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

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 For the fiscal year ended December 31, 1998;

                                       OR

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

                          Commission File Number 1-7007

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

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

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

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

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

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

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

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant  as of March 12, 1999:  Common  Stock,  $196,126,948;  Class A Common
Stock (non-voting), $164,774,426; Class B Common Stock, $857,108.

The number of shares  outstanding of the issuer's  classes of common stock as of
March 12, 1999: Common Stock, 9,085,551 shares; Class A Common Stock, 10,787,194
shares; Class B Common Stock, 2,046,043 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the  Company's  Proxy  Statement  for  the  Annual  Meeting  of the
Shareholders to be held May 4, 1999 are incorporated by reference in Part III.

<PAGE>

                                     PART I

ITEM 1. BUSINESS

                                  Introduction

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

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

         As a  result  of a  recapitalization  of the  Company  approved  by the
Company's  shareholders  on December 30, 1986,  and  substantially  completed in
February  1987, the Carver Family (as  hereinafter  defined)  obtained  absolute
voting  control  of the  Company.  As of  March  12,  1999,  the  Carver  Family
beneficially  owned shares of Common Stock and Class B Common Stock constituting
76% of the votes  entitled  to be cast in the  election of  directors  and other
corporate  matters.  The "Carver Family" is composed of (i) Lucille A. Carver, a
director  and widow of Roy J.  Carver,  (ii) the  lineal  descendants  of Roy J.
Carver and their  spouses,  and (iii) certain  trusts and other entitles for the
benefit of the Carver Family members.

         Effective as of November 1, 1997, the Company  acquired five franchised
dealerships through its wholly owned subsidiary, Tire Distribution Systems, Inc.
The  aggregate  purchase  price of the  transactions  was  approximately  $158.6
million,  which includes the fair market value of 10,000 shares of the Company's
Class A Common Stock. TDS acquired five additional smaller  dealerships in 1998.
TDS is operated through Tire Distribution Systems, Inc. See "TDS" herein.

         On  February  5, 1999,  Tire  Management  Solutions,  Inc.  ("TMS"),  a
wholly-owned  subsidiary of the Company,  entered into its first tire management
outsourcing  contract.  The  contract is with Roadway  Express.  Pursuant to the
contract,  the entire  fleet tire  management  program  of Roadway  Express  was
outsourced to TMS. TMS, in turn, subcontracts with over 70 Bandag dealers across
the  country to provide the  outsourced  tire  services.  TMS  anticipates  that
additional tire management outsourcing contracts will be obtained in the future.

                              Traditional Business

(a)      General

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

                                      -2-
<PAGE>

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

         The Company and its licensees have 1,372  franchisees  worldwide,  with
32%  located  in the United  States and 68%  internationally.  The  majority  of
Bandag's   franchisees   are   independent   operators   of  full  service  tire
distributorships.  The Traditional  Business'  revenues  primarily come from the
sale of retread  material and  equipment  to its  franchisees.  The  Traditional
Business'  products  compete with new tire sales,  as well as retreads  produced
using other retread processes. The Company concentrates its marketing efforts on
existing  franchisees and on expanding their respective market penetration.  Due
to its strong  distribution  systems,  marketing efforts and leading technology,
Bandag,  through its independent  franchisee network,  has been able to maintain
the largest market presence in the retreading industry.

         The  Traditional  Business  competes  primarily  in the light and heavy
truck tire  replacement  market.  Both new tire  manufacturers  and tread rubber
suppliers compete in this market. While the Company has independent  franchisees
in over 118  countries,  and competes in all of these  geographic  markets,  its
largest  market is the United  States.  Truck tires  retreaded by the  Company's
franchisees  make up  approximately  15% of the U.S.  light and heavy truck tire
replacement market. The Company's primary competitors are new tire manufacturers
such as The Goodyear Tire & Rubber Company,  Bridgestone  Corporation and Groupe
Michelin. The Goodyear Tire & Rubber Company also competes in the U.S. market as
a tread  rubber  supplier  to a  combination  of company  owned and  independent
retreaders and Groupe  Michelin has also recently  entered the retread market in
the United States.

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

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

(b)      Markets and Distribution

         The principal market categories for the Traditional  Business are truck
and bus,  with more than 90% of the tread rubber sold by the Company used in the
retreading of these tires. 


                                      -3-
<PAGE>

Additionally,   the  Company   markets  tread  rubber  for  the   retreading  of
off-the-road  equipment,  industrial and light commercial  vehicle and passenger
car tires; however,  historically,  sales of tread rubber for these applications
have not contributed materially to the Company's results of operations.

         Trucks and Buses Tread rubber,  equipment,  and supplies for retreading
and repairing truck and bus tires are sold primarily to independent  franchisees
by the  Company  who use the Bandag  Method for that  purpose.  Bandag has 1,372
franchisees throughout North America,  Central America,  South America,  Europe,
Africa,  Far East,  Australia and New Zealand.  These  franchisees are owned and
operated  by  independent  franchisees,  some with  multiple  franchises  and/or
locations.  Of these  franchisees,  441 are  located in the United  States.  One
hundred  thirty-eight (138) of Bandag's foreign  franchisees are franchised by a
licensee of the Company in Australia, and joint ventures in India and Sri Lanka.
A limited number of franchisees  are trucking  companies,  which operate retread
shops  primarily for their own needs.  A few  franchisees  also offer  "hot-cap"
retreading and most sell one or more lines of new tires.

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

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

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

(c)      Competition

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

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



                                      -4-
<PAGE>

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

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

(d)      Sources of Supply

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

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

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

(e)      Patents

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

         The  Company's  patent  counsel has advised the Company that the United
States  patents are by law presumed valid and that the Company does not infringe
upon the patent rights of 


                                      -5-
<PAGE>

others.  While the outcome of litigation can never be predicted with  certainty,
such  counsel  has advised the Company  that,  in its  opinion,  in the event of
litigation  placing the validity of such patents at issue,  the Company's United
States patent position should remain adequate.

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

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

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

                                       TDS

(a)      General

         The five  dealerships  that  were  acquired  in  November  1997 by Tire
Distribution Systems,  Inc. ("TDS"), an indirect wholly-owned  subsidiary of the
Company,  were: Universal Tire, Inc.  (Nashville,  TN); Southern Tire Mart, Inc.
(Columbia,  MS); J.W. Brewer Tire Co., Inc. (Wheat Ridge, CO): Joe Esco Tire Co.
(Oklahoma  City, OK); and Sound Tire, Inc.  (Auburn,  WA). The Company  acquired
five  additional  dealerships  in 1998.  As of  December  31,  1998,  all of the
acquired  dealerships  were merged into TDS. TDS, which provides new and retread
tire products and tire management services to national, regional and local fleet
transportation  companies,   operates  42  Bandag  franchise  and  manufacturing
locations and 100 commercial, retail and wholesale outlets in 17 states.

(b)      Markets and Distribution

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



                                      -6-
<PAGE>

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

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

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

(c)      Competition

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

(d)      Sources of Supply

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

                                   Regulations

         Various  federal and state  authorities  have adopted  safety and other
regulations with respect to motor vehicles and components,  including tires, and
various states and the Federal Trade Commission  enforce statutes or regulations
imposing obligations on franchisors, 


                                      -7-
<PAGE>

primarily  a  duty  to  disclose   material  facts  concerning  a  franchise  to
prospective  franchisees.  Management  is  unaware of any  present  or  proposed
regulations  or  statutes  which would have a material  adverse  effect upon its
businesses,  but cannot  predict  what other  regulations  or statutes  might be
adopted or what their effect on the Company's businesses might be.

                                Other Information

         The  Company  conducts   research  and  development  of  new  products,
primarily  in the  Traditional  Business,  and  the  improvement  of  materials,
equipment,  and retreading processes.  The cost of this research and development
program  was  approximately   $15,909,000  in  1996,  $21,113,000  in  1997  and
$18,807,000 in 1998.

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

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

         As of December 31, 1998, the Company had approximately 4,791 employees.

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

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


                                      -8-
<PAGE>


Operations  in Different  Segments and Different  Geographic  Areas and Sales by
Principal Products:
The  Company has two  operating  segments:  the  manufacture  of precured  tread
rubber,  equipment and supplies for retreading tires (Traditional  Business) and
the sales and maintenance of new and retread tires to principally commercial and
industrial customers (TDS).
Information  concerning  operations for the Company's two operating segments and
in different  geographic areas and sales by principal products follows (see Note
K to Notes to Consolidated Financial Statements):

<TABLE>
<CAPTION>
                                                             Traditional Business
                                                             --------------------

                            North America (4)                 Europe                   Latin America (4)           
                            -----------------                 ------                   -----------------           
(In millions)             1998     1997     1996      1998      1997      1996       1998     1997      1996      1998
-----------------------------------------------------------------------------------------------------------------------
<S>                      <C>      <C>      <C>        <C>      <C>       <C>        <C>      <C>       <C>      <C>   
Net Sales:                                                                                                             
  Net sales to                                                                                                         
    unaffiliated                                                                                                       
    customers (1)(2)     $422.0   $483.4   $470.9    $110.9    $123.0    $129.5     $122.2   $118.1    $108.9   $ 28.0 
  Transfers between                                                                                                    
    segments               65.7     24.1     13.7       1.0       0.5       1.1                                        
                         ---------------------------------------------------------------------------------------------
  Segment area totals    $487.7   $507.5   $484.6    $111.9    $123.5    $130.6     $122.2   $118.1    $108.9   $ 28.0 
  Eliminations                                                                                                         
   (deduction)                                                                                                         
                                                                                                                       
Total Net Sales                                                                                                        
                                                                                                                       
Gross Profit             $219.1   $217.9   $202.1    $  49.6   $ 53.8    $ 59.6     $ 43.8   $ 41.4    $ 37.1   $  9.1 
Intangible Amortization     0.6      1.0      1.0                                                                      
Depreciation Expense       19.8     19.5     20.1        6.1      6.7       7.2        5.9      5.1       4.4      1.1 
                                                                                                                       
Earnings (Expense)                                                                                                     
  Operating earnings                                                                                                   
   (loss)(3)             $ 93.1   $ 87.9   $ 96.7    $   5.3   $  8.8    $ 17.2     $ 15.5   $ 18.9    $ 13.1   $ (0.7)
  Gain on sale of                                                                                                      
    stock                                                                                                              
  Interest revenue                                                                     1.9      0.8       1.6         
  Interest expense                                                                    (0.4)    (0.7)                   
  Corporate expense                                                                                                    
                         ----------------------------------------------------------------------------------------------
Earnings Before                                                                                                        
  Income Taxes           $ 93.1   $ 87.9   $ 96.7    $   5.3   $  8.8    $ 17.2     $ 17.0   $ 19.0    $ 14.7   $ (0.7)
Total Assets at                                                                                                        
  December 31            $321.8   $312.6   $302.2    $  67.1   $ 73.9    $ 79.7     $ 80.4   $ 74.4    $ 63.8   $ 15.1 
Expenditures for                                                                                                       
  long-lived assets        33.3     15.8     19.1        4.3      7.5       7.6       10.0     15.1       5.7      1.3 
Additions to long-                                                                                                     
  lived assets              0.9                                                                                        
Long-lived assets          90.8     86.6     88.9       15.2     16.3      18.3       43.6     40.4      30.7      3.2 
                                                                                                                       
Sales by principal                                                                                                     
 product:                                                                                                              
  Retread products       $404.5   $462.5   $436.5    $ 104.4   $110.5    $120.4     $117.0   $111.4    $104.3   $ 15.4 
  New tires                                                                                                        4.8 
  Retread tires                                                                                                    5.9 
  Other                  $ 17.5   $ 20.9   $ 34.4    $   6.5   $ 12.5    $  9.1     $  5.2   $  6.7    $  4.6   $  1.9 
                                                                                                              

<CAPTION>
                            Asia (4)                    TDS                       Corporate                   Consolidated
                            --------                    ---                       ---------                   ------------
                           1997     1996      1998     1997       1996      1998     1997     1996      1998      1997     1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>      <C>       <C>       <C>       <C>       <C>     <C>        <C>     <C>         <C>      <C>  
Net Sales:             
  Net sales to
    unaffiliated 
    customers (1)(2)     $ 42.7   $ 47.6    $376.6    $ 55.3                                         $1,059.7    $822.5   $756.9
  Transfers between                                                                                                    
    segments                                                                                             66.7      24.6     14.8
                       ---------------------------------------------------------------------------------------------------------
  Segment area totals    $ 42.7   $ 47.6    $376.6    $ 55.3                                         $1,126.4    $847.1   $771.7
  Eliminations
   (deduction)                                                                                          (66.7)    (24.6)   (14.8)
                                                                                                                       
Total Net Sales                                                                                      $1,059.7    $822.5   $756.9
                                                                                                                      
Gross Profit             $ 13.0   $ 16.0    $ 89.7    $ 14.0                                         $  411.3    $340.1   $314.8
Intangible Amortization                        8.0       1.3                                              8.6       2.3      1.0
Depreciation Expense        1.4      1.5       9.4       1.5               0.5       0.4       0.4       42.8      34.6     33.6
                                                                                                                       
Earnings (Expense)                                                                                                     
  Operating earnings   
   (loss)(3)             $  3.2   $  6.8    $  2.5    $ (2.0)                                        $  115.7    $116.8   $133.8
  Gain on sale of 
    stock                                                                         $ 95.1                           95.1         
  Interest revenue                                                         7.1       6.7       5.7        9.0       7.5      7.3
  Interest expense                                                       (10.4)    ( 2.6)     (1.2)     (10.8)    ( 3.3)    (1.2)
  Corporate expense                                                      (14.4)    (13.2)     (9.1)     (14.4)    (13.2)    (9.1)
                       ---------------------------------------------------------------------------------------------------------
Earnings Before                                                                                                        
  Income Taxes           $  3.2   $  6.8    $  2.5    $ (2.0)           $(17.7)   $ 86.0    $ (4.6)    $ 99.5    $202.9    $130.8
Total Assets at                                                                                                         
  December 31            $ 21.2   $ 28.4    $217.2    $217.9            $ 54.1    $199.9    $114.2     $755.7    $899.9    $588.3
Expenditures for                                                                                                        
  long-lived assets         1.0      1.6      15.6       1.0               0.9       1.8       0.4       65.4      42.2      34.4
Additions to long-
  lived assets                                12.9     125.1                                             13.8     125.1   
Long-lived assets           5.1      7.6     133.9     123.2               1.9       1.6       1.4      288.6     273.2     146.9

Sales by principal     
 product:                                                                                              
  Retread products       $ 24.2   $ 26.9    $  -      $  -                                             $641.3    $708.6    $688.1
  New tires                 8.2      8.9     214.1      36.5                                            218.9      44.7       8.9
  Retread tires             7.5      9.1      86.6      11.6                                             92.5      19.1       9.1
  Other                  $  2.8   $  2.7    $ 75.9    $  7.2                                           $107.0    $ 50.1    $ 50.8


(1) No customer accounted for 10% or more of the Company's sales to unaffiliated
    customers in 1998, 1997, or 1996.
(2) Export sales from North America were less than 10% of sales to  unaffiliated
    customers in each of the years 1998, 1997, and 1996
(3) Aggregate  foreign  exchange  gains  (losses)  included in  determining  net
    earnings amounted to approximately  ($3,200,000),  $1,500,000 and $1,236,000
    in 1998, 1997, and 1996  respectively.
(4) For segment  reporting  purposes,  Mexico and South  Africa  operations  are
    included  in the  Latin  America  segment  and  New  Zealand  and  Australia
    operations are included in the Asia segment,  consistent  with  Management's
    grouping for internal purposes.

</TABLE>

                                      -9-
<PAGE>

Executive Officers of the Company

         The  following  table  sets  forth the names and ages of all  executive
officers of the Company as of March 12, 1999, the period of service of each with
the Company,  positions and offices with the Company presently held by each, and
the period during which each officer has served in his present office:

<TABLE>
<CAPTION>
                                                  Period of                                                   Period in
                                                   Service                 Present Position                    Present
             Name                    Age         with Company                  or Office                        Office

<S>                                   <C>          <C>             <C>                                         <C>    
Martin G. Carver*                     50           20 Yrs.         Chairman of the Board, Chief                18 Yrs.
                                                                   Executive Officer and President

Lucille A. Carver*                    81           41 Yrs.         Treasurer                                   40 Yrs.

Nathaniel L. Derby II                 56           28 Yrs.         Vice President, Manufacturing Design         2 Yrs.

Sam Ferrise II                        42           18 Yrs.         Executive Vice President, Chief              1 Yr.
                                                                   Operating Officer

Warren W. Heidbreder                  52           17 Yrs.         Vice President, Chief Financial              2 Yrs.
                                                                   Officer and Secretary

Frederico U. Kopittke                 55            4 Yrs.         Vice President, Latin America                8 Mos.
                                                                   and South America

John C. McErlane                      45           14 Yrs.         Vice President, Marketing and Sales          1 Yr.

*  Denotes that officer is also a director of the Company.
</TABLE>

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

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

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

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


                                      -10-
<PAGE>

when he was elected to his current  office of Executive Vice President and Chief
Operating Officer effective February 16, 1998.

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

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

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

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

ITEM 2.  PROPERTIES

                              Traditional Business

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

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

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



                                      -11-
<PAGE>

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

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

                                  TDS Business

         TDS currently owns 45 and leases 87 facilities. Forty-two contain space
for TDS' retread  production  and 116 contain space for  commercial,  retail and
wholesale  operations.  The Company  believes  that it will be able to renew its
existing  leases as they  expire or find  suitable  alternative  locations.  The
leases generally  provide for a base rental,  as well as charges for real estate
taxes, insurance, maintenance and various other items.

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

ITEM 3.  LEGAL PROCEEDINGS

         None,  except for legal actions in the ordinary course of the Company's
business, none of which the Company considers material.

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

         None.



                                      -12-
<PAGE>

                                    PART II


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

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

<TABLE>
<CAPTION>
                                          1998          % Change        1997              % Change          1996
                                          ----          --------        ----              --------          ----
<S>                                    <C>               <C>           <C>                 <C>            <C>
   Cash Dividends Per
   Share-Declared
   First Quarter                       $ 0.2750                        $ 0.2500                           $ 0.2250
   Second Quarter                        0.2750                          0.2500                             0.2250
   Third Quarter                         0.2750                          0.2500                             0.2250
   Fourth Quarter                        0.2850                          0.2750                             0.2500
                                     --------------- --------------- ----------------- -------------- ----------------
   Total Year                            1.1100            8.3         $ 1.0250             10.8          $ 0.9250

   Stock Price Comparison (1)
      Common Stock
   First Quarter                          $53.31  - 59.13                $45.00  -  51.88                  $50.25  - 55.88
   Second Quarter                          39.00  - 59.75                 46.38  -  51.75                   47.38  - 52.75
   Third Quarter                           29.88  - 42.06                 47.94  -  54.13                   44.50  - 49.50
   Fourth Quarter                          28.31  - 39.94                 48.38  -  55.75                   46.13  - 49.38
   Year-end Closing Price                           39.94                           53.44                            47.38
      Class A Common Stock
   First Quarter                          $48.00  - 54.38                $45.25  -  50.38                  $48.75  - 54.00
   Second Quarter                          34.50  - 54.00                 45.00  -  49.50                   46.63  - 51.50
   Third Quarter                           28.44  - 39.50                 47.50  -  53.44                   43.50  - 48.00
   Fourth Quarter                          27.38  - 35.13                 46.38  -  52.00                   45.25  - 47.88
   Year-end Closing Price                           34.88                           47.88                            45.75

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

         The approximate  number of record holders of the Company's Common Stock
as of March 12, 1999,  was 2,319,  the number of holders of Class A Common Stock
was 1,268 and the number of holders of Class B Common  Stock was 246. The Common
Stock and Class A Common Stock are traded on the New York Stock Exchange and the
Chicago Stock Exchange.  There is no established  trading market for the Class B
Common Stock.

Sale of Unregistered Securities

         On November 9, 1998,  the Company  issued 20,000 shares of Common Stock
and 20,000  shares of Class A Common  Stock to Martin G. Carver  pursuant to his
exercise  of stock  options  for an  aggregate  consideration  of  $925,000.  No
underwriters were engaged in connection with the foregoing sale. The issuance of
the foregoing  securities was exempt from 


                                      -13-
<PAGE>

registration  under the  Securities  Act of 1933  pursuant to Section  4(2) as a
transaction not involving a public offering.

ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                  1998(2)       1997 (2)        1996          1995           1994
                                               ------------------------------------------------------------------------
<S>                                               <C>            <C>            <C>           <C>            <C>     
(In thousands, except per share data)
Net Sales                                         $1,059,669     $822,523       $756,925      $740,363       $650,567
Net Earnings(1)                                       59,319      121,994         81,604        97,027         93,994
                                               ------------------------------------------------------------------------

Total Assets                                        $755,729     $899,904       $588,342      $554,159       $582,146
Long-term Debt and Other Obligations                 109,757      123,195         10,125        11,857         12,252
Net Earnings Per Share:
    Basic Earnings Per Share                           $2.64        $5.35          $3.46         $3.84          $3.53
    Diluted Earnings Per Share                         $2.63        $5.33          $3.44         $3.82          $3.51
Cash Dividends Per Share-Declared                    $1.1100      $1.0250        $0.9250       $0.8250        $0.7250

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

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

(2)      During 1997 the Company's subsidiary,  Tire Distribution Systems, Inc.,
         acquired five tire  dealerships  whose  operations  are included in the
         consolidated  financial statements from November 1, 1997, the effective
         date of the acquisitions. In addition, Tire Distribution Systems, Inc.,
         acquired  five  other  tire   dealerships  in  1998  whose  results  of
         operations are included in the 1998 consolidated  financial  statements
         from the date of each acquisition.

</TABLE>

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

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

GENERAL

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

Consolidated net sales in 1998 increased 29% from 1997. This increase was solely
attributable  to the TDS operations,  as Traditional  Business net sales were 5%
below the prior year.  Of this


                                      -14-
<PAGE>

5% decrease, approximately 2 percentage points were a result of lower translated
value  of  the  Company's   foreign-currency-denominated  sales.  The  remaining
3-percentage-point  decrease  resulted from lower equipment sales. The Company's
seasonal  sales  pattern,  which is tied to  trucking  activity,  was similar to
previous  years with the third and fourth  quarters being the strongest for both
sales and earnings. Both business segments were similarly affected.

Gross profit  margin for the  Company's  Traditional  Business  increased by 1.7
percentage points due to lower raw material costs in the U.S. and Mexico.  Gross
profit margins in Europe, Brazil and South Africa remained steady.  Inclusion of
the  TDS  operations,   which  operate  at  a  lower  gross  margin,   decreased
consolidated gross margin by 2.6 percentage points.

Consolidated  operating  and other  expenses in 1998  increased 32% from 1997. A
full year of TDS operating and other expenses accounted for 29 percentage points
of this  increase.  The remaining  3-percentage-point  increase in operating and
other  expenses was  attributable  to continued  business  development,  and the
rationalization  of unnecessary  infrastructure  to improve  profitability.  The
additional business  development spending was to improve capabilities to further
build the dealer  alliance  and to prepare the Company for the  introduction  of
tire management  outsourcing in early 1999. The lower Traditional Business sales
and the higher operating  expenses  resulted in a net earnings decline of 20% in
1998 before non-recurring items. The Company's consolidated effective income tax
rate of 40.4% was higher than the previous year's rate of 39.9%  principally due
to the impact of a full year of nondeductible TDS goodwill amortization.

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

TRADITIONAL BUSINESS

The Company's  Traditional  Business operations located in the United States and
Canada are integrated  and managed as one unit,  which is referred to internally
as North America. Net sales in North America were 4% below the prior year due to
1% lower  retread  material  unit volume,  2% from the absence of sales from the
rubber  recycling  venture,  and 1%  attributable  to product mix.  Gross profit
margin  improved 2 percentage  points  because  average raw material  costs were
lower than 1997's  average.  As a result of the higher gross  profit  margin and
lower expenses, earnings before income taxes in 1998 increased 6% from the prior
year.

The  Company's  operations  located  in Europe  principally  service  markets in
European  countries,  but also export to certain  other  countries in the Middle
East and Northern and Central Africa.  This collection of countries is under one
management  group and is referred to internally  as Europe.  Net sales in Europe
declined  9% from  1997,  despite a slight  increase  in 


                                      -15-
<PAGE>

retread material unit volume.  Four percentage points of the decline were due to
the   lower   translated   value   of   the   Belgian   franc.   The   remaining
5-percentage-point  decline  resulted mainly from lower equipment  sales.  Gross
profit  margin in 1998  increased  1% from 1997,  with the lower sales offset by
decreased  lower-margin equipment sales and lower per unit capacity costs due to
higher  production.  Operating  expenses decreased 1% from the prior year due to
the  lower  translated  value of the  Belgian  franc.  In local  currency,  1998
operating  expenses were 2% over 1997 due to restructuring  costs and additional
bad debt expense.  Principally as a result of the lower sales,  earnings  before
income taxes declined by 40% over the previous year.

The Company's  exports from North America to markets in the  Caribbean,  Central
America and South America,  along with operations in Brazil,  Mexico,  Venezuela
and South Africa are combined under one management  group referred to internally
as Latin America. Latin America exceeded prior year retread material unit volume
by 11%, but net sales  increased only 3% due to lower equipment sales in Brazil,
Mexico,  the Andean area and South  Africa,  and the lower  translated  value of
foreign currencies. Gross profit margin increased by 1 percentage point over the
previous  year mainly due to lower raw material  costs and higher  production in
Mexico.  The other areas were  basically  even with the prior  year.  The volume
growth  in  Brazil  and  Mexico  drove a 29%  increase  over the  prior  year in
operating  expenses.  Also  contributing to the operating  expense increase were
severance  and  higher  staffing  expense.  Principally  because  of the  higher
operating expenses, earnings before income taxes were 11% below last year.

The Company's  exports from North America to markets in Asian  countries,  along
with  operations  in New  Zealand,  Indonesia  and  Malaysia  and a licensee  in
Australia  are combined  under one  management  group  referred to internally as
Asia.  Net sales  declined  34% in Asia as a result of a 17%  decline in retread
material unit volume, lower equipment sales in Malaysia,  reduced new tire sales
in New Zealand and the devaluation of currencies  throughout  Asia. Gross profit
margin  increased  2  percentage   points  from  1997  due  to  the  absence  of
lower-margin equipment sales in Malaysia,  increased  higher-margin export sales
from Malaysia and higher production in Indonesia. Operating expenses declined 8%
from the prior year due to the devalued local currencies. Principally because of
the significant drop in net sales,  earnings before income taxes were 123% below
the previous year.

TIRE DISTRIBUTION SYSTEMS, INC.

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



                                      -16-
<PAGE>

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

GENERAL

Consolidated  results included the operations of both the Company's  Traditional
Business and,  beginning  effective  November 1, 1997,  TDS, which acquired five
tire dealerships as of that date.

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

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

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

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

TRADITIONAL BUSINESS

Net sales in North  America were 5% higher than 1996  primarily  due to a higher
volume of retread rubber  partially offset by a lower volume of equipment sales.
Average raw material costs for 1997 were approximately flat compared to the 1996
average  but  higher  production  to support  higher  sales  resulted  in better
absorption  of fixed  manufacturing  costs.  As a result,  gross  profit  margin
increased by 1 percentage  point compared to the margin in 1996.  North American
1997  earnings  before  income  taxes  declined  9% from  1996 due to  increased
operating  expenses in support of marketing  programs and building  capabilities
within the 


                                      -17-
<PAGE>

organization,  as part of the Company's  commitment to building an alliance with
its dealers and end-users.

In Europe,  net sales declined 5% from 1996. The decline occurred because of the
unfavorable  impact of a stronger  U.S.  dollar on the  translated  value of the
Company's  foreign-currency-denominated  sales,  offset by an  increase  in unit
volume. Gross profit margin in 1997 decreased  approximately 2 percentage points
compared to 1996 due to higher per unit  manufacturing  costs.  Earnings  before
income taxes declined by 49% over 1996.

Latin America  exceeded  retread  material unit volume in 1997 by 11% over 1996,
but net sales  increased by only 8% in 1997 compared to 1996 due to the delay in
U.S. dollar price increases  versus the devalued  currencies in South Africa and
Brazil. To remain  competitive with local  competitors,  who are not affected by
exchange rate  fluctuations,  the Company must absorb the gap between  inflation
and  devaluation.  Gross margin  increased 1  percentage  point from 1996 due to
higher  volumes,  resulting  in  improved  production  efficiencies.   Operating
expenses increased 18% over 1996 due to the volume increase and higher personnel
costs and  professional  fees. As a result of the higher volume and gross profit
margin, earnings before income taxes increased 31% over 1996.

Asia net sales  declined  10% in direct  proportion  to  retread  material  unit
volume.  Gross profit margin dropped 3 percentage points due to lower margins on
equipment  sales  and low  margin  from  the  Company's  start-up  operation  in
Indonesia.  Operating  expenses  increased  36% over 1996 because of expenses in
Indonesia and increased spending to build marketing  capabilities in the region.
Due to the reasons  stated  above,  earnings  before income taxes were 53% below
1996.

TIRE DISTRIBUTION SYSTEMS, INC.

TDS results were included for the two-month  period since the acquisition of the
five tire dealerships  through December 31, 1997. Net sales and net loss for TDS
were $55,304,000 and $1,976,000, respectively.

IMPACT OF INFLATION AND CHANGING PRICES

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

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



                                      -18-
<PAGE>

IMPACT OF CHANGING FOREIGN CURRENCIES

1998  sales and net  earnings  before  income tax from the  Company's  Brazilian
operations were 7% and 15%,  respectively,  of total  consolidated  results.  In
January 1999, Brazil experienced a major devaluation of its currency,  the real.
Except for  approximately  $4,000,000 in intercompany  debt  denominated in U.S.
dollars,  assets and liabilities of the Company's  operations are denominated in
local currency. In local currencies, the loss on revaluation of the intercompany
debt was offset by gains on  short-term  investments  which were indexed to U.S.
dollars.   Because  the  real  is  the  functional  currency,   except  for  the
intercompany  borrowing and the indexed  short-term  investments,  the Company's
operations should not be significantly impacted from a transactional standpoint.
The  extent  of the  adverse  impact  in U.S.  dollars  from  translating  local
operating  results  into U.S.  dollars  depends  upon the  Company's  ability to
increase  prices  to  recover  the lost  value,  which is  uncertain  as of this
writing.  Similarly,  the adverse  effect of the real  devaluation  on operating
results cannot be established at this time.

CAPITAL RESOURCES AND LIQUIDITY

At the end of 1998, current assets exceeded current liabilities by $264,215,000.
Cash and cash equivalents totaled  $37,912,000 at December 31, 1998,  decreasing
by  $158,488,000  during the year. The Company invests excess funds over various
terms, but only  instruments with an original  maturity date of over 90 days are
classified as investments.  These  investments  increased by $8,146,000 from the
prior year.

The only changes in working capital requirements are for normal business growth.
The Company funds its capital  expenditures from the cash flow it generates from
operations. During 1998, the Company spent $65,375,000 for capital expenditures,
of which  approximately  $8,900,000  was  related  to the  Bandag,  Incorporated
Learning Center in Muscatine, Iowa. The Company believes that spending in recent
years is  representative  of future capital  spending  needs.  In addition,  the
Company  made  $17,542,000  in  cash  payments  for  1998  acquisitions  of  TDS
businesses.

As of December 31, 1998, the Company had available  uncommitted  lines of credit
totaling  $71,000,000 in the United States for working capital  purposes.  Also,
the Company's foreign  subsidiaries had approximately  $32,000,000 in credit and
overdraft  facilities  available  to them.  From time to time during  1998,  the
Company  borrowed funds to supplement  operational  cash flow needs or to settle
intercompany   transactions.   The  Company's   long-term   liabilities  totaled
$109,757,000 at December 31, 1998,  which is  approximately  19% of the combined
total of long-term  liabilities and stockholders'  equity; this is a decrease of
$13,438,000 from December 31, 1997.

During the year, the Company purchased 918,000 shares of its outstanding  Common
Stock and Class A Common Stock for  $29,353,000 at prevailing  market prices and
paid cash dividends  amounting to $24,867,000.  The Company  generally funds its
dividends  and  stock   repurchases  from  the  cash  flow  generated  from  its
operations.  Historically  the Company has utilized excess funds to purchase its
own shares.



                                      -19-
<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Risk Management

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

Foreign Currency Exposure

Foreign  currency  exposures  arising from cash flow  transactions  include firm
commitments and anticipatory transactions.  Translation exposure is also part of
the overall foreign  exchange risk. The Company's  exposure to foreign  currency
risks exists primarily with the Brazilian real,  Canadian dollar,  Mexican peso,
Japanese yen and major European  currencies.  The Company  regularly enters into
foreign currency  contracts  primarily using foreign exchange forward  contracts
and options to hedge most of its firm  commitment  exposures.  The Company  also
employs foreign exchange forward  contracts as well as option contracts to hedge
approximately 40% - 60% of its anticipated  future cash flow transactions over a
period of one year. The notional amount of these contracts at December 31, 1998,
was  $4,800,000.  The  Company  also  limits its  exposure  to foreign  currency
fluctuations  by entering into  offsetting  asset or liability  positions and by
establishing and monitoring limits on unmatched positions.  The Company's pretax
earnings from foreign  subsidiaries and affiliates  translated into U.S. dollars
using a weighted  average  exchange  rate was  $30,172,000  for the year  ending
December  31,  1998.  On that  basis,  the  potential  loss in the  value of the
Company's   pretax   earnings  from  foreign   subsidiaries   resulting  from  a
hypothetical 10% adverse change in quoted foreign currency  exchange rates would
amount to $2,500,000.

Interest Rate Exposure

In order to mitigate the impact of fluctuations in the general level of interest
rates, the Company generally maintains a large portion of its debt as fixed rate
in nature by borrowing  on a long-term  basis.  At December 31, 1998,  while the
total  outstanding  short-term  debt of the  Company was  $2,091,000,  the total
outstanding  long-term debt for the same period was  $100,000,000.  At year-end,
the fair value of the Company's long-term debt was $105,656,000. In addition, at
December  31,  1998,  the fair  value of  securities  held  for  investment  was
$21,236,000.  The  fair  value of the  Company's  total  long-term  debt and its
securities  held  for  investment   would  not  be  materially   affected  by  a
hypothetical  10% adverse change in interest  rates.  Therefore,  the effects of
interest rates changes in the fair value of the Company's financial  instruments
are limited.


                                      -20-
<PAGE>

Commodities Exposure

Due to the  nature of its  business,  the  Company  procures  almost  all of its
synthetic rubber used in manufacturing tire tread at quarterly fixed rates using
contracts  with  the  Company's  main  suppliers.   Based  on  1998  results,  a
hypothetical  10% change in  synthetic  rubber  prices could result in a maximum
$15,000,000 change to cost of goods sold.

IMPACT OF YEAR 2000

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

Purchased  software  systems account for a significant  portion of the Company's
global software environment,  especially for date-sensitive applications such as
payroll and accounts receivable. The Company has performed inventories in recent
years  to  identify  clearly  non-compliant  software  systems  and to  initiate
replacement activities.

The Company has assessed  the Year 2000 issue in North  America and that process
has now been completed,  except for desktop  hardware,  which is still underway.
The Company now anticipates  finishing its global Year 2000 remediation  process
for mission  critical  mainframe and mid-range  applications  by fourth  quarter
1999, although work to address cosmetic changes for non-failure date usage could
extend into first quarter 2000.  Plans call for  client-server  technology to be
compliant by third  quarter 1999,  communication  and  network-technology  to be
compliant  by third  quarter  1999 and desktop  technology  to be  compliant  by
year-end 1999.  Required changes outside of the Information  Systems area should
not be significant.

The installed base for the Company's  software outside of North America consists
primarily of purchased commercial  software,  or applications written after 1990
which  were  written  Year  2000  compliant.  The  assessment  process  has been
completed for  non-software  items and plans call for compliance  issues in this
area to be addressed mid-year 1999.

The Company is shifting new software  development  efforts to the  client-server
platform,  and has so far been able to obtain sufficient resources in this area,
but mainframe  development resources remain in short supply and this will affect
development  on this  platform  into the Year 2000.  This delay has not, to this
point, significantly affected the Company's business initiatives.

The costs  related to the Year 2000 issue are  expected  to total  approximately
$14,400,000,  which  represents  an increase of  $1,700,000  from the  Company's
previous published estimate.  To date,  $5,400,000 of this amount has been spent
and  contracts  and  purchase  orders  have  been  executed  for  an  additional
$3,400,000.  The Company expects approximately 50% of total costs, which are 


                                      -21-
<PAGE>

for  contracted  services,  to be recorded as current  expense and the remaining
half of the costs,  which are to  replace  hardware  and  software  and  upgrade
existing hardware, to be capitalized.

The Company  presently  believes that with a combination  of actions,  including
modification  of existing  software,  conversion to newer  versions of purchased
software and  replacement  with new  systems,  the Year 2000 issue will not pose
significant operational problems for its computer systems. On the other hand, if
such modifications and conversions are not made or are not completed on a timely
basis, the Year 2000 issue could have a material impact on the operations of the
Company.  In addition to remediation  actions,  the Company's  contingency plans
will be reviewed and updated to address Year 2000 risks.

During 1999,  the Company will continue to have formal  communications  with its
significant  suppliers and large  customers to determine the extent to which the
Company's  activities  would be  impacted  by those  third  parties'  failure to
remediate  their own Year 2000 issues.  However,  there can be no guarantee that
the systems of other  companies on which the Company relies will be corrected on
a timely basis and therefore have no adverse effect on the Company.

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

EURO CONVERSION

On January 1, 1999,  eleven member  countries of the European Union  established
fixed conversion rates between their existing  currencies  ("legal  currencies")
and one common currency, the Euro. The Euro is now trading on currency exchanges
and may be used in certain transactions such as electronic  payments.  Beginning
in January 2002, new Euro-denominated  notes and coins will be issued, and legal
currencies  will be withdrawn from  circulation.  The conversion to the Euro has
eliminated  currency  exchange  rate risk for  transactions  between  the member
countries,  which  for the  Company  primarily  consists  of  sales  to  certain
customers and payments to certain suppliers. The Company is currently addressing
the issues involved with the new currency,  which include converting information
technology  systems,  recalculating  currency risk,  and revising  processes for
preparing  accounting and taxation records.  Based on the work completed so far,
the Company does not believe the Euro conversion will have a significant  impact
on the results of its operations or cash flows.

FORWARD-LOOKING STATEMENTS

This  Annual  Report on Form 10-K  includes  forward-looking  statements.  These
forward-looking  statements can be identified as such because the context of the
statement includes phrases such as "believes," "could," "anticipates," "should,"
"would,"  "expects,"  and "are  expected,"  or other  words of  similar  import.
Similarly,  statements  that  describe  future  plans  or  strategies  are  also
forward-looking  statements.  Such  statements  are subject to certain risks and
uncertainties  that could cause actual results to differ  materially  from those
currently  anticipated.  Factors which could affect actual  results  include the
effect of  currency  exchange  rates;  the  devaluation  of foreign  currencies,
particularly  the Brazilian  real; the  effectiveness  of the Company's  hedging

                                      -22-
<PAGE>

techniques;  the actual Year 2000 expenses;  and the timely  remediation of Year
2000 problems by the Company,  its suppliers  and its  customers.  These factors
should be considered in evaluating  the  forward-looking  statements,  and undue
reliance should not be placed on such statements. The forward-looking statements
included  herein  are  made  as of the  date  hereof  and  Bandag,  Incorporated
undertakes  no  obligation  to  update   publicly  such  statements  to  reflect
subsequent events or circumstances.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 
         MARKET RISK

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


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   Index to Consolidated Financial Statements

                                                                        Page
Report of Independent Auditors                                           24
Consolidated Balance Sheets as of 
  December 31, 1998, 1997 and 1996                                       25
Consolidated Statements of Earnings for 
  the Years Ended December 31, 1998, 1997 and 1996                       26
Consolidated Statements of Cash Flows for the 
  Years Ended December 31, 1998, 1997 and 1996                           27
Consolidated Statements of Changes in Stockholders'
  Equity for the Years Ended December 31,                         
  1998, 1997 and 1996                                                    28
Notes to Consolidated Financial Statements                               30


                                      -23-
<PAGE>

                         Report of Independent Auditors


Stockholders and Board of Directors
Bandag, Incorporated

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Bandag,
Incorporated  and  subsidiaries  as of December 31, 1998, 1997 and 1996, and the
related  consolidated   statements  of  earnings,  cash  flows  and  changes  in
stockholders'  equity for the years then  ended.  Our audits also  included  the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial  position  of  Bandag,
Incorporated  and  subsidiaries  at December  31, 1998,  1997 and 1996,  and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.


/s/ Ernst & Young LLP
Chicago, Illinois

January 29, 1999



                                      -24-
<PAGE>
<TABLE>
BANDAG, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
                                                                                   December 31
                                                                -------------------------------------------------
(In thousands)                                                      1998              1997             1996
                                                                -------------------------------------------------
<S>                                                           <C>              <C>               <C>          
Assets
Current Assets
  Cash and cash equivalents                                   $      37,912    $    196,400      $      31,453
  Investments - Note D                                                9,721           1,575              2,089
  Accounts receivable, less allowance                                                               
     (1998 - $18,724; 1997 - $12,707;
     1996 - $13,320)                                                217,299         231,648            206,732
  Inventories:                                                                 
    Finished products                                                96,889          90,228             44,704
    Material and work in process                                     14,845          17,295             14,228
                                                                --------------   ---------------   --------------
                                                                    111,734         107,523             58,932

  Deferred income tax assets                                         48,097          41,505             29,138
  Prepaid expenses and other current assets                          14,361          20,343             13,356
                                                                --------------   ---------------   --------------
      Total Current Assets                                          439,124         598,994            341,700

Property, Plant, and Equipment, on the 
 basis of cost:
  Land                                                               12,444           8,494              3,671
  Buildings and improvements                                        107,240          98,769             85,445
  Machinery and equipment                                           351,949         326,632            292,956
  Construction and equipment installation 
   in progress                                                       32,112          25,551             12,520
                                                                --------------   ---------------   --------------
                                                                    503,745         459,446            394,592
  Less allowances for depreciation and amortization                (290,699)       (261,846)          (249,457)
                                                                --------------   ---------------   --------------
                                                                    213,046         197,600            145,135

Marketable Equity Securities - Note D                                                                   79,035
Intangible Assets, less accumulated amortization
   (1998 - $14,157; 1997 - $5,516; 1996 - $3,235)                    75,539          75,627              1,753
Other Assets                                                         28,020          27,683             20,719
                                                                --------------   ---------------   --------------
    Total Assets                                              $     755,729    $    899,904      $     588,342
                                                                ==============   ===============   ==============

Liabilities and Stockholders' Equity
Current Liabilities
  Accounts payable                                            $      38,286    $     52,100      $      28,744
  Accrued employee compensation and benefits                         27,498          28,874             23,532
  Accrued marketing expenses                                         37,044          32,608             32,872
  Other accrued expenses                                             40,623          66,921             34,076
  Dividends payable                                                   6,257           6,274              5,731
  Income taxes payable                                               13,704          20,039             12,254
  Short-term notes payable and current portion 
    of other obligations                                             11,497          99,726              2,005
                                                                --------------   ---------------   --------------
    Total Current Liabilities                                       174,909         306,542            139,214

Long-term Debt and Other Obligations - Note E                       109,757         123,195             10,125
Deferred Income Tax Liabilities                                       3,766           6,753             28,136
Stockholders' Equity - Note H
  Common Stock; $1.00 par value; authorized - 21,500,000
    shares; Issued and outstanding - 9,083,797 shares
    in 1998; 9,751,063 shares In 1997; 9,842,861 
    shares in 1996                                                    9,084           9,751              9,843
  Class A Common Stock; $1.00 par value; authorized -
    50,000,000 shares; Issued and outstanding - 
    10,824,974 shares in 1998; 11,013,561 shares
    In 1997; 11,027,759 shares in 1996                               10,825          11,014             11,028
  Class B Common Stock; $1.00 par value; authorized -
    8,500,000 shares;  Issued and outstanding -
    2,046,577 shares in 1998; 2,048,785 shares
    In 1997; 2,051,984 shares in 1996                                 2,047           2,049              2,052
  Additional paid-in capital                                          7,287           6,052              4,069
  Retained earnings                                                 452,274         445,887            355,663
  Accumulated other comprehensive income:
   Unrealized gain on securities available-for-sale,
     net of related tax  effect (1996 - $20,765)                                                        33,854
   Equity adjustment from foreign currency translation              (14,220)        (11,339)            (5,642)
                                                                --------------   ---------------   --------------
     Total Stockholders' Equity                                     467,297         463,414            410,867
                                                                --------------   ---------------   --------------
       Total Liabilities and Stockholders' Equity             $     755,729    $    899,904      $     588,342
                                                                ==============   ===============   ==============

</TABLE>

See notes to consolidated financial statements.

                                      -25-
<PAGE>
<TABLE>
<CAPTION>
                                                                      Year Ended December 31
BANDAG, INCORPORATED AND SUBSIDIARIES                         ---------------------------------------------------
Consolidated Statements of Earnings
(In thousands, except per share data)                               1998               1997              1996   
                                                              ---------------------------------------------------
Income
<S>                                                           <C>               <C>               <C>           
  Net sales                                                   $    1,059,669    $      822,523    $      756,925
  Gain on sale of marketable equity
    securities - Note D                                               95,087
  Other income                                                        19,829            14,092            12,074
                                                                -------------     -------------     -------------
                                                                   1,079,498           931,702           768,999

Costs and expenses
  Cost of products sold                                              648,366           482,387           442,149
  Engineering, selling, administrative
   and other expenses                                                316,642           226,560           194,834
  Non-recurring charges - Note B                                       4,205            16,500
  Interest                                                            10,772             3,339             1,236
                                                                -------------     -------------     -------------
                                                                     979,985           728,786           638,219
                                                                -------------     -------------     -------------
    Earnings Before Income Taxes                                      99,513           202,916           130,780
  Income Taxes - Note F                                               40,194            80,922            49,176
                                                                -------------     -------------     -------------
    Net Earnings                                              $       59,319    $      121,994    $       81,604
                                                                =============     =============     =============

    Net Earnings Per Share - Note G:
      Basic                                                   $         2.64    $         5.35    $         3.46
                                                                -------------     -------------
                                                                                                    -------------
      Diluted                                                 $         2.63    $         5.33    $         3.44
                                                                -------------     -------------     -------------


</TABLE>

See notes to consolidated financial statements.


                                      -26-
<PAGE>
<TABLE>
<CAPTION>
BANDAG, INCORPORATED AND SUBSIDIARIES                                                  Year Ended December 31
                                                                          -------------------------------------------------
Consolidated Statements of Cash Flows
(In thousands)                                                               1998               1997              1996
                                                                          -------------------------------------------------
<S>                                                                      <C>               <C>                <C>        
Operating Activities
  Net earnings                                                           $    59,319       $   121,994        $    81,604
  Adjustments to reconcile net earnings to net
    cash provided by operating activities:
    Provisions for depreciation and amortization                              51,410            36,857             34,595
    Change in deferred income taxes                                           (9,758)          (13,375)             1,367
    Gain on sale of marketable equity securities                                               (95,087)
    Other                                                                     (2,306)           (9,680)            (5,883)
    Change in operating assets and liabilities, net of
      effects from acquisitions
      of businesses:
      Accounts receivable                                                     16,964            11,863             (9,959)
      Inventories                                                             (1,378)              847             (7,401)
      Prepaid expenses and other current assets                                4,771            (6,824)            (1,921)
      Accounts payable and other accrued expenses                            (26,246)           16,577             19,063
      Income taxes payable                                                    (6,168)            8,130              2,582
                                                                          ------------      -------------      ------------
    Net Cash Provided by Operating Activities                                 86,608            71,302            114,047

Investing Activities
  Additions to property, plant and equipment                                 (65,375)          (42,223)           (34,388)
  Proceeds from dispositions of property, plant, and equipment                 4,128             4,117                506
  Purchases of investments                                                   (20,941)           (3,645)           (18,205)
  Maturities of investments                                                   12,795             4,159             25,889
  Payments for acquisitions of businesses                                    (17,542)          (47,659)
  Sale of marketable equity securities                                                         119,558
                                                                          ------------      -------------      ------------
    Net Cash Provided by (Used in) Investing Activities                     (86,935)            34,307            (26,198)

Financing Activities
  Proceeds from short-term notes payables                                    48,590             11,491             42,902
  Proceeds from issuance of long-term debt                                                     100,000
  Principal payments on short-term notes payable and long-term             (151,328)           (18,422)           (45,246)
obligations
  Cash dividends                                                            (24,867)           (23,395)           (21,785)
  Purchases of Common Stock and Class A Common Stock                        (29,353)            (8,643)           (61,691)
                                                                          ------------      -------------      ------------
    Net Cash Provided by (Used in) Financing Activities                    (156,958)            61,031            (85,820)

Effect of exchange rate changes on cash and cash equivalents                 (1,203)            (1,693)            (1,593)
                                                                          ------------      -------------      ------------
    Increase (Decrease) in Cash and Cash Equivalents                       (158,488)           164,947                436
Cash and cash equivalents at beginning of year                              196,400             31,453             31,017
                                                                          ------------      -------------      ------------
    Cash and Cash Equivalents at End of Year                            $    37,912        $   196,400        $    31,453
                                                                          ============      =============      ============

</TABLE>

See notes to consolidated financial statements.


                                      -27-
<PAGE>
<TABLE>
<CAPTION>
BANDAG, INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity


                                                 Common Stock Issued  Class A Common Stock     Class B Common      Additional
                                                   and Outstanding         Issued and         Stock Issued and      Paid-In  
                                                                           Outstanding          Outstanding         Capital
                                                                                                                             
IN THOUSANDS, EXCEPT SHARE DATA                   Shares     Amount     Shares     Amount    Shares     Amount               
                                                -----------------------------------------------------------------------------

<S>                <C>                          <C>         <C>       <C>         <C>       <C>         <C>         <C>      
Balance at January 1, 1996                      10,112,164  $10,112   11,711,344  $11,711   2,355,352   $2,355      $2,493   
  Net earnings for the year                                                                                                  
  Other comprehensive income,
   net of tax:
   Unrealized gain on securities
    available-for-sale,
    net of deferred income
    taxes of $9,065                                                                                                          
   Adjustment from foreign 
    currency translation                                                                                                     

  Other comprehensive income
   for the year                                                                                                              

  Comprehensive income 
   for the year                                                                                                              

  Cash Dividends - $.9250
    per share                                                                                                                
  Conversion of Class B
    Common Stock to
    Common Stock - Note H                          303,368      303                          (303,368)    (303)
  Common Stock and Class A
    Common Stock issued
    under Restricted Stock 
    Grant Plan - Note H                              7,610        8        7,610        8                              698
  Forfeitures of Common Stock 
    and Class A Common
    Stock under Restricted 
    Stock Grant Plan - Note H                         (110)       0         (110)       0                              (10)
  Common Stock and Class A
    Common Stock issued
    under Stock Award Program
    Plan- Note H                                     2,636        3        2,638        2                              262
  Common Stock and Class A
    Common Stock issued
    under Defined Contribution
    Plan- Note I                                    10,450       10       10,738       11                            1,050
  Purchases of Common Stock
    and Class A Common Stock                      (593,257)    (593)    (704,461)    (704)                            (424)  
                                                ---------------------------------------------------------------------------
Balance at December 31, 1996                     9,842,861   $9,843   11,027,759  $11,028   2,051,984   $2,052      $4,069   

  Net earnings for the year                                                                                                  
  Other comprehensive income,
    net of tax:
   Unrealized gain on securities
     available-for-sale                                                                                                      
   Adjustment from foreign
     currency translation                                                                                                    

  Other comprehensive income
   for the year                                                                                                              

  Comprehensive income 
   for the year                                                                                                              

  Cash Dividends - $1.0250
   per share                                                                                                                 
  Conversion of Class B
   Common Stock to
   Common Stock - Note H                             3,199        3                            (3,199)      (3)
  Common Stock and Class A
   Common Stock issued
   under Restricted Stock
   Grant Plan - Note H                               6,840        6        6,840        7                              662
  Forfeitures of Common 
    Stock and Class A Common
    Stock under Restricted
    Stock Grant Plan - Note H                       (2,145)      (2)      (1,765)      (2)                            (193)
  Common Stock and Class A 
    Common Stock issued
    under Stock Award Program 
    Plan- Note H                                     2,708        3        2,708        3                              245
  Purchases of Common Stock
    and Class A Common Stock                      (122,400)    (122)     (51,981)     (52)                             (93)  
  Stock options exercised                           20,000       20       20,000       20                              885
  Stock issued in acquisition
    of businesses - Note C                                                10,000       10                              477
                                                ---------------------------------------------------------------------------
Balance at December 31, 1997                     9,751,063   $9,751   11,013,561  $11,014   2,048,785   $2,049      $6,052   

<CAPTION>

                                                  Retained  Accumulated                  
                                                  Earnings     Other                     
                                                                                            
                                                            Comprehensive Comprehensive  
                                                               Income        Income      
                                                  ----------------------------------------- 
<S>                <C>                            <C>          <C>                       
Balance at January 1, 1996                        $355,814     $17,494                   
  Net earnings for the year                         81,604                   $ 81,604    
  Other comprehensive income,                                                            
   net of tax:                                                                           
   Unrealized gain on securities                                                         
    available-for-sale,                                                                  
    net of deferred income                                                               
    taxes of $9,065                                             14,286         14,286    
   Adjustment from foreign                                                               
    currency translation                                        (3,568)        (3,568)
                                                                             --------
  Other comprehensive income                                                             
   for the year                                                                10,718    
                                                                             --------
  Comprehensive income                                                                   
   for the year                                                              $ 92,322    
                                                                             ========
  Cash Dividends - $.9250                                                                
    per share                                      (21,785)                              
  Conversion of Class B                                                                  
    Common Stock to                                                                      
    Common Stock - Note H                                                                
  Common Stock and Class A                                                               
    Common Stock issued                                                                  
    under Restricted Stock                                                               
    Grant Plan - Note H                                                                  
  Forfeitures of Common Stock                                                            
    and Class A Common                                                                   
    Stock under Restricted                                                               
    Stock Grant Plan - Note H                                                            
  Common Stock and Class A                                                               
    Common Stock issued                                                                  
    under Stock Award Program                                                            
    Plan- Note H                                                                         
  Common Stock and Class A                                                               
    Common Stock issued                                                                  
    under Defined Contribution                                                           
    Plan- Note I                                                                         
  Purchases of Common Stock                                                              
    and Class A Common Stock                       (59,970)                              
                                                                                         
Balance at December 31, 1996                      $355,663     $28,212                   
                                                                                         
  Net earnings for the year                        121,994                   $121,994    
  Other comprehensive income,                                                            
    net of tax:                                                                          
   Unrealized gain on securities                                                         
     available-for-sale                                        (33,854)       (33,854)   
   Adjustment from foreign                                                               
     currency translation                                       (5,697)        (5,697)   
                                                                             --------
  Other comprehensive income                                                             
   for the year                                                               (39,551)   
                                                                             --------
  Comprehensive income                                                                   
   for the year                                                              $ 82,443    
                                                                             ========
  Cash Dividends - $1.0250                                                               
   per share                                       (23,395)                              
  Conversion of Class B                                                                  
   Common Stock to                                                                       
   Common Stock - Note H                                                                 
  Common Stock and Class A                                                               
   Common Stock issued                                                                   
   under Restricted Stock                                                                
   Grant Plan - Note H                                                                   
  Forfeitures of Common                                                                  
    Stock and Class A Common                                                             
    Stock under Restricted                                                               
    Stock Grant Plan - Note H                                                            
  Common Stock and Class A                                                               
    Common Stock issued                                                                  
    under Stock Award Program                                                            
    Plan- Note H                                                                         
  Purchases of Common Stock                                                              
    and Class A Common Stock                        (8,375)                              
  Stock options exercised                                                                
  Stock issued in acquisition                                                            
    of businesses - Note C                                                               
                                                                                         
Balance at December 31, 1997                      $445,887    $(11,339)                  
                                                                                            

</TABLE>

                                      -28-
<PAGE>

<TABLE>
<CAPTION>
BANDAG INCORPORATED AND SUBSIDIARIES

Consolidated Statements of Changes in
 Stockholders' Equity (continued)
<S>                                              <C>         <C>      <C>         <C>       <C>         <C>         <C>   
  Net earnings for the year                          
  Other comprehensive income,                              
    net of tax:                                            
   Adjustment from foreign                           
     currency translation                            

  Comprehensive income                               
   for the year                                      
                                                     
  Cash Dividends - $1.1100                           
   per share                                         
  Conversion of Class B                              
   Common Stock to       
   Common Stock - Note H                             2,208        2                            (2,208)      (2)  
  Common Stock and Class A      
   Common Stock issued          
   under Restricted Stock       
   Grant Plan - Note H                              10,635       11       10,635       10                              753       
  Forfeitures of Common         
    Stock and Class A Common    
    Stock under Restricted      
    Stock Grant Plan - Note H                       (3,865)      (4)      (2,685)      (3)                            (331)   
  Common Stock and Class A      
    Common Stock issued         
    under Stock Award Program   
    Plan- Note H                                     2,838        3        2,838        3                              297   
  Purchases of Common Stock     
    and Class A Common Stock                      (699,082)    (699)    (219,375)    (219)                            (369) 
  Stock options exercised                           20,000       20       20,000       20                              885  
                                                --------------------------------------------------------------------------
Balance at December 31, 1998                     9,083,797   $9,084   10,824,974  $10,825   2,046,577   $2,047      $7,287
                                                ==========================================================================

<CAPTION>
<S>                                                <C>       <C>        <C>     
  Net earnings for the year                         59,319              $ 59,319
  Other comprehensive income,                 
    net of tax:                               
   Adjustment from foreign                    
     currency translation                                    (2,881)      (2,881)
                                                                        --------
  Comprehensive income                        
   for the year                                                         $ 56,438
                                                                        ========
  Cash Dividends - $1.1100                    
   per share                                       (24,867)
  Conversion of Class B                       
   Common Stock to                            
   Common Stock - Note H                      
  Common Stock and Class A                    
   Common Stock issued                        
   under Restricted Stock                     
   Grant Plan - Note H                        
  Forfeitures of Common                       
    Stock and Class A Common                  
    Stock under Restricted                    
    Stock Grant Plan - Note H                 
  Common Stock and Class A                    
    Common Stock issued                       
    under Stock Award Program                 
    Plan- Note H                              
  Purchases of Common Stock                   
    and Class A Common Stock                       (28,065)
  Stock options exercised                     
                                                  --------  -------
Balance at December 31, 1998                      $452,274 $(14,220)
                                                  ========  =======

</TABLE>

See notes to consolidated financial statements.


                                      -29-
<PAGE>

Notes to Consolidated Financial Statements

NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Inventories:
Inventories are valued at the lower of cost or market. Approximately 47% and 52%
of year-end inventory amounts at December 31, 1998 and 1997, respectively,  were
determined  by the last in,  first out (LlFO)  method and on the first in, first
out method for the remainder.  At December 31, 1996,  cost was determined by the
LIFO method for all inventories.

The excess of current cost over the amount stated for inventories  valued by the
LIFO method amounted to approximately $21,932,000, $22,635,000, and $23,111,000,
at December 31, 1998, 1997, and 1996, respectively.

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

Buildings                                                          5 to 50 years
Building Improvements                                              5 to 39 years
Machinery and Equipment                                            3 to 11 years



                                      -30-
<PAGE>

Depreciation expense approximated $42,769,000,  $34,576,000,  and $33,597,000 in
1998, 1997, and 1996 respectively.

Intangible Assets:
Intangible  assets,  which principally  represent the cost in excess of the fair
value of the net assets acquired in  acquisitions  of businesses,  are amortized
using the  straight-line  method over 10 years. At December 31, 1998,  1997, and
1996   goodwill   amounted  to   $72,161,000,   $74,600,000,   and   $1,128,000,
respectively.  Amortization expense  approximated  $8,641,000,  $2,281,000,  and
$998,000 in 1998, 1997, and 1996, respectively.

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

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

Research and Development:
Expenditures  for  research  and  development,  which are  expensed as incurred,
approximated $18,807,000,  $21,113,000, and $15,909,000 in 1998, 1997, and 1996,
respectively.

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

Segment Disclosures:
The  Company  has  adopted  SFAS No.  131,  "Disclosures  about  Segments  of an
Enterprise and Related Information" in 1998. SFAS 131 establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports.  It also establishes  standards for related  disclosures about products
and services,  geographic  areas, and major customers.  The adoption of SFAS 131
did not affect the results of operations  or financial  position of the Company,
but did affect the disclosure of segment information (see Note K).



                                      -31-
<PAGE>

Derivative Instruments and Hedging Activities:
In June 1998, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
133, "Accounting for Derivative  Instruments and Hedging  Activities",  which is
required to be adopted in years  beginning  after June 15, 1999.  The  Statement
permits  early  adoption as of the  beginning  of any fiscal  quarter  after its
issuance.  The Company  expects to adopt the new Statement  January 1, 2000. The
Statement  will require the Company to recognize all  derivatives on the balance
sheet at fair  value.  Derivatives  that are not hedges must be adjusted to fair
value through income.  If the derivative is a hedge,  depending on the nature of
the hedge,  changes in the fair value of the  derivatives  will either be offset
against  the  change in fair value of the hedged  assets,  liabilities,  or firm
commitments through earnings or recognized in other  comprehensive  income until
the  hedged  item is  recognized  in  earnings.  The  ineffective  portion  of a
derivative's  change in fair value will be  immediately  recognized in earnings.
The  Company has not yet  determined  what the effect of SFAS No. 133 will be on
the earnings and the financial position of the Company.

Computer Software Developed For or Obtained For Internal Use:
In March 1998, the AICPA issued SOP 98-1,  "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal Use." The Company plans to adopt
the SOP effective  January 1, 1999. The SOP will require the  capitalization  of
certain costs incurred after the date of adoption in connection  with developing
or obtaining  software for internal  use. The Company  currently  expenses  such
costs as  incurred.  The Company has not yet  determined  the impact of adopting
this SOP.

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

NOTE B. NONRECURRING CHARGES

During 1998, the Company recorded net non-recurring  charges totaling $4,205,000
or  $1,174,000  net of tax benefits.  The net  non-recurring  charges  include a
provision of $7,502,000  ($4,471,000 net of tax benefits) for facility closures,
personnel reductions, and other exit costs. Additionally,  the net non-recurring
charges include a gain of $3,297,000  consisting of the non-taxable  recognition
of  accumulated  translation  gains due to the exit of  operations in Indonesia.
Included  in the  non-recurring  charges  is  $4,845,000  related  to  personnel
reductions  (117  individuals).  As of December 31,  1998,  the Company had paid
$1,035,000 related to the termination of 13 employees.

During the fourth  quarter  1997,  the Company  recorded  non-recurring  charges
totaling  $16,500,000  or  $9,900,000  net of tax  benefits.  The  non-recurring
charges include a provision of $13,000,000 to adjust the asset carrying  amounts
of $9,733,000 and to cover exit costs from a rubber  recycling  venture.  During
1998, the Company  completed the sale of its investment in the rubber  recycling
venture. There were no significant adjustments related to the sale. During 1997,
$3,500,000  was  recorded  for the  1998  closing  of a  domestic  manufacturing

                                      -32-
<PAGE>

facility, including attendant personnel reductions. As of December 31, 1998, the
Company had paid $2,270,000 related to the closure of the domestic manufacturing
facility with the remainder of the original  charge to be paid in 1999.  The net
sales and results of operations of the rubber recycling  venture included in the
Company's  consolidated statement of earnings were not significant during any of
the years presented.

NOTE C. ACQUISITIONS

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

The  acquisitions  were  accounted for using the purchase  method of accounting.
Accordingly,  the  purchase  price for each  acquisition  was  allocated  to the
respective assets and liabilities based on their estimated fair values as of the
date of acquisition.  The purchase price  allocations for the 1998  acquisitions
have been completed on a preliminary basis. The accounts and transactions of the
acquired businesses have been included in the consolidated  financial statements
from the respective effective dates of the acquisitions.

The following unaudited pro forma information presents a summary of consolidated
results of operations  of the Company and the acquired  businesses as if all the
acquisitions  had occurred as of January 1, 1997.  The pro forma  information is
presented for informational purposes only and includes certain adjustments, such
as additional  depreciation expense as a result of the write-up to fair value of
fixed  assets,  amortization  of goodwill,  and  increased  interest  expense on
acquisition related debt. They do not purport to be indicative of the results of
operations  that  actually  would have been achieved had the  acquisitions  been
consummated as of January 1, 1997.

                                                Year Ended December 31
(In thousands, except per share data)             1998          1997     
 -----------------------------------       ------------------------------

Net sales                                     $1,087,000        $1,156,100
Cost of products sold                            667,800           713,600
Net earnings                                     $58,000          $121,100
Earnings per share:
  Basic                                            $2.58             $5.31
  Diluted                                          $2.57             $5.29


                                      -33-
<PAGE>



The following  unaudited pro forma information  presents the results of TDS as a
stand-alone entity as if the acquisitions had occurred as of January 1, 1997:

                                             Year ended December 31
(In thousands)                              1998             1997    
 ------------                            -----------------------------

Net sales                                 $408,200         $435,500
Costs of products sold                     310,600          320,500
Goodwill amortization                        9,100            9,100
Earnings before interest and taxes         $1,700          $  7,000

Certain supplemental non-cash information related to the Company's  acquisitions
of businesses in 1998 and 1997 is as follows:

(In thousands)                                   1998             1997
 ------------                                    ----             ----


Assets acquired                                 $22,187         $248,724
Less liabilities (1)                             (4,630)        (177,387)
Less stock issued (2)                                  -            (487)
                                              ----------     -----------
Cash paid                                        17,557           70,850
Less cash acquired                                   15           23,191
                                              ---------       ----------
Net cash paid for acquisitions                  $17,542          $47,659
                                                =======          =======


(1)      Includes  short-term  payables to sellers of $2,960,000 and $87,224,000
         in 1998 and 1997, respectively.

(2)      Represents fair market value of Class A common stock issued to sellers.


NOTE D. INVESTMENTS

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

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



                                      -34-
<PAGE>

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

                                                      Gross         Estimated
                                                 Unrealized              Fair
(In thousands)                        Cost            Gains             Value
December 31, 1998
Securities Held-to-Maturity
Obligations of states and 
  political subdivisions            $21,221              $15           $21,236 
                                    ===========================================
December 31, 1997
Securities Held-to-Maturity
Obligations of states and
  political subdivisions            $38,561                $-          $38,561
Investment in Eurodollar 
  time deposits                       2,600                 -            2,600
                                   -------------------------------------------
                                    $41,161                $-          $41,161 
                                    ===========================================
December 31, 1996
Securities Held-to-Maturity
Obligations of states and
  political subdivisions            $10,694               $5           $10,699
Short-term corporate debt             3,350                -             3,350
Investment in Eurodollar
  time deposits                       3,000                -             3,000
                                   --------------------------------------------
                                    $17,044               $5           $17,049 
                                    ===========================================
Securities Available-for-Sale
Marketable equity securities        $24,416          $54,619           $79,035
                                    ==========================================



At December 31, 1998, 1997 and 1996, securities  held-to-maturity are due in one
year or less and include $11,500,000, $39,586,000 and $14,955,000, respectively,
reported as cash equivalents.

NOTE E. FINANCING ARRANGEMENTS

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

                                                   December 31        
(In thousands)                          1998             1997              1996
 ------------                           ---------------------------------------
Total short-term notes payable at
   year end                           $ 2,091         $90,628           $    43
Weighted average interest rate at
   year end                               3.6%            6.4%              6.0%
Weighted average interest rate
   for the year                           5.0%            6.0%              5.8%

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


                                      -35-
<PAGE>

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

<TABLE>
<CAPTION>
                                       Interest
(In thousands):                          Rates        1998         1997          1996
---------------                          ---------------------------------------------
<S>                                       <C>      <C>           <C>          <C>     
Senior Unsecured Notes Payable,
   maturing 2002                          6.41%    $ 60,000      $ 60,000     $      -
Senior Unsecured Notes Payable,
   maturing 2007                          6.50%      40,000        40,000            -
                                                     ------        ------
Total long-term debt                                100,000       100,000            -
Other obligations                                     9,757        23,195       10,125
                                                    ----------------------------------
Total long-term debt and 
  other obligations                                $109,757      $123,195      $10,125
                                                    ===================================
</TABLE>


The aggregate amount of scheduled annual  maturities of long-term debt and other
obligations for each of the next five years is:  $9,406,000 in 1999,  $1,260,000
in 2000,  $6,283,000  in 2001,  $66,489,000  in 2002,  $5,810,000  in 2003,  and
$29,915,000 thereafter.

Cash payments for interest on debt were $10,869,000,  $3,143,000, and $1,764,000
in 1998, 1997, and 1996, 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,
1998 and 1997,  the fair value of the Company's  outstanding  long-term debt was
approximately $105,656,000 and $100,673,000 respectively.

Total available funds under unused lines of credit at December 31, 1998 amounted
to $103,000,000.

                                      -36-
<PAGE>


NOTE F. INCOME TAXES

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

                                                  December 31              
(In thousands)                            1998         1997        1996
--------------                            -----------------------------
                                     
Employee benefits                        $4,698       $2,749       $2,488
Marketing programs                       24,916       15,174       14,611
Accounts receivable                  
  valuation allowances                    3,746        3,111        2,660
Unremitted earnings of               
  foreign subsidiaries                   (6,776)      (5,625)      (3,488)
Excess pension funding                   (6,297)      (4,482)      (4,123)
Purchased tax benefits                        -         (445)      (1,025)
Unrealized holding gain on           
  marketable equity securities                                    (20,765)
Cost to exit rubber recycling        
  venture                                   766        4,980          -
Basis difference in fixed assets            523       (1,527)        (633)
Other nondeductible reserves              4,984        4,583        1,312
Obsolescence and valuation           
   reserves                               2,820        2,824        4,712
Insurance and legal reserves              2,647        3,387        1,800
Foreign tax credits and net          
   operating loss carryforwards           3,126            -          -
Equipment and plant reserves                496        2,707          -
Other, net                                8,682        7,316        3,453
                                        ---------------------------------
Net deferred tax assets                 $44,331      $34,752       $1,002
                                        =================================
                                  
The components of earnings before income taxes are summarized as follows:

                                                Year Ended December 31         
(In thousands)                          1998           1997              1996
--------------                         ----------------------------------------

Domestic                              $69,341         $167,126           $90,679
Foreign                                30,172           35,790            40,101
                                      ------------------------------------------
                                      $99,513         $202,916          $130,780
                                      ==========================================


                                      -37-
<PAGE>

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

                                                  Year Ended December 31     
(In thousands)                             1998             1997           1996
 ------------                              ------------------------------------
Current:
  Federal                               $38,071          $70,354        $39,570
  State                                   4,526           14,667          4,900
  Foreign                                 7,176            8,886         11,353
Deferred:
  Federal                                (8,844)         (11,619)        (4,354)
  State                                                                    (486)
  Foreign                                  (290)            (786)        (1,301)
Equivalent credit relating to
 purchased income tax
  benefits                                 (445)            (580)          (506)
                                        ---------------------------------------
                                        $40,194          $80,922        $49,176
                                        =======================================

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

                                              Year Ended December 31      
                                        1998             1997            1996
Computed at the expected
 statutory rate                         35.0%            35.0%             35.0%
State income tax-net of 
 federal tax benefit                     2.9%             4.7%              2.4%
Amortization of goodwill
 not deductible                          2.5%               -                 -
Other                                      -              0.2%              0.2%
                                        ---------------------------------------
Income tax at the effective rate        40.4%            39.9%             37.6%
                                        ========================================

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

Income taxes paid amounted to $56,108,000, $86,122,000, and $52,992,000 in 1998,
1997, and 1996, respectively.

NOTE G. EARNINGS PER SHARE

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

                                      -38-
<PAGE>

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

(In thousands, except per share amounts)      1998         1997         1996
 --------------------------------------       ----         ----         ----
Numerator:
  Net Earnings                              $59,319     $121,994      $81,604

Denominator:
  Weighted-average shares - Basic            22,471       22,786       23,613

Effect of dilutive:
  Non-vested restricted stock                    34           36           28
  Stock options                                  54           86          105
                                             --------------------------------
                                                 88          122          133
  Weighted-average shares - Diluted          22,559       22,908       23,746 
                                             =================================
Net Earnings Per Share:
  Basic                                       $2.64        $5.35        $3.46
                                              ===============================
  Diluted                                     $2.63        $5.33        $3.44
                                              ===============================

NOTE H. STOCKHOLDERS' EQUITY

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

Under the terms of the Bandag,  Incorporated  Restricted  Stock Grant Plan,  the
Company is  authorized  to grant up to an aggregate of 100,000  shares of Common
Stock and 100,000 shares of Class A Common Stock to certain key  employees.  The
shares  granted  under the Plan will  entitle the grantee to all  dividends  and
voting  rights;  however,  such shares will not vest until seven years after the
date of grant. If a grantee's  employment is terminated  prior to the end of the
seven-year period for any reason other than death,  disability or termination of
employment  after age 60, the shares will be forfeited  and made  available  for
future  grants.  A grantee who has attained age 60 and whose  employment is then
terminated  prior to the end of the  seven-year  vesting period does not forfeit
the non-vested shares. During the years ended December 31, 1998, 1997, and 1996,
10,635 shares, 6,840 shares and 7,610 shares of Common Stock, respectively, were
granted under the Plan. During the years ended December 31, 1998, 1997 and 1996,
10,635  shares,  6,840  shares  and  7,610  shares  of  Class  A  Common  Stock,
respectively, were also granted under the Plan. The resulting charge to earnings
amounted to


                                      -39-
<PAGE>

$1,300,000,  $1,177,000,  and $1,245,000, in 1998, 1997, and 1996, respectively.
During the year ended December 31, 1998,  3,865 shares of Common Stock and 2,685
shares of Class A Common Stock were  forfeited.  During the year ended  December
31, 1997,  2,145 shares of Common Stock and 1,765 shares of Class A Common Stock
were  forfeited.  During the year ended  December 31, 1996, 110 shares of Common
Stock and 110 shares of Class A Common Stock were forfeited. The credit to 1998,
1997 and  1996  earnings  related  to the  shares  forfeited  was  approximately
$337,000,  $197,000 and  $12,000,  respectively.  At December  31, 1998,  30,690
shares of Common Stock and 38,900  shares of Class A Common Stock are  available
for grant under the Plan.

Under the terms of the Bandag,  Incorporated Nonqualified Stock Option Plan, the
Company was authorized through November 13, 1997 to grant options to purchase up
to 500,000  shares of Common Stock and 500,000 shares of Class A Common Stock to
certain key employees at an option price equal to the market value of the shares
on the date of grant.  No options were  granted  under the Plan in 1997 or 1996.
During both 1998 and 1997, options to purchase 20,000 shares of Common Stock and
20,000  shares of Class A Common  Stock were  exercised.  At December  31, 1998,
options to purchase  60,000  shares of Common Stock and 60,000 shares of Class A
Common Stock were  outstanding  and  exercisable at $23.458 per share for Common
Stock options and $22.792 per share for Class A Common Stock options. Options to
purchase 20,000 shares of Common Stock and 20,000 shares of Class A Common Stock
expire on November 13, 1999, and each of the two anniversaries thereafter.

The  Company has a stock  award  program  covering  substantially  all U.S.  and
Canadian  Traditional  Business  employees  which  was  established  to  promote
employee  commitment  and  ownership  in the  Company.  In 1998,  1997 and 1996,
$225,000, $283,000 and $250,000,  respectively, were charged to earnings for the
estimated cost of awards to be made under the stock award program.

NOTE I. RETIREMENT BENEFIT PLANS

The Company sponsors  defined-benefit pension plans covering full-time employees
directly employed by Bandag, Incorporated, Bandag Licensing Corporation ("BLC"),
Bandag Canada Ltd., and certain employees in the Company's European  operations.
For the years ended December 31, 1998, 1997, and 1996,  certain employees of TDS
are also covered by  defined-benefit  plans.  In addition to  providing  pension
benefits,  the  Company  provides  certain  postretirement  medical  benefits to
certain  individuals  who  retired  from  employment  before  January  1,  1993.
Employees  who retire  after  December  31, 1992 and are at least age 62 with 15
years of service after direct  employment  with Bandag,  Incorporated,  BLC, and
Kendon Corporation are eligible for temporary medical benefits that cease at age
65.

In 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about Pensions
and Other Postretirement  Benefits." This Statement  standardizes the disclosure
requirements  for  pensions  and other  postretirement  benefits.  Prior  years'
information  has  been  restated  to  conform  with  the  requirements  of  this
Statement.


                                      -40-
<PAGE>

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:

<TABLE>
<CAPTION>
                                                             Pension Benefits                      Postretirement Benefits
 (In thousands)                                      1998          1997          1996          1998          1997          1996
 --------------                                      ----          ----          ----          ----          ----          ----
<S>                                                 <C>           <C>            <C>            <C>           <C>           <C> 
Change in benefit obligations:
Benefit obligations at the
  Beginning of the year                             $62,305       $58,357        $54,496        $5,899        $5,427        $4,974
  Service cost                                        3,117         2,420          2,193           264           247           231
  Interest cost                                       4,326         3,382          3,153           407           375           344
  Participants' contributions                            40            46             46             -             -             -
  Plan amendments                                         -          (539)            23             -             -             -
  Plan merger                                             -         2,204              -             -             -             -
  Exchange rate changes                                (180)          (96)             -             -             -             -
  Benefits paid                                      (2,232)       (1,637)        (1,305)          (85)         (306)          (48)
  Actuarial (gain) or loss                            6,227        (1,832)          (249)       (2,053)          156           (74)
                                                  --------------------------------------------------------------------------------
Benefit obligation at end of year                   $73,603       $62,305        $58,357        $4,432        $5,899        $5,427
                                                  ================================================================================

Change in plan assets at fair value:
Fair value of plan assets at beginning of year     $116,304       $90,775        $79,291         $   -          $  -         $   -
  Actual return on plan assets                          966        23,582         11,928             -             -             -
  Plan merger                                             -         2,798              -             -             -             -
  Employer contributions                                477           859            815            85           306            48
  Participants' contributions                            40            46             46             -             -             -
  Benefits paid                                      (2,232)       (1,637)        (1,305)          (85)         (306)          (48)
  Exchange rate changes                                (208)         (119)             -             -             -             -
                                                 ----------------------------------------------------------------------------------
Fair value of plan at end of year                  $115,347      $116,304        $90,775         $   -          $  -          $  -
                                                 ==================================================================================

Reconciliation of funded status:
  Funded status                                     $41,744       $53,999        $32,418       $(4,432)      $(5,899)      $(5,427)
  Unrecognized actuarial gain                       (22,119)      (38,737)       (19,557)       (2,386)         (334)         (490)
  Unrecognized transition asset                      (4,171)       (4,968)        (5,591)            -             -             -
  Unrecognized prior service cost                       413         1,054          1,187            54            58            61
                                                 ----------------------------------------------------------------------------------
Prepaid (accrued) benefit cost                      $15,867       $11,348         $8,457       $(6,764)      $(6,175)      $(5,856)
                                                 ==================================================================================

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

</TABLE>

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


                                      -41-
<PAGE>


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

<TABLE>
<CAPTION>
                                                               Pension                              Benefits
Postretirement Benefits  
(In thousands)                                        1998        1997        1996        1998        1997        1996
--------------                                        ----        ----        ----        ----        ----        ----

<S>                                                  <C>         <C>         <C>           <C>         <C>         <C> 
Components of net period (benefit) cost
  Service cost                                       $3,117      $2,420      $2,193        $264        $247        $231
  Interest cost                                       4,326       3,382       3,153         407         375         344
  Expected return on plan assets                     (9,421)     (6,950)     (6,051)          -           -           -
  Amortization of prior service cost                     88         123         124           3           3           3
  Amortization of transitional (assets) or                                                                              
      obligations                                      (749)       (748)       (737)          -           -           -
  Recognized actuarial (gain) or loss                (1,547)       (622)       (316)          -           -           -
                                                  ---------------------------------------------------------------------
Net periodic (benefit) cost                         $(4,186)    $(2,395)    $(1,634)       $674        $625        $578
                                                  =====================================================================
</TABLE>

The  assumed  health  care  cost  trend  rate is 8% for 1999 and is  assumed  to
decrease  gradually  to an ultimate  level of 6% in 2001.  Changing  the assumed
health care cost trend rates by one percentage point in each year would have the
following effects:

                                         1 Percentage              1 Percentage
(In thousands)                             Point Increase         Point Decrease

Effect on total of service
 and interest cost components                 $115                   $(98)
Effect on postretirement
 benefit obligation                           $527                   (450)

The Company also sponsors defined-contribution plans, covering substantially all
employees in the United States. Annual contributions are made in such amounts as
determined  by  the  Company's  Board  of  Directors.   Although  employees  may
contribute  up to 15% of their annual  compensation  from the Company,  they are
generally  not required to make  contributions  in order to  participate  in the
plans.  The  Company  currently  provides  plans with a variety of  contribution
levels (including employee contribution match provisions).  The Company recorded
expense  for  contributions  in  the  amount  of  $4,626,000,   $3,439,000,  and
$2,796,000 in 1998, 1997, and 1996, respectively.

Employees in most foreign  countries are covered by various  retirement  benefit
arrangements  generally  sponsored  by the foreign  governments.  The  Company's
contributions to foreign plans were not significant in 1998, 1997, and 1996.

NOTE J. DERIVATIVE FINANCIAL INSTRUMENTS

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

Option  contracts  that are  designated  as hedges  are  marked  to market  with
realized and unrealized  gains and losses deferred and recognized in earnings as
an  adjustment  to sales when 


                                      -42-
<PAGE>

the future sales occur (the deferral accounting method). Realized and unrealized
gains and losses on options that are not  designated as hedges,  that fail to be
effective  hedges,  or that  relate  to sales  that are no  longer  probable  of
occurring would be included in income as foreign  exchange gains or losses.  The
unrealized gains and losses are included in other assets and liabilities.

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

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

At December 31, 1998, 1997 and 1996, the Company had  approximately  $4,781,000,
$12,301,000 and $23,862,000,  respectively, in foreign currency forward exchange
contracts and foreign  currency  option  contracts  designated  and effective as
hedges  which  become due in various  amounts and at various  dates  through the
following  year.  The  difference  between the  contract  amounts and their fair
value, in the aggregate, was insignificant at December 31, 1998, 1997 and 1996.

NOTE K. OPERATING SEGMENT AND GEOGRAPHIC AREA INFORMATION

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

The  Traditional  Business  manufactures  precured  tread rubber,  equipment and
supplies for retreading  tires and operates on a worldwide  basis.  SFAS No. 131
requires segment  information to be reported based on how management  internally
evaluates the operating  performance of their business units.  The operations of
the Traditional  Business segment are evaluated by worldwide  geographic region.
For segment reporting purposes,  the Company's  operations located in the United
States and Canada are integrated  and managed as one unit, 


                                      -43-
<PAGE>

which is referred to internally  as "North  America".  The Company's  operations
located in Europe principally services those European countries, but also export
to certain other  countries in the Middle East and Northern and Central  Africa.
Exports  from North  America to markets in the  Caribbean,  Central  America and
South  America,  along with  operations in Brazil,  Mexico,  Venezuela and South
Africa are combined under one management  group referred to internally as "Latin
America".  Exports from North America to markets in Asian countries,  along with
operations  in New Zealand,  Indonesia  and Malaysia and a licensee in Australia
are combined under one management group referred to internally as "Asia".

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

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

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

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

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

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

<TABLE>
<CAPTION>
(In thousands)                           Net Sales (a)                       Long-lived Assets (b) 
--------------          ---------------------------------------      ------------------------------
                         1998          1997         1996             1998         1997         1996
                         ----          ----         ----             ----         ----         ----

<S>                   <C>           <C>          <C>              <C>          <C>          <C>     
United States         $  762.5      $  499.0     $  435.1         $  224.3     $  208.6     $   87.3
Brazil                    73.5          67.5         60.6             27.0         26.3         19.2
Other                    223.7         256.0        261.2             37.3         38.3         40.4
                      -----------------------------------         ----------------------------------
Consolidated          $1,059.7      $  822.5     $  756.9         $  288.6     $  273.2     $  146.9
                      ====================================        ==================================

(a) Revenues are attributed to countries based on the location of customers.
(b) Corporate long-lived assets are included in the United States.

</TABLE>


                                      -44-
<PAGE>

NOTE L. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS

Unaudited  quarterly results of operations for the years ended December 31, 1998
and 1997 are summarized as follows:

<TABLE>
<CAPTION>
                                                                 Quarter Ended                 
(In thousands, except per share data)          Mar. 31        Jun. 30       Sep. 30        Dec. 31
 -----------------------------------           ---------------------------------------------------
1998:
<S>                                             <C>           <C>           <C>           <C>     
Net sales                                       $235,931      $266,127      $282,636      $274,975
Gross profit                                      95,682       102,571       109,137       103,913
Net earnings                                       9,150        14,168        17,456        18,545
Net earnings per share:
  Basic                                            $0.40         $0.62         $0.78         $0.84
  Diluted                                          $0.40         $0.62         $0.77         $0.84

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

</TABLE>

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

Fourth  quarter  1997 net  earnings  reflect a  non-recurring  after tax gain of
$55,800,000  ($2.44  per  diluted  share) as a result of the sale of  marketable
equity  securities which is further described in Note D. As further described in
Note B, net  earnings for the fourth  quarter  1997 also  reflect  non-recurring
after tax charges totaling $9,900,000 ($.43 per diluted share) relating to costs
to  exit a  rubber  recycling  venture  and  closing  a  domestic  manufacturing
facility.

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

         None.


                                      -45-
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information called for by Item 10 (with respect to the directors of
the  registrant)  is  incorporated  herein by  reference  from the  registrant's
definitive  Proxy  Statement  involving the election of directors filed or to be
filed  pursuant to  Regulation  14A not later than 120 days after  December  31,
1998. In accordance with General Instruction G (3) to Form 10-K, the information
with respect to executive  officers of the Company  required by Item 10 has been
included in Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION

         The  information  called  for by  Item  11 is  incorporated  herein  by
reference  from  the  registrant's  definitive  Proxy  Statement  involving  the
election of directors  filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  called  for by  Item  12 is  incorporated  herein  by
reference  from  the  registrant's  definitive  Proxy  Statement  involving  the
election of directors  filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  called  for by  Item  13 is  incorporated  herein  by
reference  from  the  registrant's  definitive  Proxy  Statement  involving  the
election of directors  filed or to be filed pursuant to Regulation 14A not later
than 120 days after December 31, 1998.


                                      -46-
<PAGE>

                                    PART IV

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

(a)(1)   Financial Statements

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

                                                                 Page

         Consolidated Balance Sheets as of December 31,
           1998, 1997 and 1996....................................25

         Consolidated Statements of Earnings for the
           Years Ended December 31, 1998,
           1997 and 1996..........................................26

         Consolidated Statements of Cash Flows for the
           Years Ended December 31, 1998,
           1997 and 1996 .........................................27

         Consolidated Statements of Changes in Stockholders'
           Equity for the Years Ended December 31, 1998,
           1997 and 1996..........................................28

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

(2)      Financial Statement Schedule

         Schedule II - Valuation and qualifying accounts and reserves.

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

(3)      Exhibits

         Exhibit No.                        Description

         3.1          Bylaws: As amended February 5, 1997 (Incorporated by
                      reference to Exhibit No. 3.1 to the Company's
                      Form 10-K for the year ended December 31, 1996.)
         3.2          Restated Articles of Incorporation, effective December 30,
                      1986. (Incorporated by reference to Exhibit No. 3.2 to the
                      Company's Form 10-K for the year ended December 31, 1992.)
         3.3          Articles of Amendment to Bandag, Incorporated's Articles 
                      of Incorporation, effective May 6, 1992. Incorporated by
                      reference to Exhibit No. 3.3 to the Company's Form 10-K
                      for the year ended December 31, 1992.)

                                      -47-
<PAGE>

         4.1          Instruments defining the rights of security holders. 
                      (Incorporated by reference to Exhibit Nos. 3.2 and 
                      3.3 to the Company's Form 10-K for the year ended 
                      December 31, 1992.)
         4.2          Note Purchase Agreement dated December 15, 1997 for
                      $60,000,000 of 6.41% Senior Notes due December 15, 2002.
                      (Incorporated by reference to Exhibit 4.2 to the Company's
                      Form 10-K for the year ended December 31, 1997.)
         4.3          Note Purchase Agreement dated December 15, 1997 for 
                      $40,000,000 of 6.50% Senior Notes due December
                      15, 2007. (Incorporated by reference to Exhibit 4.3
                      to the Company's Form 10-K for the year ended
                      December 31, 1997.)
         10.1*        Bandag,  Incorporated  Restricted  Stock  Grant  Plan,  as
                      amended  November 12, 1996  (Incorporated  by reference to
                      Exhibit No. 10.1 to the  Company's  Form 10-K for the year
                      ended December 31, 1996.)
         10.2         U.S.  Bandag  System  Franchise  Agreement  Truck  and Bus
                      Tires.  (Incorporated  by reference to Exhibit No. 10.2 to
                      the  Company's  Form 10-K for the year ended  December 31,
                      1993.)
         10.2(a)      U.S.  Bandag  System  Franchise  Agreement  Truck  and Bus
                      Tires, as revised April 1996.  (Incorporated  by reference
                      to Exhibit No.  10.2(a) to the Company's Form 10-K for the
                      year ended December 31, 1996.)
         10.2(b)      Bandag System Franchise Agreement, as revised November 
                      1998
         10.3*        Miscellaneous Fringe Benefits for Executives. 
                      (Incorporated by reference to Exhibit No. 10.3 to
                      the Company's Form 10-K for the year ended December 31,
                      1996.)
         10.4*        Nonqualified  Stock Option Plan,  as amended  November 12,
                      1996 (Incorporated by reference to Exhibit No. 10.4 to the
                      Company's Form 10-K for the year ended December 31, 1996.)
         10.5*        Nonqualified  Stock  Option  Agreement of Martin G. Carver
                      dated  November 13, 1987, as amended by an Addendum  dated
                      June 12, 1992.  (Incorporated  by reference to Exhibit No.
                      10.7  to the  Company's  Form  10-K  for  the  year  ended
                      December 31, 1992.)
         10.6*        Form  of   Participation   Agreement   under  the  Bandag,
                      Incorporated Restricted Stock Grant Plan. (Incorporated by
                      reference as Exhibit 10.7 to the  Company's  Form 10-K for
                      the year ended December 31, 1994.)
         10.7*        Agreement with William A. Sweatman  regarding  termination
                      of  employment   dated  May  21,  1997   (Incorporated  by
                      reference to Exhibit No. 10.7 to the  Company's  Form 10-K
                      for the year ended December 31, 1997).
         10.8*        Separation   and  Release   Agreement  with  Henry  H.  Li
                      regarding  termination of  employment,  effective July 31,
                      1998.
         21           Subsidiaries of Registrant.
         27          Financial Data Schedule (with EDGAR filing only)

*Represents a management compensatory plan or arrangement.

(b) Current  reports on Form 8-K were filed by the Company on February  20, 1998
and December 18, 1998.



                                      -48-
<PAGE>

<TABLE>
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                      BANDAG, INCORPORATED AND SUBSIDIARIES

<CAPTION>
                                                            COL. C
COL. A                                      COL. B          ADDITIONS                          COL. D            COL. E
---------------------------------------- --------------- ---------------------------------- ----------------- ---------------
                                                               1                2                                            
                                           Balance at     Charged to     Charged to Other                       Balance at
                                           Beginning       Costs and        Accounts -        Deductions -        End of
              DESCRIPTION                  of Period       Expenses          Describe           Describe          Period
                                         --------------- -------------- ------------------- ----------------- ---------------
<S>                                         <C>             <C>           <C>                  <C>               <C>        
Year ended December 31, 1998:                                                                                                
  Allowance for doubtful accounts           $12,707,000     $8,460,000                         $2,443,000(1)     $18,724,000
Year ended December 31, 1997:                                                                                                
  Allowance for doubtful accounts           $13,320,000     $3,491,000                         $4,104,000(1)     $12,707,000
Year ended December 31, 1996:                                                                                                
   Allowance for doubtful accounts          $12,327,000     $3,289,000                         $2,296,000(1)     $13,320,000

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

</TABLE>

                                      -49-
<PAGE>

                                   SIGNATURES

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

                                  BANDAG, INCORPORATED
                                  By /s/ Martin G. Carver     
                                      Martin G. Carver
                                      Chairman of the Board,
                                      Chief Executive Officer,
                                      President and Director
                                      (Principal Executive Officer)
Date:    March 26, 1999

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

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

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

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

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

/s/ Martin G. Carver                 /s/ Warren W. Heidbreder                   
     Martin G. Carver                     Warren W. Heidbreder
     Chairman of the Board,               Vice President, Chief Financial
     Chief Executive Officer,             Officer (Principal Financial Officer)
     President and Director
(Principal Executive Officer)        /s/ Charles W. Vesey                       
                                          Charles W. Vesey
                                          Corporate Controller
                                          (Principal Accounting Officer)
Date:  March 26, 1999


                                      -50-
<PAGE>

                                  EXHIBIT INDEX

         Exhibit No.                        Description

         3.1          Bylaws: As amended February 5, 1997 (Incorporated by
                      reference to Exhibit No. 3.1 to the Company's
                      Form 10-K for the year ended December 31, 1996.)
         3.2          Restated Articles of Incorporation, effective December 30,
                      1986. (Incorporated by reference to Exhibit No. 3.2 to the
                      Company's Form 10-K for the year ended December 31, 1992.)
         3.3          Articles of Amendment to Bandag, Incorporated's Articles 
                      of Incorporation, effective May 6, 1992. Incorporated by
                      reference to Exhibit No. 3.3 to the Company's Form 10-K
                      for the year ended December 31, 1992.)
         4.1          Instruments defining the rights of security holders. 
                      (Incorporated by reference to Exhibit Nos. 3.2 and 
                      3.3 to the Company's Form 10-K for the year ended 
                      December 31, 1992.)
         4.2          Note Purchase Agreement dated December 15, 1997 for
                      $60,000,000 of 6.41% Senior Notes due December 15, 2002.
                      (Incorporated by reference to Exhibit 4.2 to the Company's
                      Form 10-K for the year ended December 31, 1997.)
         4.3          Note Purchase Agreement dated December 15, 1997 for 
                      $40,000,000 of 6.50% Senior Notes due December
                      15, 2007. (Incorporated by reference to Exhibit 4.3
                      to the Company's Form 10-K for the year ended
                      December 31, 1997.)
         10.1*        Bandag,  Incorporated  Restricted  Stock  Grant  Plan,  as
                      amended  November 12, 1996  (Incorporated  by reference to
                      Exhibit No. 10.1 to the  Company's  Form 10-K for the year
                      ended December 31, 1996.)
         10.2         U.S.  Bandag  System  Franchise  Agreement  Truck  and Bus
                      Tires.  (Incorporated  by reference to Exhibit No. 10.2 to
                      the  Company's  Form 10-K for the year ended  December 31,
                      1993.)
         10.2(a)      U.S.  Bandag  System  Franchise  Agreement  Truck  and Bus
                      Tires, as revised April 1996.  (Incorporated  by reference
                      to Exhibit No.  10.2(a) to the Company's Form 10-K for the
                      year ended December 31, 1996.)
         10.2(b)      Bandag System Franchise Agreement, as revised November 
                      1998
         10.3*        Miscellaneous Fringe Benefits for Executives. 
                      (Incorporated by reference to Exhibit No. 10.3 to
                      the Company's Form 10-K for the year ended December 31,
                      1996.)
         10.4*        Nonqualified  Stock Option Plan,  as amended  November 12,
                      1996 (Incorporated by reference to Exhibit No. 10.4 to the
                      Company's Form 10-K for the year ended December 31, 1996.)
         10.5*        Nonqualified  Stock  Option  Agreement of Martin G. Carver
                      dated  November 13, 1987, as amended by an Addendum  dated
                      June 12, 1992.  (Incorporated  by reference to Exhibit No.
                      10.7  to the  Company's  Form  10-K  for  the  year  ended
                      December 31, 1992.)


                                      -51-
<PAGE>

         10.6*        Form  of   Participation   Agreement   under  the  Bandag,
                      Incorporated Restricted Stock Grant Plan. (Incorporated by
                      reference as Exhibit 10.7 to the  Company's  Form 10-K for
                      the year ended December 31, 1994.)
         10.7*        Agreement with William A. Sweatman  regarding  termination
                      of  employment   dated  May  21,  1997   (Incorporated  by
                      reference to Exhibit No. 10.7 to the  Company's  Form 10-K
                      for the year ended December 31, 1997).
         10.8*        Separation   and  Release   Agreement  with  Henry  H.  Li
                      regarding  termination of  employment,  effective July 31,
                      1998.
         21           Subsidiaries of Registrant.
         27          Financial Data Schedule (with EDGAR filing only)

*Represents a management compensatory plan or arrangement.