FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998

                                       OR

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

                        for the transition period from to

                          Commission File Number 1-4717


                      KANSAS CITY SOUTHERN INDUSTRIES, INC.
               (Exact name of Company as specified in its charter)


          Delaware                                            44-0663509
(State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                           Identification No.)


114 West 11th Street, Kansas City, Missouri                       64105
  (Address of principal executive offices)                      (Zip Code)


                                 (816) 983-1303
                (Company's telephone number, including area code)


                                   No Changes
             (Former name,  former  address and former fiscal year,
                       if changed since last report.)

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

                         Yes [X]              No [ ]

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

             Class                                 Outstanding at July 31, 1998
Common Stock, $.01 per share par value                              109,500,735
- -------------------------------------------------------------------------------





                      KANSAS CITY SOUTHERN INDUSTRIES, INC.

                                    FORM 10-Q

                                  JUNE 30, 1998

                                      INDEX


                                                                         Page

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Introductory Comments                                                      1

Consolidated Condensed Balance Sheets -
     June 30, 1998 and December 31, 1997                                   2

Consolidated Condensed Statements of Income and Comprehensive Income -
     Three and Six Months Ended June 30, 1998 and 1997                     3

Computation of Basic and Diluted Earnings per Common Share                 3

Consolidated Condensed Statements of Cash Flows -
     Six Months Ended June 30, 1998 and 1997                               4

Notes to Consolidated Condensed Financial Statements                       5

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                              11

Item 3.  Qualitative and Quantitative Disclosures About Market Risk       23

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                24

Item 4.  Submission of Matters to a Vote of Security Holders              24

Item 5.  Other Information                                                25

Item 6.  Exhibits and Reports on Form 8-K                                 25


SIGNATURES                                                                26















                      KANSAS CITY SOUTHERN INDUSTRIES, INC.

                                    FORM 10-Q

                                  JUNE 30, 1998


PART I - FINANCIAL INFORMATION



Item 1.  Financial Statements


INTRODUCTORY COMMENTS

The  Consolidated  Condensed  Financial  Statements  included  herein  have been
prepared by Kansas City Southern Industries, Inc. ("Company" or "KCSI"), without
audit,  pursuant to the rules and  regulations  of the  Securities  and Exchange
Commission.  Certain information and footnote  disclosures  normally included in
financial  statements  prepared in accordance with generally accepted accounting
principles   have  been  condensed  or  omitted   pursuant  to  such  rules  and
regulations,  although the Company believes that the disclosures are adequate to
enable  a  reasonable   understanding  of  the  information   presented.   These
Consolidated  Condensed Financial  Statements should be read in conjunction with
the  financial  statements  and the  notes  thereto,  as  well  as  Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997, and  Management's  Discussion and Analysis of Financial  Condition and
Results of Operations  included in this form 10-Q. Results for the three and six
months  ended  June  30,  1998 are not  necessarily  indicative  of the  results
expected for the full year 1998.



 2


                      KANSAS CITY SOUTHERN INDUSTRIES, INC.
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                              (Dollars in Millions)



                                                                             June 30,           December 31,
                                                                               1998                1997    
                                                                           (Unaudited)
                                                                                          
ASSETS

Current Assets:
    Cash and equivalents                                                   $       8.8          $      33.5
    Accounts receivable, net                                                     200.2                177.0
    Inventories                                                                   39.3                 38.4
    Other current assets                                                         144.1                124.2
                                                                           -----------          -----------
        Total current assets                                                     392.4                373.1

Investments held for operating purposes                                          753.3                683.5

Properties (net of $545.7 and $518.6 accumulated
    depreciation and amortization, respectively)                               1,237.4              1,227.2

Intangibles and Other Assets,  net                                               184.1                150.4
                                                                           -----------          -----------

    Total assets                                                           $   2,567.2          $   2,434.2
                                                                           ===========          ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Debt due within one year                                               $     113.7          $     110.7
    Accounts and wages payable                                                   104.4                109.0
    Accrued liabilities                                                          178.6                217.8
                                                                           -----------          -----------
        Total current liabilities                                                396.7                437.5
                                                                           -----------          -----------

Other Liabilities:
    Long-term debt                                                               758.0                805.9
    Deferred income taxes                                                        391.9                332.2
    Other deferred credits                                                       132.9                132.1
                                                                           -----------          -----------
        Total other liabilities                                                1,282.8              1,270.2
                                                                           -----------          -----------

Minority Interest in consolidated subsidiaries                                    22.9                 28.2
                                                                           -----------          -----------

Stockholders' Equity:
    Preferred stock                                                                7.1                  7.1
    Common stock                                                                   1.1                  1.1
    Capital surplus                                                                6.4                    -
    Retained earnings                                                            956.5                839.3
    Accumulated other comprehensive income                                        93.7                 50.8
    Shares held in trust                                                        (200.0)              (200.0)
                                                                           -----------          -----------
        Total stockholders' equity                                               864.8                698.3
                                                                           -----------          -----------

    Total liabilities and stockholders' equity                             $   2,567.2          $   2,434.2
                                                                           ===========          ===========


   See accompanying notes to consolidated condensed financial statements.



 3

                      KANSAS CITY SOUTHERN INDUSTRIES, INC.
                   CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                            AND COMPREHENSIVE INCOME
                  (Dollars in Millions, Except per Share Data)
                                   (Unaudited)



                                                               Three Months                   Six Months
                                                              Ended June 30,                 Ended June 30,    
                                                           1998           1997             1998          1997  
                                                                                         
Revenues                                               $    322.6      $   252.6       $    618.3    $    490.4

Costs and expenses                                          200.3          166.8            388.8         330.5
Depreciation and amortization                                17.9           18.4             34.7          36.9
                                                       ----------      ---------       ----------    ----------
     Operating Income                                       104.4           67.4            194.8         123.0

Equity in net earnings (losses) of unconsolidated affiliates:
     DST Systems, Inc.                                        7.5            5.7             15.0          11.8
     Grupo Transportacion Ferroviaria
       Mexicana, S.A. de C.V.                                (2.1)          (3.0)            (5.2)         (3.0)
     Other                                                    0.5            1.2              0.9           1.8

Interest expense                                            (16.2)         (13.6)           (33.6)        (27.3)
Other, net                                                   15.2            4.3             21.8          10.3
                                                       ----------      ---------       ----------    ----------
     Pretax Income                                          109.3           62.0            193.7         116.6

Income tax provision                                         40.9           24.3             72.4          45.7
Minority interest in
  consolidated earnings                                       9.7            5.9             16.4          10.6
                                                       ----------      ---------       ----------    ----------

Net Income                                                   58.7           31.8            104.9          60.3

Other comprehensive income, net of tax:
     Unrealized gain on securities                           13.0           18.0             42.9           9.1
                                                       ----------      ---------       ----------    ----------

Comprehensive Income                                   $     71.7      $    49.8       $    147.8    $     69.4
                                                       ==========      =========       ==========    ==========


Computation of Basic and Diluted Earnings per Common Share

Basic Earnings per Common Share                        $     0.54      $    0.29       $     0.96    $     0.56
                                                       ==========      =========       ==========    ==========

Diluted Earnings per Common Share                      $     0.51      $    0.29       $     0.92    $     0.55
                                                       ==========      =========       ==========    ==========

Weighted Average Basic Common
  Shares Outstanding (in thousands)                       109,253         107,095         108,894       107,631
                                                       ----------      ----------      ----------    ----------

Weighted Average Diluted Common
  Shares Outstanding (in thousands)                       113,303         109,518         112,809       109,944
                                                       ----------      ----------      ----------    ----------

Cash Dividends Paid:
     Per Preferred share                               $      .25      $     .25       $      .50    $      .50
     Per Common share                                         .04            .03              .08           .07


    See accompanying notes to consolidated condensed financial statements.




 4

                      KANSAS CITY SOUTHERN INDUSTRIES, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                              (Dollars in Millions)
                                   (Unaudited)



                                                                               Six Months
                                                                             Ended June 30,      
                                                                          1998             1997  
                                                                                 
CASH FLOWS PROVIDED BY (USED FOR):

OPERATING ACTIVITIES:
   Net income                                                          $   104.9       $     60.3
   Adjustments to net income:
     Depreciation and amortization                                          34.7             36.9
     Deferred income taxes                                                  22.3             10.7
     Equity in undistributed earnings                                      (10.7)           (10.6)
     Distributions from equity investments                                   5.5              -
     Gain on sale of equity investments and property                       (14.4)            (1.7)
   Changes in working capital items:
     Accounts receivable                                                   (21.6)           (14.9)
     Inventories                                                            (0.9)             0.9
     Other current assets                                                  (17.6)            (4.6)
     Accounts and wages payable                                             (6.5)           (17.6)
     Accrued liabilities                                                   (23.1)            24.7
   Other, net                                                               (7.4)            (4.0)
                                                                       ----------      ----------
     Net                                                                    65.2             80.1
                                                                       ---------       ----------


INVESTING ACTIVITIES:
   Property acquisitions                                                   (40.2)           (33.1)
   Proceeds from disposal of property                                        5.2              4.3
   Investment in and loans with affiliates                                 (24.8)          (298.9)
   Net sales (purchases) of short-term investments                          (0.7)            27.1
   Proceeds from disposal of investments                                    10.3              -
   Other, net                                                                3.8              8.0
                                                                       ---------       ----------
     Net                                                                   (46.4)          (292.6)
                                                                       ----------      ----------


FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt                                 53.8            298.0
   Repayment of long-term debt                                            (105.0)           (50.3)
   Proceeds from stock plans                                                23.0              7.8
   Stock repurchased                                                        (3.5)           (42.4)
   Cash dividends paid                                                     (13.4)           (11.0)
   Other, net                                                                1.6              5.6
                                                                       ---------       ----------
     Net                                                                   (43.5)           207.7
                                                                       ----------      ----------


CASH AND EQUIVALENTS:
   Net decrease                                                            (24.7)            (4.8)
   At beginning of year                                                     33.5             22.9
                                                                       ---------       ----------
   At end of period                                                    $     8.8       $     18.1
                                                                       =========       ==========



    See accompanying notes to consolidated condensed financial statements.


 5

                      KANSAS CITY SOUTHERN INDUSTRIES, INC.

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS



1. In the opinion of Kansas City Southern Industries, Inc. ("Company";  "KCSI"),
   the  accompanying   unaudited  consolidated  condensed  financial  statements
   contain all adjustments  (consisting of normal closing procedures)  necessary
   to present fairly the financial  position of the Company and its subsidiaries
   as of June 30, 1998 and December 31, 1997,  the results of operations for the
   three and six months ended June 30, 1998 and 1997, and cash flows for the six
   months ended June 30, 1998 and 1997.


2. The results of  operations  for the three and six months  ended June 30, 1998
   and 1997 are not necessarily indicative of the results to be expected for the
   full year 1998.


3. The  accompanying  consolidated  condensed  financial  statements  have  been
   prepared consistently with accounting policies described more fully in Note 1
   to the  consolidated  financial  statements  included in the Company's Annual
   Report on Form 10-K for the year ended December 31, 1997.

   On February 3, 1998,  the Company  announced  the planned  separation  of its
   Transportation  and Financial Asset  Management  segments  through a proposed
   dividend  of the stock of its  Financial  Asset  Management  businesses  (the
   "Spin-off"). The Spin-off is subject to obtaining a favorable tax ruling from
   the Internal  Revenue  Service  ("IRS") and other key  factors.  A tax ruling
   request was filed with the IRS on February 27, 1998.  The Company  expects to
   complete the Spin-off in 1998,  subject to receipt of a favorable tax ruling.
   A public offering of KCSI stock (i.e. the  Transportation  segment) using the
   Company's  Universal  Shelf  Registration  Statement is  anticipated to occur
   subsequent to the  Spin-off.  Also  subsequent  to the Spin-off,  the Company
   anticipates effecting a reverse stock split, which was approved by a majority
   vote of the Company's stockholders held at a special stockholder's meeting on
   July 15, 1998.


4. The  effect of stock  options  to  employees  represent  the only  difference
   between the  weighted  average  shares used for the basic  earnings per share
   computation compared to the diluted earnings per share computation. The total
   incremental  shares from assumed  conversion of stock options included in the
   computation  of diluted  earnings  per share were  4,049,731  and  3,915,046,
   respectively,  for the three and six month  periods  ended June 30,  1998 and
   2,421,342 and  2,312,241,  respectively,  for the same 1997 periods.  For the
   three and six month  periods  ended June 30, 1998,  the  weighted  average of
   options  to  purchase   95,000  and  48,500  shares  of  KCSI  common  stock,
   respectively,  were  excluded  from the  respective  computation  of  diluted
   earnings per share because the exercise  prices were greater than the average
   market prices of the common shares. For the three and six month periods ended
   June 30,  1997,  the weighted  average of options to purchase  zero and 1,306
   shares were excluded.

   The only  adjustments  that  currently  affect the numerator of the Company's
   diluted  earnings  per share  computation  include  preferred  dividends  and
   potentially  dilutive  securities  at  subsidiaries  and  affiliates.   These
   adjustments totaled $0.5 million and $0.9 million for the three and six month
   periods ended June 30, 1998, respectively.  Adjustments for the three and six
   month periods ended June 30, 1997 were not material.


5. The Company's  inventories  ($39.3 million at June 30, 1998 and $38.4 million
   at December 31, 1997) primarily  consist of material and supplies  related to
   rail transportation. Other components of inventories are not material.

 6

6. Investments  in  unconsolidated  affiliates  and  certain  other  investments
   accounted for under the equity method generally include all entities in which
   the Company or its subsidiaries have significant  influence but not more than
   a 50% voting interest.  Investments in unconsolidated  affiliates at June 30,
   1998 include equity  interests in DST Systems,  Inc.,  ("DST"-  approximately
   41%), Grupo  Transportacion  Ferroviaria Mexicana S.A. de C.V. ("Grupo TFM" -
   37%), Southern Capital Corporation LLC ("Southern Capital - 50%) and Mexrail,
   Inc.,  ("Mexrail"  - 49%),  as  well  as the  Company's  interests  in  other
   companies.

   DST has a Stockholders' Rights Agreement, which includes provisions providing
   that under certain circumstances  following a "change in control" of KCSI, as
   defined in DST's Stockholders' Rights Agreement,  substantial dilution of the
   Company's interest in DST could result. Additionally, the Company is party to
   certain  agreements  with  Transportacion  Maritima  Mexicana,  S.A.  de C.V.
   ("TMM")  covering  the Grupo TFM and Mexrail  ventures.  TMM  (including  its
   affiliates) owns approximately  38.5% of Grupo TFM and 51% of Mexrail.  These
   agreements  contain "change in control"  provisions,  provisions  intended to
   preserve the Company's and TMM's proportionate ownership of the ventures, and
   super  majority  provisions  with  respect to voting on  certain  significant
   transactions.  Such  agreements  also provide a right of first refusal in the
   event that either party  initiates a  divestiture  of its equity  interest in
   Grupo TFM or Mexrail.  Under certain  circumstances,  such  agreements  could
   affect  the  Company's  ownership  percentage  and  rights  in  these  equity
   affiliates.

   Combined  condensed  financial  information of  unconsolidated  affiliates is
   shown below (dollars in millions):



   Financial Condition:

                                           June 30, 1998                               December 31, 1997       
                                   DST       Grupo TFM      Other                DST       Grupo TFM      Other
                                                                                      

    Current assets            $    255.7   $     93.8     $   31.6          $    231.3    $   114.7     $   29.9
    Non-current assets           1,376.4      1,959.5        274.3             1,124.1      1,990.4        255.1
                              ----------   ----------     --------          ----------    ---------     --------

       Assets                 $  1,632.1   $  2,053.3     $  305.9          $  1,355.4    $ 2,105.1     $  285.0
                              ==========   ==========     ========          ==========    =========     ========



    Current liabilities       $    126.1   $    171.4     $   21.0          $    141.0    $   158.5     $   13.2
    Non-current liabilities        478.8        778.8        214.7               378.7        830.6        191.7
    Minority Interest                -          342.4          -                   -          345.4          -
    Equity of stockholders
      and partners               1,027.2        760.7         70.2               835.7        770.6         80.1
                              ----------    ---------     --------          ----------    ---------     --------

       Liabilities and
         equity               $  1,632.1   $  2,053.3     $  305.9          $  1,355.4    $ 2,105.1     $  285.0
                              ==========   ==========     ========          ==========    =========     ========


    Investment in uncon-
      solidated affiliates    $    425.0   $    283.3     $   39.1          $    345.3    $   288.2     $   44.6
                              ==========   ==========     ========          ==========    =========     ========





 7


Operating Results:


                                                     Three Months                             Six Months
                                                    Ended June 30,                          Ended June 30,        
                                            -----------------------------           ------------------------------
                                                1998               1997                 1998              1997     
                                            -----------------------------           ------------------------------
                                                                                           

   Revenues:
     DST                                    $    184.3         $    155.4           $    371.7         $   314.1
     Grupo TFM (a)                               109.6                7.0                209.6               7.0
     All others                                   20.2               17.0                 46.3              32.8
                                            ----------         ----------           ----------         ---------

       Total revenues                       $    314.1         $    179.4           $    627.6         $   353.9
                                            ==========         ==========           ==========         =========

   Operating costs and expenses:
     DST                                    $    156.2         $    134.4           $    312.4         $   269.4
     Grupo TFM (a)                                96.6                7.0                187.3               7.0
     All others                                   19.8               13.6                 44.7              27.2
                                            ----------         ----------           ----------         ---------

       Total operating costs and expenses   $    272.6         $    155.0           $    544.4         $   303.6
                                            ==========         ==========           ==========         =========

   Net income:
     DST                                    $     17.5         $     13.8           $     36.1         $    28.9
     Grupo TFM (a)                                (5.7)              (7.9)                (9.8)             (7.9)
     All others                                    1.0                2.3                  1.4               3.1
                                            ----------         ----------           ----------         ---------

       Total net income                     $     12.8         $      8.2           $     27.7         $    24.1
                                            ==========         ==========           ==========         =========



(a)  The operating results provided for Grupo TFM for the three and six month 
     periods ended June 30, 1997 reflect its operation of TFM, S.A. de C.V. 
     ("TFM" ) beginning on June 23, 1997.



7. For  purposes of the  Statement  of Cash Flows,  the  Company  considers  all
   short-term  liquid  investments  with an initial  maturity of generally three
   months or less to be cash equivalents.


   a.   Supplemental Cash Flow Information (in millions):


                                                                         Six Months
                                                                       Ended June 30,         
                                                                   1998                1997   
                                                                              
        Interest paid (excluding capitalized interest)         $     36.2           $     25.1
        Income taxes paid                                            39.0                 18.9



   b.   Noncash Investing and Financing Activities:

   During  second  quarter 1998, in connection  with  Company's  acquisition  of
   Nelson Money Managers PLC ("Nelson"), the Company issued approximately 67,000
   shares of KCSI  Common  Stock  (valued  at $3.2  million)  to  certain of the
   sellers of the Nelson  shares.  Also,  notes  payable  of $4.9  million  were
   recorded as part of the purchase  price,  payable by March 31, 2005,  bearing
   interest at 7 percent. See Note 8 below for additional information.

   In first quarter 1998,  the Company  issued  approximately  227,000 shares of
   KCSI common  stock under the Tenth  Offering of the Employee  Stock  Purchase
   Plan ("ESPP").  These shares, totaling a purchase price of approximately $3.0
   million,  were subscribed and paid for through employee payroll deductions in
   1997.

   In first quarter 1997,  the Company  issued  approximately  246,000 shares of
   KCSI  common  stock  under the Ninth  Offering  of the  ESPP.  These  shares,
   totaling a purchase price of approximately $3.1 million,  were subscribed and
   paid for through employee payroll deductions in 1996.

 8

   Certain  Company  subsidiaries  and  affiliates  hold  investments  which are
   accounted for as "available  for sale"  securities as defined by Statement of
   Financial Accounting Standards No. 115 "Accounting for Certain Investments in
   Debt and Equity  Securities." The Company records its proportionate  share of
   any unrealized gains or losses related to these investments,  net of deferred
   taxes, in stockholders' equity. As of June 30, 1998, the unrealized gain, net
   of deferred taxes, related to these investments  increased $42.9 million from
   December 31, 1997. The unrealized gain, net of deferred taxes, as of June 30,
   1997, increased $9.1 million from December 31, 1996.


c. Additional Information:

   During July 1998, the Company  refinanced the $100 million,  5.75% Notes that
   were due using borrowings under its lines of credit.


8. On April 20, 1998, the Company completed its acquisition of 80% of Nelson, an
   investment advisor and manager based in the United Kingdom ("UK"). Nelson has
   six offices  throughout  the UK and offers  planning  based asset  management
   services directly to private clients. Nelson manages approximately $1 billion
   of assets. The acquisition,  accounted for as a purchase, was completed using
   a combination  of cash,  Company  Common Stock and notes  payable.  The total
   purchase price was approximately $32 million. The purchase price is in excess
   of the book  value  of the net  assets  received  and  this  excess  has been
   recorded in various  intangible asset accounts.  These intangible  assets are
   being amortized over periods ranging up to 20 years. Nelson, an indirect
   subsidiary of FAM Holdings Inc., is consolidated  in the Company's  Financial
   Asset Management  segment.  Nelson's  revenues and expenses for the three and
   six months ended June 30, 1998, were not material to the Company's results of
   operations.


9. The Company's other  comprehensive  income  consists  primarily of unrealized
   gains and losses relating to investments  held by Financial Asset  Management
   subsidiaries  and affiliates as "available for sale" securities as defined by
   Statement of Financial  Accounting  Standards No. 115 "Accounting for Certain
   Investments  in  Debt  and  Equity   Securities."  The  Company  records  its
   proportionate  share of any  unrealized  gains  or  losses  related  to these
   investments,  net of deferred taxes, in  stockholders'  equity as accumulated
   other comprehensive  income. The unrealized gain related to these investments
   increased  $70.0 and 15.4 million ( $42.9 and $9.1  million,  net of deferred
   taxes) for the six months  ended June 30, 1998 and 1997,  respectively,  as a
   result of unrealized gains related to these investments.  The unrealized gain
   related to these  investments  increased  $21.4 and $30.0 million ( $13.0 and
   $18.0  million,  net of deferred  taxes) for the three  months ended June 30,
   1998 and 1997, respectively.


10.In June 1997,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
   Statement  of  Financial  Accounting  Standards  No. 131  "Disclosures  about
   Segments of an Enterprise  and Related  Information"  ("SFAS 131").  SFAS 131
   establishes  standards  for the manner in which public  business  enterprises
   report  information about operating  segments in annual financial  statements
   and  requires  that  those  enterprises  report  selected  information  about
   operating segments in interim financial reports issued to shareholders.  SFAS
   131 also  establishes  standards for related  disclosures  about products and
   services,  geographic  areas and major  customers.  SFAS 131 is effective for
   financial  statements for periods beginning after December 15, 1997; however,
   in the initial year of  application,  SFAS 131 need not be applied to interim
   financial statements.  The Company is reviewing SFAS 131 and expects to adopt
   it for the year ending December 31, 1998.


 9

   In  February  1998,  Statement  of  Financial  Accounting  Standards  No. 132
   "Employers' Disclosure about Pensions and Other Postretirement  Benefits - an
   amendment  of FASB  Statements  No. 87, 88, and 106" ("SFAS 132") was issued.
   SFAS 132 establishes  standardized  disclosure  requirements  for pension and
   other  postretirement  benefit  plans,  requires  additional  information  on
   changes in the benefit  obligations  and fair values of plan assets that will
   facilitate financial analysis, and eliminates certain disclosures that are no
   longer useful. The standard does not change the measurement or recognition of
   pension or  postretirement  benefit plans.  The Company is reviewing SFAS 132
   and expects to adopt it for the year ending  December 31,  1998.  SFAS 132 is
   not expected to have a material impact on the Company's current disclosures.

   In June 1998, the FASB issued Statement of Financial Accounting Standards No.
   133 "Accounting for Derivative  Instruments  and Hedging  Activities"  ("SFAS
   133"). SFAS 133 establishes accounting and reporting standards for derivative
   financial  instruments,  including certain derivative instruments embedded in
   other contracts,  and for hedging activities.  It requires recognition of all
   derivatives as either assets or liabilities  measured at fair value. SFAS 133
   is effective for all fiscal quarters of fiscal years beginning after June 15,
   1999 and  should not be  retroactively  applied to  financial  statements  of
   periods prior to adoption.

   The Company  currently  has a program to hedge  against  fluctuations  in the
   price  of  diesel  fuel  purchases,   and  also  enters  into  fuel  purchase
   commitments from time to time. In addition, the Company continues to evaluate
   alternatives with respect to utilizing foreign currency  instruments to hedge
   its U.S.  dollar  investment  in Grupo TFM and  Nelson  as market  conditions
   change or exchange rates fluctuate. Currently, the Company has no outstanding
   foreign currency hedges.  The Company is reviewing the provisions of SFAS 133
   and expects  adoption by the  required  date.  The  adoption of SFAS 133 with
   respect to existing  hedge  transactions  is not  expected to have a material
   impact on the Company's  results of  operations,  financial  position or cash
   flows.


11.The Company has had no significant  changes in its outstanding  litigation or
   other  contingencies  from that previously  reported in the Company's  Annual
   Report on Form 10-K for the year  ended  December  31,  1997.  The  following
   provides an update concerning the Bogalusa Cases.

   Bogalusa Cases

   In July 1995,  the Kansas City Railway  Company  ("KCSR") was named as one of
   twenty-seven  defendants  in various  lawsuits in Louisiana  and  Mississippi
   arising from the  explosion of a rail car loaded with  chemicals in Bogalusa,
   Louisiana on October 23, 1995. As a result of the explosion, nitrogen dioxide
   and oxides of nitrogen were released into the  atmosphere  over parts of that
   town and the  surrounding  area allegedly  causing  evacuations and injuries.
   Approximately  25,000  residents of Louisiana and  Mississippi  have asserted
   claims to recover damages allegedly caused by exposure to the chemicals.

   KCSR  neither  owned  nor  leased  the rail car or the  rails on which it was
   located at the time of the explosion in Bogalusa.  KCSR, did,  however,  move
   the rail car from Jackson to Vicksburg, Mississippi, where it was loaded with
   chemicals,  and back to Jackson  where the car was  tendered to the  Illinois
   Central  Railroad  Company ("IC").  The explosion  occurred more than 15 days
   after KCSR last  transported  the rail car. The car was loaded by the shipper
   in  excess  of its  standard  weight  when  it was  transported  by  KCSR  to
   interchange with the IC.

   The Mississippi  lawsuit  arising from the chemical  release is scheduled for
   trial in September  1998.  KCSR sought  dismissal of these suits in the trial
   appellate courts,  which was denied in each case. KCSR is considering seeking
   review by the U.S. Supreme Court of those State Court denials.

 10

   KCSR  believes  that its exposure to  liability in these cases is remote.  If
   KCSR were to be found  liable for  punitive  damages in these  cases,  such a
   judgment could have a material  adverse effect on the financial  condition of
   the Company.


12.See the Recent  Developments  section of Item 2, Management's  Discussion and
   Analysis of Financial  Condition and Results of Operations,  for  significant
   transactions  and  events  that will have an impact on the  Company's  future
   results of operations and financial position.





 11


Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations


OVERVIEW

The  discussion  set forth below,  as well as other  portions of this Form 10-Q,
contains comments not based upon historical fact. Such forward-looking  comments
are based upon  information  currently  available to management and management's
perception  thereof as of the date of this Form 10-Q. Readers can identify these
forward-looking  comments  by their use of such verbs as  expects,  anticipates,
believes or similar verbs or conjugations  of such verbs.  The actual results of
operations of Kansas City Southern Industries,  Inc. ("Company" or "KCSI") could
materially  differ  from  those  indicated  in  forward-looking   comments.  The
differences  could be caused by a number of  factors or  combination  of factors
including, but not limited to, those factors identified in the Company's Current
Report on Form 8-K dated November 12, 1996, and its Amendment,  Form 8-K/A dated
June 3,  1997,  which  have been filed  with the U.S.  Securities  and  Exchange
Commission  (Files No. 1-4717) and are hereby  incorporated by reference herein.
Readers are strongly  encouraged to consider  these factors when  evaluating any
such forward-looking  comments.  The Company will not update any forward looking
comments set forth in this Form 10-Q.

The discussion  herein is intended to clarify and focus on the Company's results
of  operations,  certain  changes  in  financial  position,  liquidity,  capital
structure and business  developments for the periods covered by the consolidated
condensed  financial  statements  included under Item 1 of this Form 10-Q.  This
discussion  should be read in  conjunction  with  these  consolidated  condensed
financial statements and the related notes thereto and is qualified by reference
thereto.

KCSI, a Delaware Corporation organized in 1962, is a diversified holding company
with principal operations in rail transportation and financial asset management.
The Company  supplies its various  subsidiaries  with  managerial,  legal,  tax,
financial and accounting services, in addition to managing other "non-operating"
and more passive investments.

The Company's business  activities by industry segment and principal  subsidiary
companies are:

Transportation    -    The    Transportation    segment    consists    of    all
transportation-related subsidiaries and investments, including:

*   Kansas City Southern Railway Company ("KCSR"), a wholly-owned  subsidiary of
    the Company, operating a Class I Common Carrier railroad system;
*   Gateway  Western  Railway  Company  ("Gateway   Western"),   a  wholly-owned
    subsidiary of KCS Transportation  Company, a wholly-owned  subsidiary of the
    Company, operating a regional railroad system;
*   Southern  Group,  Inc., a  wholly-owned  subsidiary of KCSR,  owning 100% of
    Carland,   Inc.  and  managing  the  loan  portfolio  for  Southern  Capital
    Corporation LLC ("Southern Capital"), a 50% owned joint venture;
*   Equity investments in Southern Capital, Grupo Tranportacion Ferroviaria 
    Mexicana S.A. de C.V. ( "Grupo TFM") a 37% owned affiliate, Mexrail Inc. 
    ("Mexrail"),  a 49% owned affiliate along with its wholly-owned subsidiary,
    the Texas Mexican Railway Company ("Tex-Mex"); and Panama Canal Railway 
    Company, a 50% joint venture;
*   Various other consolidated subsidiaries;
*   Kansas City Southern Lines, Inc. ("KCSL"), a wholly-owned subsidiary of the
    Company, serving as a holding company for transportation-related entities;


 12

Financial Asset Management - The Financial Asset Management segment consists of
all subsidiaries engaged in the management of investments for mutual funds, 
private and other accounts, as well as any Financial Asset Management-related 
investments.  Included are:

*   Janus Capital Corporation ("Janus"), an 82% owned subsidiary;
*   Berger Associates, Inc. ("Berger"), a 100% owned subsidiary;
*   Nelson Money Managers PLC ("Nelson"), an 80% owned subsidiary as of 
    April 20, 1998 - see discussion in "Recent Developments" below.
*   DST Systems, Inc. ("DST"), an approximate 41% owned equity investment;
*   FAM  Holdings,  Inc.  ("FAM  Holdings"),  a  wholly-owned  subsidiary of the
    Company,  formed on January  23,  1998 for the purpose of becoming a holding
    company for financial asset management-related subsidiaries and affiliates.


RECENT DEVELOPMENTS


Planned  Separation of the Company Business Segments.  As previously  disclosed,
the Company announced the planned separation of its Transportation and Financial
Asset  Management  segments  through  a  proposed  dividend  of the stock of its
Financial Asset Management businesses (the "Spin-off").  The Spin-off is subject
to obtaining a favorable tax ruling from the Internal  Revenue  Service  ("IRS")
and other key factors.  A tax ruling  request was filed with the IRS on February
27, 1998.

The Company  expects to complete the  Spin-off in 1998,  subject to receipt of a
favorable tax ruling.  A public offering of KCSI stock (i.e. the  Transportation
segment)  using  the  Company's   Universal  Shelf  Registration   Statement  is
anticipated  to  occur  subsequent  to  the  Spin-off.  Also  subsequent  to the
Spin-off,  the Company  anticipates  effecting a reverse stock split,  which was
approved  by a majority  vote of the  Company's  stockholders  held at a special
stockholders' meeting on July 15, 1998.


Acquisition  of Nelson Money  Manager PLC  ("Nelson").  On April 20,  1998,  the
Company  completed its acquisition of 80% of Nelson,  an investment  advisor and
manager based in the United Kingdom  ("UK").  Nelson has six offices  throughout
the UK and offers planning based asset management  services  directly to private
clients.  Nelson manages  approximately  $1 billion of assets.  The acquisition,
accounted for as a purchase,  was completed using a combination of cash, Company
Common Stock and notes payable.  The total purchase price was  approximately $32
million.  The  purchase  price is in excess of the book  value of the net assets
received and this excess has been recorded in various intangible asset accounts.
These intangible assets are being amortized over periods ranging up to 20 years.
Nelson,  an indirect  subsidiary of FAM Holdings  Inc., is  consolidated  in the
Company's Financial Asset Management segment. Nelson's revenues and expenses for
the three and six months ended June 30, 1998, were not material to the Company's
results of operations.

Houston  Emergency Service Order. As disclosed in the 1997 Annual Report on Form
10-K, on October 31, 1997 the Surface  Transportation  Board  ("STB")  issued an
emergency  service  order  which  addressed  the  deteriorating  quality of rail
service in the Western  United  States.  Key measures in the STB order  included
granting the Tex-Mex access to Houston  shippers,  trackage rights over the more
direct  Algoa  Route  south of  Houston  and a  connection  with the  Burlington
Northern Santa Fe Railroad at Flatonia, Texas. The order took effect on November
5, 1997 and was extended through August 2, 1998. In a decision  released on July
31, 1998, the STB announced that it would not extend the emergency service order
in the Houston/Gulf Coast


 13

region,  citing improved conditions in Houston area rail service.  This decision
provided for a "45-day wind down" period until  September  17,  during which the
Tex-Mex could provide  service under the terms of the emergency  service  order.
The Company is currently evaluating the impact of this decision by the STB.

During second quarter 1998, the KCSR and Tex-Mex,  along with the Texas Railroad
Commission and several shipper advocate groups, filed the Houston Area Consensus
Plan  ("Consensus  Plan")  with the STB.  This  Consensus  Plan,  which has been
accepted  by the STB for  consideration,  seeks  to  provide  the  Tex-Mex  with
permanent  access  to the  Houston/Gulf  Coast  markets  and to  expand  neutral
switching to hundreds of shippers. This plan is designed to provide Houston area
shippers  with  access  to a  competitive  alternative  for their  rail  service
provider. A response from the STB is not expected until fourth quarter 1998.


RESULTS OF OPERATIONS


Segment revenues, operating income and net income comparisons follow (dollars in
millions):


                                                             Three Months                      Six Months
                                                             Ended June 30,                  Ended June 30,       
                                                          1998          1997               1998           1997  
                                                       ---------      --------          ---------       --------
                                                                                            
Revenues:
   Transportation                                      $   152.9      $  139.9          $   305.4       $  274.2
   Financial Asset Management                              169.7         112.7              312.9          216.2
                                                       ---------      --------          ---------       --------
       Total                                           $   322.6      $  252.6          $   618.3       $  490.4
                                                       =========      ========          =========       ========

Operating Income:
   Transportation                                      $    29.8      $   14.1          $    61.8       $   28.1
   Financial Asset Management                               74.6          53.3              133.0           94.9
                                                       ---------      --------          ---------       --------
       Total                                           $   104.4      $   67.4          $   194.8       $  123.0
                                                       =========      ========          =========       ========

Net Income:
    Transportation                                     $     9.4      $    0.3          $    18.6       $    3.3
    Financial Asset Management                              49.3          31.5               86.3           57.0
                                                       ---------      --------          ---------       --------
       Total                                           $    58.7      $   31.8          $   104.9       $   60.3
                                                       =========      ========          =========       ========



The Company reported second quarter 1998 earnings of $58.7 million, or $0.51 per
diluted share,  compared to $31.8 million,  or $0.29 per diluted share in second
quarter 1997.  Consolidated  second quarter 1998 revenues increased $70 million,
or 28%,  compared to the same period in 1997 as a result of improvements in both
of the Company's segments.  Operating income for the three months ended June 30,
1998  increased 55% to $104.4  million versus  comparable  1997,  largely due to
higher revenues in both segments, together with overall lower operating expenses
for  the  Transportation   segment.  Total  equity  earnings  in  unconsolidated
affiliates  increased $2.0 million,  reflecting  higher equity earnings from the
investment  in  DST  coupled  with  a  decrease  in the  losses  related  to the
investment  in Grupo TFM.  Interest  expense for the three months ended June 30,
1998  was  approximately  19%  higher  than  comparable  1997  as  a  result  of
indebtedness  associated  with the Company's  investment in Grupo TFM ( interest
expense related to the Company's  investment in Grupo TFM was capitalized during
the three and six month periods ended June 30, 1997).


For the six months  ended  June 30,  1998,  consolidated  earnings  were  $104.9
million,  or $0.92 per diluted share, versus $60.3 million, or $0.55 per diluted
share in comparable 1997. Year to date 1998 consolidated  revenues increased 26%
to $618.3  million  compared  to the same period in 1997,  primarily  due to the
growth in assets under management in the Financial Asset Management  segment and
increased  freight  revenues  in the  Transportation  segment.  These  increased
revenues, as well as lower operating expenses for the 


 14

Transportation  segment for the six months ended 1998, led to a 58%  improvement
in  operating  income.  Year to date  1998  equity  earnings  of  unconsolidated
affiliates increased by $.1 million,  mainly because of earnings improvements at
DST, offset by an increase in the equity losses in Grupo TFM.  Interest  expense
for the six  months  ended  June 30,  1998 was  approximately  23%  higher  than
comparable  1997 primarily as a result of  indebtedness  related to Grupo TFM as
discussed above.


TRANSPORTATION

Three Months Ended June 30, 1998 Compared With The Three Months Ended 
June 30, 1997



                                  THREE MONTHS ENDED JUNE 30, 1998              THREE MONTHS ENDED JUNE 30, 1997
                                  --------------------------------              --------------------------------
                                                                   (in millions)
                                          Holding Company                               Holding Company
                                        and Transportation-                           and Transportation-
                                             Related     Consolidated                      Related     Consolidated
                                  KCSR     Affiliates   Transportation          KCSR     Affiliates   Transportation
                                                                                      

Revenues                       $   138.6    $    14.3     $  152.9           $   126.2    $    13.7     $  139.9
Costs and expenses                  95.8         12.9        108.7                99.5         11.3        110.8
Depreciation and amortization       12.7          1.7         14.4                13.7          1.3         15.0
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income (loss)         30.1         (0.3)        29.8                13.0          1.1         14.1
Equity in net earnings (losses) of
  unconsolidated affiliates:
    Grupo TFM                         -          (2.1)        (2.1)                 -          (3.0)        (3.0)
    Other                            0.5         (0.3)         0.2                 0.6          0.4          1.0
Interest expense                    (9.1)        (5.9)       (15.0)               (9.5)        (1.7)       (11.2)
Other, net                           3.8          0.1          3.9                 0.6          0.3          0.9
                               ---------    ---------     --------           ---------    ---------     --------
    Pretax income (loss)            25.3         (8.5)        16.8                 4.7         (2.9)         1.8
Income tax provision (benefit)       9.9         (2.5)         7.4                 2.1         (0.6)         1.5
                               ---------    ----------    --------           ---------    ---------     --------
    Net income (loss)          $    15.4    $    (6.0)    $    9.4           $     2.6    $    (2.3)    $    0.3
                               =========    ==========    ========           =========    =========     ========



The  Transportation  segment  reported  earnings  of $9.4  million for the three
months ended June 30, 1998, a $9.1 million  increase over the three months ended
June 30,  1997.  Exclusive  of  interest  expense  and  equity  losses  from the
Company's  investment  in Grupo TFM of $4.9 and $3.1  million in second  quarter
1998 and 1997,  respectively,  earnings improved $10.9 million for the period to
$14.3 million from $3.4 million.  Increased  earnings were largely  because KCSR
more than quadrupled its net income quarter to quarter.

Total  Transportation  segment  revenues  increased  $13.0 million,  or 9.3%, to
$152.9 million for the three months ended June 30, 1998, from $139.9 million for
the three months ended June 30, 1997. This growth was driven primarily by higher
KCSR revenues, which grew $12.4 million, or nearly 10%, quarter to quarter. KCSR
revenues climbed to $138.6 million for the three months ended June 30, 1998 from
$126.2 million for the comparable  1997 period,  primarily as a result of higher
carloads  across all primary  commodity  groups,  which in total increased 14.3%
(4.9% of increase  relates to intermodal unit volume) to 224,169 from quarter to
quarter. The following is a summary of KCSR's major commodity groups:

         Agricultural  and mineral  products - Agricultural  and mineral product
revenues  increased  4.4%,  to $21.9 million for the three months ended June 30,
1998, from $21.0 million for the comparable  1997 period,  primarily as a result
of higher  carloads  of food and  non-metallic  minerals,  as well as  increased
freight  revenue per carload for food and  metallic ore  products.  A portion of
these  increases can be attributed to Mexican import and export traffic  through
Grupo TFM.

         Chemical  and  petroleum  products -  Chemical  and  petroleum  product
revenues increased $2.6 million,  or 8.0%, to $35.1 million for the three months
ended June 30,  1998,  from $32.5  million for the three  months  ended June 30,
1997. Increased revenues resulted from higher  miscellaneous  chemicals and soda
ash 


 15

shipments  and improved  revenue per carload from  plastic  products,  partially
offset by a  reduction  of  petroleum  product  carloads.  Higher  miscellaneous
chemical  shipments  partially  resulted  from the  growing  economy,  while the
increased  revenue per carload  for  plastics  resulted in part from a decreased
emphasis on certain low margin business.

         Paper and forest products - Paper and forest product revenues increased
$1.1 million, or 4.2%, to $27.1 million for the three months ended June 30, 1998
from $26.0 million for the three months ended June 30, 1997.  Increases in pulp,
paper and lumber  revenues  were  partially  offset by a decline in pulpwood and
plywood  revenues.  Improved lumber shipments have resulted from the strong home
building and remodeling  market and  pulp/paper  increases are a result of paper
mill expansions.

         Coal - Coal revenues increased $3.7 million, or 14.1%, to $30.0 million
for the three months ended June 30, 1998 from $26.3 million for the three months
ended June 30,  1997,  as a result of  significantly  higher  unit coal  traffic
(increase  of 11,805  carloads,  or  29.6%).  During  1997,  one of KCSR's  coal
customers  experienced a plant shutdown for a substantial  part of the first six
months of the year and another customer  experienced  operating problems.  These
factors  contributed to depressed  revenues for the second  quarter 1997.  These
operating  difficulties  had been resolved by first quarter 1998, and thus, more
unit coal trains were  shipped to these  customers  during  second  quarter 1998
compared  with the same  1997  period.  This  increase  in  volume  resulted  in
additional revenues of approximately $2.6 million.  The remainder of the revenue
increase results from increased capacity at several other plants served by KCSR.

         Intermodal  and other - Intermodal  and other  revenues  increased $2.8
million,  or 18.9%,  to $17.4  million for the three months ended June 30, 1998,
from $14.6 million for the comparable 1997 period. This increase is comprised of
higher  intermodal  revenues of $1.5 million  arising from more  intermodal unit
shipments (25.4%) quarter to quarter.

Exclusive  of  depreciation  and  amortization   expenses,   the  Transportation
segment's  operating expenses decreased $2.1 million, or 1.9%, to $108.7 million
for the three  months  ended June 30,  1998 from  $110.8  million  for the three
months ended June 30, 1997.  This decrease was fueled by operating  efficiencies
at KCSR as it continues to focus on cost containment.  Total KCSR second quarter
expenses  were $3.7  million  lower  than  second  quarter  1997,  and  variable
operating  expenses  as a  percentage  of revenues  decreased  more than 7% from
second quarter 1997.  Lower costs were  experienced in salaries and wages,  fuel
and lease expense.  Salaries and wages decreased $2.2 million quarter to quarter
as a result of the  termination  of a union  Productivity  Fund,  which occurred
during fourth quarter 1997, as well as lower overtime costs. Second quarter 1998
fuel  expense  decreased  $0.7  million as  compared  with the same 1997  period
arising  from a decrease  in  average  fuel cost of 15%  partially  offset by an
increase in fuel usage of 8%. Second quarter 1998 lease expense decreased nearly
$1.5 million from second quarter 1997 due to the  non-renewal of certain expired
trailer leases due to the more efficient  usage of the trailer fleet, as well as
a shift toward  utilizing more  containers.  These lower expenses were partially
offset by an increase in materials and supplies  expense  related to maintenance
on locomotives and equipment.

Depreciation  and  amortization  expenses  declined $0.6 million (4.0%) to $14.4
million  for the three  months  ended June 30,  1998 from $15.0  million for the
comparable 1997 quarter.  This decline resulted  primarily from the reduction of
amortization  and  depreciation  expense arising from the impairment of goodwill
and certain branch lines held for sale recorded during December 1997, the effect
of which was not  realized  until 1998.  This  decline was  partially  offset by
increased depreciation from property additions.

Driven by  increased  revenues  and  decreased  operating  expenses as discussed
above, the Transportation segment's operating income increased $15.7 million, or
111.3% to $29.8  million  for the three  months  ended June 30,  1998 from $14.1
million for the three months ended June 30, 1997. KCSR's operating ratio for the



 16

second quarter 1998 was 78.1%  compared with 88.4% in second quarter 1997.  This
significant  improvement  quarter to quarter  highlights  the  improved  margins
resulting  from increased  revenues and the continuing  success of the Company's
cost containment efforts.

Operating income for the Holding Company and  Transportation  related affiliates
declined $1.4 million  quarter to quarter as a result of higher holding  company
expenses,  particularly  costs  associated with efforts to obtain permanent rail
access to the Houston, Texas marketplace.

The  Transportation  segment  recorded equity in net losses of $2.1 million from
its investment in Grupo TFM for the three months ended June 30, 1998 compared to
equity in net losses of $3.0  million for the three  months ended June 30, 1997.
Grupo TFM losses for second  quarter 1997  represent  its results of  operations
from June 23, 1997 and include a $2.6 million charge  representing the Company's
proportionate  share of a one-time  charge recorded by Grupo TFM with respect to
financing-related fees.

Transportation segment interest expense increased $3.8 million, or 33.9%, to $15
million  for the three  months  ended June 30,  1998 from $11.2  million for the
three months ended June 30, 1997 primarily as a result of  indebtedness  related
to the Company's  investment in Grupo TFM (interest in 1997 related to Grupo TFM
was capitalized  until  operations  commenced in late June,  1997).  Other,  net
increased to $3.9 million for the second  quarter 1998 from $0.9 million for the
comparable 1997 period resulting  primarily from a one-time gain of $2.9 million
from the sale of a branch line by KCSR.


Six Months Ended June 30, 1998 Compared With The Six Months Ended June 30, 1997



                                   SIX MONTHS ENDED JUNE 30, 1998                SIX MONTHS ENDED JUNE 30, 1997
                               ------------------------------------          -----------------------------------
                                                                  (in millions)
                                          Holding Company                               Holding Company
                                        and Transportation-                           and Transportation-
                                             Related     Consolidated                      Related     Consolidated
                                  KCSR     Affiliates   Transportation          KCSR     Affiliates   Transportation
                                                                                      
Revenues                       $   274.3    $    31.1     $  305.4           $   247.2    $    27.0     $  274.2
Costs and expenses                 189.7         25.5        215.2               193.0         22.6        215.6
Depreciation and amortization       25.3          3.1         28.4                27.3          3.2         30.5
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income                59.3          2.5         61.8                26.9          1.2         28.1
Equity in net earnings (losses) of
  unconsolidated affiliates:
    Grupo TFM                         -          (5.2)        (5.2)                 -          (3.0)        (3.0)
    Other                            1.0         (0.7)         0.3                 1.1          0.4          1.5
Interest expense                   (18.2)       (11.8)       (30.0)              (19.2)        (3.4)       (22.6)
Other, net                           5.4          1.7          7.1                 3.0          0.4          3.4
                               ---------    ---------     --------           ---------    ---------     --------
    Pretax income (loss)            47.5        (13.5)        34.0                11.8         (4.4)         7.4
Income tax provision (benefit)      18.6         (3.2)        15.4                 5.2         (1.1)         4.1
                               ---------    ----------    --------           ---------    ---------     --------
    Net income (loss)          $    28.9    $   (10.3)    $   18.6           $     6.6    $    (3.3)    $    3.3
                               =========    ==========    ========           =========    =========     ========



The Transportation segment reported earnings of $18.6 million for the six months
ended June 30, 1998, a $15.3 million increase over the six months ended June 30,
1997.  Exclusive  of  interest  expense  and equity  losses  from the  Company's
investment  in Grupo TFM of $10.7 and $3.1  million  for the first six months of
1998 and 1997,  respectively,  earnings improved $22.9 million for the period to
$29.3 million from $6.4 million.  Increased  earnings were largely  because KCSR
more than quadrupled its net income period to period.

Total revenues increased $31.2 million,  or 11.4%, to $305.4 million for the six
months  ended June 30, 1998,  from $274.2  million for the six months ended June
30, 1997. This growth was driven  primarily by higher 


 17

KCSR revenues,  which grew $27.1 million,  or nearly 11%, period to period. Also
contributing to the increase was Gateway  Western  revenues which increased $1.6
million,  or 8%,  for the six  month  period  ended  June 30,  1998  versus  the
comparable 1997 period.  KCSR revenues grew to $274.3 million for the six months
ended June 30, 1998 from $247.2 million for the same 1997 period, primarily as a
result of higher carloads across all primary  commodity  groups,  which in total
increased 14.5% (4.4% of increase  relates to intermodal unit volume) to 443,828
from period to period.  The  following  is a summary of KCSR's  major  commodity
groups:

         Agricultural  and mineral  products - Agricultural  and mineral product
revenues  increased  9.8%,  to $44.7  million for the six months  ended June 30,
1998, from $40.7 million for the comparable 1997 period primarily as a result of
higher carloads for export grain,  food and  non-metallic  mineral  products and
higher  freight  revenue  per  carload for export  grain and food  products.  As
mentioned above in the second quarter analysis, a portion of these increases can
be  attributed  to the  Mexican  import and export  traffic  through  Grupo TFM.
Agricultural and mineral products  accounted for 17.1% of total carload revenues
for the six months ended June 30, 1998  compared  with 17.3% for the  comparable
1997 period.

         Chemical  and  petroleum  products -  Chemical  and  petroleum  product
revenues  increased  $4.3 million,  or 6.5%, to $69.7 million for the six months
ended June 30, 1998,  from $65.4 million for the six months ended June 30, 1997.
Similar to trends  experienced in second quarter 1998 as discussed  above,  this
increase results from higher traffic from  miscellaneous  chemicals and soda ash
shipments and higher revenue per carload from plastic products, partially offset
by a reduction of petroleum  product carloads.  Chemical and petroleum  products
accounted for 26.6% of total carload  revenues for the six months ended June 30,
1998 versus 27.7% for the six months ended June 30, 1997.

         Paper and forest products - Paper and forest product revenues increased
$1.9 million , or 3.7%,  to $54.2 million for the six months ended June 30, 1998
from $52.3  million for the six months ended June 30, 1997.  These  improvements
mirror the trends discussed above in the second quarter analysis and result from
higher  pulp,  paper and  lumber  revenues,  partially  offset  by a decline  in
pulpwood and plywood revenues. Paper and forest products accounted for 20.8% and
22.2% of total carload revenues for the six months ended June 30, 1998 and 1997,
respectively.

         Coal - Coal  revenues  increased  $10.6  million,  or  22.1%,  to $58.5
million  for the six months  ended  June 30,  1998 from  $47.9  million  for the
comparable 1997 period,  as a result of  significantly  higher unit coal traffic
(increase of 26,479  carloads,  or 34.4%).  During the first six months of 1997,
unit coal  revenues were  affected by unplanned  outages at utilities  served by
KCSR as discussed  above,  as well as first quarter weather  problems  affecting
carriers and mines  originating the coal.  During the first half of 1998,  there
were no significant  outages or weather problems  affecting coal delivery.  As a
result,  during the six months ended June 30,  1998,  more unit coal trains were
shipped to  customers  that had  experienced  outages  during 1997  resulting in
increased  revenues of  approximately  $4.2 million.  In addition,  1998 results
reflect the  addition of a utility  customer  that was not served by KCSR during
the first three months of 1997.  The remainder of the revenue  increase  results
from  increased  capacity at several  plants served by KCSR.  Coal accounted for
22.4% and 20.3% of total carload revenues for the six months ended June 30, 1998
and 1997, respectively.

         Intermodal  and other - Intermodal  and other  revenues  increased $4.8
million, or 16.1%, to $34.3 million for the six months ended June 30, 1998, from
$29.5 million for the comparable 1997 period.  This improvement is primarily the
result of higher  intermodal  revenues of $3.2 million  arising  from  increased
intermodal traffic of 24.2% period to period. Intermodal and other accounted for
13.1% of total carload  revenues for the six months ended June 30, 1998 compared
with 12.5% for the six months ended June 30, 1997.


 18

Exclusive  of  depreciation  and  amortization   expenses,   the  Transportation
segment's  operating  expenses  decreased $0.4 million to $215.2 million for the
six months ended June 30, 1998 from $215.6 million for the six months ended June
30,  1997.  This  decrease was fueled by  operating  efficiencies  at KCSR as it
continues to focus on cost  containment.  Total KCSR year to date  expenses were
$3.3  million  lower than the  comparable  1997 period,  and variable  operating
expenses as a percentage of revenues  decreased more than 7% from the six months
ended June 30, 1997. Lower costs were  experienced in salaries and wages,  fuel,
lease and casualties  expense.  Salaries and wages decreased $2.0 million period
to period as a result of the  termination of a union  Productivity  Fund,  which
occurred  during fourth quarter 1997, as well as lower overtime  costs.  Year to
date 1998 fuel expense  decreased  $1.3  million as compared  with the same 1997
period arising from a decrease in average fuel cost of over 16% partially offset
by an increase in fuel usage of nearly 10%.  Similar to the trends  noted during
second quarter 1998 as discussed  above,  lease expense for the first six months
of 1998 decreased  $1.9 million as compared to the same 1997 period.  Casualties
expense  declined  nearly $1.0 million  period to period as a result of a costly
1997 train derailment,  which escalated 1997 expense.  These lower expenses were
partially  offset by an increase in materials  and supplies  expense  related to
maintenance on locomotives and equipment.

Depreciation  and  amortization  expenses  declined $2.1 million (6.9%) to $28.4
million  for the six months  ended  June 30,  1998 from  $30.5  million  for the
comparable 1997 period.  This decline  resulted  primarily from the reduction of
amortization  and  depreciation  expense arising from the impairment of goodwill
and certain branch lines held for sale recorded during December 1997, the effect
of which was not  realized  until 1998.  This  decline was  partially  offset by
increased depreciation from property additions.

Operating income increased $33.7 million, or 119.9% to $61.8 million for the six
months ended June 30, 1998 from $28.1  million for the six months ended June 30,
1997,  as a result of increased  revenues and  decreased  operating  expenses as
discussed  above.  KCSR's  operating  ratio for the first six months of 1998 was
78.2%  compared  with  87.9%  for the six  months  ended  June  30,  1997.  This
significant  improvement  period  to  period  highlights  the  improved  margins
resulting  from increased  revenues and the continuing  success of the Company's
cost containment efforts.

The  Transportation  segment  recorded equity in net losses of $5.2 million from
its  investment  in Grupo TFM for the six months ended June 30, 1998 compared to
equity in net losses of $3.0  million  for the six months  ended June 30,  1997.
Grupo TFM losses for the six months ended June 30, 1997 represent its results of
operations from June 23, 1997 and include a $2.6 million charge representing the
Company's  proportionate  share of a one-time  charge recorded by Grupo TFM with
respect to financing-related fees.

Interest expense increased $7.4 million,  or 32.7%, to $30.0 million for the six
months ended June 30, 1998 from $22.6  million for the six months ended June 30,
1997 primarily as a result of indebtedness  related to the Company's  investment
in Grupo  TFM  (interest  in 1997  related  to Grupo TFM was  capitalized  until
operations  commenced in late June, 1997).  Other, net increased to $7.1 million
for the first six  months of 1998 from  $3.4  million  for the  comparable  1997
period resulting primarily from a one-time gain of $2.9 million from the sale of
a branch line.



 19


FINANCIAL ASSET MANAGEMENT

Three Months Ended June 30, 1998 Compared With The Three Months Ended 
June 30, 1997




                                 THREE MONTHS ENDED JUNE 30, 1998               THREE MONTHS ENDED JUNE 30, 1997
                                 --------------------------------               --------------------------------
                                                                 (in millions)
                                          Holding Company                               Holding Company
                                  Janus      and FAM-                          Janus       and FAM-
                                   and       Related     Consolidated            and       Related     Consolidated
                                 Berger    Affiliates         FAM              Berger    Affiliates         FAM
                                                                                      
Revenues                       $   166.1    $     3.6     $  169.7           $   113.1    $    (0.4)    $  112.7
Costs and expenses                  84.0          7.6         91.6                54.6          1.4         56.0
Depreciation and amortization        3.0          0.5          3.5                 3.3          0.1          3.4
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income (loss)         79.1         (4.5)        74.6                55.2         (1.9)        53.3
Equity in net earnings of
  unconsolidated affiliates:
    DST Systems, Inc.                 -           7.5          7.5                  -           5.7          5.7
    Other                            0.3           -           0.3                 0.2           -           0.2
Interest income (expense)           (1.7)         0.5         (1.2)               (1.7)        (0.7)        (2.4)
Other, net                          10.4          0.9         11.3                 1.3          2.1          3.4
                               ---------    ---------     --------           ---------    ---------     --------
    Pretax income                   88.1          4.4         92.5                55.0          5.2         60.2
Income tax provision (benefit)      34.4         (0.9)        33.5                22.0          0.8         22.8
Minority interest                    9.7            -          9.7                 5.9            -          5.9
                               ---------    ---------     --------           ---------    ---------     --------
    Net income                 $    44.0    $     5.3     $   49.3           $    27.1    $     4.4     $   31.5
                               =========    =========     ========           =========    =========     ========



Financial  Asset  Management  contributed  $49.3  million to KCSI's  1998 second
quarter consolidated  earnings, an increase of 56% over comparable 1997. Average
assets  under  management  by Janus and  Berger  were 49% higher  during  second
quarter  1998 than  second  quarter  1997  leading to a $57.0 and $21.3  million
increase in revenues and operating  income,  respectively,  over second  quarter
1997.

Assets under  management  increased $9.1 billion during second quarter 1998 as a
result of net sales of $2.8  billion and market  appreciation  of $6.3  billion.
Assets under management totaled $93.3 billion at June 30, 1998 ($89.1 billion at
Janus;  $4.2 billion at Berger)  versus  $71.6  billion at December 31, 1997 and
$63.6  billion at June 30, 1997.  See  discussion  of Janus and Berger  activity
separately below.

Second quarter 1998 FAM operating expenses increased to $95.1 million from $59.4
million in the prior year quarter,  primarily  due to the rapid  revenue  growth
during the period. Higher expenses were evident in salaries and wages (primarily
investment performance-based incentive compensation), marketing and fulfillment,
and alliance fees under mutual fund "supermarket" distribution arrangements.

Second quarter 1998 equity earnings from DST increased to $7.5 million from $5.7
million  in  comparable  1997,  primarily  due to  higher  mutual  fund,  output
processing  and  other  revenues,  as well as  continued  revenue  and  earnings
improvements in DST's international operations.  In addition,  operating margins
increased from 13.5% for second quarter 1997 to 15.2% for second quarter 1998.

Nelson  results  are  included  as  part  of  Holding  Company  and  FAM-Related
Affiliates.  Nelson revenues during second quarter 1998 were  approximately $3.6
million.  Nelson  operating  expenses,  coupled with higher FAM holding  company
costs (e.g.,  consulting  and legal fees  associated  with efforts to effect the
Spin-off),  comprise  the  increase  in  operating  expenses  within the Holding
Company and FAM-Related Affiliates component.


 20

Financial  Asset  Management  interest  expense  for  the  second  quarter  1998
decreased over comparable 1997 as a result of lower average debt balances during
second  quarter  1998,  primarily due to repayments  using cash  dividends  from
Janus.  Other,  net  increased  from prior year  second  quarter  due to an $8.8
million  one-time gain recognized on the sale of the Janus equity  investment in
IDEX Management ("IDEX") during the second quarter 1998.


Six Months Ended June 30, 1998 Compared With The Six Months Ended June 30, 1997



                               SIX MONTHS ENDED JUNE 30, 1998                    SIX MONTHS ENDED JUNE 30, 1997
                               ------------------------------                    ------------------------------
                                                                  (in millions)
                                          Holding Company                               Holding Company
                                  Janus      and FAM-                          Janus       and FAM-
                                   and       Related     Consolidated            and         Related   Consolidated
                                 Berger    Affiliates        FAM              Berger      Affiliates       FAM
                                                                                      
Revenues                       $   309.3    $     3.6     $  312.9           $   216.7    $    (0.5)    $  216.2
Costs and expenses                 163.1         10.5        173.6               112.2          2.7        114.9
Depreciation and amortization        5.6          0.7          6.3                 6.2          0.2          6.4
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income (loss)        140.6         (7.6)       133.0                98.3         (3.4)        94.9
Equity in net earnings of
  unconsolidated affiliates:
    DST Systems, Inc.                 -          15.0         15.0                  -          11.8         11.8
    Other                            0.6           -           0.6                 0.3           -           0.3
Interest expense                    (3.2)        (0.4)        (3.6)               (3.2)        (1.5)        (4.7)
Other, net                          12.2          2.5         14.7                 1.6          5.3          6.9
                               ---------    ---------     --------           ---------    ---------     --------
    Pretax income                  150.2          9.5        159.7                97.0         12.2        109.2
Income tax provision (benefit)      58.8         (1.8)        57.0                38.4          3.2         41.6
Minority interest                   16.4            -         16.4                10.6            -         10.6
                               ---------    ---------     --------           ---------    ---------     --------
    Net income                 $    75.0    $    11.3     $   86.3           $    48.0    $     9.0     $   57.0
                               =========    =========     ========           =========    =========     ========



For the six months ended June 30, 1998,  Financial Asset Management  contributed
$86.3 million to the Company's  consolidated  earnings,  a 51% increase over the
same period in 1997. This increase was  attributable to higher revenues  (driven
by growth in assets under management), operating income and equity earnings.

Year to date 1998 revenues  increased 45% to $312.9 million and operating income
40% to $133.0  million  compared to the six months ended June 30,  1997.  Assets
under  management  increased  $21.7 billion during the first six months of 1998,
driven by net sales of $5.1 billion and market  appreciation  of $16.6  billion.
Shareowner  accounts  numbered  nearly  2.9  million  as of June 30,  1998 (a 6%
increase from December 31, 1997).

Year to date 1998  operating  expenses  increased to $179.9  million from $121.3
million in  comparable  1997.  This  increase is indicative of the rapid revenue
growth  experienced  throughout 1997 and the first half of 1998. Higher expenses
were  evident in salaries and wages (see  comment in  quarterly  review  above),
marketing and fulfillment,  alliance distribution fees and costs attributable to
expenditures for Year 2000 compliance and efforts to effect the Spin-off.

Year to date 1998 equity earnings from DST increased 27% over the same period in
1997 as a result of the same operating trends affecting the quarter as discussed
above.  Also, U.S. mutual fund shareowner  accounts serviced by DST totaled 48.2
million at June 30, 1998,  an increase of 7.1% from  December 31, 1997 and 13.7%
from June 30, 1997.


 21

Year to date 1998  interest  expense  decreased and other,  net  increased  from
comparable 1997 as discussed in the quarterly review above. Also contributing to
the  improvement  in other,  net was  increased  interest  income during the six
months  ended June 30, 1998  resulting  from higher  levels of  income-producing
short-term investments held by Janus and Berger.

A brief discussion of Janus and Berger activity during the six months ended June
30, 1998 follows:

       Janus
       Janus  continues  to report  growth in assets  under  management  - a 31%
       increase from December 31, 1997. Assets in the Janus Advised Funds (i.e.,
       Janus No-Load,  Aspen Series and WRL Series)  increased 32% from December
       31, 1997. Also, assets in private, institutional and sub-advised accounts
       grew 27% from year end 1997.  These increases are attributable to several
       factors,  including,  among others: (i) the investment performance of the
       Janus group of mutual funds, as evidenced by 85% of (separately  tracked)
       Janus  funds  ranking  in the  first  quartile  when  compared  to  their
       respective peer categories  based on product  performance  over a rolling
       one-year period through June 30, 1998 (using data from Lipper  Analytical
       Services, Inc.); (ii) continued growth through new monies, particularly a
       result of increasing marketing efforts during the first half of 1998; and
       (iii)  competitive  levels of  expenses  and fees  compared  to  industry
       standards.

       Berger
       Berger  introduced  four new funds during fourth quarter 1997, the Berger
       Small Cap Value Fund,  the Berger  Balanced Fund, the Berger Mid Cap Fund
       and the  Berger  Select  Fund.  As of June 30,  1998 these four funds had
       combined  assets under  management of $283 million (an 82% increase since
       December 31,  1997) and the latter three ranked in the first  quartile of
       their  respective  peer  groups for the first two  quarters  of 1998.  In
       addition,  the Berger/BIAM  International Fund has increased assets under
       management  for each month during 1998,  reaching  $428.4 million at June
       30,  1998  (which is more than twice the  amount of assets  managed as of
       December 31, 1997).


TRENDS AND OUTLOOK

The Company  reported a 76% improvement in second quarter 1998 diluted  earnings
per share  compared to second quarter 1997.  Year to date 1998 diluted  earnings
per share were 67% higher than the same period in 1997.  Second quarter and year
to date 1998  earnings  from the  Financial  Asset  Management  segment  reflect
continued  growth in assets under management  resulting in significantly  higher
revenues and operating income for both periods. Despite equity losses from Grupo
TFM of $2.1 and $5.2 million for the three and six month  periods ended June 30,
1998, the Transportation segment continued its earnings improvement, raising net
income by $9.1 and $15.3 million compared to the three and six months ended June
30, 1997,  respectively,  largely attributable to KCSR, which quadrupled its net
income for both the three and six months ended June 30, 1998.

A current  outlook for the Company's  businesses for the remainder of 1998 is as
follows  (refer to the first  paragraph  of  "Overview"  section of this Item 2,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations, regarding forward-looking comments):

i)     KCSR - General  commodities  and  intermodal  traffic will continue to be
       largely  dependent on economic  trends within  certain  industries in the
       geographic  region served by KCSR.  Based on anticipated  traffic levels,
       revenues are expected to experience  growth during the remainder of 1998.
       Variable   costs  and   expenses  are  expected  to  continue  at  levels
       proportionate with revenue activity.


 22

ii)    Financial Asset  Management - Future growth will be largely  dependent on
       prevailing  financial  market  conditions,  the relative  performance  of
       Janus, Berger and Nelson products,  the introduction and market reception
       of new products,  as well as other factors.  Based on the higher level of
       assets under management starting the third quarter 1998, revenues for the
       remainder of 1998 are expected to exceed  comparable  prior year periods.
       Costs  and  expenses  are  expected  to  continue  at  operating   levels
       consistent with the rate of growth, if any, in revenues.

iii)   Equity  Investments - The Company  expects to continue to  participate in
       the  earnings/losses  from its  equity  investments  in DST,  Grupo  TFM,
       Southern Capital and Mexrail. The Company expects to report equity losses
       from Grupo TFM during the  remainder of 1998 as it continues  its efforts
       to develop the potential of the Mexico's Northeast rail lines.



LIQUIDITY AND CAPITAL RESOURCES

Summary cash flow data is as follows (in millions):


                                                           Six Months
                                                         Ended June 30,       
                                                                 
                                                     1998              1997   
Cash flows provided by (used for):
    Operating activities                          $    65.2        $     80.1
    Investing activities                              (46.4)           (292.6)
    Financing activities                              (43.5)            207.7
                                                  ---------        ----------
    Cash and equivalents:
      Net decrease                                    (24.7)             (4.8)
      At beginning of year                             33.5              22.9
                                                  ---------        ----------
      At end of period                            $     8.8        $     18.1
                                                  =========        ==========



During the six months ended June 30, 1998, the Company's cash position decreased
$24.7 million from December 31, 1997. This decrease was caused primarily by cash
used for  property  acquisitions,  debt  repayments  and the purchase of Nelson,
offset partially by positive operating cash flows,  borrowings and proceeds from
the sale of a branch line property by KCSR and the equity  investment in IDEX by
Janus.

Year to date 1998 operating cash flows decreased  $14.9 million  compared to the
same period in 1997. This decrease was chiefly attributable to the $24.2 million
payment  during  first  quarter  1998  related  to the  termination  of a  union
Productivity Fund and increases in accounts receivable and other current assets,
offset  partially by increased net income and changes in other  working  capital
components.

Cash flows used for investing  activities for the six months ended June 30, 1998
were  $246.2  million  lower  compared  with the  same  1997  period.  Investing
expenditures for the six months ended June 30, 1998 were primarily  comprised of
the  investment in Nelson and KCSR property  additions.  Cash flows used for the
six months ended June 30, 1997 included the Company's  approximate  $277 million
capital  contribution  to Grupo TFM made  during the first  quarter  1997.  Cash
received from investing  activities was generated primarily from the sale of the
equity investment in IDEX by Janus and from property disposals.

Financing cash flows were used primarily for the repayment of long-term debt and
dividends,  partially  offset by borrowings to fund the KCSR Union  Productivity
Fund  termination  and the  Nelson  acquisition,  as well as  proceeds  from the
issuance of common stock under stock plans.  Financing  cash flows for the first
six months of 1998 decreased  $251.2 million from the comparable 1997 period due
to $298.0  million of  borrowings  under credit lines in 1997 used  primarily to
fund the Grupo TFM capital contribution.


 23

Cash flows from operations are expected to increase during the remainder of 1998
from positive  operating  income,  which has historically  resulted in favorable
cash flows.  Investing  activities will continue to use  significant  amounts of
cash.  Future  roadway  improvement  projects  are expected to be funded by KCSR
operating  cash  flow.  Based  on the  financing  arrangements  for  Grupo  TFM,
significant  additional  contributions  from the  Company  to Grupo  TFM are not
expected to be  necessary.  However,  there exists a possible  capital call ($74
million) if certain Grupo TFM  benchmarks,  as outlined in Grupo TFM's financing
arrangements,  are not met.  Additionally,  if circumstances  develop in which a
contribution  may be  requested  by Grupo TFM,  the Company  will  evaluate  the
contribution based on the merits of the specific underlying need.

In addition to operating cash flows, the Company has financing available through
its various lines of credit (with a maximum borrowing amount of $660 million, of
which $399  million  was  available  at June 30,  1998).  Included  in the these
various lines of credit is a $100 line of credit  obtained during second quarter
1998 for the purpose of  providing  FAM Holdings  with its own credit  facility.
Because of  certain  financial  covenants  contained  in the credit  agreements,
however,  maximum  utilization of the Company's available lines of credit may be
restricted.  During July 1998,  the Company  refinanced  the $100 million  5.75%
Notes that were due using borrowings under its lines of credit. The Company also
has the ability to issue $500  million of  securities  under a  Universal  Shelf
Registration  Statement  ("Registration  Statement") filed in September 1993, as
amended in April 1996.  The  Securities  and  Exchange  Commission  declared the
Registration  Statement effective on April 22, 1996; however, no securities have
been issued. As discussed earlier,  subsequent to the planned Spin-off (which is
subject to favorable IRS tax ruling),  a portion of the  Registration  Statement
may be used to sell additional shares of KCSI common stock. The Company believes
its operating  cash flows and available  financing  resources are  sufficient to
fund working capital and other requirements for the remainder of 1998.

The Company's  debt ratio (total debt as a percent of total debt plus equity) at
June 30,  1998  was  50.2%  compared  to 56.8% at  December  31,  1997.  Company
consolidated  debt  decreased  $44.9  million from  December 31, 1997 (to $871.7
million at June 30, 1998)  primarily as a result of repayments of debt exceeding
borrowings.  Consolidated equity increased $166.5 million from December 31, 1997
primarily as a result of net income of $104.9 million,  a $42.9 million non-cash
equity adjustment related to unrealized gains on "available for sale" securities
held by affiliates and stock options exercised, offset partially by common stock
repurchases and dividends paid. The increase in equity coupled with the decrease
in debt resulted in a decrease in the debt ratio from December 31, 1997.

Management  anticipates  that the debt ratio will continue to decrease  slightly
during  the  remainder  of 1998 as a result of  continued  debt  repayments  and
profitable  operations.  Note, however,  that unrealized gains on "available for
sale" securities,  which are included,  net of deferred taxes, as a component of
stockholders'  equity, are contingent on market conditions and thus, are subject
to significant fluctuations in value. Significant declines in the value of these
securities  would  negatively  impact  stockholders'  equity  and  increase  the
Company's debt ratio.



Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicable



 24


PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

Part I, Item 1.  Financial  Statements,  Note 11 to the  Consolidated  Condensed
Financial  Statements  of  this  Form  10-Q is  hereby  incorporated  herein  by
reference.


Item 4. Submission of Matters to a Vote of Security Holders

a)      The Company held a Special Meeting of Stockholders  ("Special  Meeting")
        on July 15, 1998 to vote on four  proposals,  including  an Amendment to
        the Company's  Certificate  of  Incorporation  to Effect a Reverse Stock
        Split,  contingent  upon market  conditions  and the  completion  of the
        Spin-off  of  the  Financial  Asset  Management   segment.  A  total  of
        82,584,039  shares of the Common  Stock,  $.01 per share par value,  and
        Preferred Stock, par value $25.00 per share, or 75.4% of the outstanding
        voting stock on the record date, was represented at the Special Meeting,
        thereby  constituting a quorum.  These shares voted together as a single
        class.

b)      Proxies for the meeting  were  solicited  pursuant  to  Regulation  14A.
        Listed  below is each of the matters  voted on at the  Company's  Annual
        Meeting.  Each of these  matters  is fully  described  in the  Company's
        Definitive  Proxy Statement for the Special  Meeting.  The voting was as
        follows:



                                                                                              Total
                                                                                              Shares
                                                                                         
        Approval of an Amendment
        to KCSI's Certificate of Incorporation
        to Effect a Reverse Stock Split (Contingent upon Spin-off)
                              For                                                             78,670,743
                              Against                                                          3,478,407
                              Abstentions                                                        434,889
                              Non-votes                                                                -
                                                                                        ----------------
                                                     Total                                    82,584,039

        Approval of the Berger Associates, Inc.
        Stock Option Plan
                              For                                                             75,792,317
                              Against                                                          5,845,781
                              Abstentions                                                        945,941
                              Non-votes                                                                -
                                                                                        ----------------
                                                     Total                                    82,584,039

        Approval of the FAM Holdings, Inc. 1998 Long
        Term Incentive Stock Plan
                              For                                                             74,093,832
                              Against                                                          7,164,902
                              Abstentions                                                      1,325,305
                              Non-votes                                                                -
                                                                                        ----------------
                                                     Total                                    82,584,039

 25

        Approval of KCSI's Amended and Restated
        1991 Stock Option and Performance Award Plan
                              For                                                             52,004,334
                              Against                                                         29,706,692
                              Abstentions                                                        873,013
                              Non-votes                                                                -
                                                                                        ----------------
                                                     Total                                    82,584,039


Based upon the majority of affirmative votes of total outstanding  shares at the
record date, the proposal for Approval of an Amendment to KCSI's  Certificate of
Incorporation to Effect a Reverse Stock Split passed.

Based  upon the  majority  of  affirmative  votes of the  shares  present at the
Special Meeting required for approval, each of the other matters passed.


Item 5.  Other Information

The Securities  Exchange  Commission ("SEC") recently amended its proxy rules to
require a  registrant,  such as the  Company,  to disclose  the date after which
stockholder  proposals  that  are  not to be  included  in the  Company's  proxy
statement are considered "untimely" for proxy solicitation  purposes.  Under the
Company's  By-laws,  in order for such a  stockholder  proposal to be timely and
otherwise   validly   brought  before  the  Company's  1999  Annual  Meeting  of
Stockholders,  a stockholder  must notify the Company's  Corporate  Secretary no
earlier  than  February  2, 1999 and no later than March 19,  1999  (assuming  a
meeting date of May 4, 1999).  The  calculation of this notice period and By-law
requirement  for the contents of such notice are set forth in the Company's 1998
proxy statement,  which can be obtained by contacting the SEC's Public Reference
Branch or in the SEC's EDGAR  database  accessible  through the SEC's website on
the World Wide Web at www.sec.gov.


Item 6.  Exhibits and Reports on Form 8-K

a)   Exhibits


          Exhibit 27.1 -    Financial Data Schedule


b) Reports on Form 8-K

          The  Company  filed a Current  Report on Form 8-K dated April 20, 1998
          under  Items  5 and 9,  reporting  the  acquisition  of  Nelson  Money
          Managers PLC, a United Kingdom based  investment  management  company,
          using a combination of cash, Company Common Stock and notes payable.


 26

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly  caused  this  report  to be signed  on its  behalf by the  undersigned
thereunto duly authorized and in the capacities indicated on August 13, 1998.


Kansas City Southern Industries, Inc.


                             /s/ Joseph D. Monello 
                                Joseph D. Monello
                   Vice President and Chief Financial Officer
                          (Principal Financial Officer)



                             /s/ Louis G. Van Horn 
                                Louis G. Van Horn
                         Vice President and Comptroller
                         (Principal Accounting Officer)