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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number   1-7007

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

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

Bandag, Incorporated
Annual Report on Form 10-K
Year Ended December 31, 2004

Table of Contents

PART I

Item 1.  BUSINESS

Introduction

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

The Company has three reportable business segments: the manufacture and sale of precured tread rubber, equipment and supplies for retreading tires (the Traditional Business), the sale and maintenance of new and retread tires to principally commercial and industrial customers through its wholly-owned subsidiary, Tire Distribution Systems, Inc. (TDS) and the providing of quick-service truck lubrication and tire service by its 87.5% owned subsidiary, Speedco, Inc. (Speedco) through 33 on-highway locations. Refer to Note 15 of the consolidated financial statements for further details.

As a result of a recapitalization of the Company approved by the Company’s shareholders on December 30, 1986, and substantially completed in February 1987, the Carver Family (as hereinafter defined) obtained absolute voting control of the Company. As of January 31, 2005, the Carver Family beneficially owned shares of Common Stock and Class B Common Stock constituting 64% of the votes entitled to be cast in the election of directors and other corporate matters. The Carver Family is composed of (i) Lucille A. Carver, a former director and widow of Roy J. Carver, (ii) the lineal descendants of Roy J. Carver and their spouses, and (iii) certain trusts and other entitles for the benefit of the Carver Family members. Shares of Class B Common Stock have ten (10) votes per share. The Carver Family owns over 98% of the Class B Common Stock. Shares of Class B Common Stock automatically convert to shares of Common Stock on January 16, 2007.

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

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

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

Traditional Business

(a)  General

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

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

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

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

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

(b)  Markets and Distribution

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

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

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

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

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

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

(c)  Competition

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

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

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

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

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

(d)  Sources of Supply

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

The Company purchases rubber and other materials for the production of tread rubber and other rubber products from a number of suppliers. The rubber for tread is primarily synthetic and obtained principally from sources which most conveniently serve the respective areas in which the Company’s plants are located. Although synthetic rubber and other petrochemical products have periodically been in short supply and significant cost fluctuations have been experienced in previous years, including significant price increases throughout 2004, the Company has not experienced any significant difficulty in obtaining an adequate supply of such materials. Synthetic prices historically have been related to the cost of petrochemical feedstocks. However, the effect on operations of future shortages will depend upon their duration and severity and cannot presently be forecast.

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

(e)  Patents

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

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

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

TDS

(a)  General

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

(b)  Markets and Distribution

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

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

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

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

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(c)  Competition

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

(d)  Sources of Supply

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

Speedco

(a)  General

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

(b)  Markets and Distribution

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

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

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

(c)  Competition

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

(d)  Sources of Supply

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

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Regulations

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

Other Information

The Company conducts research and development of new products, primarily in the Traditional Business, and the improvement of materials, equipment, and retreading processes. The cost of this research and development program was approximately $7,063,000 in 2004, $7,238,000 in 2003, and $8,109,000 in 2002.

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

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

As of December 31, 2004, the Company had an estimated 3,384 employees.

Operating Segment and Geographic Area Information

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

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Executive Officers of the Registrant

The following table sets forth the names and ages of all executive officers of the Company as of January 31, 2005, the period of service of each with the Company, positions and offices with the Company presently held by each, and the period during which each officer has served in his/her present office:

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

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

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

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

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

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

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

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

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

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

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

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

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

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Available Information

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

Item 2.  PROPERTIES

Traditional Business

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

The tread rubber manufacturing plants of the Company are located to service principal markets. The Company owns nine plants. However, the Company only operates eight of these plants, three of which are located in the United States, and the remainder in Canada, Belgium, Brazil (two plants) and Mexico. The plants vary in size up to 194,000 square feet with the first plant being placed into production in 1959. All of the plants are owned in fee. Operations in one tread rubber manufacturing plant located in the United States were suspended in the fourth quarter of 1999 but the facility remains viable for general corporate purposes. Operations in the Chino, California plant were suspended in the first quarter of 2002. This facility was sold during the fourth quarter of 2004.

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

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

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

TDS

TDS currently owns 11 and leases 44 facilities. Fourteen (14) contain space for TDS retread production and 41 contain space for commercial and retail operations. The Company believes that it will be able to renew its existing leases as they expire or find suitable alternative locations. The leases generally provide for a base rental, as well as charges for real estate taxes, insurance, maintenance and various other items.

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

Speedco

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

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Item 3.  LEGAL PROCEEDINGS

General

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

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

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

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

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

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

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

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

None.

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PART II

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:

The approximate number of record holders of the Company’s Common Stock as of January 31, 2005 was 1,652, the number of record holders of Class A Common Stock was 945 and the number of record holders of Class B Common Stock was 191. The Common Stock and Class A Common Stock are traded on the New York Stock Exchange and the Chicago Stock Exchange. There is no established trading market for the Class B Common Stock.

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Issuer Purchases of Equity Securities(1)

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Item 6.  SELECTED FINANCIAL DATA

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

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

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

OVERVIEW

        General

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

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

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

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

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

        Trucking Industry

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

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

        New Tire Retread Pricing and Profitability

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

        Acquisitions

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

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

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

        Sale of TDS Locations

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

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

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

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

        Outsourcing Agreement

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

        Sale of South Africa Operations

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

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RESULTS OF OPERATIONS

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

        Net Sales

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

        Other Income

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

        Gross Profit Margins

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

        Operating and Other Expenses

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

        Net Earnings

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

TRADITIONAL BUSINESS

        North America

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

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

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

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

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

        EMEA

The Company’s operations located in Europe principally service markets in European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally as EMEA. Net sales in EMEA increased $7,625,000, or 9%, from 2003, on a 5% decrease in volume. The increase in net sales is substantially due to the effect of translating foreign currency denominated net sales to U.S. dollars of approximately $10,960,000. Gross profit margin increased 1.7 percentage points from 2003, primarily due to price increases targeted to improve margins.

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

        International

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

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

TIRE DISTRIBUTION SYSTEMS, INC.

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

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

See “OVERVIEW – Sale of TDS locations” hereunder for a discussion of the sale of TDS locations in 2004.

SPEEDCO, INC.

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

OTHER

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

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

RESULTS OF OPERATIONS

Results include the Company’s two reportable operating segments – its Traditional Business and TDS.

        Net Sales

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

        Gross Profit Margins

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

        Operating and Other Expenses

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

        Net Earnings

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

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

TRADITIONAL BUSINESS

        North America

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

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

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

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

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

        EMEA

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

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

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        International

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

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

TIRE DISTRIBUTION SYSTEMS, INC.

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

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

OTHER

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

IMPACT OF INFLATION AND CHANGING PRICES

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

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

FINANCIAL CONDITION

        Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

OFF BALANCE SHEET ARRANGEMENTS

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

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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Financial Risk Management

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

        Foreign Currency Exposure

Foreign currency exposures arising from cash flow transactions include firm commitments and anticipatory transactions. Translation exposure is also part of the overall foreign exchange risk. The Company’s exposure to foreign currency risks exists primarily with the Brazilian real, Canadian dollar, Mexican peso, Japanese yen and European Union euro. The Company regularly enters into foreign currency contracts primarily using foreign exchange forward contracts and options to manage the foreign currency risks associated with most of its firm commitment exposures. The Company also employs foreign exchange forward contracts as well as option contracts to manage the foreign currency risks associated with approximately 40% — 60% of its anticipated future cash flow transactions within the coming twelve months. The notional amount of these contracts at December 31, 2004 and 2003 were $4,293,000 and $5,286,000, respectively. The Company also limits its exposure to foreign currency fluctuations by entering into offsetting asset or liability positions and by establishing and monitoring limits on unmatched positions. The Company’s pre-tax earnings from foreign subsidiaries and affiliates translated into U.S. dollars using a weighted-average exchange rate was $16,946,000 and $18,046,000 for the years ending December 31, 2004 and 2003, respectively. On that basis, the potential loss in the value of the Company’s pre-tax earnings from foreign subsidiaries resulting from a hypothetical 10% adverse change in foreign currency exchange rates would have been $1,540,000 in 2004 and $1,659,000 in 2003.

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

        Interest Rate Exposure

In order to mitigate the impact of fluctuations in the general level of interest rates, the Company generally maintains a large portion of its debt as fixed rate in nature by borrowing on a long-term basis. At December 31, 2004 and 2003, the Company had outstanding debt of $17,143,000 and $22,857,000, respectively. At December 31, 2004 and 2003, the fair value of the Company’s debt was $17,734,000 and $23,809,000, respectively. In addition, at December 31, 2004 and 2003, the fair value of securities held for investment was $148,727,000 and $97,958,000, respectively. The fair value of the Company’s total long-term debt and its securities held for investment would not be materially affected by a hypothetical 10% adverse change in interest rates. Therefore, the effects of interest rate changes on the fair value of the Company’s financial instruments are limited. Securities held for investment primarily consist of obligations of states and political subdivisions of a short-term nature.

        Commodities Exposure

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

CRITICAL ACCOUNTING POLICIES

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

        Accounts Receivable

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

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

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

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

        Goodwill and Trade Name Asset Valuation

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

        Income Taxes

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

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

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

        Marketing Programs

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

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

        Pension Plans

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

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

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

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

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

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NEW ACCOUNTING STANDARDS

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

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

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

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Report of Management

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

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

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

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

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

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

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Bandag, Incorporated

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

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

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

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

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

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

/s/Ernst & Young LLP
Chicago, Illinois

February 28, 2005

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Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Bandag, Incorporated

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

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bandag, Incorporated at December 31, 2004 and, and restated, 2003, and the consolidated results of their operations and their cash flows for each of the years ended December 31, 2004 and, as restated, 2003 and 2002, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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

/s/ Ernst & Young LLP
Chicago, Illinois

February 28, 2005

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Bandag, Incorporated
Consolidated Balance Sheets

See notes to consolidated financial statements.

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Bandag, Incorporated

Consolidated Balance Sheets (continued)

See notes to consolidated financial statements.

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Bandag, Incorporated

Consolidated Statements of Earnings

See notes to consolidated financial statements.

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Bandag, Incorporated
Consolidated Statements of Cash Flows

See notes to consolidated financial statements.

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Bandag, Incorporated
Consolidated Statements of Changes in Shareholders’ Equity