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 September 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 October 30, 1998
Common Stock, $.01 per share par value                        109,572,824 Shares
- --------------------------------------------------------------------------------


                      KANSAS CITY SOUTHERN INDUSTRIES, INC.

                                    FORM 10-Q

                               SEPTEMBER 30, 1998

                                      INDEX


                                                                           Page

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Introductory Comments                                                         1

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

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

Computation of Basic and Diluted Earnings per Common Share                    3

Consolidated Condensed Statements of Cash Flows -
  Nine Months Ended September 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          28


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                   29

Item 6.  Exhibits and Reports on Form 8-K                                    29


SIGNATURES                                                                   30




1


                      KANSAS CITY SOUTHERN INDUSTRIES, INC.

                                    FORM 10-Q

                               SEPTEMBER 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 nine
months ended  September 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)


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

Current Assets:
    Cash and equivalents                                                   $      27.9          $      33.5
    Accounts receivable, net                                                     199.2                177.0
    Inventories                                                                   44.0                 38.4
    Other current assets                                                         159.0                124.2
                                                                           -----------          -----------
        Total current assets                                                     430.1                373.1

Investments held for operating purposes                                          721.1                683.5

Properties (net of $554.4 and $518.6 accumulated
    depreciation and amortization, respectively)                               1,252.8              1,227.2

Intangibles and Other Assets, net                                                180.2                150.4
                                                                           -----------          -----------

    Total assets                                                           $   2,584.2          $   2,434.2
                                                                           ===========          ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Debt due within one year                                               $      10.7          $     110.7
    Accounts and wages payable                                                   106.4                109.0
    Accrued liabilities                                                          184.8                217.8
                                                                           -----------          -----------
        Total current liabilities                                                301.9                437.5
                                                                           -----------          -----------

Other Liabilities:
    Long-term debt                                                               846.3                805.9
    Deferred income taxes                                                        387.7                332.2
    Other deferred credits                                                       130.8                132.1
                                                                           -----------          -----------
        Total other liabilities                                                1,364.8              1,270.2
                                                                           -----------          -----------

Minority Interest in consolidated subsidiaries                                    25.6                 28.2
                                                                           -----------          -----------

Stockholders' Equity:
    Preferred stock                                                                6.1                  7.1
    Common stock                                                                   1.1                  1.1
    Capital surplus                                                                  -                    -
    Retained earnings                                                            818.0                839.3
    Accumulated other comprehensive income                                        66.7                 50.8
    Shares held in trust                                                             -               (200.0)
                                                                           -----------          -----------
        Total stockholders' equity                                               891.9                698.3
                                                                           -----------          -----------

    Total liabilities and stockholders' equity                             $   2,584.2          $   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                  Nine Months
                                                            Ended September 30,        Ended September 30,     
                                                           1998           1997             1998          1997  
                                                                                         
Revenues                                               $    334.2      $   273.6       $    952.5    $    764.0

Costs and expenses                                          210.1          169.8            598.9         500.3
Depreciation and amortization                                18.7           19.3             53.4          56.2
                                                       ----------      ---------       ----------    ----------

     Operating Income                                       105.4           84.5            300.2         207.5

Equity in net earnings (losses) of unconsolidated affiliates:
     DST Systems, Inc.                                        7.7            5.6             22.7          17.4
     Grupo Transportacion Ferroviaria
       Mexicana, S.A. de C.V.                                 1.8           (2.3)            (3.4)         (5.3)
     Other                                                    0.8            1.0              1.7           2.8

Interest expense                                            (17.1)         (19.3)           (50.7)        (46.6)
Other, net                                                    4.2            4.4             26.0          14.7
                                                       ----------      ---------       ----------    ----------

     Pretax Income                                          102.8           73.9            296.5         190.5

Income tax provision                                         38.2           25.4            110.6          71.1
Minority interest in consolidated earnings                    9.4            6.7             25.8          17.3
                                                       ----------      ---------       ----------    ----------

Net Income                                                   55.2           41.8            160.1         102.1

Other comprehensive income, net of tax:
     Unrealized gain (loss) on securities                   (27.0)          13.8             15.9          22.9
                                                       -----------     ---------       ----------    ----------

Comprehensive Income                                   $     28.2      $    55.6       $    176.0    $    125.0
                                                       ==========      =========       ==========    ==========


Computation of Basic and Diluted Earnings per Common Share

Basic Earnings per Common Share                        $     0.50      $    0.39       $     1.47    $     0.95
                                                       ==========      =========       ==========    ==========

Diluted Earnings per Common Share                      $     0.49      $    0.38       $     1.41    $     0.92
                                                       ==========      =========       ==========    ==========

Weighted Average Basic Common
  Shares Outstanding (in thousands)                       109,493         107,305         109,083       107,546
                                                       ----------      ----------      ----------    ----------

Weighted Average Diluted Common
  Shares Outstanding (in thousands)                       113,311         110,802         112,966       110,253
                                                       ----------      ----------      ----------    ----------

Cash Dividends Paid:
     Per Preferred share                               $      .25      $     .25       $      .75    $      .75
     Per Common share                                         .04            .04              .12           .11


See accompanying notes to consolidated condensed financial statements.



4



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

                                                                               Nine Months
                                                                           Ended September 30,   
                                                                          1998             1997  
                                                                                 
CASH FLOWS PROVIDED BY (USED FOR):

OPERATING ACTIVITIES:
   Net income                                                          $   160.1       $    102.1
   Adjustments to net income:
     Depreciation and amortization                                          53.4             56.2
     Deferred income taxes                                                  34.6             14.0
     Equity in undistributed earnings                                      (15.3)           (14.9)
     Gain on sale of equity investments and property                       (15.4)            (1.9)
     Employee deferred compensation expenses                                 4.4              3.2
   Changes in working capital items:
     Accounts receivable                                                   (20.6)           (25.7)
     Inventories                                                            (5.7)             4.0
     Other current assets                                                  (17.5)            (2.0)
     Accounts and wages payable                                             (4.5)           (10.0)
     Accrued liabilities                                                   (17.7)            24.1
   Other, net                                                               (6.3)             1.1
                                                                       ---------       ----------
     Net                                                                   149.5            150.2
                                                                       ---------       ----------

INVESTING ACTIVITIES:
   Property acquisitions                                                   (72.9)           (57.1)
   Proceeds from disposal of property                                        7.5              5.8
   Investment in and loans with affiliates                                 (24.4)          (298.8)
   Net sales (purchases) of short-term investments                         (17.5)             2.2
   Proceeds from disposal of investments                                    10.2                -
   Other, net                                                               (2.6)             8.8
                                                                       ---------       ----------
     Net                                                                   (99.7)          (339.1)
                                                                       ---------       ----------

FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt                                152.8            336.4
   Repayment of long-term debt                                            (214.1)           (82.0)
   Proceeds from stock plans                                                25.0             17.7
   Stock repurchased                                                        (2.7)           (47.1)
   Cash dividends paid                                                     (17.8)           (15.4)
   Other, net                                                                1.4             (0.2)
                                                                       ---------       ----------
     Net                                                                   (55.4)           209.4
                                                                       ---------       ----------

CASH AND EQUIVALENTS:
   Net increase (decrease)                                                  (5.6)            20.5
   At beginning of year                                                     33.5             22.9
                                                                       ---------       ----------
   At end of period                                                    $    27.9       $     43.4
                                                                       =========       ==========



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 September 30, 1998 and December 31, 1997, the results of operations for
   the three and nine months ended  September 30, 1998 and 1997,  and cash flows
   for the nine months ended September 30, 1998 and 1997.


2. The results of operations  for the three and nine months ended  September 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.


4. As  previously  disclosed,  on February 3, 1998,  the Company  announced  its
   intention to separate  the  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.  On October 20,  1998,  the Company  announced  that a favorable
   ruling  on the  initial  structure  proposed  to the IRS  was  not  expected.
   Accordingly,  KCSI has  withdrawn  its  pending  request for a tax ruling but
   plans to resubmit a request for a ruling as soon as an alternative  structure
   is  developed.  As a  result,  the  Spin-off  will not occur  during  1998 as
   previously contemplated.


5. 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  3,818,543 and 3,882,879 for
   the three and nine month periods ended September 30, 1998, respectively,  and
   3,496,169 and 2,706,884 for the same respective  1997 periods.  For the three
   and nine month periods  ended  September  30, 1998,  the weighted  average of
   options  to  purchase   95,000  and  64,000  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 nine  month  periods
   ended September 30, 1997, the weighted  average of options to purchase shares
   which were  excluded  from the diluted  earnings per share  computation  were
   immaterial.


6. The  Company's  inventories  ($44.0  million at September  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

7. 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 September
   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.

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


                                                                                      
   Financial Condition:

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

    Current assets            $    254.6   $     99.5     $   36.3          $    231.3    $   114.7     $   29.9
    Non-current assets           1,225.2      1,970.2        270.3             1,124.1      1,990.4        255.1
                              ----------   ----------     --------          ----------    ---------     --------

       Assets                 $  1,479.8   $  2,069.7     $  306.6          $  1,355.4    $ 2,105.1     $  285.0
                              ==========   ==========     ========          ==========    =========     ========


    Current liabilities       $    137.2   $    198.6     $   40.0          $    141.0    $   158.5     $   13.2
    Non-current liabilities        397.9        760.2        195.8               378.7        830.6        191.7
    Minority Interest                -          343.7          -                   -          345.4          -
    Equity of stockholders
      and partners                 944.7        767.2         70.8               835.7        770.6         80.1
                              ----------    ---------     --------          ----------    ---------     --------

       Liabilities and
         equity               $  1,479.8   $  2,069.7     $  306.6          $  1,355.4    $ 2,105.1     $  285.0
                              ==========   ==========     ========          ==========    =========     ========


    Investment in uncon-
      solidated affiliates    $    390.6   $    285.0     $   39.8          $    345.3    $   288.2     $   44.6
                              ==========   ==========     ========          ==========    =========     ========




7

                                                                                           
Operating Results:
                                                     Three Months                             Nine Months
                                                  Ended September 30,                     Ended September 30,     
                                                1998               1997                 1998              1997  
   Revenues:
     DST                                    $    186.3         $    159.8           $    558.0         $   473.9
     Grupo TFM (a)                               113.9             100.0                 323.5             107.0
     All others                                   21.2               17.8                 67.5              50.6
                                            ----------         ----------           ----------         ---------

       Total revenues                       $    321.4         $    277.6           $    949.0         $   631.5
                                            ==========         ==========           ==========         =========

   Operating costs and expenses:
     DST                                    $    159.9         $    138.3           $    472.3         $   407.7
     Grupo TFM (a)                                94.0               89.9                281.3              96.9
     All others                                   18.4               18.4                 63.1              45.6
                                            ----------         ----------           ----------         ---------
       Total operating costs
         and expenses                       $    272.3         $    246.6           $    816.7         $   550.2
                                            ==========         ==========           ==========         =========

   Net income (loss):
     DST                                    $     18.6         $     14.1           $     54.7         $    43.0
     Grupo TFM (estimated) (a)                     6.5              (11.0)                (3.3)            (18.9)
     All others                                    0.7                0.8                  2.1               3.9
                                            ----------         ----------           ----------         ---------

       Total net income                     $     25.8         $      3.9           $     53.5         $    28.0
                                            ==========         ==========           ==========         =========


(a)  The 1997 operating results provided for Grupo TFM reflect its operation of
     TFM, S.A. de C.V. ("TFM" ) beginning on June 23, 1997.


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


                                                                            
   a.   Supplemental Cash Flow Information (in millions):
                                                                         Nine Months
                                                                    Ended September 30,       
                                                                   1998              1997   
        Interest paid (excluding capitalized interest)         $     57.4         $     50.8
        Income taxes paid                                            57.2               44.5


   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 9 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"  ("SFAS  115").  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 as of September 30, 1998,
   net of deferred taxes, related to these investments increased $15.9 million
   from December 31, 1997. The  unrealized  gain as of September 30, 1997, net
   of deferred taxes, increased $22.9 million from December 31, 1996.


9. 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  $1.1
   billion of assets as of September 30, 1998. 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 is consolidated in the Company's  Financial Asset Management  segment.
   Nelson's  revenues and expenses for the three and nine months ended September
   30, 1998, were not material to the Company's results of operations.


10.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
   SFAS 115. The unrealized  gain related to these  investments  increased $24.7
   million and $37.6 million ($15.9  million and $22.9 million,  net of deferred
   taxes) for the nine months ended  September 30, 1998 and 1997,  respectively.
   The unrealized gain (loss) related to these investments was $(44.2) and $23.0
   million  ($(27.0)  and $13.8  million,  net of deferred  taxes) for the three
   months ended September 30, 1998 and 1997, respectively.


11.Effective  September  30,  1998,  the  Company  terminated  the  Kansas  City
   Southern  Industries,  Inc.  Employee Plan Funding Trust ("EPFT" or "Trust"),
   which was  established  by KCSI as a grantor trust for the purpose of holding
   shares of KCSI  Series B  Convertible  Preferred  Stock  ("Series B Preferred
   Stock") for the benefit of various KCSI employee benefit plans, including the
   Employee Stock  Ownership  Plan,  Stock Option Plans and ESPP ( collectively,
   "Benefit  Plans").  The EPFT was  administered by an independent bank trustee
   ("Trustee") and included in the Company's  consolidated  condensed  financial
   statements.

   In 1993,  KCSI  transferred one million shares of Series B Preferred Stock to
   the EPFT  for a  purchase  price of $200  million  (based  on an  independent
   valuation),  which the Trust financed  through KCSI. The  indebtedness of the
   EPFT to KCSI was repayable over 27 years with interest at 6% per annum,  with
   no principal payments for the first three years.  Principal payments from the
   EPFT to the Company of $21.3  million  since the date of inception  decreased
   the  indebtedness to $178.7 million,  plus accrued  interest,  at the date of
   termination.  As a result  of these  principal  payments,  127,638  shares of
   Series B Preferred Stock were released from the Trust's  suspense account and
   available  for  distribution  to the  Benefit  Plans.  None of these  shares,
   however, were distributed prior to termination of the EPFT.

9

   In accordance with the Agreement to terminate the EPFT, the Company  received
   872,362  shares  of  Series  B  Preferred  Stock  in  full  repayment  of the
   indebtedness  from the Trust ( $178.7  million  plus  accrued  interest).  In
   addition,  the  remaining  127,638  shares of Series B  Preferred  Stock were
   converted  by the  Trustee  into KCSI Common  Stock,  at the rate of 12 to 1,
   resulting  in the  issuance  to the EPFT of  1,531,656  shares of such Common
   Stock.  This Common Stock was then transferred by the Trustee to KCSI and the
   Company has set these shares aside for use in connection  with the KCSI Stock
   Option and Performance Award Plan, as amended and restated effective July 15,
   1998. Following the foregoing transactions, the EPFT was terminated.

   The  impact  of the  termination  of the EPFT on the  Company's  consolidated
   condensed financial statements was a reclassification among the components of
   the stockholder's equity accounts,  with no change in the consolidated assets
   and liabilities of the Company.


12.On September  2, 1998,  DST and USCS  International,  Inc.  ("USCS")  jointly
   announced an agreement to merge USCS with a wholly-owned subsidiary of DST in
   exchange for DST's common stock. The  announcement  stated that the merger is
   expected to be completed during the fourth quarter 1998 and is intended to be
   a  tax-free  reorganization  accounted  for as a  pooling  of  interests.  In
   conjunction  with  this  merger   transaction,   the  Company,  as  owner  of
   approximately  41% of DST,  expects to record a one-time  charge to  earnings
   (estimated  to be as much  as $20  million)  resulting  from  the  associated
   dilution  in its  ownership  interest  which will  result  from the  proposed
   merger.  The  Company  estimates  its  ownership  percentage  of  DST  to  be
   approximately  31-32% following this proposed merger.  In connection with the
   proposed  merger,  the Company has entered  into a  Stockholder  Agreement in
   which  the  Company  has  agreed  to vote all of the DST  shares  held by the
   Company in favor of the merger.  Additionally,  to avoid any possible adverse
   effect upon the intended "pooling of interest" accounting for the merger, the
   Company has agreed to limited  restrictions on the timing of the Spin-off and
   as to the disposition of its DST shares. The restrictions,  if invoked, could
   delay the Spin-off.


13.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  disclosure of 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.  SFAS  131 is not  expected  to  materially  change  the
   Company's current segment reporting disclosures.

   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.
   
10

   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  investments  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.

14.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 other than as noted
   below. 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,  but under the car's capacity,  when it was
   transported by KCSR to interchange with the IC.

   The  Mississippi  lawsuit  arising  from the  chemical  release  has now been
   scheduled for trial in January 1999. KCSR sought  dismissal of these suits in
   the state appellate courts,  which was denied in each case. KCSR is currently
   seeking  review of those State  Court  denials in the United  States  Supreme
   Court.

   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.

15.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"),   an  indirect
    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.
*   Various other consolidated subsidiaries


RECENT DEVELOPMENTS

Planned  Separation of the Company Business Segments.  As previously  disclosed,
the Company announced its intention to separate the 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. On October 20, 1998, the Company  announced that a favorable ruling on
the initial structure  proposed to the IRS was not expected.  Accordingly,  KCSI
has  withdrawn  its  pending  request  for a tax ruling but plans to  resubmit a
request for a ruling as soon as an  alternative  structure  is  developed.  As a
result, the Spin-off will not occur during 1998 as previously contemplated.

Additionally,  in  contemplation  of the Spin-off,  the  Company's  stockholders
approved a reverse stock split at a special  stockholders'  meeting held on July
15, 1998.  The Company does not intend to effect a reverse stock split until the
Spin-off is completed.

Acquisition of 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
$1.1 billion of assets as of September 30, 1998. 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 is consolidated  in the Company's  Financial  Asset  Management  segment.
Nelson's revenues and expenses for the three and nine months ended September 30,
1998, were not material to the Company's results of operations.

Marketing  Alliance with Canadian National Railway Company  ("CN")/Illinois
Central  Corporation ("IC"). On April 16, 1998, KCSR, CN and IC announced a
15-year marketing alliance that offers shippers new competitive  options in a  
rail  freight   transportation   network  that  links  key   north-south
continental  freight  markets.  The  marketing  alliance  does not  require
approval  from the Surface  Transportation  Board ("STB") and was effective
immediately.  This alliance  connects  points in Canada with the major U.S.
Midwest markets of Detroit,  Chicago, Kansas City and St. Louis, as well as key
Southern  markets of  Memphis,  Dallas and  Houston.  It also  provide shippers
with access to Mexico's rail system through Grupo TFM.

13
In  addition  to  providing  access to key  north-south  international  and
domestic  U.S.  traffic  corridors,  the railways  seek to increase  business in
existing  markets,  primarily  automotive and intermodal,  but also in other key
carload  markets,  including  those for  chemical and forest  products.  Traffic
increases,   although   not   significant,   have   already   been  evident  and
Transportation  management  expects this alliance to provide  opportunities  for
revenue growth and position the railway as a key provider of rail service to the
North American Free Trade Agreement ("NAFTA") corridor.

Under a separate access agreement, subject to STB approval of the proposed CN-IC
merger,  CN and KCSR plan  investments in  automotive,  intermodal and transload
facilities  at Memphis,  Dallas,  Kansas City and Chicago to  capitalize  on the
growth potential represented by the marketing alliance.  The railways' access to
proposed terminals would be assured for the 25-year life span of the facilities,
regardless  of any change in corporate  control.  Under the terms of this access
agreement,  KCSR would  extend its rail system in the Gulf area and, in the year
2000, gain access to the Geismar  industrial  area, one of the largest  chemical
production areas in the world,  through a haulage agreement.  Management expects
this additional  access will provide  additional  revenue  opportunities for the
Company.  Prior to the this access agreement,  the Company received  preliminary
STB approval  for  construction  of a nine-mile  rail line from KCSR's main line
into the Geismar industrial area, which the chemical manufacturers  requested be
built to provide them with competitive  rail service.  The Company will continue
to hold the option of the Geismar  build-in  providing that it is able to obtain
the requisite approvals.

Voluntary  Coordination  Agreement  with the Norfolk  Southern  Railway  Company
("Norfolk  Southern").   The  Company  entered  into  a  Voluntary  Coordination
marketing  agreement  with the Norfolk  Southern  that will allow the Company to
capitalize on the east-west  corridor between Meridian,  Mississippi and Dallas,
Texas through  incremental  traffic volume gained through  interchange  with the
Norfolk Southern.  This agreement provides the Norfolk Southern with run-through
service  with access to Dallas and Mexico  while  avoiding  the  congested  rail
gateways of Memphis, Tennessee and New Orleans, Louisiana. In addition, KCSR and
Norfolk  Southern have a new joint intermodal  operation at Port Arthur,  Texas,
which  provides  an  alternative  route for traffic  from the Houston  market by
utilizing KCSR's rail network.

Houston  Emergency  Service  Order.  As disclosed in the  Company's  1997 Annual
Report on Form 10-K,  on October  31, 1997 the 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  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.

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.  The  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.

14

Termination of the Kansas City Southern  Industries,  Inc. Employee Plan Funding
Trust ("EPFT" or "Trust").  Effective September 30, 1998, the Company terminated
the EPFT,  which was  established  by KCSI as a grantor trust for the purpose of
holding shares of KCSI Series B Convertible Preferred Stock ("Series B Preferred
Stock") for the benefit of various KCSI employee  benefit  plans,  including the
Employee Stock  Ownership  Plan,  Stock Option Plans and Employee Stock Purchase
Plan  (collectively,   "Benefit  Plans").   The  EPFT  was  administered  by  an
independent bank trustee ("Trustee") and included in the Company's  consolidated
condensed financial statements.

In 1993, KCSI  transferred one million shares of Series B Preferred Stock to the
EPFT for a purchase price of $200 million  (based on an independent  valuation),
which the Trust financed  through KCSI. The indebtedness of the EPFT to KCSI was
repayable  over 27  years  with  interest  at 6% per  annum,  with no  principal
payments  for the first three  years.  Principal  payments  from the EPFT to the
Company of $21.3 million since the date of inception  decreased the indebtedness
to $178.7  million,  plus accrued  interest,  on the date of  termination.  As a
result of these principal  payments,  127,638 shares of Series B Preferred Stock
were released from the Trust's  suspense  account and available for distribution
to the Benefit Plans. None of these shares,  however,  were distributed prior to
termination of the EPFT.

In accordance  with the Agreement to terminate  the EPFT,  the Company  received
872,362 shares of Series B Preferred Stock in full repayment of the indebtedness
from the  Trust ( $178.7  million  plus  accrued  interest).  In  addition,  the
remaining  127,638  shares of Series B  Preferred  Stock were  converted  by the
Trustee  into  KCSI  Common  Stock,  at the  rate of 12 to 1,  resulting  in the
issuance to the EPFT of 1,531,656 shares of such Common Stock. This Common Stock
was then transferred by the Trustee to KCSI and the Company has set these shares
aside for use in  connection  with the KCSI Stock Option and  Performance  Award
Plan, as amended and restated  effective July 15, 1998.  Following the foregoing
transactions, the EPFT was terminated.

The  impact  of the  termination  of the  EPFT  on  the  Company's  consolidated
condensed  financial  statements was a reclassification  among the components of
the stockholder's equity accounts, with no change in the consolidated assets and
liabilities of the Company.

DST Ownership.  On September 2, 1998, DST and USCS International,  Inc. ("USCS")
jointly  announced an agreement to merge USCS with a wholly-owned  subsidiary of
DST, it exchange for DST's common stock. The announcement stated that the merger
is expected to be completed during the fourth quarter of 1998 and is intended to
be a  tax-free  reorganization  accounted  for as a  pooling  of  interests.  In
conjunction with this merger transaction, the Company, as owner of approximately
41% of DST, expects to record a one-time charge to earnings  (estimated to be as
much as $20 million)  resulting  from the  associated  dilution in its ownership
interest  which is  expected  to result from the  proposed  merger.  The Company
estimates its ownership  percentage of DST to be approximately  31-32% following
this proposed merger.  In connection with the proposed  merger,  the Company has
entered into a Stockholder Agreement in which the Company has agreed to vote all
of the DST shares held by the Company in favor of the merger.  Additionally,  to
avoid any  possible  adverse  effect upon the  intended  "pooling  of  interest"
accounting for the merger, the Company has agreed to limited restrictions on the
timing  of  the  Spin-off  and  as  to  the  disposition  of  DST  shares.   The
restrictions, if invoked, could delay the Spin-off.

15

RESULTS OF OPERATIONS


Segment revenues, operating income and net income comparisons follow (dollars in
millions):
                                                                                            
                                                             Three Months                   Nine Months Ended 
                                                             September 30,                 Ended September 30, 
                                                          1998          1997               1998           1997  
                                                       ---------      --------          ---------       --------
Revenues:
   Transportation                                      $   157.0      $  142.7          $   462.4       $  416.9
   Financial Asset Management                              177.2         130.9              490.1          347.1
                                                       ---------      --------          ---------       --------
       Total                                           $   334.2      $  273.6          $   952.5       $  764.0
                                                       =========      ========          =========       ========

Operating Income:
   Transportation                                      $    28.4      $   24.5          $    90.2       $   52.6
   Financial Asset Management                               77.0          60.0              210.0          154.9
                                                       ---------      --------          ---------       --------
       Total                                           $   105.4      $   84.5          $   300.2       $  207.5
                                                       =========      ========          =========       ========

Net Income:
    Transportation                                     $    11.6      $    3.0          $    30.2       $    6.3
    Financial Asset Management                              43.6          38.8              129.9           95.8
                                                       ---------      --------          ---------       --------
       Total                                           $    55.2      $   41.8          $   160.1       $  102.1
                                                       =========      ========          =========       ========



The Company reported a 32% increase in third quarter 1998 consolidated earnings,
which rose to $55.2  million,  or $0.49 per  diluted  share,  compared  to $41.8
million,  or $0.38 per diluted share, in third quarter 1997.  Consolidated third
quarter  1998  revenues  were 22%  higher  compared  to the same  period in 1997
resulting from improvements in both of the Company's segments.  Operating income
for the three months ended  September 30, 1998 increased 25% (to $105.4 million)
versus  comparable  1997,  largely due to higher  revenues  and  proactive  cost
containment  efforts by both the  Transportation  and Financial Asset Management
segments.  Equity earnings in unconsolidated affiliates totaled $10.3 million in
third quarter 1998, which was  significantly  higher than third quarter 1997 due
to increased  equity  earnings from DST coupled with equity  earnings from Grupo
TFM  (estimated) of $1.8 million  compared with $2.3 million of equity losses in
the third quarter 1997.  Interest  expense for the three months ended  September
30, 1998 was 11% lower than  comparable  1997  resulting from lower average debt
balances in 1998 due to net paydowns.

For the nine months ended September 30, 1998,  consolidated earnings were $160.1
million, or $1.41 per diluted share, versus $102.1 million, or $0.92 per diluted
share, in comparable 1997. Year to date 1998 consolidated revenues increased 25%
to $952.5  million  compared  to the same period in 1997,  primarily  due to the
growth in assets under  management in the  Financial  Asset  Management  segment
coupled  with  increased  freight  revenues  in  the   Transportation   segment.
Consolidated  operating  expenses for the nine months ended 1998  increased at a
lower  proportionate  rate than  revenues  compared  to 1997,  leading  to a 45%
improvement  in  operating  income.   Year  to  date  1998  equity  earnings  of
unconsolidated  affiliates  increased  over  comparable  1997 due to higher  DST
earnings and a reduction of estimated losses at Grupo TFM.  Interest expense for
the nine months ended September 30, 1998 was 9% higher than comparable 1997 as a
result  indebtedness  associated  with the  Company's  investment  in Grupo  TFM
(interest  expense  related  to Grupo TFM was  capitalized  during the first six
months of 1997).

16

TRANSPORTATION


Three Months Ended September 30, 1998 Compared With Three Months Ended September 30, 1997


                              THREE MONTHS ENDED SEPTEMBER 30, 1998           THREE MONTHS ENDED SEPTEMBER 30, 1997
                              -------------------------------------           -------------------------------------
                                                                    (in millions)
                                           Holding Company                               Holding Company
                                         and Transportation-                           and Transportation-
                                               Related   Consolidated                        Related   Consolidated
                                  KCSR       Affiliates Transportation          KCSR       Affiliates Transportation
                                                                                      
Revenues                       $   139.8    $    17.2     $  157.0           $   128.5    $    14.2     $  142.7
Costs and expenses                  98.9         15.6        114.5                92.5         10.1        102.6
Depreciation and amortization       12.7          1.4         14.1                13.6          2.0         15.6
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income                28.2          0.2         28.4                22.4          2.1         24.5
Equity in net earnings (losses) of
  unconsolidated affiliates:
    Grupo TFM                          -          1.8          1.8                   -         (2.3)        (2.3)
    Other                            0.4         (0.1)         0.3                 0.5          0.4          0.9
Interest expense                    (8.9)        (6.4)       (15.3)               (9.4)        (7.6)       (17.0)
Other, net                           2.0          1.0          3.0                 0.8         (0.1)         0.7
                               ---------    ---------     --------           ---------    ---------     --------
    Pretax income (loss)            21.7         (3.5)        18.2                14.3         (7.5)         6.8
Income tax provision (benefit)       8.5         (1.9)         6.6                 6.3         (2.5)         3.8
                               ---------    ---------     --------           ---------    ---------     --------
    Net income (loss)          $    13.2    $    (1.6)    $   11.6           $     8.0    $    (5.0)    $    3.0
                               =========    =========     ========           =========    =========     ========



The  Transportation  segment  reported  earnings of $11.6  million for the three
months ended September 30, 1998, an $8.6 million  increase over the three months
ended  September 30, 1997.  Exclusive of interest  expense and estimated  equity
earnings  (losses)  from the Company's  investment  in Grupo TFM,  third quarter
earnings improved $5.3 million from third quarter 1997. These increased earnings
were largely due to KCSR, which increased its net income 65% quarter to quarter.

Total  Transportation  segment  revenues  increased $14.3 million,  or 10.0%, to
$157.0  million for the three  months  ended  September  30,  1998,  from $142.7
million for the three months ended  September  30, 1997.  This growth was driven
primarily  by higher  KCSR  revenues,  which grew $11.3  million,  or nearly 9%,
quarter to  quarter.  KCSR  revenues  improved  to $139.8  million for the three
months ended  September  30, 1998 from $128.5  million for the  comparable  1997
period as a result of higher carloads,  which, in total,  increased more than 7%
(3% of increase  relates to  intermodal  unit  volume)  quarter to quarter.  The
following is a summary of KCSR's major commodity groups:

     Agricultural  and mineral  products - Agricultural  and mineral product
revenues  increased 14.8%, to $23.3 million for the three months ended September
30, 1998,  from $20.3  million for the  comparable  1997 period,  primarily as a
result of higher carloads of food and grain (both domestic and export),  as well
as  increased  freight  revenue  per carload  for food and export  grain.  These
increases were somewhat offset by a reduction in freight revenue per carload for
domestic grain movements. A portion of the volume increases can be attributed to
Mexican  import and  export  traffic  through  Grupo  TFM.  As Mexico  imports a
significant amount of grain, the Company expects to continue to ship carloads of
grain to Mexico through Grupo TFM.

     Chemical and petroleum  products - Chemical and petroleum  product revenues
increased  $2.9  million,  or 8.9%,  to $35.5 million for the three months ended
September 30, 1998.  Increased  revenues can be  attributed  primarily to higher
carloads  and  revenues  per carload for  miscellaneous  chemicals  and soda ash
traffic and  increased  revenue per carload for  plastics  shipments,  partially
offset by a reduction of petroleum product carloads. Higher revenues per carload
have  resulted  from a combination  of rate  increases  

17

and increased length of hauls,  while the increased  carloads resulted from
continued strength of the miscellaneous chemical and soda ash markets.

         Paper and forest products - Paper and forest product revenues increased
4.8%, to $28.3 million for the three months ended  September 30, 1998 from $27.0
million for the three months ended September 30, 1997.  Increases in pulp, paper
and lumber  revenues  were  partially  offset by a decline in pulpwood  logs and
chips 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 at several customers served by KCSR.

         Coal - Coal revenues increased $2.6 million,  or 9.6%, to $29.7 million
for the three months ended  September  30, 1998 from $27.1 million for the three
months ended September 30, 1997. These increases  resulted from higher unit coal
traffic  (increase of 5.7%) due to a higher demand from several plants served by
KCSR,  partially  offset by decreased  shipments to another plant as a result of
outages experienced during the third quarter 1998.

         Intermodal  and other - Intermodal  and other  revenues  increased $1.2
million, or 7.7% to $16.8 million for the three months ended September 30, 1998,
from $15.6 million for the comparable  1997 period.  This increase is mainly due
to higher intermodal unit shipments (17.5%) quarter to quarter.

Exclusive of depreciation and amortization expense, the Transportation segment's
operating expenses increased $11.9 million,  or 11.6%, to $114.5 million for the
three months ended  September  30, 1998 from $102.6  million for the  comparable
1997 period,  primarily as a result of higher KCSR operating expenses and higher
KCSL Holding  Company costs related to the Consensus Plan (as the Consensus Plan
has been delivered to the STB, costs  associated with it are expected to decline
in the fourth  quarter 1998).  KCSR third quarter 1998  operating  expenses were
$6.4 million (6.9%) higher than third quarter 1997 as a result of volume-related
increases  as well as certain  unusual  specific  items.  Most  notably,  higher
expenses were realized in car hire, purchased services, casualties and insurance
and fringe related employee expenses,  partially offset by decreases in salaries
and wages and fixed lease expense.  Car hire costs increased  approximately $3.4
million as a result of changes in equipment utilization,  increased carloads and
track congestion arising primarily from  weather-related  problems. A portion of
the  increase  in car hire  costs was  offset by a  corresponding  $1.9  million
decrease in fixed lease expense as a result of changes in equipment utilization.
KCSR is  electing  not to renew  certain  leases in an effort  to  maximize  the
efficiency  of its  fleet and  reduce  overall  car  costs.  Purchased  services
increased  approximately  $1.7 million related to short-term  locomotive  leases
being utilized to handle  increased  volume.  Casualties  and insurance  expense
increased  approximately  $2.1  million  quarter to quarter as the result of the
settlement  of a personal  injury  claim and a third  quarter  1998  derailment.
Fringe and employee expenses increased approximately $2.4 million as a result of
increased headcount and travel-related  expenses to handle the increased volume.
Salaries and wages  decreased $1.7 million quarter to quarter as a result of the
termination of a union  Productivity  Fund, which occurred during fourth quarter
1997.  Despite some of these  unplanned  increases,  KCSR's  variable  operating
expenses as a percentage of revenues increased only 1% quarter to quarter.

Depreciation and amortization expense declined $1.5 million (9.6%) to $14.1
million for the three months ended September 30, 1998 from $15.6 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.

18

Driven by increased revenues and the continued containment of operating expenses
as discussed above, the Transportation segment's operating income increased $3.9
million, or 15.9% to $28.4 million for the three months ended September 30, 1998
from $24.5  million  for the three  months  ended  September  30,  1997.  KCSR's
improved operating results were reflected in an improved operating margin, which
rose by 15.7%,  as well as a reduction in the third quarter 1998 operating ratio
to 79.8% compared to 81.4% for third quarter 1997.

Operating  income  for the  KCSL  Holding  Company  and  Transportation  related
affiliates  declined  $1.9  million  quarter  to  quarter  as a result of higher
holding company expenses, particularly costs associated with the Consensus Plan.

The  Transportation  segment  recorded  estimated equity in net earnings of $1.8
million from its investment in Grupo TFM for the three months September 30, 1998
compared  to equity in net losses of $2.3  million  for the three  months  ended
September  30, 1997.  This  improvement  is primarily  attributable  to improved
revenues and operating  income,  coupled with tax benefits  associated  with the
devaluation of the peso.



Nine Months Ended September 30, 1998 Compared With Nine Months Ended September 30, 1997

                                NINE MONTHS ENDED SEPTEMBER 30, 1998          NINE MONTHS ENDED SEPTEMBER 30, 1997
                                -------------------------------------          ------------------------------------
                                                                   (in millions)
                                           Holding Company                               Holding Company
                                         and Transportation-                           and Transportation-
                                               Related   Consolidated                        Related   Consolidated
                                  KCSR       Affiliates Transportation          KCSR       Affiliates Transportation
                                                                                      
Revenues                       $   414.1    $    48.3     $  462.4           $   375.7    $    41.2     $  416.9
Costs and expenses                 288.6         41.1        329.7               285.5         32.7        318.2
Depreciation and amortization       38.0          4.5         42.5                40.9          5.2         46.1
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income                87.5          2.7         90.2                49.3          3.3         52.6
Equity in net earnings (losses) of
  unconsolidated affiliates:
    Grupo TFM                          -         (3.4)        (3.4)                  -         (5.3)        (5.3)
    Other                            1.4         (0.8)         0.6                 1.6          0.8          2.4
Interest expense                   (27.1)       (18.2)       (45.3)              (28.6)       (11.0)       (39.6)
Other, net                           7.4          2.7         10.1                 3.8          0.3          4.1
                               ---------    ---------     --------           ---------    ---------     --------
    Pretax income (loss)            69.2        (17.0)        52.2                26.1        (11.9)        14.2
Income tax provision (benefit)      27.1         (5.1)        22.0                11.5         (3.6)         7.9
                               ---------    ---------     --------           ---------    ---------     --------
    Net income (loss)          $    42.1    $   (11.9)    $   30.2           $    14.6    $    (8.3)    $    6.3
                               =========    =========     ========           =========    =========     ========



The  Transportation  segment  reported  earnings  of $30.2  million for the nine
months ended  September 30, 1998, a $23.9 million  increase over the  comparable
1997 period.  Exclusive of interest expense and estimated equity losses from the
Company's  investment  in Grupo TFM of $12.0 and $7.7 million for the first nine
months of 1998 and 1997,  respectively,  earnings improved $28.2 million for the
period to $42.2  million  from  $14.0  million  in  comparable  1997.  Increased
earnings  were  largely  because  KCSR nearly  tripled its net income  period to
period.

Total revenues increased $45.5 million, or 10.9%, to $462.4 million for the nine
months ended  September 30, 1998,  from $416.9  million for the nine months
ended  September  30,  1997.  This  growth was driven  primarily  by higher KCSR
revenues,   which  grew  $38.4  million,   or  10.2%,  period  to  period.  Also
contributing to the increase was Gateway  Western  revenues which increased 7.7%
for the nine month period ended  September 30, 1998 versus the  comparable  1997
period. KCSR revenues grew to $414.1 million for the nine months ended September
30, 1998 from $375.7 million for the same 1997 period,  primarily as a result of
higher  carloads,  which in total increased  11.9% (4.1% of increase  relates to

19

intermodal unit volume) for the nine months ended September 30, 1998 compared to
the same prior  period.  The  following is a summary of KCSR's  major  commodity
groups:

         Agricultural  and mineral  products - Agricultural  and mineral product
revenues  increased  11.5%, to $68.0 million for the nine months ended September
30,  1998,  from $61.0  million for the  comparable  1997 period  primarily as a
result of higher carloads for domestic and export grain,  food and  non-metallic
mineral  products  coupled  with higher  freight  revenue per carload for export
grain,  food and metallic  products.  These  increases were somewhat offset by a
reduction in the freight  revenue per carload for domestic grain  shipments.  As
mentioned in the third  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 17.2% of total carload revenues
for the nine  months  ended  September  30,  1998  compared  with  17.0% for the
comparable 1997 period.

         Chemical  and  petroleum  products -  Chemical  and  petroleum  product
revenues increased $7.2 million,  or 7.3%, to $105.1 million for the nine months
ended September 30, 1998, from $97.9 million for the nine months ended September
30, 1997.  Similar to trends  experienced  in third quarter 1998,  this increase
results from higher  miscellaneous  chemical and soda ash  shipments  and higher
revenue per carload from plastics and soda ash products,  partially  offset by a
reduction  of  petroleum  product  carloads.  Chemical  and  petroleum  products
accounted  for  26.6% of  total  carload  revenues  for the  nine  months  ended
September 30, 1998 versus 27.3% for the nine months ended September 30, 1997.

         Paper and forest products - Paper and forest product revenues increased
$3.2 million,  or 4.1%, to $82.5 million for the nine months ended September 30,
1998 from $79.3  million for the nine months ended  September  30,  1997.  These
improvements  are a result of the same  trends  discussed  in the third  quarter
analysis  and result  from higher  pulp,  paper and lumber  revenues,  partially
offset by a decline in pulpwood logs and chips and plywood  revenues.  Paper and
forest products  accounted for 20.9% and 22.1% of total carload revenues for the
nine months ended September 30, 1998 and 1997, respectively.

         Coal - Coal  revenues  increased  $13.2  million,  or  17.5%,  to $88.2
million for the nine months ended  September 30, 1998 from $75.0 million for the
comparable 1997 period,  as a result of  significantly  higher unit coal traffic
(increase of 23.5%). A portion of the increased revenues results from the higher
demand for coal  during  1998 by certain  utilities.  The  increased  demand for
electric  power  related to the  unseasonably  warm  weather in the region these
utilities serve was partially  responsible for the higher demand.  Additionally,
during 1997,  unit coal revenues were negatively  affected by unplanned  outages
(primarily  during first and second  quarter) at utilities  served by KCSR,  and
first  quarter  weather  problems  that  impacted  carriers as well as the mines
originating the coal. During the nine months ended September 30, 1998, more coal
trains were  delivered  because  utility  customers did not  experience the same
level of outages,  nor was the weather a  significant  factor in coal  delivery.
Also,  1998  results  reflect the  addition of a utility  customer  that was not
served by KCSR during the first three months of 1997.  Coal  accounted for 22.3%
and 20.9% of total carload revenues for the nine months ended September 30, 1998
and 1997, respectively.

         Intermodal  and other - Intermodal  and other  revenues  increased $5.9
million,  or 13.1%,  to $51.1  million for the nine months ended  September  30,
1998,  from $45.2 million for the comparable  1997 period.  This  improvement is
primarily the result of higher intermodal  revenues of $3.9 million arising from
increased  intermodal  traffic of 21.8% period to period.  Intermodal  and other
accounted  for  12.9% of  total  carload  revenues  for the  nine  months  ended
September 30, 1998  compared with 12.6% for the nine months ended  September 30,
1997.

20

Exclusive of depreciation and amortization expense, the Transportation segment's
operating expenses increased $11.5 million to $329.7 million for the nine months
ended September 30, 1998 from $318.2 million for the nine months ended September
30,  1997,  primarily  as a result of higher KCSR  operating  expenses  and KCSL
Holding  Company costs related to the  Consensus  Plan.  Total KCSR year to date
expenses were only $3.1 million higher than the comparable 1997 period,  despite
the  increase  in  revenues  during the same  period.  KCSR  variable  operating
expenses as a percentage of revenues  decreased more than 4% for the nine months
ended  September  30, 1998  compared  with the same 1997 period,  while  overall
expenses  declined  more  than 6% as a  percentage  of  revenues.  Increases  in
material and supplies,  car hire,  purchased services,  casualties and insurance
and fringe and other  employee  expenses  were offset by lower costs in salaries
and wages,  fuel, and lease  expense.  Similar to factors noted during the third
quarter 1998  analysis,  car hire  increased  $3.0 million,  purchased  services
increased  $1.3 million,  casualties and insurance  increased $1.1 million,  and
fringes and other  employee  expenses were $2.7 million higher period to period.
These increases were partially  offset by declines in salaries and wages of $3.8
million  and lease  expense of $3.9  million  period to period  also  related to
factors  discussed above.  Materials and supplies expense increased $2.5 million
period to  period  primarily  as a result  of  maintenance  on  locomotives  and
equipment.  Year to date 1998 fuel  expense  decreased  $1.1 million as compared
with the same 1997  period  arising  from a  decrease  in  average  fuel cost of
approximately 15%, offset by an increase in fuel usage of about 12%.

Depreciation  and  amortization  expense  declined $3.6 million  (7.8%) to $42.5
million for the nine months ended  September 30, 1998 from $46.1 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 $37.6 million, or 71.5% to $90.2 million for the nine
months  ended  September  30, 1998 from $52.6  million for the nine months ended
September  30,  1997,  as a result  of  increased  revenues  and a  decrease  in
operating  expenses  as a  percentage  of revenues as  discussed  above.  KCSR's
operating  ratio for the first nine months of 1998 was 78.7% compared with 85.7%
for the comparable 1997 period. This 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  estimated  equity in net  losses of $3.4
million from its investment in Grupo TFM for the nine months ended September 30,
1998  compared to equity in net losses of $5.3 million for the nine months ended
September  30, 1997.  Grupo TFM losses for the nine months ended  September  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. 1998 year
to date results include  estimated  equity in net earnings for the third quarter
as discussed above in the third quarter analysis,  which helped partially offset
equity in net losses recorded during the first two quarters of 1998.

Interest expense increased $5.7 million, or 14.4%, to $45.3 million for the
nine months  ended  September  30,  1998 from $39.6  million for the nine months
ended  September 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 $10.1  million  for the first nine  months of 1998 from $4.1  million for the
comparable  1997 period.  Included in this  increase is a one-time  gain of $2.9
million (pre-tax) from the sale of a branch line.

21


FINANCIAL ASSET MANAGEMENT


Three Months Ended September 30, 1998 Compared With Three Months Ended September 30, 1997

                               THREE MONTHS ENDED SEPTEMBER 30, 1998          THREE MONTHS ENDED SEPTEMBER 30, 1997
                               -------------------------------------          -------------------------------------
                                                                  (in millions)
                                           Holding Company                               Holding Company
                                 Janus,       and FAM-                         Janus,       and FAM-
                                Berger &      Related     Consolidated        Berger &      Related     Consolidated
                                 Nelson      Affiliates       FAM              Nelson      Affiliates       FAM
                                                                                      
Revenues                       $   177.2    $       -     $  177.2           $   131.5    $    (0.6)    $  130.9
Costs and expenses                  93.2          2.4         95.6                66.7          0.5         67.2
Depreciation and amortization        4.1          0.5          4.6                 3.3          0.4          3.7
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income (loss)         79.9         (2.9)        77.0                61.5         (1.5)        60.0
Equity in net earnings of
  unconsolidated affiliates:
    DST Systems, Inc.                  -          7.7          7.7                   -          5.6          5.6
    Other                            0.5            -          0.5                 0.1             -         0.1
Interest expense                    (0.3)        (1.5)        (1.8)               (1.5)        (0.8)        (2.3)
Other, net                           4.0         (2.8)         1.2                 2.7          1.0          3.7
                               ---------    ----------    --------           ---------    ---------     --------
    Pretax income                   84.1          0.5         84.6                62.8          4.3         67.1
Income tax provision (benefit)      33.2         (1.6)        31.6                24.9         (3.3)        21.6
Minority interest                    9.4            -          9.4                 6.7            -          6.7
                               ---------    ---------     --------           ---------    ---------     --------
    Net income                 $    41.5    $     2.1     $   43.6           $    31.2    $     7.6     $   38.8
                               =========    =========     ========           =========    =========     ========



Financial  Asset  Management  contributed  $43.6  million  to KCSI's  1998 third
quarter consolidated  earnings, an increase of 12% over comparable 1997. Average
assets under management by Janus and Berger were 28% higher during third quarter
1998 than third  quarter 1997 leading to a $46.3 and $17.0  million  increase in
revenues and operating income, respectively, over third quarter 1997.

U.S. assets under  management  (i.e.,  Janus and Berger)  decreased $5.8 billion
during third quarter 1998,  resulting from market  depreciation  of $9.9 billion
partially  offset by net sales of $4.1  billion.  U.S.  assets under  management
totaled  $87.4  billion at  September  30,  1998 ($84.0  billion at Janus;  $3.4
billion at Berger)  versus $71.6  billion at December 31, 1997 and $72.0 billion
at September  30, 1997.  Nelson,  acquired in April 1998,  reported  funds under
management of approximately $1.1 billion at September 30, 1998.

Third quarter 1998 FAM operating expenses increased to $100.2 million from $70.9
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,
depreciation  (resulting  from capital  investments  associated with growth) and
alliance fees under mutual fund "supermarket" distribution  arrangements.  Also,
Nelson results were included in 1998, contributing to the increase in expenses.

Third quarter 1998 equity  earnings  from DST  increased to $7.7 million  versus
$5.6 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 third quarter 1997 to 14.2% for third quarter 1998.

Financial Asset Management interest expense for the third quarter 1998 decreased
over comparable 1997 as a result of lower average debt balances during the third
quarter of 1998.  Other,  net  decreased  from prior year third quarter due to a
$1.6 million aggregate decline in marketable  investments  designated as trading
securities based on market fluctuations.

22



Nine Months Ended September 30, 1998 Compared With Nine Months Ended September 30, 1997

                              NINE MONTHS ENDED SEPTEMBER 30, 1998         NINE MONTHS ENDED SEPTEMBER 30, 1997
                              ------------------------------------         ------------------------------------
                                                                 (in millions)
                                           Holding Company                               Holding Company
                                 Janus,       and FAM-                         Janus,       and FAM-
                                Berger &      Related     Consolidated        Berger &      Related     Consolidated
                                 Nelson      Affiliates       FAM              Nelson      Affiliates       FAM
                                                                                      
Revenues                       $   490.1    $       -     $  490.1           $   348.2    $    (1.1)    $  347.1
Costs and expenses                 259.6          9.6        269.2               178.9          3.2        182.1
Depreciation and amortization       10.1          0.8         10.9                 9.5          0.6         10.1
                               ---------    ---------     --------           ---------    ---------     --------
    Operating income (loss)        220.4        (10.4)       210.0               159.8         (4.9)       154.9
Equity in net earnings of
  unconsolidated affiliates:
    DST Systems, Inc.                  -         22.7         22.7                   -         17.4         17.4
    Other                            1.1            -          1.1                 0.4            -          0.4
Interest expense                    (3.6)        (1.8)        (5.4)               (4.7)        (2.3)        (7.0)
Other, net                          16.3         (0.4)        15.9                 4.3          6.3         10.6
                               ---------    ----------    --------           ---------    ---------     --------
    Pretax income                  234.2         10.1        244.3               159.8         16.5        176.3
Income tax provision (benefit)      92.0         (3.4)        88.6                63.3         (0.1)        63.2
Minority interest                   25.8            -         25.8                17.3            -         17.3
                               ---------    ---------     --------           ---------    ---------     --------
    Net income                 $   116.4    $    13.5     $  129.9           $    79.2    $    16.6     $   95.8
                               =========    =========     ========           =========    =========     ========



For the nine  months  ended  September  30,  1998,  Financial  Asset  Management
contributed  $129.9  million,  a 36% 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 41% to $490.1 million and operating income
36% to $210.0 million compared to the nine months ended September 30, 1997. U.S.
assets under management  increased $15.8 billion during the first nine months of
1998,  driven by net  sales of $9.1  billion  and  market  appreciation  of $6.7
billion. Shareowner accounts numbered 2.9 million as of September 30, 1998 (a 9%
increase from December 31, 1997).

Year to date 1998  operating  expenses  increased to $280.1  million from $192.2
million in  comparable  1997.  This  increase  is a result of the rapid  revenue
growth  experienced  throughout  1997 and the first nine months of 1998.  Higher
expenses  were evident in salaries  and wages (see  comment in quarterly  review
above),   marketing  and   fulfillment,   alliance   distribution   fees,  costs
attributable to  expenditures  for Year 2000 readiness and efforts to effect the
separation of the Company's  business segments (which are reported under Holding
Company and FAM-Related Affiliates).

Year to date 1998 equity earnings from DST increased 30% 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 48.9
million at September  30, 1998, an increase of 8.7% from December 31, 1997 and 
13.5% from September 30, 1997.

Lower year to date 1998 interest  expense  compared to 1997 is  attributable  to
reduced indebtedness as a result of repayment using dividends from subsidiaries.
Other,  net  increased  from prior  year 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 of 1998,  partially  offset by an aggregate
$1.3 million decline in the value of trading securities.

23

A brief  discussion of Janus,  Berger and Nelson activity during the nine months
ended September 30, 1998 follows:

Janus
Janus  continues to report  growth in assets  under  management - a 24% increase
from  December 31, 1997.  Assets in Janus Advised  Funds (i.e.,  Janus  No-Load,
Aspen Series and WRL Series)  increased 25% from December 31, 1997. Also, assets
in private,  institutional and sub-advised accounts grew 21% 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 high  product  rankings  compared  to peers for the  majority  of Janus  fund
products;  (ii)  continued  growth  through new  monies,  partly  stemming  from
increased  marketing  efforts  during  1998;  and  (iii)  competitive  levels of
expenses and fees  compared to industry  standards.  During third  quarter 1998,
Janus initiated efforts to establish  international funds to be marketed outside
of the United States.  The majority of related start-up costs are expected to be
incurred during fourth quarter 1998.

Berger
Berger  management  continues efforts to position itself in the very competitive
equity  mutual fund market.  While the flagship  Berger 100  portfolio  works to
recapture  the growth it  experienced  in prior  years,  the Berger  complex has
expanded  through the addition of complementary  portfolios.  In addition to the
four new funds introduced by Berger during fourth quarter 1997 (the Berger Small
CapValue Fund, the Berger  Balanced Fund, the Berger Mid Cap Fund and the Berger
Select  Fund),  Berger added the Mid Cap Value Fund during  August  1998.  As of
September 30, 1998 these new funds had combined assets under  management of $296
million.  The Berger/BIAM  International Fund has more than doubled assets under
management from December 31, 1997 to $418.4 million at September 30, 1998.

Nelson
The Company  purchased Nelson in April 1998 to establish a European presence for
the  Financial  Asset  Management  business  segment.  With  Nelson's  focus  on
investors at or near retirement age and its unique  marketing  approach  through
seminars at  international  public and private  companies,  the Company believes
Nelson provides a strategic  partnering  synergy with the more conventional U.S.
mutual fund investing approach.



TRENDS AND OUTLOOK

The Company  reported a 29%  improvement in third quarter 1998 earnings per
diluted share  compared to third  quarter  1997.  Year to date 1998 earnings per
diluted  share were 53% higher than the same period in 1997.  Despite the recent
volatility  in the  financial  markets,  third  quarter  and  year to date  1998
earnings from the Financial Asset Management segment reflect continued growth in
assets under  management  and revenues  compared  with third quarter and year to
date  1997  results.   The   Transportation   segment   continued  its  earnings
improvement,  reporting  higher net income in third  quarter 1998 than in either
previous  quarter  in 1998  and  comparable  1997.  Year to date  Transportation
segment earnings have more than quadrupled from the comparable 1997 period.

A current outlook for the Company's businesses for the fourth quarter 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):

24

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,
       fourth  quarter  1998  revenues are  expected to remain  relatively  flat
       compared to third  quarter  1998  revenues  and be slightly  below fourth
       quarter  1997  revenues,  which  included  approximately  $3.9 million of
       revenues  related to diverted  Union Pacific  trains.  Variable costs and
       expenses are expected to continue at levels  proportionate  with revenues
       assuming the continued success of cost containment efforts.

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 fourth 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, except for those
       costs associated with the development of  international  fund products to
       be marketed by Janus outside of the United States.

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;  however,
       the tax impact of the  devaluation  of the peso could impact  earnings in
       the fourth  quarter.  Also, as discussed  previously,  the merger between
       USCS and DST is  expected to have a negative  impact on  earnings  during
       fourth quarter 1998.


LIQUIDITY AND CAPITAL RESOURCES


Summary cash flow data is as follows (in millions):
                                                                               Nine Months
                                                                           Ended September 30,    
                                                                         1998              1997   
                                                                                 
Cash flows provided by (used for):
    Operating activities                                              $   149.5        $    150.2
    Investing activities                                                  (99.7)           (339.1)
    Financing activities                                                  (55.4)            209.4
                                                                      ---------        ----------
    Cash and equivalents:
      Net increase (decrease)                                              (5.6)             20.5
      At beginning of year                                                 33.5              22.9
                                                                      ---------        ----------
      At end of period                                                $    27.9        $     43.4
                                                                      =========        ==========


During the nine months ended  September 30, 1998,  the  Company's  cash position
decreased  $5.6  million  from  December  31,  1997.  This  decrease  was caused
primarily  by cash used for property and  investment  acquisitions  and net debt
repayments,  offset by  positive  operating  cash  flows and  proceeds  from the
issuance of common stock under employee stock plans.

Year to date 1998 operating cash flows  decreased only slightly  compared to the
same  period in 1997.  This  decrease  was  chiefly  attributable  to changes in
working capital  components (e.g.  accrued  liabilities  decreased due to, among
other things,  payment of a union  productivity  fund during first quarter 1998)
resulting in net uses of cash offset by higher 1998 net income.

25

Cash flows used for investing activities for the nine months ended September 30,
1998 were $239.4  million lower  compared  with the same 1997 period.  Investing
expenditures  for the nine  months  ended  September  30,  1998  were  primarily
comprised of the investment in Nelson, KCSR property additions and net purchases
of short-term investments at Janus. Cash flows used during the first nine months
of 1997 included the Company's approximate $298 million investment in Grupo TFM.
Cash from investing  activities in 1998 was generated primarily from the sale of
the  equity  investment  in IDEX by Janus  and  proceeds  from the  disposal  of
property.

Financing cash flows were used primarily for the repayment of long-term debt and
payment of  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 nine months  ended  September  30, 1998  decreased  $264.8  million from the
comparable 1997 period due to $298.0 million of borrowings under credit lines in
1997 used to fund the Grupo TFM capital contribution,  partially offset by $47.1
million used to fund common stock repurchases during 1997.

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  completion  of  financing  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 are not met.

In addition to operating cash flows, the Company has financing available through
its various lines of credit (with a maximum borrowing amount of $606 million, of
which $248 million was available at September  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 $100 million of 5.75% Notes
, which  were due July 1, 1998  using  borrowings  under its  existing  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. 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 and into 1999.

The  Company's  debt  ratio  (total  debt as a percent  of total  debt plus
equity) at September 30, 1998 was 49.0%  compared to 56.8% at December 31, 1997.
Company  consolidated  debt  decreased  $59.6 million from December 31, 1997 (to
$857.0  million at September  30, 1998)  primarily as a result of  repayments of
debt exceeding  borrowings.  Consolidated  equity  increased $193.6 million from
December 31, 1997 primarily as a result of net income of $160.1 million, a $15.9
million non-cash equity adjustment related to unrealized gains on "available for
sale"  securities  held  by  affiliates  and  stock  options  exercised,  offset
partially by 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. Additionally,  the merger between DST and USCS is expected
to have a
 
26

one-time  negative  impact on  earnings  during  fourth  quarter  1998
(estimated to be as much as $20 million).  This transaction,  when effective, is
expected to decrease equity and, thus, negatively impact the debt ratio.


OTHER

Year 2000. Many existing computer programs and microprocessors that use only two
digits  (rather  than four) to  identify  a year could fail or create  erroneous
results with respect to dates after  December 31, 1999 if not  corrected to read
all four digits.  This computer program flaw is expected to affect all companies
and  organizations,  either  directly  (through a  company's  own  programs)  or
indirectly (through customers/vendors of the company).

These Year 2000 related issues are of particular  importance to the Company. The
Company  depends upon its computer and other systems and the computers and other
systems  of  third  parties  to  conduct  and  manage  the  Company's  business.
Additionally,  the Company's  products and services are heavily  dependent  upon
using  accurate  dates in order to function  properly.  These Year 2000  related
issues may also adversely affect the operations and financial performance of one
or more of the Company's customers or suppliers. As a result, the failure of the
Company's computer and other systems, products or services, the computer systems
and other systems upon which the Company depends,  or the Company's customers or
suppliers  to be Year 2000 ready  could have a  material  adverse  impact on the
Company's results of operations,  financial position and cash flows. The Company
is unable to assess the extent of that impact at this time.

The Company's Year 2000 project includes  identifying,  evaluating and resolving
potential Year 2000 related issues in the Company's computer systems,  products,
services,  other  systems and  third-party  systems.  As part of  resolving  any
potential  Year 2000  issues,  the Company  expects to:  identify  all  computer
systems,  products,  services and other systems  (including  systems provided by
third  parties) that must be modified;  evaluate the  alternatives  available to
make any  identified  systems,  products or services Year 2000 ready  (including
modification,  replacement or abandonment);  complete the  modifications  and/or
replacement of identified systems;  and conduct adequate testing of the systems,
products and services,  including  interoperability testing with clients and key
organizations in the financial services industry.

In  1997,  the  Company  and  its key  subsidiaries  formed  project  teams
comprised of employees and third party  consultants  to identify and resolve the
numerous  issues  surrounding  the Year  2000.  The  project  teams,  which  are
supervised  by members of senior  management,  regularly  report their  progress
toward  remediating  Year 2000 issues to management  and the Company's  Board of
Directors.  The areas in which the  project  teams  are  focusing  most of their
efforts are information  technology  ("IT") systems,  non-IT systems,  and third
party issues. The project teams also provide  comprehensive  corporate tracking,
coordination and monitoring of all Year 2000 activities.  The following provides
a summary of each area and the progress  toward  identifying  and resolving Year
2000 issues:

     IT  Systems.  In the  Transportation  segment,  all IT  systems,  including
     operating  /  transportation  and  revenue  systems as well as  accounting,
     payroll and support  systems,  have been analyzed and are in the process of
     being modified and tested for Year 2000 readiness.  To date,  approximately
     98% of the necessary remediation and 80% of the testing has been completed.
     Final  remediation and testing is expected to be completed by year-end 1998
     for all  systems  with the  exception  of the  operating  /  transportation
     systems, which are scheduled for completion in May 1999.

27

     In addition,  the IT hardware and software  inventory  necessary to operate
     the  mainframe  computer  and  associated  equipment  are  currently  being
     evaluated  for  Year  2000  issues.  Currently,  approximately  72%  of the
     hardware  inventory and 82% of software  inventory are Year 2000 ready. Any
     changes or  modifications  necessary to the  remaining  inventory are being
     made and Year 2000 readiness is expected to be completed by December 1998.

     The IT systems (including operating, accounting and supporting systems) and
     underlying  hardware  for the  companies  comprising  the  Financial  Asset
     Management segment have been analyzed and are being modified and tested for
     Year 2000  readiness.  While the  majority of the work has been  completed,
     final  remediation and testing is expected to be completed during the first
     half of 1999.

     Non-IT  Systems.  All equipment that contains an internal clock or embedded
     micro-processor  is being analyzed for Year 2000  readiness.  This includes
     PC's, software, fax machines, telephone systems, elevator systems, security
     and fire control systems,  locomotives,  signal and communications  systems
     and other miscellaneous equipment and devices.  Replacement and upgrades of
     all PC's and related  software is underway  and expected to be completed by
     December  1998. The evaluation of  locomotives,  signals and  communication
     systems   and  other   equipment   with   internal   clocks  and   embedded
     micro-processors continues and is expected to be completed during the first
     half of 1999.

     Third Party Systems.  The Company depends heavily on third party systems in
     the  operation  of its  businesses.  As  part  of the  Year  2000  project,
     significant third party  relationships are being evaluated to determine the
     status  of their  Year  2000  readiness  and the  potential  impact  on the
     Company's operations if those significant third parties fail to become Year
     2000  ready.  Questionnaires  have been sent to critical  suppliers,  major
     customers,  key banking and financial  institutions,  utility providers and
     interchange railroads to determine the status of their Year 2000 readiness.
     In  addition,  the  Company is working  with the  Association  of  American
     Railroads  (AAR) in its efforts to coordinate the Year 2000 project for all
     Class I railroads.  All Class I railroads have committed to being Year 2000
     ready by the end of 1998 and  initial  testing  between  railroads  started
     during second quarter 1998.

     Based  on  the  responses   received  to  the  questionnaires  and  ongoing
     discussions  with these third  parties,  the Company  believes,  based upon
     information  provided to the Company,  that the majority of the significant
     customers,  banking and financial  institutions,  suppliers and interchange
     railroads are or will be Year 2000 ready in all material aspects by the end
     of  calendar  year  1998  or  mid-1999.  We  do  not  anticipate,  however,
     performing  any   independent   testing   procedures  to  verify  that  the
     information  received by the Company from these third  parties is accurate.
     For  those  third  parties  who have not  responded  or who have  expressed
     uncertainty  as to their  Year  2000  readiness,  management  is  exploring
     alternatives to limit the impact this will have on the Company's operations
     and financial results. The Company will continue to monitor its third party
     relationships for Year 2000 issues.

Testing and Documentation Procedures. All modifications to IT and non-IT systems
are being  documented  and  maintained  by the  project  teams for  purposes  of
tracking  the Year 2000  project and as a part of the  Company's  due  diligence
process.  All  modified  systems have been or are in the process of being tested
extensively for Year 2000  remediation,  unit acceptance,  system acceptance and
user acceptance.  The testing procedures used and the results of these tests are
being  documented  and  maintained  as a part of the  Year  2000  due  diligence
process.

The project teams meet  periodically  (usually weekly) to discuss their progress
and ensure that all issues and problems are identified  and properly  addressed.
Quarterly  meetings are held with senior management to keep them apprised of the
progress of the Year 2000 project. 

28

Year 2000 Risks.  The Company is attempting to evaluate the principal risks
associated  with its IT and non-IT  systems,  as well as third party  systems if
they were not to be Year  2000  ready on a timely  basis.  Areas  that  could be
affected  include,  but are not limited to, the  ability  to:  accurately  track
pricing and trading information, obtain and process customer orders and investor
transactions,  properly  track and record  revenue  movements,  order and obtain
critical  supplies,  and operate equipment and control systems.  These risks are
presently  under  assessment and the Company has no basis to form an estimate of
costs or lost revenues at this time.

The Company  believes,  however,  that the risks  involved  with the  successful
completion of its Year 2000 conversion  relate primarily to available  resources
and third party  readiness.  The key success  factors include the proper quality
and quantity of human and capital  resources to address the complexity and costs
of the  project  tasks.  Currently,  the  Company  believes  that the project is
adequately  staffed by employees,  consultants and contractors.  The Company has
allocated  substantial resources to the Year 2000 project and believes the risks
of its IT and  non-IT  systems  not being  Year  2000  ready to be  minimal.  In
addition,  the Company is taking the necessary  precautions  to ensure its third
party relationships have been adequately addressed.  Based on work performed and
information received to date, the Company believes its key suppliers,  customers
and other third party  relationships  will be prepared  for the Year 2000 in all
material  respects within an acceptable time frame, or that alternatives will be
available.

Contingency  Plans.  The  Company  and its  subsidiaries  are in the  process of
identifying  alternative  plans in the event  that the Year 2000  project is not
completed on a timely  basis or otherwise  does not meet  anticipated  needs.  A
business  contingency  planning  specialist was recently hired and is working on
the initial contingency plans for critical business  processes.  This process is
scheduled to be completed by June 1999.

In addition,  an  information  system black out period has been  scheduled  from
October 1, 1999 to April 2000.  During this  period,  the project team and other
members of the  information  systems  group will focus all of their  efforts and
time toward  addressing  Year 2000 related  issues.  No new project  requests or
upgrades will be allowed during this time.

Year 2000 Costs.  To date,  the Company  has spent  approximately  $9 million in
connection with ensuring that all Company and subsidiary  computer  programs are
compatible  with Year 2000  requirements.  The Company  anticipates  spending an
additional  $15 million in  connection  with this  process.  Current  accounting
principles  require all costs associated with Year 2000 issues to be expensed as
incurred.  A portion of these costs will not result in an increase in accounting
expense to the Company because  existing  employees and equipment are being used
to complete the project.

While the Company continues to evaluate and pursue  discussions with its various
customers, partners and vendors with respect to their preparedness for Year 2000
issues,  no assurance can be made that all such parties will be Year 2000 ready.
While the Company cannot fully  determine its impact,  the inability to complete
Year 2000  readiness  for its  computer  systems  could  result  in  significant
difficulties in processing and completing fundamental  transactions.  In such an
event, the Company's  results of operations,  financial  position and cash flows
could be materially adversely affected. However, the Company does not anticipate
that business operations will be disrupted or that its customers will experience
interruption in the service of its  Transportation or Financial Asset Management
businesses.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not applicable


29


PART II - OTHER INFORMATION


Item 1. Legal Proceedings

Part I, Item 1.  Financial  Statements,  Note 14 to the  Consolidated  Condensed
Financial  Statements  of  this  Form  10-Q is  hereby  incorporated  herein  by
reference.


Item 6.  Exhibits and Reports on Form 8-K

a)   Exhibits

          Exhibit 10.1 - Appendix D to the Company's Notice and Proxy Statement
                         for A Special Meeting of Stockholders to be held
                         July 15, 1998, Kansas City Southern Industries, Inc. 
                         1991 Amended and Restated Stock Option and Performance
                         Award Plan (as amended and restated effective as of 
                         July 15, 1998), is hereby incorporated by reference as
                         Exhibit 10.1

          Exhibit 27.1 - Financial Data Schedule


b) Reports on Form 8-K

          The Company filed a Current  Report on Form 8-K dated November 5, 1998
          reporting the  withdrawal of the  Company's  pending  request with the
          Internal  Revenue  Service for a favorable  tax ruling on the proposed
          structure for the Spin-off of the Company's Financial Asset Management
          business.








30


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 November 12, 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)