# UNITED STATES SECURITIES 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, 2006

# Commission File Number
1-7007

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

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

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

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          | New York Stock Exchange and Chicago Stock Exchange
|Class A Common Stock - $1 Par Value  |                                                   
|Common Share Purchase Rights         |                                                   
|Class A Common Share Purchase Rights |                                                   
|(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 if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes |_| No |X|

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes |_| No |X|

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

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

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Act. (Check one):

Large accelerated filer |_|
 Accelerated filer |X|  Non-accelerated filer |_|

Indicate by check mark whether the
registrant is shell company (as defined in Rule 12b-2 of the Act).  Yes |_|  No |X|

The aggregate market value of the
voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2006:
Common Stock, $236,952,659, Class A Common Stock (non-voting), $146,955,168, Class B
Common Stock, $524,115.

The number of shares outstanding of
the issuers classes of common stock as of January 31, 2007: Common Stock, 9,982,291
shares; Class A Common Stock, 9,520,791 shares.

Documents Incorporated by
Reference:Portions of the Companys Proxy Statement for the 2007 Annual Meeting
of the Shareholders are incorporated herein by reference in Part III, unless the Proxy
Statement will not be filed by April 30, in which case the Company will amend this Form
10-K to provide omitted information.

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# Bandag, Incorporated 
Annual Report on Form 10-K Year Ended December 31, 2006 Table of Contents

|         |                                                                                               |  | Page
|-------- | --------------------------------------------------------------------------------------------- |  | ----
|PART I   |                                                                                               |  | 2   
|         | Item 1. Business                                                                              |  | 2   
|         | Item 1A. Risk Factors                                                                         |  | 10  
|         | Item 1B. Unresolved Staff Comments                                                            |  | 11  
|         | Item 2. Properties                                                                            |  | 11  
|         | Item 3. Legal Proceedings                                                                     |  | 12  
|         | Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 13  
|PART II  |                                                                                               |  | 14  
|         | Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer        
|         | Purchases of Equity Securities                                                                |  | 14  
|         | Item 6. Selected Financial Data                                                               |  | 16  
|         | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|         | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                           |  | 30  
|         | Item 8. Financial Statements and Supplementary Data                                           |  | 30  
|         | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 68  
|         | Item 9A. Controls and Procedures                                                              |  | 68  
|         | Item 9B. Other Information                                                                    |  | 68  
|PART III |                                                                                               |  | 68  
|         | Item 10. Directors, Executive Officers and Corporate Governance                               |  | 68  
|         | Item 11. Executive Compensation                                                               |  | 68  
|         | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related          
|         | Stockholder Matters                                                                           |  | 69  
|         | Item 13. Certain Relationships and Related Transactions, and Director Independence            |  | 69  
|         | Item 14. Principal Accountant Fees and Services                                               |  | 69  
|PART IV  |                                                                                               |  | 70  
|         | Item 15. Exhibits and Financial Statement Schedules                                           |  | 70  

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# BANDAG, INCORPORATED

FORWARD-LOOKING
STATEMENTS

Statements contained in this Annual
Report on Form 10-K and the accompanying 2006 Annual Report which are not historical facts
may be forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those currently
anticipated due to a number of factors. In addition to the risk factors described in Item
1A of this Annual Report on Form 10-K, factors that could result in material variations
include, but are not limited to:

|o |  | unanticipated
issues associated with obtaining approvals to complete the proposed merger with
Bridgestone Americas Holding, Inc.;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------

|o |  | other
unanticipated issues associated with completion of the proposed merger;
|- |  | -----------------------------------------------------------------------------

|o |  | changes
in consumer demand and prices resulting in a negative impact on revenues and margins;
|- |  | ---------------------------------------------------------------------------------------------

|o |  | increased
competition in our product lines;
|- |  | -------------------------------------------

|o |  | raw
material substitutions and increases in the cost of raw materials, utilities, labor and
other supplies;
|- |  | -----------------------------------------------------------------------------------------------------------

|o |  | changes
in capital availability or costs;
|- |  | -----------------------------------------

|o |  | workforce
factors such as labor interruptions;
|- |  | ----------------------------------------------

|o |  | cost
of compliance with applicable governmental regulations and changes in such regulations,
including environmental regulations; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------

|o |  | the
general political, economic and competitive conditions in markets and countries where we
and our subsidiaries operate, including currency fluctuations and other risks associated
with operating in foreign countries.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These factors should be considered in
evaluating the forward-looking statements and undue reliance should not be placed on such
statements. We undertake no obligation, and disclaim any obligation, to update information
contained in this Annual Report on Form 10-K and the accompanying 2006 Annual Report,
including these forward-looking statements, to reflect events or circumstances that occur
after the date of the filing of this Annual Report on Form 10-K and the accompanying 2006
Annual Report.

MANAGEMENT
CERTIFICATIONS

Bandag, Incorporated has filed as
exhibits to this Annual Report on Form 10-K the certifications of its Chief Executive Officer and
the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act.  Bandag,
Incorporated has submitted to the New York Stock Exchange the Annual CEO Certification
required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.

---

PART I

# Item 1.    BUSINESS

# Introduction

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

The Company has three reportable
business segments: the manufacture and sale of precured tread rubber, equipment and
supplies for retreading tires (the Traditional Business), the sale and maintenance of new
and retread tires to principally commercial and industrial customers through its
wholly-owned subsidiary, Tire Distribution Systems, Inc. (TDS) and the providing through
the Companys subsidiaries Speedco, Inc. (Speedco) and Truck Lube 1 of quick-service
truck lubrication, routine tire service and light truck maintenance through company-owned
locations (Vehicle Services). Refer to Note 13, Operating Segment and Geographic
Area Information, of the consolidated financial statements contained in Item 8 of
this Annual Report on Form 10-K for further details.

On December 5, 2006, Bandag entered
into a definitive merger agreement with Bridgestone Americas Holding, Inc. (BSAH) and a
subsidiary thereof pursuant to which BSAH will acquire the outstanding shares of each
class of stock of Bandag for US $50.75 per share in cash. This proposed merger remains
subject to the receipt of shareholder approval and other regulatory approvals, as well as
the satisfaction of customary closing conditions. The transaction is expected to be
completed in the second quarter of 2007.

As of December 31, 2006, the Company
had three classes of capital stock outstanding. These three classes were Common Stock,
Class A Common Stock and Class B Common Stock. On January 16, 2007, pursuant to the terms
of the Companys charter, all of the Class B Common Stock was automatically converted
into Common Stock on a share-per-share basis. As of January 31, 2007, the Carver Family
(identified below) beneficially owned shares of Common Stock constituting 36% 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.

On February 13, 2004, the Company
acquired an 87.5% majority interest in Speedco from its founders and Equilon Enterprises,
LLC, a Royal Dutch Shell Group company. On June 10, 2004, Speedco acquired the assets of
six licensed locations, which were owned and operated by PM Express, Inc. On April 1,
2006, the Company acquired Truck Lube 1.

# 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
844 franchisees worldwide, with 36% located in the United States and 64% internationally.
The majority of Bandags franchisees are independent operators of full service tire
distributorships. The remaining franchises are owned by either GCR, a Bridgestone
Corporation wholly-owned company, or by Bandags distribution company, 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 86 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 22% of the United States medium and wide
base commercial tire replacement market. Other companies which supply to trucking fleets
in the replacement tire market include large new tire manufacturers such as The Goodyear
Tire & Rubber Company (Goodyear), Bridgestone Corporation (Bridgestone) and Groupe
Michelin (Michelin). Goodyear, Michelin and Cooper Tire and Rubber Company also compete in
the United States market as well as in other markets as a tread rubber supplier to a
combination of company-owned and independent retreaders.

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

The Traditional Business can be
divided into two main areas: (i) manufacturing the tread rubber and (ii) providing and
supporting the retreading system to bond the tread rubber to the tire casing. Bandag
manufactures over 500 separate tread designs and sizes, treads specifically designed for
various applications, allowing fleet managers to fine-tune their tire programs. Bandag
tread rubber is vulcanized prior to shipment to its franchisees. The Bandag franchisee
prepares the tire casing for retreading and performs the retreading process of bonding the
cured tread to the prepared tire casing. This two-step process allows utilization of the
optimum temperature and pressure levels at each step. Using optimum temperature levels
during the bonding process results 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 and other dealers a limited
amount of tread rubber for off-the-road tires, industrial tires, including solid and
pneumatic, passenger car tires and light commercial tires for light trucks and
recreational vehicles.

Franchises.  Bandag
has 844 franchises 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 franchises, 307 are located in the United States.           Thirty-three of Bandags
foreign franchises are franchised by a licensee of           the Company in Australia and
34 are franchised by a licensee in South Africa.           The Company also has a joint
venture in Sri Lanka.

3

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

(c)     Competition

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

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

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

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

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

(d)     Sources
of Supply

The Company manufactures the precured
tread rubber, cushion gum, and related supplies in Company-owned manufacturing plants in
the United States, Brazil, Belgium and Mexico. The Company also participates in a joint
venture agreement in Sri Lanka as well as licensing agreements in South Africa and
Australia. The Company also manufactures pressure chambers, tire casing analyzers,
buffers, tire builders, tire-handling systems, and other items of equipment used in the
Bandag Method. Curing rims, chucks, spreaders, rollers, certain miscellaneous equipment,
and various retreading supplies, sold by the Company, are purchased from others.

The Company purchases rubber and
other materials for the production of tread rubber and other rubber products from a number
of suppliers. The rubber for tread is primarily synthetic and obtained principally from
sources which most conveniently serve the respective areas in which the Companys
plants are located. Although synthetic rubber and other petrochemical products have
periodically been in short supply and significant cost fluctuations have been experienced
in previous years, including significant price increases throughout 2006, 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 and natural gas used in processing. However, the effect on operations of future
shortages will depend upon their duration and severity and cannot presently be forecasted.

4

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

(e)     Patents

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

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

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

# TDS

(a)     General

TDS, which provides new and retread
tire products and tire management services to national, regional and local fleet
transportation companies, operates 12 Bandag franchise and manufacturing locations and 46
commercial and retail outlets in 8 states. During 2006, TDS opened 1 new commercial and
retail location and closed 3 retread plant locations. During 2005, TDS closed 1 commercial
and retail outlet, and acquired 1 retread plant and 5 commercial and retail outlets. In
2004, TDS sold or closed 6 retread plants and 15 commercial and retail outlets and
acquired 2 retread plants and 7 commercial and retail outlets.

(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.

The Company believes that 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.

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

5

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(c)     Competition

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

(d)     Sources
of Supply

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

# Vehicle Services

(a)     General

On February 13, 2004, the Company
acquired an 87.5% majority interest in Speedco, Inc. from its founders and Equilon
Enterprises, LLC, a Royal Dutch Shell Group company. On June 10, 2004, Speedco, Inc.
acquired the assets of six licensed locations, which were owned and operated by PM
Express, Inc. Speedco provides quick-service truck lubrication and routine tire service
and has 47 company-owned on-highway locations in the United States. On April 1, 2006, the
Company acquired Truck Lube 1, which provides light truck maintenance.

(b)     Markets
and Distribution

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

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

Speedco tire customers are divided
into two types: Speedco Direct and Manufacturer National Accounts. Speedco Direct
customers purchase tire product and services per the Manufacturers Suggested Retail
Price established by Speedco. For new tire Manufacturer National Account customers, the
tire manufacturer sets the pricing for the new tire and Speedco earns a delivery
commission.

Truck Lube 1s locations for
providing light truck maintenance are in Florida.

(c)     Competition

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

(d)     Sources
of Supply

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

6

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# Regulations

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

# 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 $6,737,000 in 2006, $7,353,000 in 2005 and $7,063,000 in 2004.

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, 2006, the Company
had an estimated 3,362 employees.

# Operating Segment and
Geographic Area Information

Information concerning operating
segment and geographic area information is incorporated by reference to Note 13
Operating Segment and Geographic Area Information, of the consolidated
financial statements contained in Item 8 of this Annual Report on Form 10-K.

7

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# Executive Officers of
the Registrant

The following table sets forth the
names and ages of all executive officers of the Company as of January 31, 2007, 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*     |     |                                |                            | 58                      
|David W. Dahms        |     |                                |                            | 47                      
|Warren W. Heidbreder  |     |                                |                            | 60                      
|Frederico U. Kopittke |     |                                |                            | 63                      
|John C. McErlane      |     |                                |                            | 53                      
|Jeffrey C. Pattison   |     |                                |                            | 51                      
|Michael A. Tirona     |     |                                |                            | 57                      
|Mark A. Winkler       |     |                                |                            | 49                      

* 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. Dahms
joined Bandag in 1989. From 1989 through 1997, he held several positions           with
the Company. In March of 1997 he was promoted to Credit Manager of North
          American Sales. In January 1999 he was promoted to Manager, Corporate Credit
and           held that position until January 2004, when he was promoted to Director,
          Treasury Services. In March 2004 he was elected to the position of Director,
          Treasury Services and Treasurer and served in that position until April 2006,
          when he was elected Vice President and Treasurer.

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

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

Mr. McErlane joined Bandag in 1985. From 1985 through 1995, he held several
          managerial positions with the Company. In 1996, he was promoted to the position
          of Director, Marketing. In January 1997, he was appointed to the office of Vice
          President, Marketing. In February 1998, he was elected to the office of Vice
          President, Marketing and Sales. In September 2001 he was elected to the offices
          of Vice President, Bandag, Incorporated and President, Tire Distribution
          Systems, Inc. and served in that position until May 2006, when he was elected to
          his current office of Vice President, North America.

8

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Mr. Pattison
joined Bandag in 1986. From 1986 through 1999, he held several           positions with
the Company. In 1999, he was promoted to Director, Treasury           Services and
Assistant Treasurer and served in that position until August 2002,           when he was
elected to the office of Vice President and Treasurer. In January           2004, Mr.
Pattison assumed the responsibilities of Vice President, People           Services. Mr.
Pattison was elected to the office of Vice President and Corporate           Controller
on August 5, 2005 and served in that position until April 2006, when           he was
elected to his current position of Vice President, Corporate Controller           and
Assistant Secretary.

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. Winkler
joined Bandag in 1991. From 1991 through 1996, he held several positions           with
the Company. In June 1996 he was promoted to Sales Manager, EHRD and held           that
position until August 1998, when he was promoted to Marketing Director. In
          April 2006 he was elected to his current position of Vice President, Vehicle
          Services.

Under severance agreements, entered
into in 1999, certain of the executive officers (Martin G. Carver, Warren W. Heidbreder
and John C. McErlane) are entitled to receive severance benefits equal to the greater of a
specified dollar amount or an amount equal to 24 months base salary if their employment is
involuntary terminated or they voluntarily terminate their employment for good reason,
except for death, disability or retirement. For purposes of these severance agreements,
good reason means (1) a 15% or greater reduction in the executives base
pay, (2) a materially adverse change, without the executives prior written consent,
in the nature or scope of the executives title or responsibilities, or (3) the
relocation of the executives principal place of employment by more than fifty (50)
miles. The severance agreements restrict the executive officers from competing with Bandag
for twenty-four months following the termination of employment and also contain extensive
restrictions on disclosure of Bandag confidential information. In connection with entering
into the consulting agreements discussed below, the employment of Martin G. Carver and
Warren W. Heidbreder will be terminated as of the effective date of the merger, thereby
triggering the obligation to make severance payments to them under these agreements.

Certain other executive officers
(Mark A. Winkler, David W. Dahms, Frederico U. Kopittke and Jeffrey C. Pattison) are
parties to severance agreements entered into in connection with the merger agreement that
provide for a severance payment of one years base salary (two years base
salary for Mr. Kopittke) in the event that, within one year following a change of control
of the Company, the executive officer is terminated without cause or the
executive officer terminates his or her employment for good reason (namely, a
reduction in salary and benefits to amounts which are not substantially the same as those
in effect as of the date of the agreement or the relocation of the officers
principal place of employment to a location more than 50 miles from such persons
principal place of employment as of the date of the agreement).

Each of Martin G. Carver, Chairman of
the Board, President and Chief Executive Officer, and Warren W. Heidbreder, Vice
President, Chief Financial Officer and Secretary, whose employment with Bandag will
terminate as of the effective date of the merger, entered into a consulting agreement, to
be effective as of the effective date of the merger, pursuant to which Messrs. Carver and
Heidbreder will provide certain consulting and other related services to the Company in
accordance with the terms and conditions contained therein, if requested by the Company
(Bandag is not required to request any such services).

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

9

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# Available Information

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

# Item 1A.   RISK FACTORS

You should carefully consider the
risk factors described below in addition to the other information set forth or
incorporated by reference in this 2006 Annual Report on Form 10-K. If any of the following
risks actually occur, our financial condition or results of operations could be materially
adversely affected. The following list of risk factors may not be exhaustive. Additional
risks and uncertainties not presently known or that we currently believe to be immaterial
may also adversely affect us.

We have entered into
an agreement to be acquired and we cannot assure that the transaction will be completed.

On December 5, 2006, we entered into an
agreement to be acquired by Bridgestone Americas Holding, Inc. Consummation of the
transaction is subject to various conditions, including shareholder and regulatory
approvals, that are beyond our control. In the event the transaction is not consummated,
it could have a material adverse effect on the Company.

We face significant
global competition and our market share could decline.

Retreaded tires are sold under highly
competitive conditions throughout the world. We compete with other new and retread tire
manufacturers on the basis of product design, performance, price, reputation, customer
service, and consumer convenience. 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. The
narrowing of prices between new tires and retread tires reduces one of the competitive
advantages of retread tires, thereby increasing competition. Our ability to compete
successfully will depend, in significant part, on our ability to reduce costs. If we are
unable to compete successfully, our market share may decline, materially adversely
affecting our results of operations and financial condition.

We rely on the success
and stability of our franchisees.

Our franchisees compete with many
other new-tire dealers and retreading operators of varying sizes. If we are unable to
maintain the stability of our franchise organization, our market share may decline,
materially adversely affecting our results of operations and financial condition.

If we are unable to
complete the merger with BSAH our business could be materially adversely affected.

If we are unable to complete the
merger transaction BSAH may seek another opportunity in North America to enter the retread
market, thereby materially adversely affecting our results of operations and financial condition.

Higher raw material costs
may adversely affect our operating results and financial condition.

Raw material costs increased
significantly in 2005 and 2006, driven by increases in costs of oil and natural rubber.
Market conditions may prevent us from passing these increased costs on to our customers
through timely price increases. As a result, higher raw material costs may result in
declining margins and operating results.

Speedco expansion may
adversely affect our operating results and financial condition.

We anticipate strengthening
Speedcos success by adding more locations and related tire capability. A major
component of the expansion thus far has been to modify most of the existing locations and build new
locations to include a Bandag designed and developed high-speed tire sales and service
capability. As a result, the increased costs associated with the Speedco expansion
resulted in declining margins and operating results in 2006 and may continue to result in
declining margins and operating results in 2007.

10

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Our international
operations have certain risks that may materially adversely affect our operating results.

We have franchisees in Central
America, South America, Europe, Africa and Asia and licensees in Australia and South
Africa. These international operations are subject to certain inherent risks, including:
exposure to local economic conditions, potential adverse changes in the diplomatic
relations of foreign countries with the United States, adverse currency exchange controls,
withholding taxes and the withdrawal of foreign investments and earnings, the potential
instability of foreign governments, export and import restrictions, and other changes in
laws or government policies. The likelihood of such occurrences and their potential impact
on us vary from country to country and are unpredictable.

We have foreign currency
translation and transaction risks that may adversely affect our operating results.

The financial condition and results
of operation of certain of our operating entities are reported in various foreign
currencies and then translated into U.S. dollars at the applicable exchange rate for
inclusion in our financial statements. As a result, the appreciation of the U.S. dollar
against these foreign currencies has a negative impact on our reported sales and operating
margin (and conversely, the depreciation of the U.S. dollar against these foreign
currencies has a positive impact). The volatility of currency exchange rates may
materially adversely affect our operating results.

If we are unable to
attract and retain key personnel our business could be materially adversely affected.

Our business substantially depends on
the continued service of key members of our management, particularly Martin G. Carver, our
chief executive officer. The loss of Mr. Carver or the services of a significant number of
our management could have a material adverse effect on our business. Our continued success
is also dependent upon our ability to attract and retain qualified personnel. Competition
for these employees is intense, and we could experience difficulty from time to time in
hiring and retaining the personnel necessary to support our business. If we do not succeed
in retaining our current employees and attracting new high quality employees, our business
could be materially adversely affected.

# Item 1B.   UNRESOLVED
STAFF COMMENTS

None.

# Item 2.    PROPERTIES

# Traditional Business

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

The tread rubber manufacturing plants
of the Company are located to service principal markets. The Company owns nine plants.
However, the Company only operates seven of these plants, three of which are located in
the United States, and the remainder in Belgium, Brazil (two plants) and Mexico. The
plants vary in size up to 194,000 square feet with the first plant being placed into
production in 1959. All of the plants are owned in fee. Operations in one tread rubber
manufacturing plant located in Canada were suspended in the second quarter of 2006 and
that facility is being prepared for sale. 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.

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 and an 83,000
square foot training and conference center. Similar training facilities are located in
Brazil and Europe. The Company owns a 26,000 square foot office facility in Muscatine
which is being prepared for sale. The Company also owns a 26,000 square foot office and
machining facility in Muscatine.

11

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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.

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

# TDS

TDS currently owns 8 and leases 50
facilities. Twelve (12) contain space for TDS retread production and 46 contain space for
commercial and retail operations. The Company believes that it will be able to renew its
existing leases as they expire or find suitable alternative locations. The leases
generally provide for a base rental, as well as charges for real estate taxes, insurance,
maintenance and various other items.

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

# Vehicle Services

Speedco currently owns 47 locations.
Each location is sited on two or more acres visible from major interstates with easy
access to those interstates. Each standard facility has a minimum of an 8,500 square foot
building with three pitted service bays for lubrication service. In addition, a number of
facilities also have tire lanes. Truck Lube 1 currently leases 4 locations. In the opinion
of the Company, all of its properties are maintained in good operating condition and are
adequate for the near future.

# 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.

Plumbers &
Pipefitters Local 572 Pension Fund v. Bandag, et al.

On December 8, 2006, a purported
class action shareholder complaint was filed in the Muscatine County District Court in the
State of Iowa (the complaint) by Plumbers and Pipefitters Local 572 Pension Fund, seeking
to pursue a class action on behalf of all of the Bandag shareholders. The complaint names
Bandag, Martin G. Carver, the Chairman, President and Chief Executive Officer, and other
directors, Gary E. Dewel, R. Stephen Newman, Roy J. Carver, Jr., James R. Everline,
Phillip J. Hanrahan and Amy P. Hutton, as defendants. The complaint alleges, among other
things, that in connection with the proposed business combination transaction with
Bridgestone Americas Holding, Inc., the directors breached their fiduciary duties of due
care and good faith by failing to solicit bids from other potential bidders and failing to
maximize shareholder value and by creating deterrents to third party offers. Among other
things, the complaint seeks class action status, and a court order enjoining the
consummation of the merger and directing the defendants to take appropriate steps to
maximize shareholder value. While the lawsuit is in its preliminary stage, Bandag believes
that the claims in the lawsuit are without merit and intends to vigorously defend it.

12

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Audra Smith v. Michael Rouse, et
al. and Yolanda Jackson v. Michael Rouse, 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: These cases arise from an explosion and fire which occurred on May
17, 2002, at a rubber recycling plant in Mississippi, operated by Rouse Rubber Co.,
(Rouse) killing five employees and seriously injuring at least seven others. Bandag has
been named in two of about six pending cases. Plaintiffs allege that a rubber recycling
machine was dangerously designed or maintained, causing the explosion, and that Bandag may
be passively liable as a joint venturer with Rouse. Bandag was named in the
cases based on its majority ownership of Rouse prior to 1995. Bandag had only limited
involvement with the equipment in question while it had an ownership interest in Rouse.
Bandag did not manufacture, operate or repair the equipment in question.

Bandag was originally named as one of
numerous defendants in the wrongful death actions brought in these two cases; however,
Bandag was dismissed without prejudice from the Jacksoncase for tactical reasons.
The Smithcase 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 from all defendants, including Bandag, or only from certain defendants,
not including Bandag. Astec, the manufacturer of the dryer system that exploded, settled
with the plaintiffs in apparently all cases for approximately $45 million. This settlement
will apply as a credit to the remaining defendants. Bandag has reached an agreement to
settle with all known claimants including those in Smithand Jackson, in consideration of
the payment of a nominal amount. This matter remains pending subject to final approval of
the necessary parties, including the court, of a proposed settlement agreement.

Bandag has reached an agreement to
settle with all known claimants, including those in Smith andJackson, in
consideration of the payment of a nominal amount. The parties are in the process of
securing the courts approval of the settlement.

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

None.

13

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PART II

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

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

|                             | 2006   | % Change | 2005   | % Change | 2004  
|---------------------------- | ------ | -------- | ------ | -------- | ------
|Dividends Declared Per Share |        |          |        |          |       
|First Quarter                | $0.335 |          | $0.330 |          | $0.325
|Second Quarter               | 0.335  |          | 0.330  |          | 0.325 
|Third Quarter                | 0.335  |          | 0.330  |          | 0.325 
|Fourth Quarter               | 0.340  |          | 0.335  |          | 0.330 
|                             |        |          |        |          |       
|Total Year                   | $1.345 | 1.5      | $1.325 | 1.5      | $1.305

|Stock Price Comparison(1) | Low    |    | High  |  | Low    |    | High  |  | Low    |    | High 
|------------------------- | ------ | -- | ----- |  | ------ | -- | ----- |  | ------ | -- | -----
|Common Stock              |        |    |       |  |        |    |       |  |        |    |      
|First Quarter             | $40.57 | -- | 45.42 |  | $43.26 | -- | 50.35 |  | $40.31 | -- | 49.95
|Second Quarter            | 34.82  | -- | 42.67 |  | 42.51  | -- | 48.26 |  | 38.32  | -- | 51.30
|Third Quarter             | 32.79  | -- | 42.38 |  | 41.89  | -- | 47.93 |  | 42.91  | -- | 48.20
|Fourth Quarter            | 40.57  | -- | 52.27 |  | 41.18  | -- | 44.22 |  | 43.22  | -- | 50.83
|Year-end Closing Price    |        |    | 50.43 |  |        |    | 42.67 |  |        |    | 49.81
|Class A Common Stock     
|First Quarter             | $34.00 | -- | 39.05 |  | $39.20 | -- | 46.45 |  | $39.86 | -- | 47.71
|Second Quarter            | 29.59  | -- | 37.00 |  | 37.70  | -- | 43.36 |  | 35.38  | -- | 46.98
|Third Quarter             | 27.99  | -- | 35.80 |  | 36.40  | -- | 41.91 |  | 39.60  | -- | 43.68
|Fourth Quarter            | 34.28  | -- | 51.50 |  | 35.60  | -- | 37.62 |  | 39.10  | -- | 46.69
|Year-end Closing Price    |        |    | 49.96 |  |        |    | 36.05 |  |        |    | 46.33

| | (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, 2007 was 1,471 and the number
of record holders of Class A Common Stock was 876. The Common Stock and Class A Common
Stock are traded on the New York Stock Exchange and the Chicago Stock Exchange.

14

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The following performance graph is
not deemed to be soliciting material or to be filed with the SEC
or subject to Regulation 14A or 14C under the Securities Act of 1934 or to the liabilities
of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or the
Securities Act of 1934, except to the extent the Company specifically incorporates it by
reference into such a filing.

The following is a line graph
comparing the yearly percentage change during the last five years in the cumulative total
shareholder return (assuming reinvestment of dividends) on the Corporations Common
Stock and Class A Common Stock with the cumulative total returns of the Standard &
Poors 500 Stock Index and the Dow Jones & Co., Inc. Tire and Rubber  Index
(Tire and Rubber Index). The graph assumes $100 invested on December 31 2001 in
Bandag, Incorporated Common Stock and Class A Common Stock, the S&P 500 Stock Index
and the Dow Jones & Co., Inc. Tire and Rubber  Index.

# Comparison of Five
Year Cumulative Total Return

|                        | 2001 | 2002 | 2003 | 2004 | 2005 | 2006
|----------------------- | ---- | ---- | ---- | ---- | ---- | ----
|Bandag, Incorporated    | 100  | 118  | 136  | 165  | 140  | 184 
|S&P 500 Stock Index     | 100  | 78   | 100  | 111  | 117  | 135 
|Tire and Rubber - Index | 100  | 45   | 58   | 83   | 85   | 97  

15

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Issuer Purchases of
Equity Securities(1)

|October 1, 2006 -
December 31, 2006 | Total
Number 
of Shares
Purchased | Average Price
Paid per Share | Total Number 
of Shares Purchased
as Part 
of Publicly
Announced
Programs | Maximum Number 
of Shares that May
Yet be Purchased
Under the Program |       
|----------------------------------- | --------------------------------- | ---------------------------- | ------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------
|Common Stock                        |                                   |                              |                                                                           |                                                                       |       
|October 1 - October 31              | 2,274                             | $42.37                       | 2,274                                                                     | 492,807                                                               |       
|November 1 - November 30            | 3,038                             | $44.55                       | 3,038                                                                     | 486,590                                                               |       
|December 1 - December 31            | 2,761                             | $49.88                       | 2,761                                                                     | 479,906                                                               |       
|                                    |                                   |                              |                                                                           |                                                                       |       
|Total                               | 8,073                             | $45.76                       | 8,073                                                                     | 479,906                                                               | (1)(2)
|                                    |                                   |                              |                                                                           |                                                                       |       
|Class A Common Stock               
|October 1 - October 31              | 2,528                             | $35.63                       | 2,528                                                                     | 492,807                                                               |       
|November 1 - November 30            | 3,179                             | $37.52                       | 3,179                                                                     | 486,590                                                               |       
|December 1 - December 31            | 3,923                             | $48.80                       | 3,923                                                                     | 479,906                                                               |       
|                                    |                                   |                              |                                                                           |                                                                       |       
|Total                               | 9,630                             | $41.62                       | 9,630                                                                     | 479,906                                                               | (1)(2)
|                                    |                                   |                              |                                                                           |                                                                       |       

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

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

# Item 6.    SELECTED
FINANCIAL DATA

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

|                                              | 2006        | 2005        | 2004        | 2003        | 2002       
|--------------------------------------------- | ----------- | ----------- | ----------- | ----------- | -----------
|(In thousands, except per share data)         |             |             |             |             |            
|Net sales                                     | $973,570    | $914,640    | $864,343    | $826,354    | $910,834   
|Earnings from continuing operations(1)(2)     | 36,556      | 49,479      | 66,880      | 60,200      | 50,053     
|                                              |             |             |             |             |            
|Total assets                                  | $752,948    | $755,037    | $730,727    | $657,287    | $616,128   
|Long-term debt and other obligations          | 22,964      | 24,061      | 29,963      | 35,259      | 45,373     
|Earnings per share from continuing operations
|Basic                                         | $      1.89 | $      2.55 | $      3.47 | $      3.14 | $      2.53
|Diluted                                       | $      1.87 | $      2.52 | $      3.39 | $      3.11 | $      2.52
|Dividends Declared Per Share                  | $    1.345  | $    1.325  | $    1.305  | $    1.285  | $    1.265 

(1)    
          In 2006, includes charges of $19,762 pre-tax, $12,667 after-tax, related to
          restructuring.

(2)    
          In 2005, includes charges of $3,100 pre-tax, $2,130 after-tax, related to
          restructuring.

16

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

# Year Ended December 31,
2006 Compared to Year Ended December 31, 2005

# OVERVIEW

General

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

Bandag and its licensees have 844
franchise locations worldwide, with 36% located in the United States and 64%
internationally. The majority of Bandags franchisees are independent operators of
full service tire distributorships and the remaining are owned by either GCR, a
Bridgestone wholly-owned company, or 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. In Vehicle Services,
Speedco, Inc. (Speedco) provides quick-service truck lubrication and routine tire service and Truck Lube 1
provides light truck maintenance.

Bandag anticipates strengthening
Speedcos success by adding more locations and related tire capability in 2007 while
not compromising Speedcos deserved reputation for convenient, quick, quality
service. A major component of the expansion thus far has been to modify most of the existing locations
and build new locations to include a Bandag designed and developed high-speed tire sales
and service capability. Most new locations were built with a minimum of two high-speed
tire lanes. The majority of the current locations were modified to include two tire lanes
with the exception of those locations where current sites were not large enough to add two
lanes and the adjoining property was unavailable or cost prohibitive. Speedco had
$60,000,000 in capital expenditures in 2006 and anticipates capital expenditures of
$16,000,000 to $18,000,000 in 2007. Bandag anticipates that the costs associated with the
start up of new locations and the expansion of tire lanes at existing locations will
continue to put pressure on Speedco margins and costs which may offset the positive
contribution of Speedco.

Approximately 34% of Bandags
retread material sales in North America come from national account contracts with a
variety of major fleets. The depth of the Companys franchisee network combined with
the quality of its products has allowed Bandag to build a significant national account
business. Significant fleet revenue is important to Bandags franchisees who act with
Bandag as subcontractors to deliver products, information and services to national fleet
customers. Bandags franchise agreements require its franchisees to buy their
precured retreading material and equipment from Bandag, which gives Bandag a secure
revenue stream. Growth in revenue can be achieved by expanding the amount of services that
can be provided to a fleet by Bandag and its franchisees while continuing to provide
value-added retread products. Bandag also generates significant cash flow which has
historically been used to reinvest in the business, make debt payments, pay dividends,
repurchase stock and other corporate purposes.

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

Proposed
Sale of the Company

On December 5, 2006, Bandag entered
into a definitive merger agreement with Bridgestone Americas Holding, Inc. (BSAH) pursuant
to which BSAH will acquire the outstanding shares of each class of stock of Bandag for US
$50.75 per share in cash. This proposed merger remains subject to the receipt of
shareholder approval and other regulatory approvals, as well as the satisfaction of
customary closing conditions. The transaction is expected to be completed in the second
quarter of 2007.

17

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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.

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 driver 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,
which can provide more reliable utilization of their assets.

New
Tire Retread Pricing and Profitability

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

Acquisitions

On April 1, 2006, the Company
acquired Truck Lube 1, which provides light truck maintenance, for approximately
$8,094,000. The Company recorded $3,800,000 of goodwill and $4,060,000 of other intangible
assets.

During 2005, the Companys TDS
segment acquired one retread plant and five commercial and retail outlets for $2,978,000.

Divestitures

During the first quarter of 2006, the
Company recorded the previously announced deferred loss on the sale of its business in
South Africa. Bandag recorded a net loss on discontinued operations of $16,604,000, or
$0.85 per diluted share. The loss was primarily due to the cumulative translation
adjustment of $14,212,000 that was recorded in the Consolidated Balance Sheet related to
the South African operation.

Bandags TDS subsidiary closed
one location during 2005. The Company considers TDS to be essential in order to protect
Bandags distribution where no independent Bandag franchise exists. Bandag will
continue to divest TDS locations where an independent Bandag dealer is willing to buy the
location and when it is a sensible decision for the Company to sell. Bandag will also
continue to purchase locations for TDS if it is necessary to maintain Bandags
distribution in an area. In currently unprofitable locations where TDS must operate to
maintain Bandags presence to serve its fleet customers, the Company intends to
continue to improve operational efficiencies to seek to achieve profitability.

Restructuring

During 2006, the North American
business unit announced the closing of the tread production plant in Shawinigan, Quebec.
Also during 2006, the Company announced that its pension plans have been closed to new
hires in the United States and Canada, and that the existing pension plans for salaried
and hourly U.S. employees and salaried Canadian employees were frozen effective December
31, 2006.

During 2006, the North American
business unit reduced its company-wide employee workforce by approximately 200 through
early retirements and voluntary and involuntary separation programs. The early retirement
program, announced in the second quarter of 2006, was offered to eligible U.S. employees
who had reached age 55 by December 31, 2006. Employees who accepted the offer will have
five years added to their age in determining their pension benefit. Participants will also
be able to purchase medical coverage through the Company until age 65.

18

---

Bandag recorded total pre-tax
restructuring expenses of $19,762,000 in 2006. The Companys North American business
unit recorded pre-tax charges related to the restructuring of $13,072,000, the
Companys International business unit recorded $912,000 of pre-tax restructuring
charges for an employee reduction program, and the Companys European business unit
recorded $5,778,000 of pre-tax restructuring charges for a workforce reduction of 48
persons.

The restructuring charges recorded
consisted of an increase in pension benefit obligations of $8,316,000, termination
benefits of $12,333,000, an increase in postretirement medical benefits of $1,400,000 and
plant closing costs of $613,000. These costs were partially offset by a pension
curtailment gain of $2,900,000 related to freezing the pension plans. As of December 31,
2006 approximately $3,919,000 of these restructuring costs remained accrued, substantially
all of which is expected to be paid by December 31, 2007. The amounts related to the
pension benefits and postretirement medical benefits were recorded in the Companys
Condensed Consolidated Balance Sheet which resulted in a decrease in the pension asset of
$5,423,000 and an increase in the postretirement medical benefit liability of $1,400,000.

# RESULTS OF OPERATIONS

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

Net
Sales

Consolidated net sales in 2006
increased $58,930,000, or 6%, from 2005. Retread unit volume in the Traditional Business
decreased 7% from 2005. Retread unit volume was negatively impacted by intense pressures
from competitive retread tires and low-priced new tires. Net sales were positively
impacted by an increase in Vehicle Services net sales of $31,033,000, or 38%, from 2005.
Net sales were positively impacted by an increase in TDS net sales of $36,217,000, or 21%,
from 2005, and by $10,984,000 due to the effect of
translating foreign currency denominated net sales into U.S. dollars. 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
2006 decreased 2.5 percentage points from 2005. Traditional Business gross profit margin
decreased 2.7 percentage points from 2005. The decrease in Traditional Business gross
profit margin is primarily due to higher raw material costs.

Operating
and Other Expenses

Consolidated operating and other
expenses increased $651,000 from 2005. Consolidated operating and other expenses in 2006
were positively impacted by the reduction in workforce and spending decreases due to the
restructuring. Consolidated operating and other expenses in 2006 were negatively impacted
by expenses related to Vehicle Services operations due to the start-up of new Speedco
stores, the addition of tire lanes to existing stores and the acquisition of Truck Lube 1.

Other
Income

Consolidated other income increased
$4,241,000 from 2005. Other income was positively impacted by $2,900,000 due to legal
settlements with raw material suppliers and by $845,000 due to the sale of the
Companys joint venture in India.

Net
Earnings

Consolidated earnings from continuing
operations in 2006 were $36,556,000, or $1.87 per diluted share, as compared to
$49,479,000, or $2.52 in 2005. During 2006, the Company recorded a net loss on
discontinued operations of $16,604,000, or $0.85 per diluted share, resulting in 2006 net
earnings of $19,952,000, or $1.02 per diluted share.

19

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# TRADITIONAL BUSINESS

North
America

The Companys Traditional
Business operations located in the United States and Canada, together with Open Road
Technologies, 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.

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  |                        
|                             |                        
|                             |                        

Retread product sales in 2006 were
negatively impacted by a 6% decrease in retread material unit volume from the prior year.
The decrease in retread material unit volume was offset by the price increases in May 2005
and January 2006. Net sales for 2006 were positively impacted by increased equipment sales
of $3,502,000. Net sales were also positively impacted by the effect of translating
Canadian dollar foreign currency denominated results to U.S. dollars of $3,790,000 for
2006.

Higher raw material costs and an
increase in sales incentive programs primarily resulted in a 2.5 percentage point decrease
in North Americas gross profit margin in 2006 as compared to 2005.

North American operating and other
expenses in 2006 were $6,223,000, or 6%, lower than 2005 expenses. The decrease in
operating and other expenses was primarily due to the reduction in workforce and spending
decreases due to the restructuring. Other income for 2006 was positively impacted by
$2,005,000 due to legal settlements with raw material suppliers. Restructuring expenses of
$13,072,000 were recorded in 2006.

Restructuring expenses and lower
gross profit margin were the primary reasons for a decrease for North America of
$13,642,000 in earnings before income taxes, minority interest and discontinued operations
from 2005. North America recorded earnings before income taxes, minority interest and
discontinued operations of $49,384,000 in 2006 as compared to $63,026,000 in 2005.

EMEA

The Companys operations located
in Europe principally service markets in European countries, but also export to certain
other countries in the Middle East and Northern and Central Africa. This collection of
countries is under one management group and is referred to internally as EMEA. Net
sales in EMEA decreased $3,953,000, or 4%, from 2005, on a 1% increase in volume. Net
sales in EMEA for 2006 were negatively impacted by intense competitive pressures and by a
decrease in fleet sales due to the loss of fleet contract business. Net sales for EMEA in
2006 were also negatively impacted by $637,000 due to the effect of translating foreign
currency denominated net sales to U.S. dollars.

Gross profit margin decreased 5.0
percentage points from 2005, primarily due to higher raw material costs. Operating and
other expenses were $1,943,000, or 6%, lower than 2005 expenses. The decrease in 2006
operating and other expenses is primarily due to a decrease in personnel related costs.
Other income for 2006 was positively impacted by $340,000 due to a legal settlement with a
raw material supplier. Restructuring expenses of $5,778,000 were recorded in 2006 compared
to $3,100,000 recorded in 2005.

Restructuring expenses and lower
gross profit margin were the primary reasons for a decrease for EMEA of $6,618,000 in
earnings before income taxes, minority interest and discontinued operations from 2005.
EMEA recorded a loss before income taxes, minority interest and discontinued operations of
$6,880,000 in 2006 as compared to a loss on the same basis of $262,000 in 2005.

20

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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 and Venezuela and royalties from licensees in Australia and
South Africa, are combined under one management group referred to internally as
International. International net sales decreased $10,287,000, or 8%, from 2005.
Retread material unit volume decreased 14% from 2005. Excluding South Africa, unit volume
increased 1% and net sales increased 8% for 2006 as compared to 2005. Net sales were
positively impacted by price increases and by $7,831,000 due to the effect of translating
foreign currency denominated net sales to U.S. dollars.

Gross profit margin decreased 2.4
percentage points from 2005, primarily due to higher raw material costs. Operating and
other expenses decreased $2,669,000, or 10%, from 2005, primarily due to the sale of South
Africa. Other income for 2006 was positively impacted by $555,000 due to a legal
settlement with a raw material supplier and by $845,000 due to the sale of the
Companys joint venture in India. International recorded $912,000 of restructuring
expenses in 2006.

Lower volume and gross profit margin
were the primary reasons for a decrease for International of $3,253,000 in earnings before
income taxes, minority interest and discontinued operations. International recorded
earnings before income taxes, minority interest and discontinued operations of $11,568,000
in 2006 as compared to $14,821,000 in 2005.

During 2006 the Company recorded the
previously announced deferred loss on the sale of its business in South Africa. Bandag
recorded a net loss on discontinued operations of $16,604,000. The loss was primarily due
to the cumulative translation adjustment of $14,212,000 that was recorded in the
Consolidated Balance Sheet related to the South African operation.

# TIRE DISTRIBUTION
SYSTEMS, INC.

TDS net sales increased $36,217,000,
or 21%, as compared to 2005. TDS net sales were positively impacted by increased unit
sales and higher prices.

TDS gross profit margin decreased 1.1
percentage points from 2005 primarily due to an increase in sales of products which carry
lower margins. Operating and other expenses increased $2,688,000, or 7%, but decreased as
a percentage of sales.

Higher net sales was the primary
reason for an improvement in 2006 for TDS of $5,135,000 in earnings before income taxes,
minority interest and discontinued operations. TDS recorded earnings before income taxes,
minority interest and discontinued operations of $11,719,000 in 2006 as compared to
$6,584,000 in 2005.

# VEHICLE SERVICES

The Companys Speedco, Inc. and
Truck Lube 1 operations are combined under one management group referred to internally as
Vehicle Services. Truck Lube 1, which provides light truck maintenance, was
purchased in April 2006 and contributed $7,079,000 to net sales in 2006. Speedco net sales
increased $22,909,000, or 28%, for 2006. For 2006, Speedco same store lube sales increased
$8,378,000, or 11%, and same store tire sales increased $626,000, or 11%, as compared to
2005. Same store revenue is comprised of locations that have operated for twelve full
months. As of December 31, 2006, same store lube sales included 35 locations and same
store tire sales included 21 locations. Speedco had 47 locations, 39 with tire service
capabilities, as of December 31, 2006, compared to 35 locations, 23 with tire service
capabilities, at the same time last year.

Vehicle Services gross profit margin
decreased 0.6 percentage points from 2005. Operating and other expenses increased
$10,906,000, or 41%, as compared to 2005. Gross profit margin and operating and other
expenses were negatively impacted by expenses associated with the start-up of new Speedco
stores and the addition of tire lanes to existing stores.

21

---

Lower gross profit margin and higher
operating and other expenses were the primary reasons for a decrease in 2006 for Vehicle
Services of $1,093,000 in earnings before income taxes, minority interest and discontinued
operations. Vehicle Services recorded a loss before income taxes, minority interest and
discontinued operations of $512,000 in 2006 as compared to earnings on the same basis of
$581,000 in 2005.

# OTHER

The Companys Other segment
consists of corporate expenses, interest income on invested cash balances and interest
expense on long-term and short-term debt. Corporate expenses decreased $2,108,000
primarily due to net foreign exchange gains and losses on U.S. denominated investments.

# Year Ended December 31,
2005 Compared to Year Ended December 31, 2004

# RESULTS OF OPERATIONS

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

Net
Sales

Consolidated net sales in 2005
increased $50,297,000, or 6%, from 2004. This included an increase of $27,643,000 of net
sales for Speedco and an increase of $17,753,000 due to the effect of translating foreign
currency denominated net sales into U.S. dollars. Net sales in the Traditional Business
were also positively impacted by price increases. These increases in consolidated net
sales were offset by a $32,273,000 decrease in TDS net sales primarily as a result of the
divestitures in 2004. Retread unit volume in the Traditional Business was even with the
prior year. The Companys sales pattern is tied to the overall performance of the
economy and to the level of trucking activity.

Other
Income

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

Gross
Profit Margins

Consolidated gross profit margin for
2005 decreased 2.5 percentage points from 2004. Speedcos gross profit margin
declined 6.2 percentage points, primarily due to expenses associated with the start-up of
new stores and the addition of tire lanes to existing facilities. Traditional Business
gross profit margin decreased 4.2 percentage points from 2004, primarily due to higher raw
material costs and a decline in the profitability of fleet contract business. TDS
gross margin increased 2.4 percentage points.

Operating
and Other Expenses

Consolidated operating and other
expenses increased $4,608,000, or 2%, from 2004. Speedco operating and other expenses
increased $11,358,000, primarily due to the additional stores and tire lanes. EMEA
operating and other expenses were negatively impacted by $3,100,000 for charges related to
a reduction in workforce. TDS operating and other expenses decreased $9,242,000 from 2004,
primarily due to the divestitures in 2004.

Interest
Income

Consolidated interest income
increased $3,207,000 from 2004, primarily due to an increase in interest rates.

Income
Taxes

The effective tax rate was 31.3% for
2005 as compared to 20.8% for 2004. The lower effective tax rate in 2004 was largely
attributable to $7,200,000 of tax adjustments in 2004, resulting primarily from the
reassessment of certain tax matters.

Net
Earnings

Consolidated net earnings in 2005
were $49,479,000, or $2.52 per diluted share, as compared to $66,880,000, or $3.39 per
diluted share in 2004. Consolidated net earnings in 2004 included $3,700,000, or $0.19 per
diluted share, due to the sale of assets. Consolidated net earnings in 2004 were also
favorably impacted by $7,200,000, or $0.37 per diluted share, for the resolution and
reassessment of certain tax matters.

22

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# TRADITIONAL BUSINESS

North
America

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

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

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

The increase in retread product sales
to independent dealers is due to several factors, including price increases in December
2004 and May 2005, a 3% increase in retread material unit volume, increased sales to
independent dealers that purchased TDS locations and the positive effect of translating
Canadian dollar foreign currency denominated results to U.S. dollars of approximately
$3,819,000. Retread product sales increased at a higher rate than the unit volume
increased due to the impact of price increases in December 2004 and May 2005. The decrease
in retread product sales to TDS is primarily due to the divestitures and closures of TDS
locations.

Higher raw material costs and a
decline in the profitability of fleet contract business primarily resulted in a 5.5
percentage point decrease in North Americas gross profit margin in 2005 as compared
to 2004. North America increased prices in December 2004, May 2005 and November 2005 to
partially offset the increased raw material prices. The November 2005 price increase did
not have a material impact on 2005 gross margins.

North American operating and other
expenses in 2005 were $6,570,000, or 6%, lower than 2004 expenses. North American
operating expenses in 2004 included $2,400,000 of expenses related to Quality Designs
Systems, Inc. (QDS) which was divested in December 2004. North American operating and
other expenses in 2004 were negatively impacted by a $1,100,000 adjustment related to a
reassessment of sales tax accruals. North American other income in 2004 was positively
impacted by a gain on sale of assets of approximately $6,000,000, which included a gain of
$1,937,000 from the sale of certain assets of QDS and a gain of approximately $3,400,000
from the sale of the Chino, California facility. North America recorded income before
income taxes and minority interest of $63,026,000 in 2005 as compared to $72,529,000 in
2004.

EMEA

Net sales in EMEA increased $709,000,
or 1%, from 2004, on a 7% decrease in volume. The increase in net sales is primarily due
to the effect of translating foreign currency denominated net sales to U.S. dollars of
approximately $1,392,000 and increased selling prices. The primary reason for the decline
in retread material unit volume was the loss of several dealers during 2004. Gross profit
margin increased 0.6 percentage points from 2004, primarily due to price increases
targeted to improve margins.

Operating and other expenses
increased $3,628,000, or 12%, from 2004, primarily due to charges of $3,100,000 for a
reduction in workforce. EMEA recorded a loss before income taxes and minority interest of
$262,000 in 2005 as compared to income on the same basis of $2,789,000 in 2004.

International

International net sales increased
$18,712,000, or 18%, from 2004. Retread material unit volume decreased 5% from 2004 which
includes a 12% decrease in volume in Brazil. The primarily reason for the decline in
retread material unit volume in Brazil was the loss of several dealers during 2004. Net
sales were positively impacted by price increases and by $12,542,000 due to the effect of
translating foreign currency denominated net sales to U.S. dollars. Gross profit margin
decreased 2.6 percentage points from 2004, primarily due to higher raw material costs.

23

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Operating and other expenses
increased $3,849,000, or 16%, from 2004, primarily due to the higher translated value of
the foreign Brazilian Real. International recorded earnings before income taxes and
minority interest of $14,821,000 in 2005 as compared to $14,886,000 in 2004.

# TIRE DISTRIBUTION
SYSTEMS, INC.

TDS net sales decreased $32,273,000,
or 16%, as compared to 2004, primarily due to the divestitures and closures in 2004. TDS
net sales were positively impacted by higher prices and an increase in service revenue and
new tire sales.

The divested and closed locations had
net sales and a loss before income taxes and minority interest of $60,504,000 and
$600,000, respectively, for 2004.

TDS gross profit margin increased 2.4
percentage points from 2004 primarily due to higher selling prices and increased service
revenue, which has higher margins.

Operating and other expenses
decreased $9,242,000, or 18%, primarily due to the divestitures in 2004. Operating and
other expenses were positively impacted by a decrease in reserves for insurance. TDS
recorded earnings before income taxes and minority interest of $6,584,000 in 2005 as
compared to $1,506,000 in 2004.

# VEHICLE SERVICES

The net sales of Speedco, which was
acquired February 13, 2004, and its six licensees which were acquired June 10, 2004,
increased $27,643,000, or 50%, for 2005. The increase in net sales is primarily due to an
increase in volume at existing locations, the addition of two facilities and the addition
of tire lanes to eighteen existing facilities. Gross profit margin decreased 6.2
percentage points and operating and other expenses increased $11,358,000. The decrease in
gross profit margin and the increase in operating and other expenses are primarily due to
the additional facilities and the installation of tire lanes.

Speedco recorded earnings before
income taxes and minority interest of $581,000 in 2005 as compared to $6,249,000 in 2004.
The decrease is primarily due to the additional facilities and the installation of tire
lanes at existing facilities.

# OTHER

The Companys Other segment
consists of corporate expenses, interest income on invested cash balances and interest
expense on long-term and short-term debt. Corporate expenses and depreciation increased
$1,676,000 primarily due to net foreign exchange gains and losses on U.S. denominated
investments. Consolidated interest income increased $3,207,000 from 2004, primarily due to
an increase in interest rates.

# IMPACT OF INFLATION AND
CHANGING PRICES

Historically, it has generally been
the Companys practice to adjust its selling prices and sales allowances to reflect
changes in production and raw material costs in order to maintain its gross profit margin.
To soften the impact of higher raw material costs caused by increases in oil prices the
Company increased selling prices in the United States and Canada effective May 1, 2005 and
January 1, 2006, and increased selling prices in some foreign locations during the year.
The Company may continue to increase prices if raw material costs rise further; however,
due to competitive pressure and the decreasing difference between the price on a Bandag
retread and a substitute new tire, the Company believes its ability to continue to pass on
such increases may be diminished. The ability of the Company to raise prices does not
eliminate its exposure to pricing risks on its fleet contract business due to the terms of
the agreements.

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

24

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# FINANCIAL CONDITION

Liquidity
and Capital Resources

At December 31, 2006, the Company had
cash and cash equivalents of $45,900,000 as compared to $97,071,000 at December 31, 2005.
At December 31, 2006, the Company had investments of $80,300,000, as compared to
$60,150,000 at December 31, 2005. The Companys ratio of total current assets to
total current liabilities was 2.9 to 1 at December 31, 2006 with current assets exceeding
current liabilities by $280,208,000. The Company believes it has an adequate cash balance
for future cash needs.

Net cash provided by operating
activities for the twelve months ended December 31, 2006 was $81,577,000 as compared to
$56,983,000 for the same period of 2005. The increase in net cash provided by operating
activities for 2006 is primarily due to a decrease in accounts receivables and other
assets.

The Company typically funds its
capital expenditures from operating cash flows. During 2006, the Company spent $77,444,000
for capital expenditures as compared to $65,647,000 in 2005. The Company anticipates
capital expenditures of $45,000,000 to $55,000,000 in 2007. The increase in capital
expenditures in 2005 and 2006 from prior years was primarily due to expenditures made by
Speedco for new facilities and expansion of existing facilities.

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

The Company invests excess funds over
various terms, but only instruments with an original maturity date of over 90 days are
classified as investments for balance sheet purposes. The Companys purchases of
investments exceeded maturities by $20,150,000 during 2006, resulting in total investments
of $80,300,000 as of December 31, 2006.

As of December 31, 2006, the Company
had available uncommitted and committed lines of credit totaling $72,030,000 in the United
States for working capital purposes. Also, the Companys foreign subsidiaries had
approximately $35,330,000 in credit and overdraft facilities available to them. From time
to time during 2006, the Company borrowed funds to supplement operational cash flow needs
or to settle intercompany transactions. The Companys long-term liabilities totaled
$22,964,000 at December 31, 2006, which is approximately 4% of the combined total of
long-term liabilities and shareholders equity; and is a decrease of $1,097,000 from
December 31, 2005.

During the year, the Company paid
$12,551,000 on short-term notes payable and long-term obligations compared to $16,938,000
in 2005.

Cash dividends paid totaled
$26,053,000 in 2006 compared to $25,774,000 in 2005. Cash dividends per share declared
were $1.345 in 2006 compared to $1.325 in 2005.

During the year, the Company
purchased 237,464 shares of Common Stock and Class A Common Stock at an average purchase
price of $34.01 per share, as compared to the purchase of 210,443 shares of Common Stock
and Class A Common Stock at an average price of $38.27 for 2005.

# OFF BALANCE SHEET
ARRANGEMENTS

The Company has no off balance sheet arrangements.

25

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# CONTRACTUAL OBLIGATIONS
AND COMMERCIAL COMMITMENTS

Following is a summary of the
Companys commitments as of December 31, 2006 (in thousands):

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

|                             | TotalAmounts | Amount of CommitmentsExpiration Per Period
|---------------------------- | ------------ | ------------------------------------------
|
|Standby Letters of Credit(3) |              |                                           

|(1) | Future
pension contributions are expected to approximate 2007 estimates of $554.
               Post retirement medical contributions are expected to approximate 2007
estimates                of $624.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial
Risk Management

The Company is exposed to market risk
from changes in interest rates, foreign exchange rates, and commodity prices. To mitigate
such risks, the Company enters into various derivative transactions. All derivative
transactions are authorized and executed pursuant to clearly defined Company policies and
procedures, which strictly prohibit the use of financial instruments for trading or
speculative 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 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, 2006 and 2005 were zero and $146,000,
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 $6,637,000 and $16,720,000 for the years ending December 31, 2006 and 2005,
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 $544,000 in 2006 and $1,508,000 in 2005.

26

---

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 as a result of its investment in
foreign subsidiaries are the European euro, Brazilian real, Mexican peso and Canadian
dollar. A 10% change in foreign currency exchange rates from balance sheet date levels
would have impacted the Companys net foreign investments by $7,700,000 and
$11,773,000 at December 31, 2006 and 2005, respectively.

Interest
Rate Exposure

In order to mitigate the impact of
fluctuations in the general level of interest rates, the Company generally maintains a
large portion of its debt as fixed rate in nature by borrowing on a long-term basis. At
December 31, 2006 and 2005, the Company had outstanding debt of $5,714,000 and $11,429,000
respectively. At December 31, 2006 and 2005, the fair value of the Companys debt was
$5,781,000 and $11,686,000, respectively. In addition, at December 31, 2006 and 2005, the
fair value of securities held for investment was $80,300,000 and $73,198,000,
respectively. The fair value of the Companys total long-term debt and its securities
held for investment would not be materially affected by a hypothetical 10% adverse change
in interest rates. Therefore, the effects of interest rate changes on the fair value of
the Companys financial instruments are limited. Securities held for investment
primarily consist of obligations of states and political subdivisions of a short-term
nature.

Commodities
Exposure

Due to the nature of its business,
the Company procures almost all of its synthetic rubber, which is the predominant raw
material used in manufacturing tire tread, at quarterly fixed rates using contracts with
the Companys main suppliers. Historically, the Company increases its selling prices
and sales allowances to reflect significant changes in commodity costs; however, due to
competitive pressures and the decreasing difference between the price on a Bandag retread
and a substitute new tire, the Company believes its ability to continue to pass on such
increases may be diminished. To soften the impact of higher raw material costs caused by
increases in oil prices, the Company increased selling prices in the United States and
Canada effective May 1, 2005 and January 1, 2006 and increased selling prices in some
foreign locations during the year. Therefore, the Companys exposure is limited to
the extent selling price increases fail to offset increases in commodity costs. The
ability of the Company to raise prices does not eliminate its exposure to pricing risks on
its fleet contract business due to the terms of the related agreements.

# CRITICAL ACCOUNTING
POLICIES

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

Accounts
Receivable

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

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

Bandag also extends credit in North
America to customers in the trucking and transportation industry. Credit is extended to
large national and regional customers on a contractual basis through Bandag. Smaller
regional and local trucking customers are provided credit through TDS, Speedco and
Trucklube 1.

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.

27

---

Goodwill
and Trade Name Asset Valuation

While goodwill is not amortized, it
is subject to periodic reviews for impairment. The Company utilizes discounted cash flow
methods to review the carrying value of goodwill and trade name assets for impairment
periodically (at least annually) and whenever events or changes in business circumstances
indicate that the carrying value of the assets may not be recoverable. Changes in
estimates of future cash flows caused by items such as unforeseen events or changes in
market conditions could negatively affect the reporting units goodwill and trade
name assets fair value and result in an impairment charge. The Company cannot
predict the occurrence of events that might adversely affect the reported value of
goodwill and trade name assets that totaled $35,303,000 at December 31, 2006; however, the
current fair values of the Companys reporting units goodwill and trade name
assets are in excess of carrying values.

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, 2006, the Company had net deferred tax assets of $28,290,000.
This balance consists of approximately $32,670,000 of net deferred tax assets primarily
related to the timing of income and deductions for tax versus books, and $4,380,000 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, Income Taxes, of the consolidated financial statements
contained in Item 8 of this Annual Report on Form 10-K for further details.

The Company believes it has a
reasonable basis in the tax law for all of the positions it takes on the various federal,
state and foreign tax returns it files. However, in recognition of the fact that various
taxing authorities may not agree with the Companys position on certain issues, that
the cost of litigation in maintaining the positions that the Company has taken on various
issues might be significant, and that the taxing authorities may prevail in their attempts
to overturn such positions, 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 primarily in the form of DMR promissory notes from the
dealer to Bandag. The proceeds from the promissory notes can only be used by the dealer
toward the acquisition of equipment (including equipment sold by the Company), service
vehicles, facility expansions and other items aligned with Company goals. The notes
generally 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, 2006, 2005, and 2004 was $13,146,000,
$13,622,000 and $14,189,000, respectively. In 2006, 2005 and 2004, DMR costs of
$10,004,000, $9,236,000 and $7,830,000, respectively, were recorded as a reduction of
sales. For those DMR agreements that do not include notes, the Company records expense and
a corresponding liability, or discloses such agreements in accordance with SFAS No. 5,
Accounting for Contingencies.

28

---

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. SFAS No.
87 and the policies used by the Company generally reduce the volatility of pension income
or expense arising from changes in the pension liability discount rates and the
performance of the pension plans assets.

An important element in determining
the Companys pension income or expense in accordance with SFAS No. 87 is the
expected return on assets. The Companys long-term rate of return assumption for its
United States plans is 5.5% as of December 31, 2006. This assumption is based on expected
returns in the structured fixed income portfolio in which the pension assets are presently
invested.

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, 2006 was 5.8%.

For the years ended December 31, 2006
and 2005, the Company recognized consolidated pre-tax pension expense of $4,947,000 and
$4,751,000, respectively. The Company estimates pension expense will be approximately
$96,000 for 2007. Refer to Note 15 of the consolidated financial statements for further
details.

A 50 basis point increase in the
assumed discount rate would have decreased pension and other postretirement benefit
obligations by approximately $7,282,000 at December 31, 2006, and decreased pension and
postretirement benefit costs by approximately $1,007,000. A 50 basis point decrease in the
assumed discount rate would have increased pension and other postretirement benefit
obligations by approximately $8,098,000 at December 31, 2006, and increased pension and
postretirement benefit costs by approximately $1,135,000. A 50 basis point increase or
decrease in the assumed expected long-term rate of return on plan assets would have
decreased or increased pension costs by approximately $569,000 for 2006, respectively.

# NEW ACCOUNTING STANDARDS

In June 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FAS 109, Accounting for
Income Taxes, (FIN 48), to create a single model to address accounting for
uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim
periods and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company will adopt FIN 48 as of January 1, 2007, as required. The cumulative
effect of adoption will be recorded in retained earnings. The Company has not determined
the effect, if any, the adoption of FIN 48 will have on the Companys financial
position and results of operation.

In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106 and 132 (R) (SFAS 158). SFAS 158 requires balance sheet
recognition of the overfunded or underfunded status of pension and postretirement benefit
plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any
remaining transition assets or obligations that had not been recognized under previous
accounting standards are now recognized in Accumulated Other Comprehensive Income in
Equity, net of tax effects, until they are amortized as a component of net periodic
benefit cost. At December 31, 2006 the effect of adoption of SFAS 158 was to increase
assets by $6,609,000, increase liabilities by $1,173,000 and increase stockholders
equity by $5,436,000. SFAS 158 will also require the Company to change the date used to
measure its defined benefit pension and other postretirement obligations from September 30
to December 31. The measurement date change will be effective as of December 31, 2008. The
incremental pension cost recognized as a result of this change in measurement date will be
recognized as an adjustment to retained earnings. The measurement date change is not
expected to have a material impact on financial position, results of operations, or
liquidity.

29

---

# 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 Management                                                           | 31  
|Report of Independent Registered Public Accounting Firm - Internal Control    
|Over Financial Reporting                                                       | 32  
|Report of Independent Registered Public Accounting Firm - Consolidated        
|Financial Statements                                                           | 33  
|Consolidated Balance Sheets as of December 31, 2006 and 2005                   | 34  
|Consolidated Statements of Earnings for the years ended                       
|December 31, 2006, 2005 and 2004                                               | 36  
|Consolidated Statements of Cash Flows for the years ended                     
|December 31, 2006, 2005 and 2004                                               | 37  
|Consolidated Statements of Changes in Shareholders' Equity for the years ended
|December 31, 2006, 2005 and 2004                                               | 38  
|Notes to Consolidated Financial Statements                                     | 41  

30

---

# Report of Management

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

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

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

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

We conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the framework in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls, testing of
the operating effectiveness of controls and a conclusion on this evaluation. Although
there are inherent limitations in the effectiveness of any system of internal controls
over financial reporting, based on our evaluation, we have concluded that our internal
controls over financial reporting were effective as of December 31, 2006.

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

Bandag, Incorporated

|                                      |  |                                      
|------------------------------------- |  | -------------------------------------
|/s/ Martin G. Carver                  |  | /s/ Warren W. Heidbreder             
|                                      |  |                                      
|Martin G. Carver                      |  | Warren W. Heidbreder                 
|Chairman of the Board,                |  | Vice President, Chief Financial      
|Chief Executive Officer and President |  | Officer (Principal Financial Officer)
|(Principal Executive Officer)         | 
|/s/ Jeffrey C. Pattison               |  |                                      
|                                      |  |                                      
|Jeffrey C. Pattison                   |  |                                      
|Corporate Controller                  |  |                                      
|(Principal Accounting Officer)        |  |                                      

31

---

# Report of Independent
Registered Public Accounting Firm

Shareholders and Board of Directors
Bandag, Incorporated

We have audited managements
assessment, included in the accompanying Report of Management, that Bandag, Incorporated
maintained effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Bandag, Incorporateds management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the companys
internal control over financial reporting based on our audit.

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

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

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

In our opinion, managements
assessment that Bandag, Incorporated maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, Bandag, Incorporated maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2006,
based on the COSO criteria.

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Bandag, Incorporated as of December 31, 2006 and the
related consolidated statements of earnings, cash flows and changes in shareholders
equity for each of the years ended December 31, 2006, 2005 and 2004, and our report dated
March 15, 2007 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP
Chicago, Illinois

March 15, 2007

32

---

# Report of Independent
Registered Public Accounting Firm

Shareholders and Board of
DirectorsBandag, Incorporated

We have audited the accompanying
consolidated balance sheets of Bandag, Incorporated as of December 31, 2006 and 2005, and
the related consolidated statements of earnings, cash flows and changes in
shareholders equity for each of the years ended December 31, 2006, 2005 and 2004.
Our audits also included the financial statement schedule listed in the Index at Item
15(2). These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Bandag, Incorporated at December 31, 2006 and 2005, and the
consolidated results of its operations and its cash flows for each of the years ended
December 31, 2006, 2005 and 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

As discussed in Note 1 to the
consolidated financial statements, on January 1, 2006, Bandag, Incorporated changed its
method of accounting for share-based awards to conform with Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment. Additionally, on
December 31, 2006, Bandag, Incorporated changed its method of accounting for defined
benefit pension and other postretirement benefit plans to conform with SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans  an amendment of FASB Statements No. 87, 88, 106 and 132 (R).

We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Bandag Incorporateds internal control over financial reporting as
of December 31, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 15, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Chicago, Illinois

March 15, 2007

33

---

# Bandag, Incorporated Consolidated Balance
Sheets

|                                                     | December 31
|---------------------------------------------------- | -----------
|In thousands                                         | 2006       
|Assets                                               |            
|Current Assets                                       |            
|Cash and cash equivalents                            |            
|Investments - Note 5                                 |            
|Accounts receivable, less allowance                  |            
|(2006 - $12,979; 2005 - $13,782)                     |            
|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                                             |            
|Intangible assets, less accumulated amortization     |            
|(2006 - $4,845; 2005 - $3,619)                       |            
|Other assets                                         |            
|                                                     |            
|Total Assets                                         |            
|                                                     |            

See notes to consolidated financial
statements.

34

---

# Bandag, IncorporatedConsolidated Balance
Sheets (continued)

|                                                                            | December 31
|--------------------------------------------------------------------------- | -----------
|In thousands                                                                | 2006       
|Liabilities and Shareholders' Equity                                        |            
|Current Liabilities                                                         |            
|Accounts payable                                                            |            
|Accrued employee compensation and benefits                                  |            
|Accrued marketing expenses                                                  |            
|Other accrued expenses                                                      |            
|Dividends payable                                                           |            
|Income taxes payable                                                        |            
|Current portion of debt and other obligations                               |            
|                                                                            |            
|Total Current Liabilities                                                   |            
|Long-term debt and other obligations - Note 6                               |            
|Deferred income tax liabilities                                             |            
|Minority interest                                                           |            
|Shareholders' Equity - Note 14                                              |            
|Common Stock; $1.00 par value; authorized 21,500,000 shares;                |            
|Issued and outstanding - 9,066,683 shares in 2006; 9,129,060 shares in 2005 |            
|Class A Common Stock; $1.00 par value; authorized 50,000,000 shares;        |            
|Issued and outstanding - 9,517,117 shares in 2006; 9,388,786 shares in 2005 |            
|Class B Common Stock; $1.00 par value; authorized 8,500,000 shares;         |            
|Issued and outstanding - 916,910 shares in 2006, 917,563 shares in 2005     |            
|Additional paid-in capital                                                  |            
|Retained earnings                                                           |            
|Accumulated other comprehensive loss:                                       |            
|Minimum pension asset (liability)                                           |            
|Foreign currency translation adjustment                                     |            
|                                                                            |            
|                                                                            |            
|                                                                            |            
|Total Shareholders' Equity                                                  |            
|                                                                            |            
|Total Liabilities and Shareholders' Equity                                  |            
|                                                                            |            

See notes to consolidated financial
statements.

35

---

# Bandag, IncorporatedConsolidated
Statements of Earnings

|                                                        | Year Ended December 31
|------------------------------------------------------- | ----------------------
|In thousands, except per share data                     | 2006                  
|Income                                                  |                       
|Net sales of products                                   |                       
|Net sales of services                                   |                       
|Other                                                   |                       
|                                                        |                       
|                                                        |                       
|Cost and Expenses                                       |                       
|Cost of products sold                                   |                       
|Cost of services sold                                   |                       
|Engineering, selling, administrative and other expenses |                       
|Restructuring                                           |                       
|                                                        |                       
|                                                        |                       
|Income from Operations                                  |                       
|Interest income                                         |                       
|Interest expense                                        |                       
|                                                        |                       
|Earnings Before Income Taxes, Minority Interest and     |                       
|Discontinued Operations                                 |                       
|Income taxes - Note 11                                  |                       
|Minority interest                                       |                       
|                                                        |                       
|Earnings from Continuing Operations                     |                       
|Net Loss on Discontinued Operations                     |                       
|                                                        |                       
|Net Earnings                                            |                       
|                                                        |                       
|Net Earnings Per Share - Note 12                        |                       
|Basic Earnings Per Share                                |                       
|Net Loss on Discontinued Operations                     |                       
|                                                        |                       
|Net Earnings                                            |                       
|                                                        |                       
|Diluted Earnings Per Share                              |                       
|Net Loss on Discontinued Operations                     |                       
|                                                        |                       
|Net Earnings                                            |                       
|                                                        |                       

See notes to consolidated financial
statements.

36

---

# Bandag, IncorporatedConsolidated
Statements of Cash Flows

|                                                                                    | Year Ended December 31
|----------------------------------------------------------------------------------- | ----------------------
|In thousands                                                                        | 2006                  
|Operating Activities                                                                |                       
|Net earnings                                                                        |                       
|Adjustments to reconcile net earnings to net cash provided by operating activities: |                       
|Non-cash translation adjustment due to sale of South Africa                         |                       
|Depreciation expense                                                                |                       
|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                                         |                       
|Accounts payable and other accrued expenses                                         |                       
|Income taxes payable                                                                |                       
|                                                                                    |                       
|Net Cash Provided by Operating Activities                                           |                       
|Investing Activities                                                                |                       
|Additions to property, plant and equipment                                          |                       
|Proceeds from dispositions of property, plant and equipment                         |                       
|Purchases of investments                                                            |                       
|Maturities of investments                                                           |                       
|Payments for acquisitions of businesses                                             |                       
|Proceeds from divestitures of businesses                                            |                       
|Proceeds from sale of tire and wheel assets                                         |                       
|                                                                                    |                       
|Net Cash Provided by (Used in) Investing Activities                                 |                       
|Financing Activities                                                                |                       
|Principal payments on short-term notes payable and long-term obligations            |                       
|Proceeds from short-term notes payable                                              |                       
|Cash dividends                                                                      |                       
|Purchases of Common, Class A and Class B Stock                                      |                       
|Stock Options Exercised                                                             |                       
|Excess tax benefits from share-based compensation expense                           |                       
|                                                                                    |                       
|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.

37

---

# Bandag, IncorporatedConsolidated
Statements of Changes in Shareholders Equity

|In thousands, except share data   | Common Stock
Issued
and Outstanding | Class A
Common Stock
Issued
and Outstanding | Class B
Common Stock
Issued
and Outstanding | Additional
Paid-In | Retained | Accumulated
Other
Compre-
hensive | Compre-
hensive
|--------------------------------- | ----------------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------ | -------- | --------------------------------- | ---------------
|                                  | Shares                              | Amount                                      | Shares                                      | Amount             | Shares   | Amount                            | Capital        
|Balance at December 31, 2003      |                                     |                                             |                                             | 9,099,745          |          | $                                 | 9,100          
|Net earnings for the year         |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income, -     |                                     |                                            
|adjustment for foreign            |                                     |                                            
|currency translation              |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,       |                                     |                                            
|net of tax of $208 -              |                                     |                                            
|adjustment for minimum            |                                     |                                            
|pension liability                 |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Comprehensive income for the year |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                            
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Cash dividends - $1.305 per share |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                            
|Conversion of Class B Common      |                                     |                                            
|Stock to Common Stock - Note 14   |                                     |                                             |                                             | 97                 |          |                                   |                
|Forfeitures of Common Stock       |                                     |                                            
|and Class A Common Stock          |                                     |                                            
|under Restricted Stock            |                                     |                                            
|Grant Plan - Note 14              |                                     |                                             |                                             | (950               | )        |                                   | (1             
|Forfeitures of Class A Common     |                                     |                                            
|Stock under Stock Award           |                                     |                                            
|Plan - Note 14                    |                                     |                                             |                                             |                    |          |                                   |                
|Class A Common Stock issued       |                                     |                                            
|under Stock Award Plan,           |                                     |                                            
|including tax benefit of          |                                     |                                            
|$295 - Note 14                    |                                     |                                             |                                             |                    |          |                                   |                
|Common Stock and Class A          |                                     |                                            
|Common Stock issued under         |                                     |                                            
|Stock Award Program               |                                     |                                            
|Plan - Note 15                    |                                     |                                             |                                             | 21,319             |          |                                   | 21             
|Restricted Stock Units and        |                                     |                                            
|Stock Appreciation Rights         |                                     |                                            
|issued under Stock Grant          |                                     |                                            
|& Awards Plan - Note 14           |                                     |                                             |                                             |                    |          |                                   |                
|Purchases of Common Stock and     |                                     |                                            
|Class A Common Stock              |                                     |                                             |                                             | (2,999             | )        |                                   | (3             
|Stock options exercised under     |                                     |                                            
|Stock Award Plan, including       |                                     |                                            
|tax benefit of $799 -             |                                     |                                            
|Note 14                           |                                     |                                             |                                             |                    |          |                                   |                
|Stock option expense              |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Balance at December 31, 2004      |                                     |                                             |                                             | 9,117,212          |          | $                                 | 9,117          
|                                  |                                     |                                             |                                             |                    |          |                                   |                

See notes to consolidated financial statements

38

---

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

|In thousands, except share data   | Common Stock
Issued
and Outstanding | Class A
Common Stock
Issued
and Outstanding | Class B
Common Stock
Issued
and Outstanding | Additional
Paid-In | Retained | Accumulated
Other
Compre-
hensive | Compre-
hensive
|--------------------------------- | ----------------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------ | -------- | --------------------------------- | ---------------
|                                  | Shares                              | Amount                                      | Shares                                      | Amount             | Shares   | Amount                            | Capital        
|Balance at December 31, 2004      |                                     |                                             |                                             | 9,117,212          |          | $                                 | 9,117          
|Net earnings for the year         |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,       |                                     |                                            
|net of tax of $2,170-             |                                     |                                            
|adjustment for foreign            |                                     |                                            
|currency translation              |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,       |                                     |                                            
|net of tax of $401-               |                                     |                                            
|adjustment for minimum            |                                     |                                            
|pension liability                 |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Comprehensive income for the year |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Cash dividends - $1.325 per share |                                     |                                             |                                             |                    |          |                                   |                
|Conversion of Class B Common      |                                     |                                            
|Stock to Common Stock - Note 14   |                                     |                                             |                                             | 1,028              |          |                                   | 1              
|Forfeitures of Common Stock       |                                     |                                            
|and Class A Common Stock          |                                     |                                            
|under Restricted Stock            |                                     |                                            
|Grant Plan - Note 14              |                                     |                                             |                                             | (855               | )        |                                   | (1             
|Forfeitures of Class A Common     |                                     |                                            
|Stock under Stock Award           |                                     |                                            
|Plan - Note 14                    |                                     |                                             |                                             |                    |          |                                   |                
|Forfeitures of Class A Common     |                                     |                                            
|Stock under Stock Grant &         |                                     |                                            
|Awards Plan - Note 14             |                                     |                                             |                                             |                    |          |                                   |                
|Class A Common Stock issued       |                                     |                                            
|under Stock Award Plan,           |                                     |                                            
|including tax of $33 - Note 14    |                                     |                                             |                                             |                    |          |                                   |                
|Class A Common Stock issued       |                                     |                                            
|under Stock Grant & Awards        |                                     |                                            
|Plan - Note 14                    |                                     |                                             |                                             |                    |          |                                   |                
|Common Stock and Class A          |                                     |                                            
|Common Stock issued under         |                                     |                                            
|Stock Award Program               |                                     |                                            
|Plan - Note 15                    |                                     |                                             |                                             | 18,521             |          |                                   | 19             
|Restricted Stock Units and        |                                     |                                            
|Stock Appreciation Rights         |                                     |                                            
|issued under Stock Grant          |                                     |                                            
|& Awards Plan - Note 14           |                                     |                                             |                                             |                    |          |                                   |                
|Purchases of Common Stock and     |                                     |                                            
|Class A Common Stock              |                                     |                                             |                                             | (6,846             | )        |                                   | (7             
|Stock options exercised under     |                                     |                                            
|Stock Award Plan, including       |                                     |                                            
|tax benefit of $356 - Note 14     |                                     |                                             |                                             |                    |          |                                   |                
|Stock option expense              |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Balance at December 31, 2005      |                                     |                                             |                                             | 9,129,060          |          | $                                 | 9,129          
|                                  |                                     |                                             |                                             |                    |          |                                   |                

See notes to consolidated financial
statements.

39

---

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

|In thousands, except share data   | Common Stock
Issued
and Outstanding | Class A
Common Stock
Issued
and Outstanding | Class B
Common Stock
Issued
and Outstanding | Additional
Paid-In | Retained | Accumulated
Other
Compre-
hensive | Compre-
hensive
|--------------------------------- | ----------------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------ | -------- | --------------------------------- | ---------------
|                                  | Shares                              | Amount                                      | Shares                                      | Amount             | Shares   | Amount                            | Capital        
|Balance at December 31, 2005      |                                     |                                             |                                             | 9,129,060          |          | $                                 | 9,129          
|Net earnings for the year         |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,       |                                     |                                            
|net of tax of $3,184-             |                                     |                                            
|adjustment for foreign            |                                     |                                            
|currency translation              |                                     |                                             |                                             |                    |          |                                   |                
|Other comprehensive income,       |                                     |                                            
|net of tax of $1,398 -            |                                     |                                            
|adjustment for minimum            |                                     |                                            
|pension liability                 |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Comprehensive income for the year |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                            
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Cash dividends - $1.345 per share |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                            
|Conversion of Class B Common      |                                     |                                            
|Stock to Common Stock - Note 14   |                                     |                                             |                                             | 653                |          |                                   | 1              
|Forfeitures of Common Stock       |                                     |                                            
|and Class A Common Stock          |                                     |                                            
|under Restricted Stock            |                                     |                                            
|Grant Plan - Note 14              |                                     |                                             |                                             | (785               | )        |                                   | (1             
|Forfeitures of Class A Common     |                                     |                                            
|Stock under Stock Award           |                                     |                                            
|Plan - Note 14                    |                                     |                                             |                                             |                    |          |                                   |                
|Forfeitures of Class A Common     |                                     |                                            
|Stock under Stock Grant &         |                                     |                                            
|Awards Plan - Note 14             |                                     |                                             |                                             |                    |          |                                   |                
|Class A Common Stock issued       |                                     |                                            
|under Stock Grant & Awards        |                                     |                                            
|Plan, including tax of $19        |                                     |                                            
|- Note 14                         |                                     |                                             |                                             |                    |          |                                   |                
|Common Stock and Class A          |                                     |                                            
|Common Stock issued under         |                                     |                                            
|Stock Award Program               |                                     |                                            
|Plan - Note 15                    |                                     |                                             |                                             | 4,312              |          |                                   | 4              
|Restricted Stock Units and        |                                     |                                            
|Stock Appreciation Rights         |                                     |                                            
|expense under Stock Grant         |                                     |                                            
|& Awards Plan - Note 14           |                                     |                                             |                                             |                    |          |                                   |                
|Purchases of Common Stock and     |                                     |                                            
|Class A Common Stock              |                                     |                                             |                                             | (66,557            | )        |                                   | (66            
|Stock options exercised under     |                                     |                                            
|Stock Award Plan,                 |                                     |                                            
|including tax benefit of          |                                     |                                            
|$214 - Note 14                    |                                     |                                             |                                             |                    |          |                                   |                
|Stock option expense              |                                     |                                             |                                             |                    |          |                                   |                
|Performance unit award expense    |                                     |                                             |                                             |                    |          |                                   |                
|                                  |                                     |                                             |                                             |                    |          |                                   |                
|Balance at December 31, 2006      |                                     |                                             |                                             | 9,066,683          |          | $                                 | 9,067          
|                                  |                                     |                                             |                                             |                    |          |                                   |                

See notes to consolidated financial
statements.

40

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Note 1.   Summary of
Significant Accounting Policies

# Principles of
Consolidation:

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

# Use of Estimates:

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

# Cash Equivalents:

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

# Accounts Receivable and
Concentrations of Credit Risk:

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

# Accounts Receivable and
Allowance for Doubtful Accounts:

The Company carries its accounts
receivable at their face amounts less an allowance for doubtful accounts. On a regular
basis, the Company evaluates its accounts receivable and establishes the allowance for
doubtful accounts based on a combination of specific customer circumstances as well as
credit conditions and based on a history of write-offs and collections. A receivable is
considered past due if payments have not been received within agreed upon invoice terms.
Accounts receivable are charged to the allowance when the Company determines the
receivable will not be collected. The Company also maintains notes receivable with certain
customers. 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. Inventories held by the Traditional Business segment consist mainly of
synthetic rubber, natural rubber and material and equipment used to retread tires. These
inventories are accounted for under the last in, first out (LIFO) method, except for those
inventories carried by the Brazil and Mexico operations which are accounted for under the
first in, first out (FIFO) method.

Inventories held by the TDS segment
consist primarily of new and retreaded tires. New tires represent approximately 67% of the
total TDS inventory with retread tires comprising a majority of the difference.
Inventories held by the Vehicle Services segment consist primarily of lubricants and
supplies and tires. TDS and Vehicle Services inventories are accounted for under the FIFO
method. The FIFO method is commonly used within the retail tire industry and Management
believes the use of FIFO allows better comparability to other businesses in the industry.

41

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

Approximately 50% and 52% of year-end
inventory amounts at December 31, 2006 and 2005, respectively, were determined by the LIFO
method. The remainder of year-end inventory amounts are determined by the FIFO method. The
excess of current cost over the amount stated for inventories valued by the LIFO method
amounted to approximately $31,697,000 and $26,046,000 at December 31, 2006 and 2005,
respectively. During 2004, inventory quantities were reduced which resulted in a
liquidation of LIFO inventory layers carried at lower costs which prevailed in prior
years. The effect of the liquidation was to decrease cost of goods sold approximately
$1,766,000 for the year ended December 31, 2004.

The Company has commitments to
purchase raw materials in 2007 of $161,044,000.

# 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 was
approximately $26,877,000, $26,302,000 and $27,182,000 in 2006, 2005 and 2004,
respectively.

# Goodwill and Other
Intangible Assets:

In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible
assets, while not amortized, are reviewed at least annually for impairment using the
discounted cash flow method. Separable intangible assets that have finite useful lives are
amortized over their useful lives using the straight-line method over 3 to 5 years. An
impaired intangible asset would be written down to fair value, using the discounted cash
flow method. Intangible amortization expense was approximately $1,226,000, $840,000 and
$1,018,000 in 2006, 2005 and 2004, respectively. Amortization expense is estimated to be
$831,000, $340,000, $202,000, $202,000 and $202,000 for the years 2007, 2008, 2009, 2010
and 2011, respectively.

# Foreign Currency
Translation:

Assets and liabilities of foreign subsidiaries
are translated at the year-end exchange rate and items of income and expense are
translated at the average exchange rate for the year. Exchange gains and losses arising
from transactions denominated in a currency other than the functional currency of the
foreign subsidiary and translation adjustments in countries with highly inflationary
economies or in which operations are directly and integrally linked to the Companys
United States operations are included in income. Net foreign exchange gains, which are
included in engineering, selling, administrative and other expenses in the Consolidated
Statements of Earnings, were $137,000, in 2006. Net foreign exchange losses, which are
included in engineering, selling, administrative and other expenses in the Consolidated
Statements of Earnings, were $1,979,000 and $1,381,000 in 2005 and 2004.

# 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.

42

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Research and Development:

Expenditures for research and
development, which are expensed as incurred, approximated $6,737,000, $7,353,000 and
$7,063,000 in 2006, 2005, and 2004, respectively.

# Advertising:

The Company expenses all advertising
costs in the year incurred. Advertising expense was $6,052,000, $6,596,000 and $3,668,000
in 2006, 2005, and 2004, respectively.

# Revenue Recognition:

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

# Shipping and Handling
Costs:

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

# Marketing Programs:

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

Under the DMR Program, the Company
provides financial assistance primarily in the form of DMR promissory notes from the
dealer to Bandag. The proceeds from the promissory notes can only be used by the dealer
toward the acquisition of equipment (including equipment sold by the Company), service
vehicles, facility expansions and other items aligned with Company goals. The notes
generally 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, 2006, 2005 and 2004 was $13,146,000,
$13,622,000 and $14,189,000, respectively. In 2006, 2005 and 2004, DMR costs of
$10,004,000, $9,236,000 and $7,830,000, respectively, were recorded as a reduction of
sales. For those DMR agreements that do not include notes, the Company records expense and
a corresponding liability, or discloses such agreements in accordance with SFAS No. 5,
Accounting for Contingencies.

# 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 2006,
2005, and 2004, fleet subsidy expenses of $36,987,000, $30,800,000 and $21,288,000,
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 Consolidated Balance Sheets 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.

43

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

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 zero at December 31, 2006 and 2005. Changes in the fair values of these
instruments are reflected in engineering, selling, administrative and other expenses in
the Consolidated Statements of Earnings because the Company has not designated these
instruments as accounting hedges.

# Accounting for
Stock-Based Compensation:

Effective January 1, 2002, the
Company adopted the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosures (the Statement). Under the
modified prospective method of adoption selected by the Company under the provisions of
the Statement, compensation cost 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. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS
123(R)), Share-Based Payment using the modified prospective method.

The Company has historically expensed
stock-based compensation over the explicit service period up to the date of retirement.
Upon adoption of SFAS 123(R) the Company recognized compensation cost over the period
through the date that the employee is eligible to retire.

SFAS 123(R) also requires that the
benefits of tax deductions in excess of compensation amounts recognized for book purposes,
be reported as a financing cash flow rather than an operating cash flow as required
previously. This change in presentation in the accompanying Consolidated Statement of Cash
Flows has reduced net operating cash flows and increased net financing cash flows by
$380,000 for 2006.

The Companys Board of Directors
adopted the Bandag, Incorporated Stock Award Plan in 1999 (the Plan) and the Bandag,
Incorporated 2004 Stock Grant and Awards Plan in 2004 (the 2004 Plan). No additional
grants may be made under plans other than the 2004 Plan. Under the terms of the 2004 Plan,
the Company may award to certain eligible employees and directors stock options, stock
appreciation rights, performance shares, performance units, restricted stock, restricted
stock units, dividend equivalent units and incentive awards, whether granted alone or in
addition to, in tandem with, or in substitution for any other award. Up to 2,000,000
shares of Class A Common Stock is authorized for issuance under the 2004 Plan and as of
December 31, 2006, 1,790,373 shares were available for issuance under the 2004 Plan.

The Company recognized compensation
expense related to its stock-based compensation plans of $3,188,661, $4,292,077 and
$3,585,506 in 2006, 2005 and 2004, respectively.

44

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

A summary of the status of the
Companys option activity under the Plan and 2004 Plan is presented below (aggregate
intrinsic value in thousands):

|                               | Class A
Common
Shares | Weighted-
Average
Exercise
Price | Aggregate
Intrinsic
Value
|------------------------------ | --------------------- | -------------------------------- | -------------------------
|Outstanding, January 1, 2004   |                       |                                  |                          
|Granted                        |                       |                                  |                          
|Exercised                      |                       |                                  |                          
|Forfeited                      |                       |                                  |                          
|                               |                       |                                  |                          
|Outstanding, December 31, 2004 |                       |                                  |                          
|Granted                        |                       |                                  |                          
|Exercised                      |                       |                                  |                          
|Forfeited                      |                       |                                  |                          
|                               |                       |                                  |                          
|Outstanding, December 31, 2005 |                       |                                  |                          
|Granted                        |                       |                                  |                          
|Exercised                      |                       |                                  |                          
|Forfeited                      |                       |                                  |                          
|                               |                       |                                  |                          
|Outstanding, December 31, 2006 |                       |                                  |                          
|                               |                       |                                  |                          
|Exercisable, December 31, 2006 |                       |                                  |                          

The following summarizes information
about stock options outstanding under the Plan and the 2004 Plan at December 31, 2006:

|                         | Options Outstanding   | Options Exercisable               
|------------------------ | --------------------- | ----------------------------------
|Range of Exercise Prices | Class A
Common
Shares | Average
Remaining
Contractual
Life
|$18.99 - $23.74          | 159,610               | 3.2 years                         
|$23.74 - $28.48          | 442,290               | 5.3 years                         
|$28.48 - $33.23          | 196,209               | 4.8 years                         
|$33.23 - $37.98          | 101,640               | 5.7 years                         
|$37.98 - $42.72          | 88,120                | 7.8 years                         
|$42.72 - $47.47          | 117,860               | 6.6 years                         
|                         |                       |                                   
|$18.99 - $47.47          | 1,105,729             | 5.3 years                         
|                         |                       |                                   

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:

|                        | 2006      | 2005      | 2004     
|----------------------- | --------- | --------- | ---------
|Dividend yield          | 3.6%      | 3.7%      | 3.7%     
|Expected volatility     | 36.5%     | 29.4%     | 33.6%    
|Risk-free interest rate | 4.3%      | 4.2%      | 3.8%     
|Expected lives          | 7.7 years | 7.7 years | 7.7 years

45

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

The weighted-average fair value of
options granted during 2006, 2005 and 2004 was $10.97, $10.29 and $11.41 per option,
respectively. The number of options exercisable was 886,794, 928,717 and 681,382 at
December 31, 2006, 2005, and 2004, respectively. The weighted-average remaining
contractual life of options exercisable was 4.7 years at December 31, 2006.

Bandag accounts for restricted stock
at historical cost which equals its fair market value at the date of grant. A summary of
the status of the Companys restricted stock activity under the Plan and the 2004
Plan is presented below:

|                              | Class A
Common
Shares
|----------------------------- | ---------------------
|Non-vested, January 1, 2006   | 124,277              
|Granted                       | 8,290                
|Vested                        | (22,096)             
|Forfeited                     | (17,313)             
|                              |                      
|Non-vested, December 31, 2006 | 93,158               
|                              |                      

Restricted stock awards for an
aggregate 93,158 shares of Class A Common Stock were outstanding at December 31, 2006, and
vest as follows: 36,914 in 2007, 49,268 in 2008 and 6,976 in 2009. The weighted-average
fair value of restricted stock granted during 2006, 2005 and 2004 was $35.69, $40.99
and $44.69 per share, respectively. The total fair value of restricted stock that vested
during 2006, 2005 and 2004 was $663,000, $107,000 and $252,000, respectively.

# New Accounting Standards:

In June 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FAS 109, Accounting for
Income Taxes, (FIN 48), to create a single model to address accounting for
uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim
periods and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company will adopt FIN 48 as of January 1, 2007, as required. The cumulative
effect of adoption will be recorded in retained earnings. The Company has not determined
the effect, if any, the adoption of FIN 48 will have on the Companys financial
position and results of operation.

In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106 and 132 (R) (SFAS 158). SFAS 158 requires balance sheet
recognition of the overfunded or underfunded status of pension and postretirement benefit
plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any
remaining transition assets or obligations that had not been recognized under previous
accounting standards are now recognized in Accumulated Other Comprehensive Income in
Equity, net of tax effects, until they are amortized as a component of net periodic
benefit cost. At December 31, 2006 the effect of adoption of SFAS 158 was to increase
assets by $6,609,000, increase liabilities by $1,173,000 and increase stockholders
equity by $5,436,000. SFAS 158 will also require the Company to change the date used to
measure its defined benefit pension and other postretirement obligations from September 30
to December 31. The measurement date change will be effective as of December 31, 2008. The
incremental pension cost recognized as a result of this change in measurement date will be
recognized as an adjustment to retained earnings. The measurement date change is not
expected to have a material impact on financial position, results of operations, or
liquidity.

46

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Reclassification:

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

# Note 2.   Acquisitions

On April 1, 2006, the Company
acquired Truck Lube 1, which provides light truck maintenance, for approximately
$8,094,000. The Company recorded $3,800,000 of goodwill and $4,060,000 of other intangible
assets.

During 2005, the Companys TDS
segment acquired one retread plant and five commercial and retail outlets for $2,978,000.
During 2004, the Companys TDS segment acquired seven commercial and retail outlets
and two retread plants for $4,163,000.

Certain supplemental non-cash
information related to the Companys 2006 and 2005 acquisitions are as follows (in
thousands):

|                           | 2006   | 2005   
|-------------------------- | ------ | -------
|                           |        |        
|Assets acquired            | $8,094 | $ 3,028
|Less liabilities           | --     | (50)   
|                           |        |        
|Cash paid for acquisitions | 8,094  | 2,978  
|                           |        |        

# Note 3.   Divestitures

During the first quarter of 2006, the
Company recorded the previously announced deferred loss on the sale of its business in
South Africa. Bandag recorded a net loss on discontinued operations of $16,604,000, or
$0.85 per diluted share. The loss was primarily due to the cumulative translation
adjustment of $14,212,000 that was recorded in the Consolidated Balance Sheet related to
the South African operation.

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

The divested and closed locations had
net sales and loss before income taxes and minority interest as follows (in thousands):

|                                               | 2004      
|---------------------------------------------- | ----------
|
|Net sales                                      | $ 60,504  
|Loss before income taxes and minority interest | $    (606)

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

47

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Note 4.   Restructuring
Costs and Other

During 2006, the North American
business unit announced the closing of the tread production plant in Shawinigan, Quebec.
Also during 2006, the Company announced that its pension plans have been closed to new
hires in the United States and Canada, and that the existing pension plans for salaried
and hourly U.S. employees and salaried Canadian employees were frozen effective December
31, 2006.

During 2006, the North American
business unit reduced its company-wide employee workforce by approximately 200 through
early retirements and voluntary and involuntary separation programs. The early retirement
program, announced in the second quarter of 2006, was offered to eligible U.S. employees
who had reached age 55 by December 31, 2006. Employees who accepted the offer will have
five years added to their age in determining their pension benefit. Participants will also
be able to purchase medical coverage through the Company until age 65.

Bandag recorded total pre-tax
restructuring expenses of $19,762,000 in 2006. The Companys North American business
unit recorded pre-tax charges related to the restructuring of $13,072,000, the
Companys International business unit recorded $912,000 of pre-tax restructuring
charges for an employee reduction program, and the Companys European business unit
recorded $5,778,000 of pre-tax restructuring charges for a workforce reduction of 48
persons.

The restructuring charges recorded
consisted of an increase in pension benefit obligations of $8,316,000, termination
benefits of $12,333,000, an increase in postretirement medical benefits of $1,400,000 and
plant closing costs of $613,000. These costs were partially offset by a pension
curtailment gain of $2,900,000 related to freezing the pension plans. As of December 31,
2006 approximately $3,919,000 of these restructuring costs remained accrued, substantially
all of which is expected to be paid by December 31, 2007. The amounts related to the
pension benefits and postretirement medical benefits were recorded in the Companys
Condensed Consolidated Balance Sheet which resulted in a decrease in the pension asset of
$5,423,000 and an increase in the postretirement medical benefit liability of $1,400,000.

# Note 5.   Investments

All marketable securities are
classified as available-for-sale. Realized gains and losses from the sales of marketable
securities are based on the specific identification method. Interest on securities
classified as available-for-sale is included in interest income.

The following is a summary of
securities available-for-sale:

|In thousands                                     | Cost | Estimated
Fair
Value
|------------------------------------------------ | ---- | --------------------
|
|December 31, 2006                                |      |                     
|Obligations of states and political subdivisions |      |                     
|Corporate debt                                   |      |                     
|                                                 |      |                     
|                                                 |      |                     
|                                                 |      |                     
|December 31, 2005                                |      |                     
|Obligations of states and political subdivisions |      |                     
|Corporate debt                                   |      |                     
|                                                 |      |                     
|                                                 |      |                     
|                                                 |      |                     

48

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

The contractual maturities of debt
securities at December 31, 2006 are as follows:

|In thousands                     | Estimated
Fair
Value
|-------------------------------- | --------------------
|
|Due after one through five years |                     
|Due after ten years              |                     
|                                 |                     
|Debt securities                  |                     
|                                 |                     

Proceeds from the sales of
available-for-sale securities were $684,350,000 in 2006, $1,239,430,000 in 2005 and
$1,070,525,000 in 2004. Realized gains and losses and unrealized gains and losses were not
material in the years 2006, 2005 and 2004. At December 31, 2005, securities
available-for-sale include $13,048,000 reported as cash equivalents.

# Note 6.   Financing
Arrangements

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

|In thousands                                  | Interest
  Rates | 2006 | 2005
|--------------------------------------------- | ---------------- | ---- | ----
|
|Senior Unsecured Notes Payable, maturing 2007 |                  |      |     
|                                              |                  |      |     
|Total debt                                    |                  |      |     
|Other obligations                             |                  |      |     
|                                              |                  |      |     
|Total debt and other obligations              |                  |      |     
|Current portion of debt and other obligations |                  |      |     
|                                              |                  |      |     
|Long-term debt and other obligations          |                  |      |     
|                                              |                  |      |     

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

|Scheduled maturities, in thousands | 
|---------------------------------- | 
|2007                               | 
|2008                               | 
|2009                               | 
|2010                               | 
|2011                               | 
|Thereafter                         | 

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

Cash payments for interest on debt
were $1,539,000, $1,912,000 and $2,057,000 in 2006, 2005, and 2004, 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, 2006 and 2005, the fair value of the Companys
outstanding debt was approximately $5,781,000 and $11,686,000, 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, 2006, the Company had
uncommitted and committed unused lines of credit arrangements totaling $107,360,000. 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.

49

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Note 7.   Goodwill and
Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived
intangible assets are reviewed at least annually for impairment. As of December 31, 2006
and 2005 the Company had goodwill in the amount of $22,903,000 and $18,587,000,
respectively. As of December 31, 2006 and 2005 the Company had trade name assets in the
amount of $12,400,000. Separable intangible assets that have finite lives continue to be
amortized over their useful lives.

As of December 31, 2006 and 2005, the
Company tested for impairment of goodwill and indefinite-lived intangibles using
discounted cash flow models. As a result of these tests, the Company was not required to
recognize any impairment.

# Note 8.   Other Income

Other income includes gain on sale of
assets, lease income, royalties and other miscellaneous items. In 2006 other income
includes $2,900,000 for legal settlements with raw material suppliers and $845,000 for the
sale of the Companys joint venture in India. In 2004 a gain on sale of assets was
recorded of approximately $1,937,000 for the sale of certain assets of QDS and
approximately $3,400,000 for the sale of the Chino, California facility.

# Note 9.   Impairment of
Long-Lived Assets

Long-lived assets related to the
Companys North American and Speedco business units were determined to be impaired in
2005 and charges of $1,604,000 and $365,000, respectively, were recorded in engineering,
selling, administrative and other expenses. The fixed assets 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 appraisals.

# Note 10.   Leases

Certain equipment and facilities are
rented under non-cancelable and cancelable operating leases. Total rental expense under
operating leases was $12,100,000, $11,245,000 and $11,679,000 for the years ended December
31, 2006, 2005, and 2004, respectively. At December 31, 2006, future minimum lease
payments under non-cancelable operating leases having initial lease terms in excess of one
year are: $10,078,000 in 2007, $7,757,000 in 2008, $6,012,000 in 2009, $4,942,000 in 2010,
$3,916,000 in 2011, and $17,304,000 in the aggregate for all years after 2011.

50

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# 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
|----------------------------------------------- | -----------
|In thousands                                    | 2006       
|Deferred tax assets:                            |            
|Marketing programs                              |            
|Excess foreign tax credits upon repatriation of |            
|unremitted earnings                             |            
|Employee benefits                               |            
|Insurance and legal reserves                    |            
|Foreign tax credits(1)                          |            
|Accounts receivable valuation allowances        |            
|Other nondeductible reserves                    |            
|Obsolescence and valuation reserves             |            
|Plant and equipment reserves                    |            
|Other accruals                                  |            
|                                                |            
|Total deferred tax assets                       |            
|                                                |            
|Deferred tax liabilities:                       |            
|Basis difference in fixed assets                |            
|Excess pension funding                          |            
|Unremitted earnings of foreign subsidiaries     |            
|Other liabilities                               |            
|                                                |            
|                                                |            
|Valuation allowance((2))                        |            
|                                                |            
|Total deferred tax liabilities                  |            
|                                                |            
|Net deferred tax assets                         |            
|                                                |            
|Net current deferred tax assets                 |            
|Net non-current deferred tax liabilities        |            
|                                                |            
|Net deferred tax assets                         |            
|                                                |            

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

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

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

|                                                                               | Year Ended December 31
|------------------------------------------------------------------------------ | ----------------------
|In thousands                                                                   | 2006                  
|Domestic                                                                       |                       
|Foreign                                                                        |                       
|                                                                               |                       
|Earnings before income taxes and minority interest and
discontinued operations |                       
|                                                                               |                       
|                                                                               |                       

51

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

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

|             | Year Ended December 31
|------------ | ----------------------
|In thousands | 2006                  
|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
|------------------------------------------------------------------- | ----------------------
|                                                                    | 2006                  
|Computed at the expected statutory rate                             |                       
|State income tax - net of federal tax benefit                       |                       
|Deferred tax on unremitted earnings of foreign subsidiaries         |                       
|and foreign tax rate differentials                                  |                       
|Audit settlement and prior year accrual changes(1)                  |                       
|Research and development credit                                     |                       
|Net operating loss benefits not utilized and capital loss carryback |                       
|Tax exempt interest                                                 |                       
|Section 199, manufacturing deduction                                |                       
|Other                                                               |                       
|                                                                    |                       
|Income tax at the effective rate                                    |                       
|                                                                    |                       

(1)    
          Decrease in 2004 due to $7,200,000 for the resolution and reassessment of
          certain tax matters in 2004.

Income taxes paid amounted to
$17,906,000, $28,278,000 and $27,303,000 in 2006, 2005, and 2004, respectively.

52

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# 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
|----------------------------------- | ----------------------
|In thousands, except per share data | 2006                  
|Numerator:                          |                       
|Earnings from continuing operations |                       
|Net loss on discontinued operations |                       
|                                    |                       
|Net earnings                        |                       
|                                    |                       
|Denominator:                        |                       
|Weighted-average shares - Basic     |                       
|Effect of dilutive:                 |                       
|Restricted stock                    |                       
|Stock options                       |                       
|                                    |                       
|                                    |                       
|Weighted-average shares - Diluted   |                       
|                                    |                       
|Basic earnings (loss) per share     |                       
|Earnings from continuing operations |                       
|Net loss on discontinued operations |                       
|                                    |                       
|Net earnings                        |                       
|                                    |                       
|Diluted earnings (loss) per share   |                       
|Earnings from continuing operations |                       
|Net loss on discontinued operations |                       
|                                    |                       
|Net earnings                        |                       
|                                    |                       

Options to purchase 96,780, 253,812
and 143,660 shares of Class A Common Stock were outstanding during 2006, 2005 and 2004,
respectively, but were not included in the computation of diluted earnings per share
because the effect would have been antidilutive.

53

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Note 13.   Operating
Segment and Geographic Area Information

# Description of Types of
Products and Services:

The Company has three reportable
operating segments: Traditional Business, TDS and Vehicle Services. 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 together with Open Road Technologies, are integrated and
managed as one unit, which is referred to internally as North America. The
Companys operations located in Europe principally service those European countries,
but also export to certain other countries in the Middle East and Northern and Central
Africa. This collection of countries is under one management group and is referred to
internally as EMEA. The Companys exports from North America to markets
in the Caribbean, Central America, South America and Asia, along with operations in
Brazil, Mexico and Venezuela and royalties from licensees in Australia and South Africa,
are combined under one management group referred to internally as
International.

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

Speedco, together with Truck Lube 1,
acquired in the second quarter of 2006, are now combined into one segment, Vehicle
Services. Speedco provides quick-service truck lubrication and routine tire services
through company-owned on-highway locations in the United States. Truck Lube 1 is located
in Florida and provides light truck maintenance.

# Measurement of Segment
Profit and Loss and Segment Assets:

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

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

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

54

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

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

|                                       | Traditional Business
|-------------------------------------- | --------------------
|                                       | North America((2))  
|In thousands                           | 2006                
|Sales by product                       |                     
|Retread products                       |                     
|New tires                              |                     
|Retread tires                          |                     
|Equipment                              |                     
|Services                               |                     
|Other                                  |                     
|                                       |                     
|Net sales to unaffiliated customers(1) |                     
|                                       |                     
|Transfers                              |                     
|Gross profit                           |                     
|Depreciation expense                   |                     
|Restructuring expense                  |                     
|Corporate expense                      |                     
|Operating earnings (loss)              |                     
|Interest revenue                       |                     
|Interest expense                       |                     
|                                       |                     
|Earnings (loss) before income taxes,   |                     
|minority interest and                  |                     
|discontinued operations                |                     
|Total assets at December 31            |                     
|Expenditures for long-lived assets     |                     
|Additions to (deductions from) long-   |                     
|lived assets due to acquisitions       |                     
|(divestitures)                         |                     
|Fixed assets                           |                     
|Goodwill and intangible assets         |                     
|Retained earnings                      |                     

|(1) | No
customer accounted for 10% or more of the Companys sales to           unaffiliated
customers in 2006, 2005 or 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | Export
sales from North           America were less than 10% of sales to unaffiliated customers
in each of the           years 2006, 2005 and 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

55

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

|                                       | Traditional Business |      |      |        
|-------------------------------------- | -------------------- | ---- | ---- | -------
|                                       | International        | TDS 
|In thousands                           | 2006                 | 2005 | 2004 | 2006   
|Sales by product                       |                      |      |      |        
|Retread products                       |                      |      | $    | 112,404
|New tires                              |                      |      |      | --     
|Retread tires                          |                      |      |      | --     
|Equipment                              |                      |      |      | 1,887  
|Services                               |                      |      |      | --     
|Other                                  |                      |      |      | --     
|                                       |                      |      |      |        
|Net sales to unaffiliated customers(1) |                      |      | $    | 114,291
|                                       |                      |      |      |        
|Transfers                              |                      |      | $    | 10,459 
|Gross profit                           |                      |      | $    | 33,718 
|Depreciation expense                   |                      |      |      | 3,195  
|Restructuring expense                  |                      |      |      | 912    
|Corporate expense                      |                      |      |      | --     
|Operating earnings (loss)              |                      |      | $    | 11,568 
|Interest revenue                       |                      |      |      | --     
|Interest expense                       |                      |      |      | --     
|                                       |                      |      |      |        
|Earnings before income taxes,          |                      |     
|minority interest and                  |                      |     
|discontinued operations                |                      |      | $    | 11,568 
|Total assets at December 31            |                      |      | $    | 64,732 
|Expenditures for long-lived assets     |                      |      |      | 4,698  
|Additions to (deductions from) long-   |                      |     
|lived assets due to acquisitions       |                      |     
|(divestitures)                         |                      |      |      | --     
|Fixed assets                           |                      |      |      | 18,347 
|Goodwill and intangible assets         |                      |      |      | --     
|Retained earnings                      |                      |      |      | 39,532 

|(1) | No
customer accounted for 10% or more of the Companys sales to           unaffiliated
customers in 2006, 2005 or 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------

56

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

|                                       | Vehicle Services(2) | Other(3)
|-------------------------------------- | ------------------- | --------
|In thousands                           | 2006                | 2005    
|Sales by product                       |                     |         
|Retread products                       |                     |         
|New tires                              |                     |         
|Retread tires                          |                     |         
|Equipment                              |                     |         
|Services                               |                     |         
|Other                                  |                     |         
|                                       |                     |         
|Net sales to unaffiliated customers(1) |                     |         
|                                       |                     |         
|Transfers                              |                     |         
|Gross profit                           |                     |         
|Depreciation expense                   |                     |         
|Restructuring expense                  |                     |         
|Corporate expense                      |                     |         
|Operating earnings (loss)              |                     |         
|Interest revenue                       |                     |         
|Interest expense                       |                     |         
|                                       |                     |         
|Earnings (loss) before income taxes,   |                     |         
|minority interest and                  |                     |         
|discontinued operations                |                     |         
|Total assets at December 31            |                     |         
|Expenditures for long-lived assets     |                     |         
|Additions to (deductions from) long-   |                     |         
|lived assets due to acquisitions       |                     |         
|(divestitures)                         |                     |         
|Fixed assets                           |                     |         
|Goodwill and intangible assets         |                     |         
|Retained earnings                      |                     |         

|(1) | No
customer accounted for 10% or more of the Companys sales to           unaffiliated
customers in 2006, 2005 and 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(2) | Truck
Lube 1 was acquired on           April 1, 2006 and Speedco was acquired on February 13,
2004.
|--- | ---------------------------------------------------------------------------------------------------

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

57

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

|                                     | Consolidated
|------------------------------------ | ------------
|In thousands                         | 2006        
|Sales by product                     |             
|Retread products                     |             
|New tires                            |             
|Retread tires                        |             
|Equipment                            |             
|Services                             |             
|Other                                |             
|                                     |             
|Net sales to unaffiliated customers  |             
|                                     |             
|Transfers                            |             
|Gross profit                         |             
|Depreciation expense                 |             
|Restructuring expense                |             
|Corporate expense                    |             
|Operating earnings                   |             
|Interest revenue                     |             
|Interest expense                     |             
|                                     |             
|Earnings before income taxes,        |             
|minority interest and                |             
|discontinued operations              |             
|Total assets at December 31          |             
|Expenditures for long-lived assets   |             
|Additions to (deductions from) long- |             
|lived assets due to acquisitions     |             
|(divestitures)                       |             
|Fixed assets                         |             
|Goodwill and intangible assets       |             
|Retained earnings                    |             

58

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

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

|In thousands  | Year Ended December 31
|------------- | ----------------------
|Net Sales(1)  | 2006                  
|United States |                       
|Other         |                       
|              |                       
|Total         |                       
|              |                       

|                     | December 31
|-------------------- | -----------
|Long-Lived Assets(2) | 2006       
|United States        |            
|Other                |            
|                     |            
|Total                |            
|                     |            

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

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

# Note 14.  
Shareholders Equity

As of December 31, 2006, the Company
had three classes of capital stock outstanding. These classes were Common Stock, Class A
Common Stock and Class B Common Stock. On January 16, 2007, each share of Class B Common
Stock was automatically converted into one share of Common Stock. Class A Common Stock has
the same rights regarding dividends and distributions upon liquidation, merger and
consolidation as Common Stock. However, Class A Common Shareholders are not entitled to
vote, while Common Shareholders are entitled to one vote for each share held.

On August 21, 2006, Bandag entered
into a shareholder rights agreement. In general, the rights agreement imposes significant
adverse consequences upon any person or group that acquires 20% or more of the outstanding
Common Stock, 20% or more of the outstanding Class A Common Stock or 20% or more of the
outstanding Common Stock and Class A Common Stock on a combined basis without the approval
of the Bandag board of directors. On December 5, 2006, immediately prior to the execution
of the merger agreement with BSAH, Bandag, entered into an amendment to the rights
agreement which provides that neither the execution of the merger agreement nor the
completion of the merger will trigger the provisions of the rights agreement. The rights
agreement, as amended, also provides that the potential exercisability of the rights will
terminate immediately prior to the effective time of the merger, but only if such
effective time occurs. Except as provided in the amendment, the rights agreement remains
in effect.

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 was authorized, through February 18, 2005 to award up to 2,400,000
shares of Class A Common Stock to certain eligible employees and directors incentive stock
options, nonqualified stock options, and restricted stock. 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, 2005 and 2004, 23,253 and 47,378 restricted
shares of Class A Common Stock were granted under the Plan and $1,111,000 and $975,000 of
expense was recorded, respectively. During 2006, $643,000 of restricted stock expense was
recorded for restricted stock granted in previous years under the Plan. Also during 2004,
152,510 options were granted and $2,641,000 of expense was recorded. During 2006 and 2005,
$879,000 and $2,313,000 of option expense was recorded for options issued in previous
years under the Plan, respectively. No further grants of options or restricted stock shall
be made under the Plan. For further information see Accounting for Stock-Based
Compensation under Note 1.

59

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

In 2004, the Companys Board of
Directors adopted the Bandag, Incorporated 2004 Stock Grant and Awards Plan (the 2004
Plan). Under the terms of the 2004 Plan, the Company may award to certain eligible
employees and directors stock options, stock appreciation rights, performance shares,
performance units, restricted stock, restricted stock units, dividend equivalent units and
incentive awards, whether granted alone or in addition to, in tandem with, or in
substitution for any other award. Up to 2,000,000 shares of Class A Common Stock is
authorized for issuance under the 2004 Plan and as of December 31, 2006, 1,790,373 shares
were available for issuance under the 2004 Plan. During the years ended December 31, 2006
and 2005, 8,290 and 41,156 restricted shares of Class A Common Stock were granted under
the 2004 Plan and $557,000 and $496,000 of expense was recorded, respectively. Also during
2006 and 2005, 62,160 and 102,320 options were granted and $387,000 and $354,000 of
expense was recorded, respectively. During the year ended December 31, 2005, 6,400 stock
appreciation rights and 3,320 restricted stock units were granted under the Plan and
$78,000 of expense was recorded. During the year ended December 31, 2004, 6,200 stock
appreciation rights and 1,915 restricted stock units were granted under the 2004 Plan and
$36,000 of expense was recorded. During 2006 $22,000 of expense was recorded for stock
appreciation rights and restricted stock units granted in previous years under the 2004
Plan.

# Note 15.   Retirement
Benefit Plans

The Company sponsors defined-benefit
pension plans covering full-time employees directly employed by Bandag, Incorporated,
Bandag Canada Ltd. and certain employees of TDS and in the Companys European
operations. Effective December 31, 2006 the pension plans were frozen for U.S. salaried
and hourly employees and for salaried Canadian employees. 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 or Kendon Corporation are eligible for temporary medical
benefits that cease at age 65. The Company uses a September 30 measurement date for the
majority of its plans.

60

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

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
|---------------------------------------- | ---------------- | -----------------------
|In thousands                             | 2006             | 2005                   
|Change in benefit obligations:           |                  |                        
|Benefit obligations at beginning of year |                  |                        
|Service cost                             |                  |                        
|Interest cost                            |                  |                        
|Participants' contributions              |                  |                        
|Plan amendments                          |                  |                        
|Exchange rate changes                    |                  |                        
|Benefits paid                            |                  |                        
|Curtailment gain                         |                  |                        
|Settlement gain                          |                  |                        
|Special termination benefits             |                  |                        
|Actuarial (gain) or loss                 |                  |                        
|                                         |                  |                        
|Benefit obligations at end of year       |                  |                        
|                                         |                  |                        
|Change in plan assets at fair value:     |                  |                        
|Fair value of plan assets at             |                  |                        
|beginning of year                        |                  |                        
|Actual return on plan assets             |                  |                        
|Employer contributions                   |                  |                        
|Participants' contributions              |                  |                        
|Benefits paid                            |                  |                        
|Settlement payments                      |                  |                        
|Exchange rate changes                    |                  |                        
|                                         |                  |                        
|Fair value of plan assets at end of year |                  |                        
|                                         |                  |                        

|                                      | Pension Benefits | Postretirement Benefits
|------------------------------------- | ---------------- | -----------------------
|In thousands                          | 2006             | 2005                   
|Reconciliation of funded status:      |                  |                        
|Funded status                         |                  |                        
|Unrecognized actuarial (gain) or loss |                  |                        
|Unrecognized transition asset         |                  |                        
|Unrecognized prior service cost       |                  |                        
|Employer contributions after          |                  |                        
|measurement date                      |                  |                        
|                                      |                  |                        
|Net amount recognized                 |                  |                        
|                                      |                  |                        

61

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

Amounts recognized in the
consolidated balance sheet as of December 31, 2006 consist of:

|In thousands                    | Pension
Benefits2006 | Postretirement
Benefits2006
|------------------------------- | -------------------- | ---------------------------
|
|Non-current asset               |                      |                            
|Accrued liability - current     |                      |                            
|Accrued liability - non-current |                      |                            
|                                |                      |                            
|Net amount recognized           |                      |                            
|                                |                      |                            

Amounts recognized in accumulated
other comprehensive loss (pre-tax) as of December 31, 2006 consist of:

|In thousands               | Pension
Benefits2006 | Postretirement
Benefits2006
|-------------------------- | -------------------- | ---------------------------
|Transitional asset         |                      |                            
|Prior service credit       |                      |                            
|Accumulated (loss) or gain |                      |                            
|                           |                      |                            
|Net amount recognized      |                      |                            
|                           |                      |                            

Amounts recognized in the
consolidated balance sheet as of December 31, 2005 consist of:

|In thousands                         | Pension
Benefits
2005 | Postretirement
Benefits
2005
|------------------------------------ | --------------------- | ----------------------------
|Non-current asset                    |                       |                             
|Accrued liability - current          |                       |                             
|Accrued liability - non-current      |                       |                             
|Accumulated other comprehensive loss |                       |                             
|                                     |                       |                             
|Net amount recognized                |                       |                             
|                                     |                       |                             

The estimated costs that will be
amortized from accumulated other comprehensive loss into net periodic cost during fiscal
year 2007 are as follows:

|In thousands            | Pension
Benefits | Postretirement
Benefits
|----------------------- | ---------------- | -----------------------
|Transitional asset      |                  |                        
|Prior service credit    |                  |                        
|Accumulated (gain) loss |                  |                        
|                        |                  |                        
|Net amount recognized   |                  |                        
|                        |                  |                        

62

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

The incremental effect of applying
SFAS 158 on the consolidated balance sheet at December 31, 2006 was as follows:

|In thousands                         | Pension
Benefits2006 | Postretirement
Benefits2006
|------------------------------------ | -------------------- | ---------------------------
|Non-current asset                    |                      |                            
|Accrued liability - current          |                      |                            
|Accrued liability - non-current      |                      |                            
|Accumulated other comprehensive loss |                      |                            

The accumulated benefit obligation
for the U.S. defined benefit pension plan was $117,551,000 and $108,006,000 at December
31, 2006 and 2005, respectively.

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

|                               | Pension Benefits | Postretirement Benefits
|------------------------------ | ---------------- | -----------------------
|In thousands                   | 2006             | 2005                   
|Projected benefit obligation   |                  |                        
|Accumulated benefit obligation |                  |                        
|Fair value of plan assets      |                  |                        

Net periodic cost is composed of the
following:

|                                             | Pension Benefits | Postretirement Benefits
|-------------------------------------------- | ---------------- | -----------------------
|In thousands                                 | 2006             | 2005                   
|Components of net periodic (benefit) cost    |                  |                        
|Service cost                                 |                  |                        
|Interest cost                                |                  |                        
|Expected return on plan assets               |                  |                        
|Amortization of prior service cost           |                  |                        
|Amortization of transitional assets          |                  |                        
|Recognized actuarial (gain) loss             |                  |                        
|                                             |                  |                        
|Net periodic cost                            |                  |                        
|                                             |                  |                        
|Additional (gain) or loss recognized due to: |                  |                        
|Curtailment                                  |                  |                        
|Settlement                                   |                  |                        
|Special termination benefits                 |                  |                        

63

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

Additional information:

|                                       | Pension Benefits | Postretirement Benefits
|-------------------------------------- | ---------------- | -----------------------
|                                       | 2006             | 2005                   
|Weighted-average assumptions used      |                  |                        
|to determine net periodic benefit cost |                  |                        
|at October 1                           |                  |                        
|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 September 30                        |                  |                        
|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 reached in 2009.

**Ultimate trend rate reached in
2011.

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

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

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

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

64

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

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

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

The Company expects to fund pension
plans approximately $554,000 in 2007. The Company expects to fund its postretirement plan
approximately $624,000 in 2007. 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 obtain an average 5.5% annual return for the long-term. Each
year, the Company periodically reviews with its actuaries its investment strategy and
funding needs.

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

|             | Pension
Benefits | Postretirement
Benefits
|------------ | ---------------- | -----------------------
|In thousands |                  |                        
|2007         |                  |                        
|2008         |                  |                        
|2009         |                  |                        
|2010         |                  |                        
|2011         |                  |                        
|2012-2016    |                  |                        

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 $3,943,000, $5,003,000 and $3,960,000 in 2006, 2005, and
2004, respectively. During the years ended December 31, 2006, 2005 and 2004, the Company
issued 4,312, 18,521 and 21,319 shares of Common Stock, respectively. During the years
ended December 31, 2006, 2005, and 2004, the Company issued 4,312, 20,034 and 21,773
shares of Class A Common Stock, respectively. The Common Stock and Class A Common Stock
were all accrued for in the previous years. The Company recorded expense under the plan of
$1,200,000 for the year ended December 31, 2004.

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
2006, 2005, and 2004.

65

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Note 16.   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.

Plumbers &Pipefitters Local
572 Pension Fund v. Bandag, et al.

On December 8, 2006, a purported
class action shareholder complaint was filed in the Muscatine County District Court in the
State of Iowa (the complaint) by Plumbers and Pipefitters Local 572 Pension Fund, seeking
to pursue a class action on behalf of all of the Bandag shareholders. The complaint names
Bandag, Martin G. Carver, the Chairman, President and Chief Executive Officer, and other
directors, Gary E. Dewel, R. Stephen Newman, Roy J. Carver, Jr., James R. Everline,
Phillip J. Hanrahan and Amy P. Hutton, as defendants. The complaint alleges, among other
things, that, in connection with the proposed business combination transaction with
Bridgestone Americas Holding, Inc., the directors breached their fiduciary duties of due
care and good faith by failing to solicit bids from other potential bidders and failing to
maximize shareholder value and by creating deterrents to third party offers. Among other
things, the complaint seeks class action status, and a court order enjoining the
consummation of the merger and directing the defendants to take appropriate steps to
maximize shareholder value. While the lawsuit is in its preliminary stage, Bandag believes
that the claims in the lawsuit are without merit and intends to vigorously defend it.

Audra Smith v. Michael Rouse, et
al. and Yolanda Jackson v. Michael Rouse, 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: These cases arise from an explosion and fire which occurred on May
17, 2002, at a rubber recycling plant in Mississippi, operated by Rouse Rubber Co.,
(Rouse) killing five employees and seriously injuring at least seven others. Bandag has
been named in two of about six pending cases. Plaintiffs allege that a rubber recycling
machine was dangerously designed or maintained, causing the explosion, and that Bandag may
be passively liable as a joint venturer with Rouse. Bandag was named in the
cases based on its majority ownership of Rouse prior to 1995. Bandag had only limited
involvement with the equipment in question while it had an ownership interest in Rouse.
Bandag did not manufacture, operate or repair the equipment in question.

Bandag was originally named as one of
numerous defendants in the wrongful death actions brought in these two cases; however,
Bandag was dismissed without prejudice from the Jacksoncase for tactical reasons. The
Smithcase 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
from all defendants, including Bandag, or only from certain defendants, not including
Bandag. Astec, the manufacturer of the dryer system that exploded, settled with the
plaintiffs in apparently all cases for approximately $45 million. This settlement will
apply as a credit to the remaining defendants. Bandag has reached an agreement to settle
with all known claimants including those in Smithand Jackson, in consideration of the
payment of a nominal amount. This matter remains pending subject to final approval of the
necessary parties, including the court, of a proposed settlement agreement.

Bandag has reached an agreement to
settle with all known claimants, including those in Smithand Jackson, in consideration of
the payment of a nominal amount. The parties are in the process of securing the
courts approval of the settlement.

66

---

# Bandag, Incorporated Notes to Consolidated
Financial Statements

# Note 17.   Summary of
Unaudited Quarterly Results of Operations

Unaudited quarterly results of
operations for the years ended December 31, 2006 and 2005 are summarized as follows (in
thousands except per share data):

|                                    | Quarter Ended 2006
|----------------------------------- | ------------------
|                                    | Mar. 31           
|Net sales                           |                   
|Gross profit                        |                   
|Earnings from continuing operations |                   
|Net earnings (loss)                 |                   
|Basic earnings (loss) per share     |                   
|Earnings from continuing operations |                   
|Net loss on discontinued operations |                   
|                                    |                   
|Net earnings (loss)                 |                   
|Diluted earnings (loss) per share   |                   
|Earnings from continuing operations |                   
|Net loss on discontinued operations |                   
|                                    |                   
|Net earnings (loss)                 |                   

|                        | Quarter Ended 2005
|----------------------- | ------------------
|                        | Mar. 31           
|Net sales               |                   
|Gross profit            |                   
|Net earnings            |                   
|Net earnings per share: |                   
|Basic                   |                   
|Diluted                 |                   

Third quarter 2006 net earnings
reflect $9,318 after-tax, or $0.48 per diluted share, related to restructuring charges.

Fourth quarter 2006 net earnings
reflect $3,850 after-tax, or $0.20 per diluted share, related to restructuring charges.

Fourth quarter 2005 net earnings
reflect $2,680 after-tax, or $0.14 per diluted share, related to restructuring charges.

67

---

# 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, 2006.

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, 2006 that has materially affected, or is likely to
materially affect, the Companys internal control over financial reporting.

# Item 9B.    OTHER
INFORMATION

None

PART III

# Item 10.    DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information concerning the
directors of the registrant called for by Items 401 and 405 of Regulation S-K is
incorporated herein by reference from the registrants definitive Proxy Statement for
the 2007 Annual Meeting of Shareholders (referred to as the Proxy Statement) under the
headings Election of Directors and Miscellaneous  Section 16(a)
Beneficial Reporting Compliance, unless the Proxy Statement will not be filed by
April 30, in which case Bandag will amend this Form 10-K to provide the omitted
information in accordance with the requirements of Instruction G to Form 10-K. In
accordance with General Instruction G 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, the identification of the audit committee members and
communications, with the Board required pursuant to Items 407(c)(3), (d)(4) and (d)(5) of
Regulation S-K is incorporated herein by reference from the Proxy Statement under the
heading The Board of Directors and Its Committees, unless the Proxy Statement
will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide
the omitted information in accordance with the requirements of Instruction G to Form 10-K.

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 Proxy Statement under the heading
Remuneration of Executive Officers and Directors, unless the Proxy Statement
will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide
the omitted information in accordance with the requirements of Instruction G to Form 10-K.
The subsection entitled Report of Management Continuity and Compensation Committee
on Executive Compensation is not deemed to be soliciting material or to
be filed with the Securities and Exchange Commission or subject to Regulation
14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18
of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent as specifically incorporated by reference into such filing.

68

---

# 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 Proxy Statement
under the heading Remuneration of Executive Officers and Directors, unless the
Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form
10-K to provide the omitted information in accordance with the requirements of Instruction
G to Form 10-K. The information called for by Item 403 of Regulation S-K is incorporated
herein by reference from the Proxy Statement under the heading Security
Ownership, unless the Proxy Statement will not be filed by April 30, in which case
Bandag will amend this Form 10-K to provide the omitted information in accordance with the
requirements of Instruction G to Form 10-K.

# Item 13.      CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by Item 13
is incorporated herein by reference from the Proxy Statement under the heading
Remuneration of Officers and Directors  Transactions with Management/Principal
Shareholders and Directors and the heading The Board of Directors and its
Committees  Independence, unless the Proxy Statement will not be filed by
April 30, in which case Bandag will amend this Form 10-K to provide the omitted
information in accordance with the requirements of Instruction G to Form 10-K.

# Item 14.    PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The information called for by Item 14
is incorporated herein by reference from the Proxy Statement under the heading
Proposal No. 3  Ratification of Selection of Independent Auditors,
unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend
this Form 10-K to provide the omitted information in accordance with the requirements of
Instruction G to Form 10-K.

69

---

PART IV

# Item 15.    EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES

|(1) | Financial
Statements
|--- | --------------------

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

| |                                                                                                     | Page
| | --------------------------------------------------------------------------------------------------- | ----
| | Report of Management                                                                                | 31  
| | Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting | 32  
| | Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements         | 33  
| | Consolidated Balance Sheets as of December 31, 2006 and 2005                                        | 34  
| | Consolidated Statements of Earnings for the Years Ended December 31, 2006,                          |     
| | 2005 and 2004                                                                                       | 36  
| | Consolidated Statements of Cash Flows for the Years Ended December 31, 2006,                        |     
| | 2005 and 2004                                                                                       | 37  
| | Consolidated Statements of Changes in Shareholders' Equity for the Years Ended                      |     
| | December 31, 2006, 2005 and 2004                                                                    | 38  
| | Notes to Consolidated Financial Statements                                                          | 41  

|(2) | Financial
Statement Schedule
|--- | ----------------------------

| | Schedule II
- Valuation and qualifying accounts and reserves.
| | -------------------------------------------------------------

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

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

|Exhibit No. | Description                                                                                                    
|----------- | ---------------------------------------------------------------------------------------------------------------
|2.1         | Agreement and Plan of Merger, dated as of December 5, 2006, by and among Bandag, Incorporated, Grip Acquisition
|            | Corporation and Bridgestone Americas Holding, Inc. (Incorporated by reference to the Company's Form 8-K dated  
|            | as of December 5, 2006.)                                                                                       
|3.1         | Bylaws: As amended November 8, 2005. (Incorporated by reference to Exhibit No. 3.1 to the Company's Form 10-K  
|            | for the year ended December 31, 2005.)                                                                         
|3.2         | Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by reference to Exhibit No. 3.2 
|            | to the Company's Form 10-K for the year ended December 31, 1992.)                                              
|3.3         | Articles of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6, 1992.              
|            | (Incorporated by reference to Exhibit No. 3.3 to the Company's Form 10-K for the year ended December 31, 1992.)
|3.4         | 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.)                                                 

70

---

|      |                                                                                                                
|----- | ---------------------------------------------------------------------------------------------------------------
|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.)    
|4.3   | Rights Agreement dated as of August 21, 2006, between Bandag, Incorporated and Computershare Trust Company,    
|      | N.A. (Incorporated by reference to the Company's Form 8-A dated as of August 22, 2006.)                        
|4.4   | Amendment to Rights Agreement, dated as of December 5, 2006, between Bandag, Incorporated and Computershare    
|      | Trust Company, N.A. (Incorporated by reference to the Company's Form 8-A/A dated as of December 6, 2006.)      
|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  | 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  | 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  | 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  | Form letter to the Company's U.S. franchisees. (Incorporated by reference to Exhibit 99.1 to the Company's     
|      | Form 8-K dated June 14, 2002.)                                                                                 
|10.2  | Current Form of Bandag Dealer Franchise Agreement. (Incorporated by reference to Exhibit 10.2(e) to the        
|      | Company's Form 10-K for the year ended December 31, 2004.)                                                     
|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.)            
|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. (Incorporated by reference to Exhibit No. 10.12 to the Company's  
|      | Form 10-K for the year ended December 31, 2005.)                                                               
|10.13 | Bandag, Incorporated 2004 Stock Grant and Awards Plan. (Incorporated by reference to Appendix A to the         
|      | Company's definitive proxy statement for its 2004 annual meeting of shareholders filed on March 31, 2004.)     

71

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|      |                                                                                                                
|----- | ---------------------------------------------------------------------------------------------------------------
|10.14 | Form of Stock Appreciation Rights Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards Plan.   
|      | (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No.
|      | 333-115369, filed on May 11, 2004.)                                                                            
|10.15 | Form of Restricted Stock Unit Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards Plan.       
|      | (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No.
|      | 333-115369, filed on May 11, 2004.)                                                                            
|10.16 | Form of Restricted Stock Award Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards Plan.      
|      | (Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on February 25,   
|      | 2005.)                                                                                                         
|10.17 | Form of Nonqualified Stock Option Award Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards   
|      | Plan. (Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K filed on March    
|      | 17, 2005.)                                                                                                     
|10.18 | Form of Restricted Stock Award Agreement for Non-Employee Directors. (Incorporated by reference to Exhibit     
|      | 99.1 to the Company's Current Report on Form 8-K filed on March 17, 2005.)                                     
|10.19 | Form of Nonqualified Stock Option Award Agreement for Non-Employee Directors. (Incorporated by reference to    
|      | Exhibit 99.2 to the Company's Current Report on Form 8-K filed on March 17, 2005.)                             
|10.20 | Voting Agreement, dated as of December 5, 2006, by and between Martin G. Carver and Grip Acquisition           
|      | Corporation. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)               
|10.21 | Voting Agreement, dated as of December 5, 2006, by and between Roy J. Carver and Grip Acquisition Corporation. 
|      | (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)                            
|10.22 | Voting Agreement, dated as of December 5, 2006, by and between Carver Partners LP and Grip Acquisition         
|      | Corporation. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)               
|10.23 | Consulting Agreement, dated as of the effective date of the merger, by and between Martin G. Carver and Bandag,
|      | Incorporated. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)              
|10.24 | Consulting Agreement, dated as of the effective date of the merger, by and between Warren W. Heidbreder and    
|      | Bandag, Incorporated. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)      
|10.25 | Severance Agreement, dated as of December 14, 2006, by and between Frederico U. Kopittke and Bandag,           
|      | Incorporated. (Incorporated by reference to the Company's Form 8-K dated as of December 14, 2006.)             
|10.26 | Form of Severance Agreement. (Incorporated by reference to the Company's Form 8-K dated as of December 14,     
|      | 2006.)                                                                                                         
|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.

72

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SCHEDULE II 
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

BANDAG, INCORPORATED
AND SUBSIDIARIES

|COL. A                          | COL. B                         | ADDITIONSCOL. C               | DEDUCTIONSCOL. D                       | COL. E                       
|------------------------------- | ------------------------------ | ----------------------------- | -------------------------------------- | -----------------------------
|DESCRIPTION                     | Balance at
Beginning
of Period | Charged to
Costs and
Expenses | (1)
Uncollectible
Accounts
Written-Off | Foreign
Exchange
Fluctuations
|Year ended December 31, 2006:   |                                |                               | $                                      | 13,782,000                   
|Allowance for doubtful accounts |                                |                              
|Year ended December 31, 2005:   |                                |                              
|Allowance for doubtful accounts |                                |                               | $                                      | 14,734,000                   
|Year ended December 31, 2004:   |                                |                              
|Allowance for doubtful accounts |                                |                               | $                                      | 16,350,000                   

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

73

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SIGNATURES

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

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

Date:    March 15, 2007

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

|                                      |                                      
|------------------------------------- | -------------------------------------
|/s/ Roy J. Carver, Jr.                | /s/ Gary E. Dewel                    
|Roy J. Carver, Jr                     | Gary E. Dewel                        
|Director                              | Director                             
|/s/ James R. Everline                 | /s/ Phillip J. Hanrahan              
|James R. Everline                     | Phillip J. Hanrahan                  
|Director                              | Director                             
|/s/ Amy P. Hutton                     | /s/ R. Stephen Newman                
|Amy P. Hutton                         | R. Stephen Newman                    
|Director                              | Director                             
|/s/ Martin G. Carver                  | /s/ Warren W. Heidbreder             
|Martin G. Carver                      | Warren W. Heidbreder                 
|Chairman of the Board,                | Vice President, Chief Financial      
|Chief Executive Officer and President | Officer (Principal Financial Officer)
|(Principal Executive Officer)        
|                                      | /s/ Jeffrey C. Pattison              
|                                      | Jeffrey C. Pattison                  
|                                      | Corporate Controller                 
|                                      | (Principal Accounting Officer)       

Date:   March 15, 2007

74

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EXHIBIT INDEX

| | Exhibit No. | Description                                                                                   
| | ----------- | ----------------------------------------------------------------------------------------------
| | 2.1         | Agreement and Plan of Merger, dated as of December 5, 2006, by and among Bandag,              
| |             | Incorporated, Grip Acquisition Corporation and Bridgestone Americas Holding, Inc.             
| |             | (Incorporated by reference to the Companys Form 8-K dated as of December 5, 2006.)           
| | 3.1         | Bylaws: As amended November 8, 2005. (Incorporated by reference to Exhibit No.                
| |             | 3.1 to the Companys Form 10-K for the year ended December 31, 2005.)                         
| | 3.2         | Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by             
| |             | reference to Exhibit No. 3.2 to the Companys Form 10-K for the year ended December 31, 1992.)
| | 3.3         | Articles of Amendment to Bandag, Incorporateds Articles of Incorporation,                    
| |             | effective May 6, 1992. (Incorporated by reference to Exhibit No. 3.3 to the                   
| |             | Companys Form 10-K for the year ended December 31, 1992.)                                    
| | 3.4         | 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.)                                    
| | 4.3         | Rights Agreement dated as of August 21, 2006, between Bandag, Incorporated and                
| |             | Computershare Trust Company, N.A. (Incorporated by reference to the Companys                 
| |             | Form 8-A dated as of August 22, 2006.)                                                        
| | 4.4         | Amendment to Rights Agreement, dated as of December 5, 2006, between Bandag,                  
| |             | Incorporated and Computershare Trust Company, N.A. (Incorporated by reference to              
| |             | the Companys Form 8-A/A dated as of December 6, 2006.)                                       
| | 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        | 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        | 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        | 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        | Form letter to the Companys U.S. franchisees. (Incorporated by reference to                  
| |             | Exhibit 99.1 to the Companys Form 8-K dated June 14, 2002.)                                  
| | 10.2        | Current Form of Bandag Dealer Franchise Agreement. (Incorporated by reference to              
| |             | Exhibit 10.2(e) to the Companys Form 10-K for the year ended December 31, 2004.)             
| | 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.)                                   

75

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| |       |                                                                                            
| | ----- | -------------------------------------------------------------------------------------------
| | 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.)                                         
| | 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. (Incorporated by reference to                 
| |       | Exhibit No. 10.12 to the Companys Form 10-K for the year ended December 31, 2005.)        
| | 10.13 | Bandag, Incorporated 2004 Stock Grant and Awards Plan. (Incorporated by reference          
| |       | to Appendix A to the Companys definitive proxy statement for its 2004 annual              
| |       | meeting of shareholders filed on March 31, 2004.)                                          
| | 10.14 | Form of Stock Appreciation Rights Agreement under the Bandag, Incorporated 2004            
| |       | Stock Grant and Awards Plan. (Incorporated by reference to Exhibit 4.2 to the              
| |       | Companys Registration Statement on Form S-8, Registration No. 333-115369, filed           
| |       | on May 11, 2004.)                                                                          
| | 10.15 | Form of Restricted Stock Unit Agreement under the Bandag, Incorporated 2004 Stock          
| |       | Grant and Awards Plan. (Incorporated by reference to Exhibit 4.3 to the Companys          
| |       | Registration Statement on Form S-8, Registration No. 333-115369, filed on May 11,          
| |       | 2004.)                                                                                     
| | 10.16 | Form of Restricted Stock Award Agreement under the Bandag, Incorporated 2004 Stock         
| |       | Grant and Awards Plan. (Incorporated by reference to Exhibit 99.1 to the                   
| |       | Companys Current Report on Form 8-K filed on February 25, 2005.)                          
| | 10.17 | Form of Nonqualified Stock Option Award Agreement under the Bandag, Incorporated           
| |       | 2004 Stock Grant and Awards Plan. (Incorporated by reference to Exhibit 99.3 to            
| |       | the Companys Current Report on Form 8-K filed on March 17,2005.)                          
| | 10.18 | Form of Restricted Stock Award Agreement for Non-Employee Directors.                       
| |       | (Incorporated by reference to Exhibit 99.1 to the Companys Current Report on Form         
| |       | 8-K filed on March 17, 2005.)                                                              
| | 10.19 | Form of Nonqualified Stock Option Award Agreement for Non-Employee Directors.              
| |       | (Incorporated by reference to Exhibit 99.2 to the Companys Current Report on Form         
| |       | 8-K filed on March 17, 2005.)                                                              
| | 10.20 | Voting Agreement, dated as of December 5, 2006, by and between Martin G. Carver            
| |       | and Grip Acquisition Corporation. (Incorporated by reference to the Companys              
| |       | Form 8-K dated as of December 5, 2006.)                                                    
| | 10.21 | Voting Agreement, dated as of December 5, 2006, by and between Roy J. Carver and           
| |       | Grip Acquisition Corporation. (Incorporated by reference to the Companys Form             
| |       | 8-K dated as of December 5, 2006.)                                                         
| | 10.22 | Voting Agreement, dated as of December 5, 2006, by and between Carver Partners LP          
| |       | and Grip Acquisition Corporation. (Incorporated by reference to the Companys              
| |       | Form 8-K dated as of December 5, 2006.)                                                    
| | 10.23 | Consulting Agreement, dated as of the effective date of the merger, by and between         
| |       | Martin G. Carver and Bandag, Incorporated. (Incorporated by reference to the               
| |       | Companys Form 8-K dated as of December 5, 2006.)                                          
| | 10.24 | Consulting Agreement, dated as of the effective date of the merger, by and between         
| |       | Warren W. Heidbreder and Bandag, Incorporated. (Incorporated by reference to the           
| |       | Companys Form 8-K dated as of December 5, 2006.)                                          
| | 10.25 | Severance Agreement, dated as of December 14, 2006, by and between Frederico U.            
| |       | Kopittke and Bandag, Incorporated. (Incorporated by reference to the Companys             
| |       | Form 8-K dated as of December 14, 2006.)                                                   

76

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| |       |                                                                                  
| | ----- | ---------------------------------------------------------------------------------
| | 10.26 | Form of Severance Agreement. (Incorporated by reference to the Companys Form 8-K
| |       | dated as of December 14, 2006.)                                                  
| | 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. §1350.                   
| | 32.2  | Written Statement of the Vice President, Chief Financial Officer and Secretary of
| |       | Bandag, Incorporated Pursuant to 18 U.S.C. §1350.                                

*Represents a management compensatory
plan or arrangement.

77