarily due to the $47,260 charge
          reported as a cumulative effect of accounting change, resulting from the
          adoption of SFAS No. 142. Refer to Note 8 of the consolidated financial
          statements for further details.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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

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

# OVERVIEW

| | General
| | -------

The Company has two reportable
operating segments  its Traditional Business which manufactures and sells precured
tread rubber, equipment and supplies for retreading tires and Tire Distribution Systems,
Inc. (TDS) which sells and maintains retread tires and new tires to principally commercial
and industrial customers.

Bandag and its licensees have 1,020
franchise locations worldwide, with 33% located in the United States and 67%
internationally. The majority of Bandags franchisees are independent operators of
full service tire distributorships and the remaining are owned by TDS. The Traditional
Business revenues primarily come from the sale of retread material and equipment to its
franchisees. TDS offers complete tire management services including the complete line of
Bandag retreads, new tires (commercial, retail and off-the-road), alignment and 24-hour
road service.

Approximately 31% of Bandags
retread material sales in North America come from national account contracts with a
variety of major fleets. The depth of the Companys franchisee network combined with
the quality of its products has allowed Bandag to build a significant national account
business. Significant fleet revenue is important to Bandags franchisees who act with
Bandag as subcontractors to deliver products, information and services to national fleet
customers. Bandags franchise agreements require its franchisees to buy their
precured retreading material and equipment from Bandag, which gives Bandag a secure
revenue stream. Growth in revenue can be achieved by expanding the amount of services that
can be provided to a fleet by Bandag and its franchisees while continuing to provide
value-added retread products. Bandag also generates significant cash flow which has
historically been used to reinvest in the business, make debt payments, pay dividends,
repurchase stock and other corporate purposes.

On February 13, 2004, the Company
announced the acquisition of an 87.5% majority interest in Speedco, Inc. from its founders
and Equilon Enterprises, LLC, a Royal Dutch Shell Group company. Speedco provides
quick-service truck lubrication nationwide through 26 company-owned and six licensed
on-highway locations. In total, Bandag paid approximately $56,000,000 for its 87.5%
interest and to assume and retire $20,100,000 of debt. Speedco generated unaudited
revenues of approximately $46,000,000 and unaudited pre-tax income of approximately
$4,800,000 in 2003. Bandag expects diluted earnings per share to improve between $0.10 and
$0.15 in 2004 due to this acquisition.

| | Trucking Industry
| | -----------------

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

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

13

---

On December 11, 2003, Yellow
Corporation acquired Roadway Corporation, forming Yellow Roadway Corporation. The Company
currently has an outsourcing agreement with Roadway Corporation that was extended to July
2004 and is in negotiations with Yellow Roadway Corporation to enter into a new agreement.
If Yellow Roadway Corporation were to allow the contract to expire, the effect on the
Company could be materially adverse to net sales and net income. The Company currently has
tire and wheel assets of approximately $31,700,000 recorded in connection with this
contract. Upon termination of the agreement, the tire and wheel assets will either be
repurchased by Roadway Corporation or a third party at a contractually agreed upon price,
which the Company believes will approximate their carrying value, or will remain the
property of the Company. For further information see Outsourcing Agreement in
Critical Accounting Policies below.

| | New Tire Retread Pricing and Profitability
| | ------------------------------------------

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

| | Sale of TDS Locations
| | ---------------------

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

During 2003, TDS sold 41 locations
with a net carrying value of $31,213,000 for cash of $21,315,000 and assumed liabilities
of $8,909,000. The divestitures resulted in a loss before income taxes and cumulative
effect of accounting change of $989,000. During 2003, TDS also closed three locations.

In conjunction with the divestiture
of certain TDS locations in 2003, Bandag guaranteed a portion of third-party loans to a
dealer. Bandags exposure under these guarantees is $2,800,000. The guarantees are
secured by assets of the dealer. The term of the guarantees is three years. The fair value
of the guarantees, which was originally determined to be $600,000, is included in
long-term debt and other obligations in the Companys Consolidated Balance Sheet with
an offsetting charge of $600,000 included in engineering, selling, administrative and
other expenses on the Consolidated Statement of Earnings in 2003.

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

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

14

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| | Assets
Held for Sale
| | --------------------

As of December 31, 2003, TDS had
three locations in Tennessee held for sale which were sold subsequent to year end. These
locations had net sales and loss before income taxes and cumulative effect of accounting
change as follows (in thousands):

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

# RESULTS OF OPERATIONS

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

| | Net
Sales
| | ---------

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

| | Gross
Profit Margins
| | --------------------

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

| | Operating
and Other Expenses
| | ----------------------------

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

| | Net
Earnings
| | ------------

Consolidated earnings before income taxes
and cumulative effect of accounting change increased $12,382,000, or 17%, from 2002.
Consolidated net earnings in 2003 were $60,200,000, or $3.11 per diluted share, as
compared to $2,793,000, or $0.14 per diluted share in 2002. A cumulative effect of
accounting change of $47,260,000 net of income tax, or $2.38 per diluted share, was
recorded in 2002 in accordance with SFAS 142, Goodwill and Other Intangible
Assets to recognize impairment of goodwill, substantially all of which related to
TDS.

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

15

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# TRADITIONAL BUSINESS

| | North
America
| | -------------

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

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

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

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

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

North American operating and other
expenses in 2003 were $5,877,000, or 5% higher than 2002 expenses, primarily due to
$5,800,000 of increased pension expense offset by the absence of approximately $2,500,000
in expense related to converting SystemBandag users to the RoadWare software system
which was recorded in 2002. Lower gross profit margin and increased operating and other
expenses primarily resulted in a decrease for North America of $18,465,000 in earnings
before income taxes and cumulative effect of accounting change for 2003 as compared to
2002.

| | Europe
| | ------

The Companys operations located
in Europe principally service markets in European countries, but also export to certain
other countries in the Middle East and Northern and Central Africa. This collection of
countries is under one management group and is referred to internally as Europe.
Net sales in Europe increased $15,888,000, or 24%, from 2002, including a $13,474,000
increase due to the effect of translating foreign currency denominated net sales to U.S.
dollars and a 3% increase in volume. Gross profit margin increased 4.7 percentage points
from 2002, primarily due to the absence of approximately $3,000,000 of restructuring
charges recorded in 2002.

Operating and other expenses
increased $4,192,000, or 18%, from 2002, primarily due to the higher translated value of
the Euro, higher expenses related to securing new fleet contracts, and increased net
foreign exchange losses of $700,000 from revaluing funds held in U.S. dollars into local
currencies. Primarily as a result of higher net sales and gross margin, partially offset
by higher operating and other expenses, Europe recorded income before income taxes and
cumulative effect of accounting change of $2,718,000 as compared to a loss in 2002 of
$1,511,000 on the same basis.

16

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| | International
| | -------------

The Companys exports from North
America to markets in the Caribbean, Central America, South America and Asia, along with
operations in Brazil, Mexico, Venezuela, South Africa and royalties from a licensee in
Australia, are combined under one management group referred to internally as
International.International net sales increased $5,553,000, or 6%, from
2002 primarily due to price increases in Brazil and South Africa, partially offset by an
8% decrease in volume. Gross profit margin decreased 2.4 percentage points from 2002 due
mainly to higher raw material costs, partially offset by price increases.

Operating and other expenses
decreased $5,003,000, or 20%, from 2002, primarily due to the absence of $2,700,000
related to impairment charges recorded in 2002. Primarily as a result of higher net sales
and lower operating and other expenses, earnings before income taxes and cumulative effect
of accounting change increased $5,153,000 in 2003 as compared to 2002.

# TIRE DISTRIBUTION
SYSTEMS, INC.

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

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

See OVERVIEW  Sale of TDS
locations hereunder for a discussion of the sale of TDS locations in 2003.

# Year Ended December 31,
2002 Compared to Year Ended December 31, 2001

# RESULTS OF OPERATIONS

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

| | General
| | -------

During the first quarter of 2002, the
Company acquired the assets of Open Road Technologies, Inc., the supplier of
RoadWare retread shop management software, which contributed sales of approximately
$6,200,000 in 2002.

| | Sale
of TDS Locations
| | ---------------------

Also, during the third and fourth
quarters of 2002, the Companys TDS segment sold or closed nine retread plants and
eighteen commercial and retail outlets which contributed $34,000,000 and $42,000,000 to
net sales and $3,900,000 and $2,500,000 of losses to earnings before taxes and cumulative
effect of accounting change, for the years ended December 31, 2002 and 2001, respectively.

| | Net
Sales
| | ---------

Consolidated net sales in 2002
decreased $48,829,000, or 5%, from 2001. This included a decrease of $23,039,000, or 4%,
in the Traditional Business. The decrease in Traditional Business net sales primarily
resulted from a 1% decline in retread material unit volume, a 27% decrease in equipment
sales from 2001 and an increase of approximately $5,200,000 related to dealer marketing
programs classified as a reduction of sales. In addition, Traditional Business revenues
were approximately 2% lower due to the lower translated value of the Companys
foreign-currency-denominated sales, particularly the Brazilian real and South African
rand. TDS sales decreased $33,843,000, or 8%, from 2001, primarily as a result of the
negative impact of the declining economy and the loss of several significant customers,
most notably the bankruptcy of Consolidated Freightways. The Companys seasonal sales
pattern is tied to the overall performance of the economy and to the level of trucking
activity.

17

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| | Gross
Profit Margins
| | --------------------

Consolidated gross profit margin for
2002 increased by 1.9 percentage points from 2001. Gross profit margin for the Traditional
Business (which includes sales to TDS) and TDS increased by 2.5 and 0.7 percentage points,
respectively, from 2001. Consolidated and Traditional Business gross profit margins were
positively impacted by $3,800,000 due to decreased LIFO inventory levels, which was
partially offset by restructuring charges in Europe of $3,000,000.

| | Operating
and Other Expenses
| | ----------------------------

Consolidated operating and other
expenses decreased $10,264,000, or 4%, from 2001. Excluding the effects of $8,905,000 of
goodwill amortization in 2001, consolidated operating and other expenses decreased
$1,359,000, or 1%, from 2001. Traditional Business operating and other expenses in 2002
decreased $3,752,000, or 2%, from 2001. The decrease in consolidated operating and other
expenses primarily resulted from decreased litigation expenses, which were significantly
offset by lower pension income, $2,500,000 in expense related to converting SystemBandag
users to the RoadWare software system and $2,700,000 related to impairment charges
recorded against the carrying value of the Companys joint venture in India, and
operations in Brazil and Venezuela. As previously announced, the settlement of
Bandags ongoing litigation with Michelin included dismissal of all financial claims
against all parties. Expenses related to the Michelin litigation in 2002 were $10,700,000,
as compared to $18,300,000 in 2001.

| | Net
Earnings
| | ------------

Consolidated earnings before income taxes
and cumulative effect of accounting change increased $5,013,000, or 8%, from 2001.
Consolidated net earnings in 2002 were $2,793,000, or $0.14 per diluted share. This
included a charge of $47,260,000 (net of income tax benefit of $3,704,000), reported as a
cumulative effect of accounting change, or $2.38 per diluted share, resulting from the
adoption of SFAS No. 142 as of January 1, 2002. Earnings in 2002 were $50,053,000 before
the cumulative effect of accounting change, or $2.52 per diluted share, which was a 14%
increase from the prior year amount of $43,832,000, or $2.12 per diluted share. However,
excluding the effects of goodwill amortization and the cumulative effect of accounting
change, consolidated net earnings were $50,053,000, or $2.52 per diluted share, as
compared to $51,784,000, or $2.50 per diluted share, in 2001.

Repurchases of 418,371 shares of
Bandag Class A Common Stock and 1,114,746 shares of Bandag Class B Common Stock during
2002 had a favorable impact on diluted earnings per share of $0.08.

# TRADITIONAL BUSINESS

| | North
America
| | -------------

Sales of $49,841,000 of retread
products to TDS accounted for 13% of North Americas total retread products sold in
2002, compared to $54,594,000 or 14% in 2001. Total retread products sold in North America
in 2002 were $4,149,000 or 1% below 2001 sales. Retread product sales to TDS declined 9%
in 2002 compared to 2001, while sales of retread products to independent dealers increased
1%. The increase in retread product sales to independent dealers is primarily due to a 1%
increase in retread material unit volume. Equipment sales to independent dealers in 2002,
which totaled $17,968,000, decreased 23% as compared to 2001, and equipment sales to TDS
in 2002, which totaled $1,858,000, decreased 65% as compared to 2001. Equipment sales
typically vary depending on the signing of new franchisees and new product innovations.
North American other net sales increased $6,552,000, or 26%, in 2002 as compared to 2001,
primarily as a result of the acquisition of Open Road Technologies. Total North America
net sales increased $3,162,000, or 1%, in 2002 as compared to 2001.

A decrease in average raw material
costs, coupled with a decrease in depreciation expense, decreased LIFO inventory levels
and a decrease in equipment sales, which carry lower gross margins than retread products,
and increased production efficiency in the United States and Canada, primarily resulted in
a 3.1 and 3.5 percentage point increase in North Americas gross margin for 2002 on
sales to independent dealers and total sales, respectively, as compared to 2001.

North American operating expenses in
2002 were $5,600,000, or 6% higher than 2001, expenses primarily due to lower pension
income and approximately $2,500,000 in expense related to converting SystemBandag users to
the RoadWare software system. Higher sales and gross profit was partially offset by
higher operating and other expenses, resulting in an increase of $5,221,000, or 6% in
earnings before income taxes and cumulative effect of accounting change in 2002, as
compared to 2001.

18

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| | Europe
| | ------

Net sales in Europe declined
$5,297,000, or 7%, from 2001, primarily due to a retread material unit volume decrease of
8%. Gross profit margin decreased 4.8 percentage points from 2001 primarily due to
approximately $3,000,000 of restructuring charges recorded in 2002, partially offset by
$1,400,000 of reduced cost of sales due to decreased LIFO inventory levels.

Operating and other expenses
decreased $1,185,000, or 5%, from 2001 primarily due to lower personnel-related costs and
net foreign exchange losses in 2001 that did not recur, partially offset by approximately
$500,000 of restructuring charges recorded in 2002. Primarily as a result of lower sales
and gross margin, Europe recorded a loss before income taxes and cumulative effect of
accounting change of $1,511,000 in 2002 as compared to income before income taxes and
cumulative effect of accounting change of $2,464,000 in 2001.

| | International
| | -------------

International net sales decreased
$12,723,000, or 13%, from 2001 as a result of a 5% decrease in retread material unit
volume, which is primarily a result of the regions economic downturn, particularly
in Argentina, Brazil and Venezuela, which depressed market activity throughout that
region. The spread between the net sales decrease and the retread material unit volume
decrease is primarily due to the lower translated value of the Brazilian real and South
African rand. Gross profit margin increased 1.6 percentage points from 2001.

Operating and other expenses
decreased $187,000, or 1%, from 2001. Operating and other expenses were positively
impacted by net foreign exchange gains and the lower translated value of the Brazilian
real and South African rand, and negatively impacted by the $2,700,000 impairment charge
recorded against the carrying value of the Companys joint venture in India and
operations in Brazil and Venezuela. Primarily as a result of the reduction in sales and
the impairment charge, earnings before income taxes and cumulative effect of accounting
change decreased $2,828,000, or 24%, from 2001.

# TIRE DISTRIBUTION
SYSTEMS, INC.

During the third and fourth quarters
of 2002, TDS sold or closed nine retread plants and 18 commercial and retail outlets which
contributed $34,000,000 and $42,000,000 to net sales and $3,900,000 and $2,500,000 of
losses to earnings before taxes and cumulative effect of accounting change, for the years
ended December 31, 2002 and 2001, respectively. TDS net sales decreased $33,971,000, or
9%, from 2001, due largely to soft market conditions and the loss of several significant
customers, most notably the bankruptcy of Consolidated Freightways during 2002. TDS gross
margin increased 0.7 percentage points from 2001.

Operating expenses of $95,017,000, as
a percent of net sales, were 3.0 percentage points higher than 2001, principally due to
increases in employee health insurance, workers compensation and legal expenses.
Primarily as a result of lower sales volume and higher operating expenses, TDS recorded a
loss before income taxes and cumulative effect of accounting change of $11,382,000 in
2002, which compares to a loss before income taxes of $11,099,000 in 2001, or a loss
before income taxes of $2,828,000 excluding goodwill amortization.

# IMPACT OF INFLATION AND
CHANGING PRICES

Historically, it has generally been
the Companys practice to adjust its selling prices and sales allowances to reflect
changes in production and raw material costs in order to maintain its gross profit margin.
To soften the impact of higher raw material costs caused by increases in oil prices the
Company adjusted selling prices in the United States and Canada effective January 1, 2003
and adjusted selling prices in some foreign locations during the year. The Company may
continue to adjust prices if raw material costs rise further; however, due to competitive
pressure and the decreasing difference between the price on a Bandag retread and a
substitute new tire, the Company believes its ability to continue to pass on such
increases may be diminished. The ability of the Company to raise prices does not eliminate
its exposure to pricing risks on its fleet contract business due to the terms of the
agreements.

19

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

# FINANCIAL CONDITION

| | Liquidity
and Capital Resources
| | -------------------------------

As of December 31, 2003, the Company
had cash and cash equivalents of $189,976,000 as compared to $129,412,000 at December 31,
2002. The Companys ratio of total current assets to total current liabilities was
3.1 to 1 at December 31, 2003 with current assets exceeding current liabilities by
$318,093,000. At December 31, 2003, the Company had approximately $5,143,000 of assets
held for sale, consisting primarily of inventory and property, plant and equipment
classified as other current assets. The Company believes it has an adequate cash balance
for future cash needs. The acquisition of 87.5% of Speedco, Inc. subsequent to year end
was financed with available cash on hand. Refer to Note 19 of the consolidated financial
statements for further details.

Net cash provided by operating
activities for the twelve months ended December 31, 2003 was $78,122,000, primarily due to
net earnings and depreciation. The only changes in working capital requirements are for
normal business growth.

The Company typically funds its
capital expenditures from operating cash flows. During 2003, the Company spent $17,563,000
for capital expenditures as compared to $17,938,000 in 2002. The Company believes that
spending in the current year is representative of future capital spending needs. During
2003, the Company sold 44 TDS locations for cash proceeds of $21,315,000.

The Company invests excess funds over
various terms, but only instruments with an original maturity date of over 90 days are
classified as investments for balance sheet purposes. The Companys maturities of
investments exceeded purchases by $3,453,000 during 2003, resulting in total investments
of $10,808,000 at December 31, 2003.

As of December 31, 2003, the Company
had available uncommitted and committed lines of credit totaling $71,471,000 in the United
States for working capital purposes. Also, the Companys foreign subsidiaries had
approximately $25,873,000 in credit and overdraft facilities available to them. From time
to time during 2003, the Company borrowed funds to supplement operational cash flow needs
or to settle intercompany transactions. The Companys long-term liabilities totaled
$35,259,000 at December 31, 2003, which is approximately 7% of the combined total of
long-term liabilities and shareholders equity; and is a decrease of $10,114,000 from
December 31, 2002.

During the year, the Company paid
$7,066,000 on short-term notes payable and long-term obligations compared to $67,979,000
in 2002.

Cash dividends totaled $24,595,000 in
2003 compared to $25,550,000 in 2002. Cash dividends per share declared were $1.285 in
2003 compared to $1.265 in 2002.

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

During 2003, the Company purchased an
additional 6,655 shares of its outstanding Common Stock and Class A Common Stock for
$238,000 at prevailing market prices. The Company generally funds its dividends and stock
repurchases from the cash flow generated from its operations.

# OFF BALANCE SHEET
ARRANGEMENTS

In conjunction with the divestiture
of certain TDS locations in 2003, the Company guaranteed a portion of third-party loans to
a dealer. Bandags exposure under these guarantees is $2,800,000. The guarantees are
secured by assets of the dealer. The term of the guarantees is three years.

20

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# CONTRACTUAL OBLIGATIONS
AND COMMERCIAL COMMITMENTS

Following is a summary of the
Companys commitments as of December 31, 2003 (in thousands):

|                              | Payments Due by Period
|----------------------------- | ----------------------
|
|Long-term debt                |                       
|Operating leases              |                       
|Purchase commitments          |                       
|Other obligations             |                       
|                              |                       
|Total contractual obligations |                       
|                              |                       

|                          | TotalAmount |  | Amount of Commitments Expiration Per Period
|------------------------- | ----------- |  | -------------------------------------------
|
|Standby Letters of Credit |             |  | $                                          

Other obligations consist primarily
of a postretirement medical liability and miscellaneous other liabilities. Standby letters
of credit are provided to the Companys insurance administrators to cover costs
associated with self insurance liabilities.

# QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RESK

| | Financial
Risk Management
| | -------------------------

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

| | Foreign
Currency Exposure
| | -------------------------

Foreign currency exposures arising
from cash flow transactions include firm commitments and anticipatory transactions.
Translation exposure is also part of the overall foreign exchange risk. The Companys
exposure to foreign currency risks exists primarily with the Brazilian real, Canadian
dollar, Mexican peso, Japanese yen and European Union euro. The Company regularly enters
into foreign currency contracts primarily using foreign exchange forward contracts and
options to manage the foreign currency risks associated with most of its firm commitment
exposures. The Company also employs foreign exchange forward contracts as well as option
contracts to manage the foreign currency risks associated with approximately 40% 
60% of its anticipated future cash flow transactions within the coming twelve months. The
notional amount of these contracts at December 31, 2003 and 2002 were $5,286,000 and
$6,599,000, respectively. The Company also limits its exposure to foreign currency
fluctuations by entering into offsetting asset or liability positions and by establishing
and monitoring limits on unmatched positions. The Companys pre-tax earnings from
foreign subsidiaries and affiliates translated into U.S. dollars using a weighted-average
exchange rate was $18,046,000 and $10,702,000 for the years ending December 31, 2003 and
2002, respectively. On that basis, the potential loss in the value of the Companys
pre-tax earnings from foreign subsidiaries resulting from a hypothetical 10% adverse
change in foreign currency exchange rates would have been $1,659,000 in 2003 and $959,000
in 2002.

The Company also has foreign currency
exposure arising from the translation of the Companys net equity investment in its
foreign subsidiaries to U.S. dollars. The Company generally views as long-term its
investments in foreign subsidiaries with functional currencies other than the U.S. dollar.
The primary currencies to which the Company is exposed are the European euro, Brazilian
real, Mexican peso, Canadian dollar and South African rand. A 10% change in foreign
currency exchange rates from balance sheet date levels would have impacted the
Companys net foreign investments by $10,651,000 and $8,665,000 at December 31, 2003
and 2002, respectively.

21

---

| | Interest
Rate Exposure
| | ----------------------

In order to mitigate the impact of
fluctuations in the general level of interest rates, the Company generally maintains a
large portion of its debt as fixed rate in nature by borrowing on a long-term basis. At
December 31, 2003 and 2002, the Company had outstanding debt of $22,857,000 and
$28,571,000, respectively. At December 31, 2003 and 2002, the fair value of the
Companys debt was $23,809,000 and $30,383,000, respectively. In addition, at
December 31, 2003 and 2002, the fair value of securities held for investment was
$97,958,000 and $62,742,000, respectively. The fair value of the Companys total
long-term debt and its securities held for investment would not be materially affected by
a hypothetical 10% adverse change in interest rates. Therefore, the effects of interest
rate changes on the fair value of the Companys financial instruments are limited.
Securities held for investment primarily consist of obligations of states and political
subdivisions of a short-term nature.

| | Commodities
Exposure
| | --------------------

Due to the nature of its business,
the Company procures almost all of its synthetic rubber, which is the predominant raw
material used in manufacturing tire tread, at quarterly fixed rates using contracts with
the Companys main suppliers. Historically, the Company adjusts its selling prices
and sales allowances to reflect significant changes in commodity costs; however, due to
competitive pressures and the decreasing difference between the price on a Bandag retread
and a substitute new tire, the Company believes its ability to continue to pass on such
increases may be diminished. To soften the impact of higher raw material costs caused by
increases in oil prices the Company adjusted selling prices in the United States and
Canada effective January 1, 2003 and adjusted selling prices in some foreign locations
during the year. Therefore, the Companys exposure is limited to the extent selling
price adjustments fail to offset increases in commodity costs. The ability of the Company
to raise prices does not eliminate its exposure to pricing risks on its fleet contract
business due to the terms of the related agreements.

# CRITICAL ACCOUNTING
POLICIES

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

| | Accounts
Receivable
| | -------------------

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

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

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

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

22

---

| | Income
Taxes
| | ------------

The Company utilizes the asset and
liability method of accounting for deferred income taxes which requires that deferred tax
assets and liabilities be recorded to reflect the future tax consequences of temporary
timing differences between the tax and financial statement basis of assets and
liabilities. At December 31, 2003, the Company had net deferred tax assets of $39,679,000.
This balance consists of approximately $45,082,000 of net deferred tax assets primarily
related to the timing of income and deductions for tax versus books, and $5,403,000 of net
deferred tax liabilities primarily related to the unremitted earnings of foreign
subsidiaries. Deferred taxes on the unremitted earnings of foreign subsidiaries are
provided under the assumption that all profits of the foreign subsidiaries will be
repatriated to the United States and all foreign taxes paid will be available to offset
United States taxes. In addition, any deferred tax asset is reviewed annually to determine
the probability of realizing the asset. If it is determined unlikely that the asset will
be fully realized in the future, a valuation allowance is established against the asset.
Refer to Note 11 of the consolidated financial statements for further details.

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

| | Marketing
Programs
| | ------------------

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

Under the DMR Program, the Company
provides financial assistance in the form of DMR promissory notes from the dealer to
Bandag. The proceeds from the promissory notes can only be used by the dealer toward the
acquisition of equipment (including equipment sold by the Company), service vehicles,
facility expansions and other items aligned with Company goals. The notes have a term of
up to five years. However, if the dealer achieves a business objective, typically
purchasing a specified amount of tread rubber each year, then the Company forgives either
part or all of the principal and interest for that year. The Company records a reduction
in sales for the costs of the program as financial assistance is provided. The DMR reserve
at December 31, 2003, 2002 and 2001 was $15,529,000, $18,927,000 and $14,716,000,
respectively. In 2003, 2002 and 2001, DMR costs of $4,905,000, $8,628,000 and $5,376,000,
respectively, were recorded as a reduction of sales.

| | Outsourcing
Agreement
| | ---------------------

In connection with a tire management
outsourcing agreement entered into by TMS, the Company is providing tire management
services to a customer, Roadway Corporation. The current outsourcing agreement with
Roadway Corporation was extended to July 2004 and the Company is in negotiations with
Yellow Roadway Corporation to enter into a new agreement. The substance of the outsourcing
agreement, as more fully described below, is that the Company provides complete
maintenance of the customers tire and wheel assets over the term of the agreement
and provides a full range of services to maintain the assets. These services include
replacing and repairing tires and wheels, as well as other tire related services. The
Company entered into this agreement because fleets were experiencing narrowing margins and
expanding needs, including the need for suppliers (such as the Company) to provide
services, such as outsourcing services, as well as products. The Company recognizes
revenue for these outsourcing services on a per mile basis based on the number of tire
miles traveled by the customers truck fleet in the month of usage.

23

---

Over the term of the agreement, the
Company estimates that approximately 75% of the revenue will be realized through cash
payments and the balance will be realized by recording an incrementally increasing
ownership percentage in the customers tire assets. The Company agreed to accept the
non-cash consideration as partial payment for its services as a result of the negotiating
process between the Company and the customer, its longstanding relationship with the
customer and the anticipated return on the contract, including the non-cash consideration
received. The tire and wheel assets are classified as other assets. In 2003, 2002, and
2001, these non-current assets amounted to $31,700,000, $26,803,000 and $22,855,000,
respectively. The Company does not record depreciation on the tire and wheel assets;
rather, the Company incurs direct expenses related to the efforts of maintaining the tires
at the mutually agreed upon specifications. These amounts are expensed as incurred and
approximate the amount that would otherwise be recorded as depreciation expense.

Quarterly, the Company evaluates the
carrying value of the tire and wheel assets for impairment and adjusts the carrying value
as required. Upon termination of the agreement, the tire and wheel assets will either be
repurchased by the customer or a third party at a contractually agreed upon price, which
the Company believes will approximate their carrying value, or will remain the property of
the Company. There could be a material difference between the carrying value and the
realizable value should the tire and wheel assets not be repurchased by the customer, or a
third party. Although the acquisition of Roadway by Yellow adds uncertainty, the Company
has determined the probability that the customer, or a third party, will not repurchase
the tire and wheel assets to be highly unlikely based upon the facts and conditions
surrounding the contract with this customer, which includes a significant termination
penalty that the Company believes is sufficient to make this option unfavorable to the
customer.

| | Pension
Plans
| | -------------

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

An important element in determining
the Companys pension income or expense in accordance with SFAS No. 87 is the
expected return on assets. Based on recent realized negative returns and lower projected
future equity returns the Companys long-term rate of return assumption for its
United States plans is 7.0% as of December 31, 2003. The Company has historically had
returns in excess of 7.0%; however; the Company has experienced losses in two of the last
three years. The Company believes the assumption of future returns is reasonable.

Each year, the Company determines the
discount rate to be used to discount plan liabilities. The discount rate reflects the
current rate at which the pension liabilities could be effectively settled at the end of
the year. In estimating this rate, the Company looks to rates of return on high quality,
fixed-income investments. The discount rate for December 31, 2003 was 6.0%.

For the year ended December 31, 2003,
the Company recognized consolidated pre-tax pension expense of $4,670,000 which compares
to consolidated pre-tax pension income of $782,000 recognized in 2002. The Company
estimates pension expense will be approximately $3,900,000 for 2004. Refer to Note 16 of
the consolidated financial statements for further details.

A 50 basis point increase or decrease
in the assumed discount rate would have changed pension and other postretirement benefit
obligations by approximately $8,300,000 at December 31, 2003, and changed pension and
postretirement benefit costs by approximately $825,000. A 50 basis point increase or
decrease in the assumed expected long-term rate of return on plan assets would have
changed pension costs by approximately $500,000 for 2003.

24

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# NEW ACCOUNTING STANDARDS

In December 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation Number (FIN) No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 addresses accounting
for variable interest entities (VIE), defined as a separate legal structure that either 1)
has equity investors who lack the essential characteristics of a controlling financial
interest, or 2) has equity investors that do not provide sufficient financial resources
for the entity to support its own activities. FIN No. 46 requires that a VIE be
consolidated by a company if that company is entitled to a majority of the VIEs
residual returns or is subject to a majority of its expected losses, and also requires
disclosures concerning VIEs that a company is not required to consolidate but in which it
has a significant variable interest. The Company performed a preliminary analysis and has
determined none of its franchisees would require consolidation under FIN 46. The
consolidation requirements of FIN 46 would be effective for the Company as of March 31,
2004.

# FORWARD LOOKING
STATEMENTS

This Form 10-K contains the following
forward-looking statement that is made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995: Bandag expects diluted
earnings per share to improve between $0.10 to $0.15 in 2004 due to this
acquisition. Such statement is based on Managements current projections,
beliefs and opinions at the date of this press release. Such projections involve unknown
risks and uncertainties, which may cause the actual results to differ materially from
expected results. Bandags ability to predict future results is inherently uncertain.
Factors which could affect the forward-looking statement include (i) whether
raw material costs of Speedco, which are largely dependent on the price of crude oil
which, in turn, is affected by various global factors and events, both political and
economic, increase or decrease and (ii) whether the United States economy continues to
strengthen or weakens, both conditions which could significantly impact the volume of
truck traffic on the interstate highways and, therefore, the level of Speedcos
business.

# Item 7A.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

# Item 8.   FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

# Index to Consolidated
Financial Statements

|                                                                               | Page
|------------------------------------------------------------------------------ | ----
|Report of Independent Auditors                                                 |     
|Consolidated Balance Sheets as of December 31, 2003, 2002 and 2001             |     
|Consolidated Statements of Earnings for the years ended                        |     
|December 31, 2003, 2002 and 2001                                               |     
|Consolidated Statements of Cash Flows for the years ended                      |     
|December 31, 2003, 2002 and 2001                                               |     
|Consolidated Statements of Changes in Shareholders' Equity for the years ended |     
|December 31, 2003, 2002 and 2001                                               |     
|Notes to Consolidated Financial Statements                                     |     

25

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# Report of Independent
Auditors

Shareholders and Board of
DirectorsBandag, Incorporated

We have audited the accompanying
consolidated balance sheets of Bandag, Incorporated and subsidiaries as of December 31,
2003, 2002, and 2001, and the related consolidated statements of earnings, cash flows and
changes in shareholders equity for the years then ended. Our audits also included
the financial statement schedule listed in the Index at Item 15(a)(2). These financial
statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule based
on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Bandag, Incorporated and subsidiaries at December 31, 2003, 2002,
and 2001, and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed in Note 1 and Note 8,
respectively, to the financial statements, effective January 1, 2002, the Company changed
its method of accounting for stock based compensation to conform with FASB Statement No.
148 and its method of accounting for goodwill and other intangible assets to conform with
FASB Statement No 142.

/s/ Ernst & Young LLPChicago,
Illinois

January 27, 2004, except as to Note
19 as to which the date is February 13, 2004

26

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# Bandag, IncorporatedConsolidated Balance
Sheets

|                                                     | December 31 | 
|---------------------------------------------------- | ----------- | 
|
|In thousands                                         |             | 
|Assets                                               |             | 
|Current Assets                                       |             | 
|Cash and cash equivalents                            |             | 
|Investments - Note 6                                 |             | 
|Accounts receivable, less allowance                  |             | 
|(2003 - $16,350; 2002 - $13,644; 2001 - $15,206)     |             | 
|Inventories:                                         |             | 
|Finished products                                    |             | 
|Material and work in process                         |             | 
|                                                     |             | 
|                                                     |             | 
|Deferred income tax assets - Note 11                 |             | 
|Prepaid expenses and other current assets            |             | 
|                                                     |             | 
|Total Current Assets                                 |             | 
|Property, Plant and Equipment, on the basis of cost: |             | 
|Land                                                 |             | 
|Buildings and improvements                           |             | 
|Machinery and equipment                              |             | 
|Construction and equipment installation in progress  |             | 
|                                                     |             | 
|                                                     |             | 
|Less allowances for depreciation and amortization    |             | 
|                                                     |             | 
|                                                     |             | 
|Goodwill, less accumulated amortization              |             | 
|(2001 - $37,298)                                     |             | 
|Intangible assets, less accumulated amortization     |             | 
|(2003 - $8,856; 2002 - $7,906; 2001 - $6,781)        |             | 
|Deferred income tax asset - Note 11                  |             | 
|Other assets                                         |             | 
|                                                     |             | 
|Total Assets                                         |             | 
|                                                     |             | 

See notes to
consolidated financial statements.

27

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# Bandag, IncorporatedConsolidated Balance
Sheets (continued)

|                                                                     | December 31 | 
|-------------------------------------------------------------------- | ----------- | 
|
|In thousands                                                         |             | 
|Liabilities and Shareholders' Equity                                 |             | 
|Current Liabilities                                                  |             | 
|Accounts payable                                                     |             | 
|Accrued employee compensation and benefits                           |             | 
|Accrued marketing expenses                                           |             | 
|Other accrued expenses                                               |             | 
|Dividends payable                                                    |             | 
|Income taxes payable                                                 |             | 
|Short-term notes payable and current portion of other obligations    |             | 
|                                                                     |             | 
|Total Current Liabilities                                            |             | 
|Long-term debt and other obligations - Note 7                        |             | 
|Deferred income tax liabilities                                      |             | 
|Shareholders' Equity - Note 15                                       |             | 
|Common Stock; $1.00 par value; authorized 21,500,000 shares;         |             | 
|issued and outstanding - 9,099,745 shares in 2003; 9,078,798 shares  |             | 
|in 2002; 9,079,093 shares in 2001                                    |             | 
|Class A Common Stock; $1.00 par value; authorized 50,000,000 shares; |             | 
|issued and outstanding - 9,249,756 shares in 2003; 9,150,967 shares  |             | 
|in 2002; 9,525,514 shares in 2001                                    |             | 
|Class B Common Stock; $1.00 par value; authorized 8,500,000 shares;  |             | 
|issued and outstanding - 918,688 shares in 2003; 921,985 shares      |             | 
|in 2002; 2,037,370 shares in 2001                                    |             | 
|Additional paid-in capital                                           |             | 
|Retained earnings                                                    |             | 
|Accumulated other comprehensive loss:                                |             | 
|Minimum pension liability                                            |             | 
|Foreign currency translation adjustment                              |             | 
|                                                                     |             | 
|                                                                     |             | 
|                                                                     |             | 
|Total Shareholders' Equity                                           |             | 
|                                                                     |             | 
|Total Liabilities and Shareholders' Equity                           |             | 
|                                                                     |             | 

See notes to
consolidated financial statements.

28

---

# Bandag, IncorporatedConsolidated
Statements of Earnings

|                                                                               | Year Ended December 31 | 
|------------------------------------------------------------------------------ | ---------------------- | 
|
|In thousands, except per share data                                            |                        | 
|Income                                                                         |                        | 
|Net sales                                                                      |                        | 
|Other income                                                                   |                        | 
|                                                                               |                        | 
|                                                                               |                        | 
|Cost and Expenses                                                              |                        | 
|Cost of products sold                                                          |                        | 
|Engineering, selling, administrative and other expenses                        |                        | 
|Non-recurring charges - Note 2                                                 |                        | 
|Interest expense                                                               |                        | 
|                                                                               |                        | 
|                                                                               |                        | 
|Earnings Before Income Taxes and Cumulative Effect                             |                        | 
|of Accounting Change                                                           |                        | 
|Income taxes - Note 11                                                         |                        | 
|                                                                               |                        | 
|Earnings Before Cumulative Effect of Accounting Change                         |                        | 
|Cumulative effect of accounting change   (net of income tax benefit of $3,704) |                        | 
|                                                                               |                        | 
|Net Earnings                                                                   |                        | 
|                                                                               |                        | 
|Net Earnings Per Share - Note 12                                               |                        | 
|Basic earnings per share                                                       |                        | 
|Earnings before cumulative effect of accounting change                         |                        | 
|Cumulative effect of accounting change                                         |                        | 
|                                                                               |                        | 
|Net Earnings                                                                   |                        | 
|                                                                               |                        | 
|Diluted earnings per share                                                     |                        | 
|Earnings before cumulative effect of accounting change                         |                        | 
|Cumulative effect of accounting change                                         |                        | 
|                                                                               |                        | 
|Net Earnings                                                                   |                        | 
|                                                                               |                        | 

See notes to
consolidated financial statements.

29

---

# Bandag, IncorporatedConsolidated Statements
of Cash Flows

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

See notes to
consolidated financial statements.

30

---

# Bandag, IncorporatedConsolidated
Statements of Changes in Shareholders Equity

|                                  | Common Stock
Issued
and Outstanding |  | Class A
Common Stock
Issued
and Outstanding |           | Class B
Common Stock
Issued
and Outstanding |   | Additional
Paid-In |   | Retained |           | Accumulated
Other
Comprehensive | Comprehensive
|--------------------------------- | ----------------------------------- |  | ------------------------------------------- | --------- | ------------------------------------------- | - | ------------------ | - | -------- | --------- | ------------------------------- | -------------
|
|Balance at January 1, 2001        |                                     |  |                                             | 9,057,561 |                                             | $ | 9,058              |   |          | 9,465,445 |                                 | $            
|Net earnings for the year         |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|Other comprehensive income,       |                                     | 
|net of tax - Adjustment for       |                                     | 
|foreign currency                  |                                     | 
|translation                       |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                
|Comprehensive income for          |                                     | 
|the year                          |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                
|Cash dividends - $1.23 per        |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|share                             |                                     | 
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Conversion of Class B Common      |                                     | 
|Stock to Common Stock -           |                                     | 
|Note 15                           |                                     |  |                                             | 1,375     |                                             |   | 1                  |   |          |           |                                 |              
|Forfeitures of Common Stock       |                                     | 
|and Class A Common Stock          |                                     | 
|under Restricted Stock            |                                     | 
|Grant Plan - Note 15              |                                     |  |                                             | (1,720    | )                                           |   | (2                 | ) |          | (1,720    | )                               |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Class A Common Stock issued       |                                     | 
|under Stock Award Plan -          |                                     | 
|Note 15                           |                                     |  |                                             |           |                                             |   |                    |   |          | 32,186    |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Common Stock and Class A          |                                     | 
|Common Stock issued under         |                                     | 
|Stock Award Program               |                                     | 
|Plan - Note 16                    |                                     |  |                                             | 20,704    |                                             |   | 21                 |   |          | 25,383    |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Purchases of Common Stock and     |                                     | 
|Class A Common Stock              |                                     |  |                                             | (18,827   | )                                           |   | (19                | ) |          | (20,225   | )                               |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Stock options exercised under     |                                     | 
|Stock Award Plan - Note 15        |                                     |  |                                             |           |                                             |   |                    |   |          | 4,445     |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Stock options exercised under     |                                     | 
|Non-qualified Stock               |                                     | 
|Option Plan - Note 15             |                                     |  |                                             | 20,000    |                                             |   | 20                 |   |          | 20,000    |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|Balance at December 31, 2001      |                                     |  |                                             | 9,079,093 |                                             | $ | 9,079              |   |          | 9,525,514 |                                 | $            
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Net earnings for the year         |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |          
|Other comprehensive income,       |                                     | 
|net of tax - Adjustment for       |                                     | 
|foreign currency                  |                                     | 
|translation                       |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                
|Comprehensive loss for            |                                     | 
|the year                          |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                
|Cash dividends - $1.265 per share |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|Conversion of Class B Common      |                                     | 
|Stock to Common Stock - Note15    |                                     |  |                                             | 639       |                                             |   |                    |   |          |           |                                 |              
|Forfeitures of Common Stock       |                                     | 
|and Class A Common Stock          |                                     | 
|under Restricted Stock            |                                     | 
|Grant Plan - Note 15              |                                     |  |                                             | (1,265    | )                                           |   | (1                 | ) |          | (1,265    | )                               |              
|Class A Common Stock issued       |                                     | 
|under Stock Award Plan -          |                                     | 
|Note 15                           |                                     |  |                                             |           |                                             |   |                    |   |          | 1,782     |                                 |              
|Common Stock and Class A          |                                     | 
|Common Stock issued under         |                                     | 
|Stock Award Program               |                                     | 
|Plan - Note 16                    |                                     |  |                                             | 2,454     |                                             |   | 2                  |   |          | 2,454     |                                 |              
|Purchases of Common Stock,        |                                     | 
|Class A Common Stock and          |                                     | 
|Class B Common Stock              |                                     |  |                                             | (2,123    | )                                           |   | (1                 | ) |          | (420,898  | )                               |              
|Stock options exercised under     |                                     | 
|Stock Award Plan - Note 15        |                                     |  |                                             |           |                                             |   |                    |   |          | 43,380    |                                 |              
|Stock option expense              |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|Balance at December 31, 2002      |                                     |  |                                             | 9,078,798 |                                             | $ | 9,079              |   |          | 9,150,967 |                                 | $            
|                                  |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              

See notes to
consolidated financial statements.

31

---

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

|                                    | Common Stock
Issued
and Outstanding |  | Class A
Common Stock
Issued
and Outstanding |           | Class B
Common Stock
Issued
and Outstanding |   | Additional
Paid-In |   | Retained |           | Accumulated
Other
Comprehensive | Comprehensive
|----------------------------------- | ----------------------------------- |  | ------------------------------------------- | --------- | ------------------------------------------- | - | ------------------ | - | -------- | --------- | ------------------------------- | -------------
|
|Balance at December 31, 2002        |                                     |  |                                             | 9,078,798 |                                             | $ | 9,079              |   |          | 9,150,967 |                                 | $            
|Net earnings for the year           |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|Other comprehensive income,         |                                     | 
|net of tax - Adjustment for         |                                     | 
|foreign currency                    |                                     | 
|translation                         |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|Other comprehensive income,         |                                     | 
|net of tax - Adjustment             |                                     | 
|from minimum pension                |                                     | 
|liability                           |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                    |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                
|Comprehensive income for the   year |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                    |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                
|Cash dividends - $1.285 per         |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|share                               |                                     | 
|Conversion of Class B Common        |                                     | 
|Stock to Common Stock - Note 15     |                                     |  |                                             | 3,297     |                                             |   | 3                  |   |          |           |                                 |              
|Class A Common Stock issued         |                                     | 
|under Stock Award Plan -            |                                     | 
|Note 15                             |                                     |  |                                             |           |                                             |   |                    |   |          | 21,400    |                                 |              
|Common Stock and Class A            |                                     | 
|Common Stock issued under           |                                     | 
|Stock Award Program                 |                                     | 
|Plan - Note 16                      |                                     |  |                                             | 20,814    |                                             |   | 21                 |   |          | 23,140    |                                 |              
|Purchases of Common Stock and       |                                     | 
|Class A Common Stock                |                                     |  |                                             | (3,164    | )                                           |   | (3                 | ) |          | (3,491    | )                               |              
|Stock options exercised under       |                                     | 
|Stock Award Plan - Note 15          |                                     |  |                                             |           |                                             |   |                    |   |          | 57,740    |                                 |              
|Stock option expense                |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|                                    |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              
|Balance at December 31, 2003        |                                     |  |                                             | 9,099,745 |                                             | $ | 9,100              |   |          | 9,249,756 |                                 | $            
|                                    |                                     |  |                                             |           |                                             |   |                    |   |          |           |                                 |              

See notes to
consolidated financial statements.

32

---

# Bandag, IncorporatedNotes to Consolidated
Financial Statements

# Note 1.  Summary of
Significant Accounting Policies

# Principles of
Consolidation:

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

# Use of Estimates:

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

# Cash Equivalents:

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

# Accounts Receivable and
Concentrations of Credit Risk:

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

# Accounts Receivable and
Allowance for Doubtful Accounts:

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

# Deferred Taxes:

Deferred taxes on the unremitted
earnings of foreign subsidiaries are provided under the assumption that all profits of the
foreign subsidiaries will be repatriated to the United States and all foreign taxes paid
will be available to offset United States taxes. In addition, any deferred tax asset is
reviewed annually to determine the probability of realizing the asset. If it is determined
unlikely that the asset will be fully realized in the future, a valuation allowance is
established against the asset. Refer to Note 11 of the consolidated financial statements
for further details.

# Inventories:

Inventories are valued at the lower
of cost or market. Approximately 52%, 45%, and 45%, of year-end inventory amounts at
December 31, 2003, 2002, and 2001, respectively, were determined by the last in, first out
(LIFO) method. The remainder of year-end inventory amounts are determined by the first in,
first out method.

The excess of current cost over the
amount stated for inventories valued by the LIFO method amounted to approximately
$19,694,000, $17,634,000, and $20,328,000 at December 31, 2003, 2002, and 2001,
respectively.

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

33

---

# Property, Plant, and
Equipment:

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

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

Depreciation expense approximated
$26,229,000, $31,208,000, and $36,139,000 in 2003, 2002, and 2001, respectively.

# Intangible Assets:

Intangible assets, which principally
represent software, are amortized using the straight-line method over 3 to 5 years.
Intangible amortization expense approximated $950,000, $1,125,000, and $1,111,000 in 2003,
2002, and 2001, respectively. Amortization expense is estimated to be $950,000 for the
years 2004-2006 and $100,000 for 2007.

# Outsourcing Agreement:

In connection with a tire management
outsourcing agreement entered into by Tire Management Solutions, Inc. (TMS), the Company
is providing tire management services to a customer, Roadway Corporation. The current
outsourcing agreement with Roadway Corporation was extended to July 2004 and the Company
is in negotiations with Yellow Roadway Corporation to enter into a new agreement. The
substance of the outsourcing agreement, as more fully described below, is that the Company
provides complete maintenance of the customers tire and wheel assets over the term
of the agreement and provides a full range of services to maintain the assets. These
services include replacing and repairing tires and wheels, as well as other tire related
services. The Company entered into this agreement because fleets were experiencing
narrowing margins and expanding needs, including the need for suppliers (such as the
Company) to provide services, such as outsourcing services, as well as products. The
Company recognizes revenue for these outsourcing services on a per mile basis based on the
number of tire miles traveled by the customers truck fleet in the month of usage.

Over the term of the agreement, the
Company estimates that approximately 75% of the revenue will be realized through cash
payments and the balance will be realized by recording an incrementally increasing
ownership percentage in the customers tire assets. The Company agreed to accept the
non-cash consideration as partial payment for its services as a result of the negotiating
process between the Company and the customer, its longstanding relationship with the
customer and the anticipated return on the contract, including the non-cash consideration
received. The tire and wheel assets are classified as other assets. In 2003, 2002, and
2001, these non-current assets amounted to $31,700,000, $26,803,000 and $22,855,000,
respectively. The Company does not record depreciation on the tire and wheel assets;
rather, the Company incurs direct expenses related to the efforts of maintaining the tires
at the mutually agreed upon specifications. These amounts are expensed as incurred and
approximate the amount that would otherwise be recorded as depreciation expense.

Quarterly, the Company evaluates the
carrying value of the tire and wheel assets for impairment and adjusts the carrying value
as required. Upon termination of the agreement, the tire and wheel assets will either be
repurchased by the customer or a third party at a contractually agreed upon price, which
the Company believes will approximate their carrying value, or will remain the property of
the Company. There could be a material difference between the carrying value and the
realizable value should the tire and wheel assets not be repurchased by the customer, or a
third party. Although the acquisition of Roadway by Yellow adds uncertainty, the Company
has determined the probability that the customer, or a third party, will not repurchase
the tire and wheel assets to be highly unlikely based upon the facts and conditions
surrounding the contract with this customer, which includes a significant termination
penalty that the Company believes is sufficient to make this option unfavorable to the
customer.

34

---

# Foreign Currency
Translation:

Assets and liabilities of foreign subsidiaries
are translated at the year-end exchange rate and items of income and expense are
translated at the average exchange rate for the year. Exchange gains and losses arising
from transactions denominated in a currency other than the functional currency of the
foreign subsidiary and translation adjustments in countries with highly inflationary
economies or in which operations are directly and integrally linked to the Companys
United States operations are included in income. Net foreign exchange losses, which are
included in engineering, selling, administrative and other expenses in the Consolidated
Statements of Earnings, were $1,750,000, $1,102,000, and $2,769,000 in 2003, 2002, and
2001, respectively.

# Long-Lived Assets:

In accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, when indicators of impairment are present, the
Company evaluates the carrying value of property, plant, and equipment and finite lived
intangibles in relation to the operating performance and future undiscounted cash flows of
the underlying businesses. The Company adjusts the net book value of the underlying assets
to fair value if the sum of the expected future cash flows is less than book value.

# Research and Development:

Expenditures for research and
development, which are expensed as incurred, approximated $7,238,000, $8,109,000, and
$10,225,000 in 2003, 2002, and 2001, respectively.

# Advertising:

The Company expenses all advertising
costs in the year incurred. Advertising expense was $4,804,000, $5,723,000, and $7,137,000
in 2003, 2002, and 2001, respectively.

# Revenue Recognition:

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

# Shipping and Handling
Costs:

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

# Marketing Programs:

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

Under the DMR Program, the Company
provides financial assistance in the form of DMR promissory notes from the dealer to
Bandag. The proceeds from the promissory notes can only be used by the dealer toward the
acquisition of equipment (including equipment sold by the Company), service vehicles,
facility expansions and other items aligned with Company goals. The notes have a term of
up to five years. However, if the dealer achieves a business objective, typically
purchasing a specified amount of tread rubber each year, then the Company forgives either
part or all of the principal and interest for that year. The Company records a reduction
in sales for the costs of the program as financial assistance is provided. The DMR reserve
at December 31, 2003, 2002 and 2001 was $15,529,000, $18,927,000 and $14,716,000,
respectively. In 2003, 2002 and 2001, DMR costs of $4,905,000, $8,628,000 and $5,376,000,
respectively, were recorded as a reduction of sales.

34

---

# National Account
Business:

The Company enters into contracts to
supply retreaded tires and other tire-related services through its network of franchised
dealers to large national and regional customers in the North American trucking and
transportation industry. The Company provides various forms of financial incentives to its
dealers to continue the supply of retreaded tires and services on these accounts. In 2003,
2002, and 2001, fleet subsidy expenses of $25,026,000, $21,315,000, and $18,969,000,
respectively, were recorded as a reduction of sales.

# Derivative Instruments
and Hedging Activities:

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

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

The fair value of the derivative
instruments was a liability of $107,000 and $347,000 and an asset of $185,000 at December
31, 2003, 2002, and 2001, respectively. Changes in the fair values of these instruments
are reflected in engineering, selling, administrative and other expenses in the
Consolidated Statements of Earnings because the Company has not designated these
instruments as accounting hedges.

# Accounting for
Stock-Based Compensation:

In 1999, the Companys Board of
Directors adopted the Bandag, Incorporated Stock Award Plan, which is described more fully
in Note 15. Prior to 2002, the Company accounted for the plan under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly, compensation
expense for stock options was measured as the excess, if any, of the quoted market price
of the Companys stock at the date of the grant over the amount an employee must pay
to acquire the stock. Effective January 1, 2002, the Company adopted the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosures (the Statement). Under the modified
prospective method of adoption selected by the Company under the provisions of the
Statement, compensation cost of $2,210,000 and $1,572,000 recognized in 2003 and 2002,
respectively, is the same as that which would have been recognized had the recognition
provisions of the Statement been applied from its original effective date in 1994. Results
for prior years have not been restated.

36

---

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

|                               | Class A
Common
Shares |  | Weighted-
Average
Exercise
Price |          
|------------------------------ | --------------------- |  | -------------------------------- | ---------
|Outstanding, January 1, 2001   |                       |  |                                  | 532,700  
|Granted                        |                       |  |                                  | 388,200  
|Exercised                      |                       |  |                                  | (4,445   
|Forfeited                      |                       |  |                                  | (55,245  
|                               |                       |  |                                 
|Outstanding, December 31, 2001 |                       |  |                                  | 861,210  
|Granted                        |                       |  |                                  | 312,400  
|Exercised                      |                       |  |                                  | (43,380  
|Forfeited                      |                       |  |                                  | (17,820  
|                               |                       |  |                                 
|Outstanding, December 31, 2002 |                       |  |                                  | 1,112,410
|Granted                        |                       |  |                                  | 435,650  
|Exercised                      |                       |  |                                  | (58,902  
|Forfeited                      |                       |  |                                  | (24,518  
|                               |                       |  |                                 
|Outstanding, December 31, 2003 |                       |  |                                  | 1,464,640
|                               |                       |  |                                 

The following summarizes information
about stock options outstanding under the Bandag, Incorporated Stock Award Plan at
December 31, 2003:

|                | Options Outstanding |  | Options Exercisable |          
|--------------- | ------------------- |  | ------------------- | ---------
|
|$20.33 - $23.71 |                     |  |                     | 360,240  
|$23.71 - $27.10 |                     |  |                     | 358,675  
|$27.10 - $30.49 |                     |  |                     | 399,550  
|$30.49 - $33.88 |                     |  |                     | 346,175  
|                |                     |  |                     |          
|$20.33 - $33.88 |                     |  |                     | 1,464,640
|                |                     |  |                     |          

37

---

The following table presents, on a
pro forma basis, net earnings and net earnings per share as if the fair value based method
had been applied to all outstanding and unvested awards in 2001 prior to the adoption of
SFAS No. 123:

|In thousands, except per share data                                  | 2001 | 
|-------------------------------------------------------------------- | ---- | 
|Net earnings, as reported                                            |      | 
|Deduct: Total stock-based employee compensation expense              |      | 
|determined under fair value based method, net of related tax effects |      | 
|                                                                     |      | 
|Pro forma net earnings                                               |      | 
|                                                                     |      | 
|Net earnings per share - basic:                                      |      | 
|As reported                                                          |      | 
|Pro forma                                                            |      | 
|Net earnings per share - diluted:                                    |      | 
|As reported                                                          |      | 
|Pro forma                                                            |      | 

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

|                        | 2003     | 2002     | 2001    
|----------------------- | -------- | -------- | --------
|Dividend yield          | 4.7%     | 4.6%     | 4.1%    
|Expected volatility     | 32.3%    | 33.2%    | 31.3%   
|Risk-free interest rate | 4.0%     | 5.1%     | 5.3%    
|Expected lives          | 10 years | 10 years | 10 years

The weighted-average fair value of
options granted during 2003, 2002, and 2001 was $6.41, $8.52, and $6.74 per option,
respectively.

The number of options exercisable
were 495,042, 281,720, and 137,185 at December 31, 2003, 2002, and 2001, respectively.

# New Accounting Standards:

In December 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation Number (FIN) No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 addresses accounting
for variable interest entities (VIE), defined as a separate legal structure that either 1)
has equity investors who lack the essential characteristics of controlling financial
interest, or 2) has equity investors that do not provide sufficient financial resources
for the entity to support its own activities. FIN No. 46 requires that a VIE be
consolidated by a company if that company is entitled to a majority of the VIEs
residual returns or is subject to a majority of its expected losses, and also requires
disclosures concerning VIEs that a company is not required to consolidate but in which it
has a significant variable interest. The Company performed a preliminary analysis and has
determined none of its franchisees would require consolidation under FIN 46. The
consolidation requirements of FIN 46 would be effective for the Company as of March 31,
2004.

# Reclassification:

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

38

---

# Note 2.  Non-Recurring
Charges

During the fourth quarter 2001, the
Company recorded a non-recurring charge totaling $4,300,000 ($2,580,000 net of tax
benefits) related to the closure of a North American tread rubber manufacturing facility
and certain retirement benefits. Costs include $2,659,000 ($1,595,000 net of tax benefits)
for termination benefits for the reduction of 46 employees, $1,521,000 ($913,000 net of
tax benefits) for early retirement benefits of 19 employees, and other miscellaneous
closure costs. The Company paid $93,000, $1,321,000 and $1,542,000 in 2003, 2002 and 2001,
respectively, related to the termination of employees. As of December 31, 2003, $1,344,000
of the charges related to the closure of the North American tread rubber manufacturing
facility remained accrued. The Company estimates that substantially all of the remaining
payments will be made by the end of 2004. Also, included in the net non-recurring charge
was $1,800,000 ($1,080,000 net of tax benefits) for post-retirement health care costs
associated with 64 terminated employees that is included in the post-employment benefit
liability at December 31, 2001. These two charges were offset by a benefit of $2,700,000
($1,620,000 net of tax benefits) for the reduction of other accrued expenses due to the
resolution of a tax audit settlement and prior year tax accrual changes.

# Note 3.  Restructuring
Charges

In 2002, the Company recorded
restructuring charges totaling $3,500,000 ($2,450,000 net of tax benefits) for termination
benefits covering 39 employees. The Company paid approximately $2,428,000 and $650,000 in
2003 and 2002, respectively, related to the termination of employees. As of December 31,
2003, $836,000 of the charges related to the restructuring remained accrued, which
reflects a $414,000 increase in the original provision due to exchange rate changes.
Substantially all of the remaining payments, which are primarily severance pay, will be
made by the end of 2006.

# Note 4.  Acquisitions

On February 14, 2002, the Company
acquired the assets of Open Road Technologies, Inc. (Open Road), and the results of
operations from that point forward are included in the consolidated results. Open Road is
the supplier of RoadWare retread shop management software, which contributed sales
of approximately $7,700,000 and $6,200,000 in 2003 and 2002, respectively. The assets,
which were primarily software, were acquired for $1,951,000, net of cash received. As part
of the purchase agreement additional payments will be made each year for three years
following the purchase. The total of such payments will range from $2,200,000 to
$5,000,000 over the three year period.

# Note 5.  Divestitures

During 2003, the Companys TDS
segment sold 41 locations with a net carrying value of $31,213,000 for cash of $21,315,000
and assumed liabilities of $8,909,000. The assets of these locations consisted primarily
of inventory and property, plant and equipment. The divestitures resulted in a loss before
income taxes and cumulative effect of accounting change of $989,000 which was recorded in
engineering, selling, administrative and other expenses in the Consolidated Statements of
Earnings. During 2003, TDS also closed three locations. These divested and closed
locations contributed $40,982,000 to net sales and $4,118,000 of losses to earnings before
taxes and cumulative effect of accounting change for the year ended December 31, 2003. TDS
held for sale assets included in other current assets in the Consolidated Balance Sheet
decreased approximately $28,000,000 from December 31, 2002.

In conjunction with the divestiture
of certain TDS locations in 2003, Bandag guaranteed a portion of third-party loans to a
dealer. Bandags exposure under these guarantees is $2,800,000. The guarantees are
secured by assets of the dealer. The term of the guarantees is three years. The fair value
of the guarantees, which was estimated at $600,000, is included in long-term debt and
other obligations in the Companys Consolidated Balance Sheet with an offsetting
charge of $600,000 included in engineering, selling, administrative and other expenses on
the Consolidated Statements of Earnings in 2003.

39

---

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

# Note 6. Investments

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

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

|In thousands                                     | Cost |  | Gross
Unrealized
Gains |         | Estimated
Fair
Value |  
|------------------------------------------------ | ---- |  | ---------------------- | ------- | -------------------- | -
|December 31, 2003                                |      |  |                        |         |                      |  
|Securities Held-to-Maturity                      |      | 
|Obligations of states and political subdivisions |      |  | $                      | 85,550  |                      |  
|Corporate debt                                   |      |  |                        | 9,407   |                      |  
|Debt securities issued by foreign governments    |      |  |                        | 3,001   |                      |  
|                                                 |      |  |                        |         |                      |  
|                                                 |      |  | $                      | 97,958  |                      |  
|                                                 |      |  |                        |         |                      |  
|December 31, 2002                                |      | 
|Securities Held-to-Maturity                      |      | 
|Obligations of states and political subdivisions |      |  | $                      | 62,736  |                      | $
|                                                 |      |  |                        |         |                      |  
|December 31, 2001                                |      | 
|Securities Held-to-Maturity                      |      | 
|Obligations of states and political subdivisions |      |  | $                      | 113,544 |                      | $
|                                                 |      |  |                        |         |                      |  

At December 31, 2003, 2002, and 2001,
securities held-to-maturity include $87,150,000, $48,475,000, and $102,850,000,
respectively, reported as cash equivalents.

40

---

# Note 7.  Financing
Arrangements

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

|In thousands                                  | Interest
Rates |  | 2003 |       | 2002 |   | 2001    |  
|--------------------------------------------- | -------------- |  | ---- | ----- | ---- | - | ------- | -
|Senior Unsecured Notes Payable, matured 2002  |                |  |      | 6.41% |      | $ | --      |  
|Senior Unsecured Notes Payable, maturing 2007 |                |  |      | 6.50% |      |   | 22,857  |  
|                                              |                |  |      |       |      |   |         |  
|Total debt                                    |                |  |      |       |      |   | 22,857  |  
|Other obligations                             |                |  |      |       |      |   | 22,654  |  
|                                              |                |  |      |       |      |   |         |  
|Total debt and other obligations              |                |  |      |       |      |   | 45,511  |  
|Current portion of debt and other obligations |                |  |      |       |      |   | (10,252 | )
|                                              |                |  |      |       |      |   |         |  
|Long-term debt and other obligations          |                |  |      |       |      | $ | 35,259  |  
|                                              |                |  |      |       |      |   |         |  

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

|                                   |        
|---------------------------------- | -------
|Scheduled maturities, in thousands |        
|2004                               | $10,252
|2005                               | 9,774  
|2006                               | 8,518  
|2007                               | 6,753  
|2008                               | 253    
|Thereafter                         | 9,961  

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

Cash payments for interest on debt
were $2,428,000, $6,982,000, and $7,419,000 in 2003, 2002, and 2001, 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, 2003, 2002, and 2001, the fair value of the Companys
outstanding debt was approximately $23,809,000, $30,383,000, and $96,256,000,
respectively. Changes in the market value of the Companys debt does not affect the
reported results of operations unless the Company is retiring such obligations prior to
maturity.

At December 31, 2003, the Company had
uncommitted and committed unused lines of credit arrangements totaling $97,344,000. These
arrangements are available to the Company or certain of its international subsidiaries
through various domestic and international banks at various interest rates and expiration
dates.

41

---

# Note 8.  Goodwill

Effective January 1, 2002, the
Company adopted SFAS No. 142, which resulted in a non-cash transition charge of
$47,260,000 (net of tax benefit of $3,704,000), or $2.38 per diluted share, to recognize
impairment of goodwill, substantially all of which related to TDS. The fair value of the
reporting units was estimated using present value of future cash flows. Pursuant to SFAS
No. 142, the $47,260,000 charge was treated as a change in accounting principle.

The changes in the carrying amount of
goodwill for 2002 were as follows:

|In thousands                    | Traditional
Business |  | TDS |        | Total |  
|------------------------------- | -------------------- |  | --- | ------ | ----- | -
|Balance as of January 1, 2002   |                      |  | $   | 3,388  |       | $
|Impairment losses               |                      |  |     | (3,388 | )     |  
|                                |                      |  |     |        |       |  
|Balance as of December 31, 2002 |                      |  | $   | --     |       | $
|                                |                      |  |     |        |       |  

Proforma information assuming SFAS
No. 142 was adopted on January 1, 2001:

|                                              | Year Ended December 31 | 
|--------------------------------------------- | ---------------------- | 
|
|Reported earnings before cumulative effect of |                        | 
|accounting change                             |                        | 
|Add goodwill amortization                     |                        | 
|                                              |                        | 
|Proforma earnings before cumulative effect of |                        | 
|accounting change                             |                        | 
|                                              |                        | 
|Basic earnings per share                      |                        | 
|Reported earnings before cumulative effect of |                        | 
|accounting change                             |                        | 
|Add goodwill amortization                     |                        | 
|                                              |                        | 
|Proforma earnings before cumulative effect of |                        | 
|accounting change                             |                        | 
|                                              |                        | 
|Diluted earnings per share                    |                        | 
|Reported earnings before cumulative effect of |                        | 
|accounting change                             |                        | 
|Add goodwill amortization                     |                        | 
|                                              |                        | 
|Proforma earnings before cumulative effect of |                        | 
|accounting change                             |                        | 
|                                              |                        | 

# Note 9.  Other Income

Other income includes lease income,
royalties and other miscellaneous items.

42

---

# Note 10.  Impairment of
Long-Lived Assets

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

# Note 11.  Income Taxes

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

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

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

43

---

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

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

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

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

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

|                                                            | Year Ended December 31
|----------------------------------------------------------- | ----------------------
|
|Computed at the expected statutory rate                     |                       
|State income tax - net of federal tax benefit               |                       
|Amortization of goodwill not deductible                     |                       
|Research and development credit                             |                       
|Audit settlement and prior year accrual changes             |                       
|Deferred tax on unremitted earnings of foreign subsidiaries |                       
|and foreign tax rate differentials                          |                       
|Other                                                       |                       
|                                                            |                       
|Income tax at the effective rate                            |                       
|                                                            |                       

Income taxes paid amounted to
$25,773,000, $21,565,000, and $9,306,000 in 2003, 2002, and 2001, respectively.

44

---

# Note 12. Earnings Per
Share

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

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

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

Options to purchase 46,100 shares of
Class A Common Stock at an option price of $33.875 were outstanding during each of 2003,
2002, and 2001, but were not included in the computation of diluted earnings per share
because the effect would have been antidilutive.

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

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

# Note 13.  Leases

Certain equipment and facilities are
rented under non-cancelable and cancelable operating leases. Total rental expense under
operating leases was $8,454,000, $9,351,000, and $10,210,000 for the years ended December
31, 2003, 2002, and 2001, respectively. At December 31, 2003, future minimum lease
payments under non-cancelable operating leases having initial lease terms in excess of one
year are: $9,813,000 in 2004, $8,354,000 in 2005, $7,159,000 in 2006, $4,958,000 in 2007,
$3,112,000 in 2008, and $22,105,000 in the aggregate for all years after 2008.

45

---

# Note 14.  Operating
Segment and Geographic Area Information

# Description of Types of
Products and Services:

The Company has two reportable
operating segments: the Traditional Business and TDS.

The Traditional Business manufactures
precured tread rubber, equipment and supplies for retreading tires and operates on a
worldwide basis. SFAS No. 131 requires segment information to be reported based on how
management internally evaluates the operating performance of their business units. The
operations of the Traditional Business segment are evaluated by worldwide geographic
region. For segment reporting purposes, the Companys operations located in the
United States and Canada, along with Tire Management Solutions, Inc. and Quality Design
Systems, Inc. are integrated and managed as one unit, which is referred to internally as
North America. The Companys operations located in Europe principally
service those European countries, but also export to certain other countries in the Middle
East and Northern and Central Africa. Exports from North America to markets in the
Caribbean, Central America, South America and Asia, along with operations in Brazil,
Mexico, Venezuela, South Africa, and royalties from a licensee in Australia, are combined
under one management group referred to internally as International.

TDS operates retreading locations and
commercial, retail, and wholesale outlets in 10 states west of the Mississippi in the
United States for the sale and maintenance of new and retread tires to principally
commercial and industrial customers.

# Measurement of Segment
Profit and Loss and Segment Assets:

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

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

Other assets are principally cash and
cash equivalents, investments, corporate office and related equipment.

46

---

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

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

|                                          | Traditional Business
|----------------------------------------- | --------------------
|
|
|Sales by product                          |                     
|Retread products                          |                     
|New tires                                 |                     
|Retread tires                             |                     
|Equipment                                 |                     
|Other                                     |                     
|                                          |                     
|Net sales to unaffiliated customers(1)(2) |                     
|Transfers                                 |                     
|                                          |                     
|Segment area totals                       |                     
|Eliminations (deduction)                  |                     
|Total Net Sales                           |                     
|Gross Profit                              |                     
|Goodwill Amortization Expense(3)          |                     
|Intangible Amortization Expense           |                     
|Depreciation Expense                      |                     
|Operating earnings (loss)                 |                     
|Interest revenue                          |                     
|Interest expense                          |                     
|Corporate expenses                        |                     
|                                          |                     
|Earnings (loss) before income taxes &     |                     
|cumulative effect of  accounting change   |                     
|Total Assets at December 31               |                     
|Expenditures for Long-Lived Assets        |                     
|Additions to (Deductions from) Long-      |                     
|Lived Assets due to Acquisitions          |                     
|(Divestitures)                            |                     
|Long-Lived Assets                         |                     
|Retained Earnings                         |                     

|(1) | No
customer accounted for 10% or more of the Companys sales to
                    unaffiliated customers in 2003, 2002 or 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Export
sales from North America were less than 10% of sales to unaffiliated
                    customers in each of the years 2003, 2002 and 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Goodwill
amortization expense discontinued in 2002, due to the adoption of SFAS
                    142 as of January 1, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(4) | In
2002, includes $2.4 of reduced cost of sales due to decreased LIFO inventory
                    levels. (5) In 2001, includes non-recurring charges of $3.4 related
to costs                     associated with the closure of a domestic manufacturing
facility and other                     non-recurring costs.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | In
2002, includes $3.0 of restructuring charges classified as cost of sales and
                    $0.5 of restructuring charges classified as operating expenses, and
$1.4 of                     reduced cost of sales due to decreased LIFO inventory levels.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | In
2002, includes $2.7 of impairment charges recorded against long-lived assets.
|--- | --------------------------------------------------------------------------------

|(8) | Other
corporate expenses consist of corporate administrative expenses including
                    corporate legal expenses.
|--- | -----------------------------------------------------------------------------------------------------------------------------

47

---

|                                          | TDS | Other(8) | Consolidated
|----------------------------------------- | --- | -------- | ------------
|
|Sales by product                          |     |          |             
|Retread products                          |     |          | $           
|New tires                                 |     |          |             
|Retread tires                             |     |          |             
|Equipment                                 |     |          |             
|Other                                     |     |          |             
|                                          |     |          |             
|Net sales to unaffiliated customers(1)(2) |     |          | $           
|Transfers                                 |     |          |             
|                                          |     |          |             
|Segment area totals                       |     |          | $           
|Eliminations (deduction)                  |     |          |             
|                                          |     |          |             
|Total Net Sales                           |     |          |             
|Gross Profit                              |     |          | $           
|Goodwill Amortization                     |     |          |             
|Intangible Amortization Expense           |     |          |             
|Depreciation Expense                      |     |          |             
|Operating earnings (loss)(3)              |     |          | $           
|Interest revenue                          |     |          |             
|Interest expense                          |     |          |             
|Corporate expenses                        |     |          |             
|                                          |     |          |             
|Earnings (loss) before income taxes &     |     |         
|cumulative effect of  accounting change   |     |          | $           
|Total Assets at December 31               |     |          | $           
|Expenditures for Long-Lived Assets        |     |          |             
|Additions to (Deductions from) Long-      |     |         
|Lived Assets due to Acquisitions          |     |         
|(Divestitures)                            |     |          |             
|Long-Lived Assets                         |     |          |             
|Retained Earnings                         |     |          |             

48

---

# Bandag, IncorporatedNotes to Consolidated
Financial Statements

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

|              | Year Ended December 31 | 
|------------- | ---------------------- | 
|
|Net Sales(a)  |                        | 
|United States |                        | 
|Other         |                        | 
|              |                        | 
|Total         |                        | 
|              |                        | 

|                     | December 31 | 
|-------------------- | ----------- | 
|
|Long-Lived Assets(b) |             | 
|United States        |             | 
|Other                |             | 
|                     |             | 
|Total                |             | 
|                     |             | 

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

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

# Note  15.
Shareholders Equity

Class A Common Stock and Class B
Common Stock have the same rights regarding dividends and distributions upon liquidation
as Common Stock. However, Class A Common Shareholders are not entitled to vote, Class B
Common Shareholders are entitled to ten votes for each share held and Common Shareholders
are entitled to one vote for each share held. Transfer of shares of Class B Common Stock
is substantially restricted and must be converted to Common Stock prior to sale. In
certain instances, outstanding shares of Class B Common Stock will be automatically
converted to shares of Common Stock. All then-outstanding shares of Class B Common Stock
will be converted to shares of Common Stock on January 16, 2007.

Under the terms of the Bandag,
Incorporated Nonqualified Stock Option Plan, the Company was authorized through November
13, 1997 to grant options to purchase up to 500,000 shares of Common Stock and 500,000
shares of Class A Common Stock to certain key employees at an option price equal to the
market value of the shares on the date of grant. During 2001, options to purchase 20,000
shares of Common Stock and 20,000 shares of Class A common Stock were exercised. No
further options are outstanding under the Plan.

In 1999, the Companys Board of
Directors adopted the Bandag, Incorporated Stock Award Plan (the Plan). Under the terms of
the Plan, the Company may award to certain eligible employees and directors incentive
stock options, nonqualified stock options, and restricted stock. Up to 2,400,000 shares of
Class A Common Stock is authorized for issuance under the Plan and as of December 31,
2003, 773,265 shares were available for issuance under the Plan. All employees of Bandag
and its subsidiaries and directors of Bandag who are not employees of Bandag or its
subsidiaries are eligible to participate in the Plan. The exercise price of each option is
equal to the market price of the Companys stock on the date of the grant. The
maximum term of the options is 10 years and the maximum vesting period is 5 years.
Restricted stock granted under the Plan vests over a three year period. The Company
records expense related to the Plan on a straight-line basis over the period the grants
vest. During the years ended December 31, 2003 and 2002, 21,400 and 1,782 restricted
shares of Class A Common Stock were granted under the Plan and $192,000 and $14,000 of
expenses was recorded, respectively. Also during 2003 and 2002, 435,650 and 312,400
options were granted and $2,210,000 and $1,572,000 of expense was recorded, respectively.
During the year ended December 31, 2001, 32,186 restricted shares of Class A Common Stock,
which were accrued for at December 31, 2000, were granted under the Plan. Expense of
$784,000 was recorded in 2000. For further information see Accounting for
Stock-Based Compensation under Note 1.

49

---

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

# Note 16.  Retirement
Benefit Plans

The Company sponsors defined-benefit pension
plans covering full-time employees directly employed by Bandag, Incorporated, Bandag
Licensing Corporation (BLC), Bandag Canada Ltd., TMS, and certain employees of TDS and in
the Companys European operations. In addition to providing pension benefits, the
Company provides certain postretirement medical benefits to certain individuals who
retired from employment before January 1, 1993. Employees who retire after December 31,
1992 and are at least age 62 with 15 years of service of direct employment with Bandag,
Incorporated, BLC, and Kendon Corporation are eligible for temporary medical benefits that
cease at age 65. The Company uses a September 30 measurement date for the majority of its
plans.

50

---

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

|                                         | Pension Benefits |  | Postretirement Benefits |        
|---------------------------------------- | ---------------- |  | ----------------------- | -------
|
|Change in benefit obligations:           |                  |  |                         |        
|Benefit obligations at beginning         |                  | 
|of  year                                 |                  |  | $                       | 101,189
|Service cost                             |                  |  |                         | 3,939  
|Interest cost                            |                  |  |                         | 6,427  
|Participants' contributions              |                  |  |                         | 50     
|Plan amendments(1)                       |                  |  |                         | --     
|Exchange rate changes                    |                  |  |                         | 880    
|Special termination benefits             |                  |  |                         | --     
|Benefits paid                            |                  |  |                         | (4,121 
|Actuarial (gain) or loss                 |                  |  |                         | 7,130  
|                                         |                  |  |                         |        
|Benefit obligations at end of year       |                  |  | $                       | 115,494
|                                         |                  |  |                         |        
|Change in plan assets at fair value:     |                  | 
|Fair value of plan assets at             |                  | 
|beginning of year                        |                  |  | $                       | 91,680 
|Actual return on plan assets             |                  |  |                         | 16,982 
|Employer contributions                   |                  |  |                         | 271    
|Participants' contributions              |                  |  |                         | 50     
|Benefits paid                            |                  |  |                         | (4,121 
|Exchange rate changes                    |                  |  |                         | 618    
|                                         |                  |  |                         |        
|Fair value of plan assets at end of year |                  |  | $                       | 105,480
|                                         |                  |  |                         |        
|Reconciliation of funded status:         |                  | 
|Funded status                            |                  |  | $                       | (10,014
|Unrecognized actuarial (gain) or loss    |                  |  |                         | 34,091 
|Unrecognized transition asset            |                  |  |                         | (513   
|Unrecognized prior service cost          |                  |  |                         | 1,349  
|                                         |                  |  |                         |        
|Net amount recognized                    |                  |  | $                       | 24,913 
|                                         |                  |  |                         |        

|(1) | Changes
in benefit obligations for 2002 includes $1,102 relating to plan
                    amendments, of which $803 relates to changes in the Bandag
Supplemental Pension                     Plan including increasing the salary limit to
$500 and inclusion of certain                     employees of TDS. Also included in the
plan amendments were $185 related to the                     adoption of supplemental
coverage for certain employees of Bandag Canada Ltd.                     and actuarial
corrections of $114.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

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

|                                     | Pension Benefits |  | Postretirement Benefits |       
|------------------------------------ | ---------------- |  | ----------------------- | ------
|
|Prepaid benefit cost                 |                  |  | $                       | 27,086
|Accrued benefit liability            |                  |  |                         | (4,010
|Intangible asset                     |                  |  |                         | 863   
|Accumulated other comprehensive loss |                  |  |                         | 974   
|                                     |                  |  |                         |       
|Net amount recognized                |                  |  | $                       | 24,913
|                                     |                  |  |                         |       

The accumulated benefit obligation
for the U.S. defined benefit pension plan was $81,787,000, $73,565,000, and $59,158,000 at
December 31, 2003, 2002, and 2001, respectively.

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

|                               | Pension Benefits |  | Postretirement Benefits |      
|------------------------------ | ---------------- |  | ----------------------- | -----
|
|Projected benefit obligation   |                  |  | $                       | 9,984
|Accumulated benefit obligation |                  |  |                         | 7,892
|Fair value of plan assets      |                  |  |                         | 3,882

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

|                                     | Pension Benefits |  | Postretirement Benefits |       
|------------------------------------ | ---------------- |  | ----------------------- | ------
|
|Components of net periodic           |                  |  |                         |       
|(benefit) cost                       |                  | 
|Service cost                         |                  |  | $                       | 3,939 
|Interest cost                        |                  |  |                         | 6,427 
|Expected return on plan assets       |                  |  |                         | (6,269
|Amortization of prior service cost   |                  |  |                         | 124   
|Amortization of transitional assets  |                  |  |                         | (653  
|Recognized actuarial (gain) loss     |                  |  |                         | 1,515 
|                                     |                  |  |                         |       
|Net periodic (benefit) cost          |                  |  | $                       | 5,083 
|                                     |                  |  |                         |       
|Additional (gain) or loss recognized |                  | 
|due to:                              |                  | 
|Special Termination Cost             |                  |  |                         | --    

52

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Additional information:

|                                       | Pension Benefits |  | Postretirement Benefits |    
|-------------------------------------- | ---------------- |  | ----------------------- | ---
|
|Increase in minimum liability included |                  |  |                         |    
|in other comprehensive income net      |                  | 
|of tax of $373 in 2003                 |                  |  | $                       | 601

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

|* | Ultimate
trend rate for 2001 reached in 2002.
|- | ---------------------------------------------

|** | Ultimate
trend rate for 2002 reached in 2009.
|-- | ---------------------------------------------

|*** | Ultimate
trend rate for 2003 reached in 2011.
|--- | ---------------------------------------------

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

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

53

---

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

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

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

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

The Company expects to fund a pension
plan approximately $530,000 in 2004. The Company expects to fund its postretirement plan
approximately $1,100,000 in 2004. The need for further contributions will be based on
changes in the value of plan assets and the movements of interest rates during each year.
The investment strategy is to achieve an asset allocation balance within planned targets
to obtain an average 7.0% annual return for the long-term. Each year, the Company
periodically reviews with its actuaries its investment strategy and funding needs.

On December 8, 2003, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was enacted. The
accounting and disclosure implications of the Act are addressed by Financial Staff
Position No. 106-1 (FSP No. FAS 106-1). In accordance with FSP No. FAS 106-1, any measures
of the accumulated postretirement benefit obligation or net periodic postretirement
benefit cost do not reflect the effects of the Act. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance, when issued, could
require the sponsor to change previously reported information.

The Company also sponsors
defined-contribution plans, covering substantially all employees in the United States.
Annual contributions are made in such amounts as determined by the Companys Board of
Directors and include a potential Company contribution of stock based on earnings per
share. Although employees may contribute up to 75% of their annual compensation from the
Company, they are generally not required to make contributions in order to participate in
the plans. The Company currently provides plans with a variety of contribution levels
(including employee contribution match provisions). The Company recorded expense for
contributions in the amount of $3,835,000, $5,044,000, and $4,568,000 in 2003, 2002, and
2001, respectively. During the years ended December 31, 2003, 2002, and 2001, the Company
issued 20,814, 2,454, and 20,704 shares of Common Stock, respectively. During the years
ended December 31, 2003, 2002, and 2001, the Company issued 23,140, 2,454, and 25,383
shares of Class A Common Stock, respectively. The Common Stock and Class A Common Stock
were all accrued for in the previous years. The Company recorded expense under the plan of
$1,600,000, $1,100,000, and $163,000 for the years ended December 31, 2003, 2002, and
2001, 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
2003, 2002, and 2001.

54

---

# Note 17.  Litigation

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

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

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

Although these cases have been
pending for some time, little discovery has been undertaken because the cases have been
stayed by the pendency of motions to remand the cases from federal to state court and
proceedings in bankruptcy court involving Rouse Rubber Co. Bandag has been named in the
cases based on its majority ownership of Rouse prior to 1995. Bandag did not manufacture,
operate or repair the equipment in question. Bandag had only limited involvement with the
equipment in question while it had an ownership interest in Rouse. Plaintiffs allege that
Bandag may be passively liable as a joint venturer with the employer, Rouse
Rubber Co., an allegation which Bandag believes is without any basis.

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

55

---

# Note 18.  Summary of
Unaudited Quarterly Results of Operations

Unaudited quarterly results of
operations for the years ended December 31, 2003 and 2002 are summarized as follows:

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

|                                       | Quarter Ended 2002 | 
|-------------------------------------- | ------------------ | 
|
|Net sales                              |                    | 
|Gross profit                           |                    | 
|Earnings before cumulative effect of   |                    | 
|accounting change                      |                    | 
|Net earnings (loss)                    |                    | 
|Basic earnings (loss) per share        |                    | 
|Earnings before cumulative effect of   |                    | 
|accounting change                      |                    | 
|Cumulative effect of accounting change |                    | 
|                                       |                    | 
|Net earnings (loss)                    |                    | 
|Diluted earnings (loss) per share      |                    | 
|Earnings before cumulative effect of   |                    | 
|accounting change                      |                    | 
|Cumulative effect of accounting change |                    | 
|                                       |                    | 
|Net earnings (loss)                    |                    | 

Fourth quarter 2002 earnings reflect
$2,450 after-tax, related to restructuring charges, $1,890 after-tax ($.10 per diluted
share), related to impairment charges, and $2,660 after-tax of reduced cost of sales
related to decreased LIFO inventory levels.

# Note 19.  Subsequent Event

On February 13, 2004, the Company
announced the acquisition of an 87.5% majority interest in Speedco, Inc. from its founders
and Equilon Enterprises, LLC, a Royal Dutch Shell Group company. Speedco provides
quick-service truck lubrication nationwide through 26 company-owned and six licensed
on-highway locations. In total, Bandag paid approximately $56,000,000 for its 87.5%
interest and to assume and retire $20,100,000 of debt. Speedco generated unaudited
revenues of approximately $46,000,000 and unaudited pre-tax income of approximately
$4,800,000 in 2003.

56

---

# Bandag, Incorporated

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

None

# Item 9A.  CONTROLS AND
PROCEDURES

Based on an evaluation performed by
the Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the Companys
disclosure controls and procedures, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were
effective as of December 31, 2003.

Based on an evaluation performed by
the Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, there were no changes in the Companys
internal control over financial reporting identified in such evaluation that occurred
during the quarter ended December 31, 2003 that has materially affected, or is likely to
materially affect, the Companys internal control over financial reporting.

# PART III

# Item 10.  DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by Item
401 of Regulation S-K with respect to the directors of the registrant and by Item 405 of
Regulation S-K is incorporated herein by reference from the registrants definitive
Proxy Statement involving the election of directors filed or to be filed pursuant to
Regulation 14A not later than 120 days after December 31, 2003 (the Proxy
Statement) under the headings Election of Directors and
Miscellaneous  Section 16(a) Beneficial Reporting Compliance. In
accordance with General Instruction G (3) to Form 10-K, the information with respect to
executive officers of the Company required by Item 401 of Regulation S-K has been included
in Part I hereof.

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

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

# Item 11. EXECUTIVE
COMPENSATION

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

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

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

57

---

# Item 13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

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

# Item 14   PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The information called for by Item 14
is incorporated herein by reference from the registrants Proxy Statement under the
heading  Proposal No. 3  Ratification of Selection of Independent
Auditors.

# PART IV

# Item 15.  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
         Report of Independent
Auditors | 26
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --

| | Consolidated Balance
Sheets as of December 31, 2003, 2002 and 2001 | 27
| | ------------------------------------------------------------------ | --

| | Consolidated Statements
of Earnings for the Years Ended December 31, 2003,                   2002 and
2001 | 29
| | ---------------------------------------------------------------------------------------------------------- | --

| | Consolidated Statements
of Cash Flows for the Years Ended December 31, 2003,                   2002 and 2001 | 30
| | ------------------------------------------------------------------------------------------------------------ | --

| | Consolidated Statements
of Changes in Shareholders' Equity for the Years Ended                   December 31,
2003, 2002 and 2001 | 31
| | --------------------------------------------------------------------------------------------------------------------------------- | --

| | Notes to
Consolidated Financial
Statements | 33
| | ------------------------------------------ | --

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

58

---

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

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

| | 3.1 | Bylaws:
As amended November 11, 2003.
| | --- | -------------------------------------

| | 3.2 | Amendment to Bylaws
adopted on November 11, 2003.
| | --- | -------------------------------------------------

| | 3.3 | Restated
Articles of Incorporation, effective December 30, 1986.  (Incorporated by
             reference to Exhibit No. 3.2 to the Company's Form 10-K for the year ended
December 31,              1992.)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4 | Articles
of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6,
             1992.  (Incorporated by reference to Exhibit No. 3.3 to the Company's Form
10-K for the              year ended December 31, 1992.)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 4.2 | Note
Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior Notes due
             December 15, 2007.  (Incorporated by reference to Exhibit 4.3 to the
Company's Form 10-K              for the year ended December 31, 1997.)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1* | Bandag,
Incorporated Restricted Stock Grant Plan, as amended August 24, 1999.
             (Incorporated by reference to Exhibit No. 10.1 to the Company's Form 10-K
for the year              ended December 31, 1999).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

| | 10.3* | Miscellaneous
Fringe Benefits for Executives.  (Incorporated by reference to Exhibit No.
             10.3 to the Company's Form 10-K for the year ended December 31, 2001.)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4* | Form
of Participation Agreement under the Bandag, Incorporated Restricted Stock Grant
             Plan.  (Incorporated by reference as Exhibit 10.7 to the Company's Form 10-K
for the year              ended December 31, 1994.)
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and
             Martin G. Carver (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q/A              for the quarter ended June 30, 1999).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and
             Nathaniel L. Derby, II (incorporated by reference to Exhibit 10.2 to the
Company's Form              10-Q/A for the quarter ended June 30, 1999).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and
             Warren W. Heidbreder (incorporated by reference to Exhibit 10.4 to the
Company's Form              10-Q/A for the quarter ended June 30, 1999).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and John
             C. McErlane (incorporated by reference to Exhibit 10.5 to the Company's Form
10-Q/A for the              quarter ended June 30, 1999).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

59

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

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

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

| | 10.13 | Stock
Purchase Agreement dated June 18, 2002 between Bandag, Incorporated and Lucille A.
             Carver.  (Incorporated by reference to Exhibit 10 to the Company's Form 10-Q
for the              quarterly period ended June 30, 2002.)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

|* | Represents
a management compensatory plan or arrangement.
|- | ---------------------------------------------------------

|(b) | Reports
on Form 8-K
|--- | -------------------

The Company filed a Current Report on
Form 8-K dated October 20, 2003, reporting in Item 12 the issuance of a press release
reporting financial results for the third quarter ended September 30, 2003.

60

---

SCHEDULE II 
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

# BANDAG, INCORPORATED
AND SUBSIDIARIES

|COL. A                          | COL. B | ADDITIONS
COL. C | DEDUCTIONS
COL. D | COL. E    
|------------------------------- | ------ | ---------------- | ----------------- | ----------
|
|Year ended December 31, 2003:   |        |                  | $                 | 13,644,000
|Allowance for doubtful accounts |        |                 
|Year ended December 31, 2002:   |        |                 
|Allowance for doubtful accounts |        |                  | $                 | 15,206,000
|Year ended December 31, 2001:   |        |                 
|Allowance for doubtful accounts |        |                  | $                 | 15,810,000

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

61

---

# SIGNATURES

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

|                     | BANDAG, INCORPORATED
|-------------------- | --------------------
|Date:  March 1, 2004 | By:                 
|                     |                     

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

|                     |                                                                                                             |                       |                                                                                           
|-------------------- | ----------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------------------------------------------------------------
|By:                  | /s/  Robert T. Blanchard                                                                                    | By:                   | /s/  Roy J. Carver, Jr.                                                                   
|                     | Robert T. Blanchard
Director                                                                                |                       | Roy J. Carver, Jr.
Director                                                               
|By:                  | /s/  Gary E. Dewel                                                                                          | By:                   | /s/  James R. Everline                                                                    
|                     | Gary E. Dewel
Director                                                                                      |                       | James R. Everline
Director                                                                
|By:                  | /s/  Phillip J. Hanrahan                                                                                    | By:                   | /s/  Amy P. Hutton                                                                        
|                     | Phillip J. Hanrahan
Director                                                                                |                       | Amy P. Hutton
Director                                                                    
|By:                  | /s/  Edgar D. Jannotta                                                                                      | By:                   | /s/  R. Stephen Newman                                                                    
|                     | Edgar D. Jannotta
Director                                                                                  |                       | R. Stephen Newman
Director                                                                
|                     | /s/  Martin G. Carver                                                                                       |                       | /s/  Warren W. Heidbreder                                                                 
|                     | Martin G. Carver
Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer) |                       | Warren W. Heidbreder
Vice President, Chief Financial
Officer (Principal Financial Officer)
|Date:  March 1, 2004 |                                                                                                             | /s/  Charles W. Vesey
|                     |                                                                                                             |                       | Charles W. Vesey
Corporate Controller
(Principal Accounting Officer)                      

62

---

EXHIBIT INDEX

|ExhibitNo. | Description
|---------- | -----------

|3.1 | Bylaws:
As amended November 11, 2003.
|--- | -------------------------------------

|3.2 | Amendment to Bylaws
adopted on November 11, 2003.
|--- | -------------------------------------------------

|3.3 | Restated
Articles of Incorporation, effective December 30, 1986.  (Incorporated by
             reference to Exhibit No. 3.2 to the Company's Form 10-K for the year ended
December 31,              1992.)
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.4 | Articles
of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6,
             1992.  (Incorporated by reference to Exhibit No. 3.3 to the Company's Form
10-K for the              year ended December 31, 1992.)
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|4.2 | Note
Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior Notes due
             December 15, 2007.  (Incorporated by reference to Exhibit 4.3 to the
Company's Form 10-K              for the year ended December 31, 1997.)
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1* | Bandag,
Incorporated Restricted Stock Grant Plan, as amended August 24, 1999.
             (Incorporated by reference to Exhibit No. 10.1 to the Company's Form 10-K
for the year              ended December 31, 1999).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

|10.3* | Miscellaneous
Fringe Benefits for Executives.  (Incorporated by reference to Exhibit No.
             10.3 to the Company's Form 10-K for the year ended December 31, 2001.)
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4* | Form
of Participation Agreement under the Bandag, Incorporated Restricted Stock Grant
             Plan.  (Incorporated by reference as Exhibit 10.7 to the Company's Form 10-K
for the year              ended December 31, 1994.)
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and
             Martin G. Carver (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q/A              for the quarter ended June 30, 1999).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and
             Nathaniel L. Derby, II (incorporated by reference to Exhibit 10.2 to the
Company's Form              10-Q/A for the quarter ended June 30, 1999).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and
             Warren W. Heidbreder (incorporated by reference to Exhibit 10.4 to the
Company's Form              10-Q/A for the quarter ended June 30, 1999).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8* | Severance
Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and John
             C. McErlane (incorporated by reference to Exhibit 10.5 to the Company's Form
10-Q/A for the              quarter ended June 30, 1999).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

63

---

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

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

|10.13 | Stock
Purchase Agreement dated June 18, 2002 between Bandag, Incorporated and Lucille A.
             Carver.  (Incorporated by reference to Exhibit 10 to the Company's Form 10-Q
for the              quarterly period ended June 30, 2002.)
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

|* | Represents
a management compensatory plan or arrangement.
|- | ---------------------------------------------------------

64