SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K(Mark10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended
December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 Identification No.)
incorporation or organization) Identification No.)

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

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

Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
Preferred Stock, Par Value
$25 Per Share, 4%, Noncumulative New York Stock Exchange

Common Stock, $.01 Per Share Par Value New York Stock Exchange

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

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

Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "KSU." As of March 3, 1997, 36,032,136 shares of
common stock and 242,170 shares of voting preferred stock were outstanding.
On such date, the aggregate market value of the voting common and preferred
stock held by non-affiliates was $1,913,699,013 (amount computed based on
closing prices of preferred and common stock on New York Stock Exchange).

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:

Document Part of Form 10-K into which incorporated

Company's Definitive Proxy Statement for the 1997 Part III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 1996
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1996 FORM 10-K ANNUAL REPORT

Table of Contents

Page

PART I

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 2
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 5
Item 4. Submission of Matters to a Vote of Security Holders. . 5
Executive Officers of the Company. . . . . . . . . . . 5

PART II

Item 5. Market for the Company's Common Stock and
Related Stockholder Matters. . . . . . . . . . . . . 7
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 9
Item 8. Financial Statements and Supplementary Data. . . . . .38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . .78

PART III

Item 10. Directors and Executive Officers of the Company. . . .79
Item 11. Executive Compensation . . . . . . . . . . . . . . . .79
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . .79
Item 13. Certain Relationships and Related Transactions . . . .79

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . .80
Signatures . . . . . . . . . . . . . . . . . . . . . .85

ii
[Page 1]
Part I

Item 1. Business

(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS

The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, on pages 9 through 37 of this Form 10-K is incorporated
by reference in response to this Item 1.

(b) INDUSTRY SEGMENT FINANCIAL INFORMATION

The information set forth in response to Item 101 of Regulation S-K relative
to financial information by industry segment for the three years ended
December 31, 1996 under Part II Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, on pages 17 through 28 of
this Form 10-K, and Item 8, Financial Statements and Supplementary Data, at
Note 13. Industry Segments on pages 72 through 75 of this Form 10-K, is
incorporated by reference in response to this Item 1.

Employees. As of December 31, 1996, Kansas City Southern Industries, Inc.
("Company" or "KCSI") and its majority owned subsidiaries employed
approximately 3,800 persons, with approximately 2,780 employed in The Kansas
City Southern Railway Company, 900 in Financial Asset Management, and 120 in
Corporate & Other. In addition, unconsolidated affiliates of the Company and
its subsidiaries employed approximately 6,000 persons, including approximately
5,600 at DST Systems, Inc. ("DST"), the largest employer of such ventures.

[Page 2]
Item 2. Properties

In the opinion of management, the various facilities, office space and other
properties owned and/or leased by the Company (and its subsidiaries and
affiliates) are adequate for existing operating needs.

The Kansas City Southern Railway Company

The Kansas City Southern Railway Company ("KCSR") owns and operates
approximately 2,739 miles of main and branch lines, and approximately 1,106
miles of other tracks, in a nine state region, including Missouri, Kansas,
Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, and Texas. In
addition, approximately 215 miles of main and branch lines and 87 miles of
other tracks are operated by KCSR under trackage rights and leases.

Kansas City Terminal Railway Company (of which KCSR is a partial owner), with
other railroads, owns and operates approximately 80 miles of track, and
operates an additional 8 miles of track under trackage rights in greater
Kansas City, Missouri. KCSR also leases for operating purposes certain short
sections of trackage owned by various other railroad companies and jointly
owns certain other facilities with such railroads.

KCSR and the Union Pacific Railroad ("UP") have a haulage and trackage rights
agreement, which gives KCSR access to Nebraska and Iowa, and additional routes
in Kansas, Missouri and Texas. The haulage rights require the UP to move KCSR
traffic in UP trains; the trackage rights allow KCSR to operate its trains
over UP tracks.

KCSR owns and operates repair shops, depots and office buildings along its
right-of-way in support of its transportation operations. A major facility,
Deramus Yard, is located in Shreveport, Louisiana and includes a general
office building, locomotive repair shop, car repair shops, customer service
center, material warehouses and fueling facilities totaling approximately
226,750 square feet. KCSR owns a 108,000 square foot major diesel locomotive
repair facility in Pittsburg, Kansas. KCSR owns freight and truck maintenance
buildings in Dallas, Texas totaling approximately 125,000 square feet. KCSR
and KCSI executive offices are located in an eight story office building in
Kansas City, Missouri and are leased from a subsidiary of the Company.

KCSR owns and operates six intermodal facilities. These facilities are
located in Dallas, Texas; Kansas City, Missouri; Sallisaw, Oklahoma;
Shreveport and New Orleans, Louisiana; and Jackson, Mississippi. The facility
in Jackson was completed in December 1996. The various locations include
strip tracks, cranes and other equipment used in facilitating the transfer and
movement of trailers and containers.

At December 31, 1996, KCSR's fleet of rolling stock consisted of:

* 435 diesel locomotives: 160 owned by KCSR and 275 leased from
affiliates;
* 15,285 freight cars: 3,675 owned by KCSR, 8,612 leased from
non-affiliates, and 2,998 leased
from affiliates;
* 3,143 tractors, trucks and trailers: 7 owned or leased from an affiliate
and 3,136 leased from non-affiliates.

Some of this equipment is subject to liens created under conditional sales
agreements, equipment trust certificates and leases in connection with the
original purchase or lease of such equipment. KCSR indebtedness with respect
to equipment trust certificates, conditional sales agreements and capital
leases totaled approximately $96 million at December 31, 1996.

[Page 3]
Maintenance expenses for Way and Structure and Equipment (pursuant to
regulatory accounting rules, which include depreciation) for the three years
ended December 31, 1996 and as a percent of KCSR revenues are as follows
(dollars in millions):

KCSR Maintenance
Way and Structure Equipment
Percent of Percent of
Amount Revenue Amount Revenue

1996 $ 92.6 18.8% $ 99.8 20.3%
1995 88.0 17.5 108.8 21.7
1994 73.6 15.6 83.4 17.6

Southern Group, Inc. leases approximately 4,150 square feet of office space in
downtown Kansas City, Missouri from an affiliate of DST.

Financial Asset Management

Janus Capital Corporation ("Janus"). Janus leases from non-affiliates 227,000
square feet of office space in three facilities for administrative,
investment, and shareowner processing operations, and approximately 34,000
square feet for mail processing and storage requirements. These corporate
offices and mail processing facilities are located in Denver, Colorado. Janus
also leases 5,500 square feet for a customer service and telephone center in
Kansas City, Missouri and 1,400 square feet of office space in London, England
for securities research and trading.

Berger Associates, Inc. ("Berger"). Berger leases from a non-affiliate
approximately 29,800 square feet of office space in Denver, Colorado for its
administrative and corporate functions.

Corporate & Other

The Company is an 80% owner of Wyandotte Garage Corporation, which owns a
parking facility in downtown Kansas City, Missouri. The facility is located
adjacent to the Company's and KCSR's executive offices, and consists of 1,147
parking spaces which are utilized by the employees of the Company and its
affiliates, as well as the public.

Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian,
Louisiana under an industrial revenue bond lease arrangement with an option to
purchase. This facility includes buildings totaling approximately 12,000
square feet.

Pabtex, Inc. owns a 70 acre coal and petroleum coke bulk handling facility in
Port Arthur, Texas.

Mid-South Microwave, Inc. owns and operates a microwave system, which extends
essentially along the right-of-way of KCSR from Kansas City, Missouri to
Dallas, Beaumont and Port Arthur, Texas and New Orleans, Louisiana. This
system is leased to KCSR.

Other subsidiaries of the Company own approximately 8,000 acres of land at
various points adjacent to the KCSR right-of-way. Other properties also
include a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk
handling facility at Port Arthur, Texas, and several former railway buildings
now being rented to non-affiliated companies, primarily as warehouse space.

The Company owns 1,025 acres of property located on the waterfront in the Port
Arthur, Texas area, which includes 22,000 linear feet of deep water frontage
and three docks. Port Arthur is an uncongested port with direct access to the
Gulf of Mexico. Approximately 75% of this property is available for
development.

[Page 4]
Unconsolidated Affiliates

DST, an approximate 41% owned unconsolidated affiliate, owns a 161,000 square
foot Data Center located in Kansas City, Missouri, commonly known as its
Winchester Data Center.

DST master-leases three downtown Kansas City office buildings consisting of
approximately 353,000 square feet, in which DST or its affiliates occupy
approximately 145,000 square feet and the balance is leased to non-affiliated
tenants. This space is utilized by DST for its shareholder operations,
systems development and other support functions.

DST's subsidiaries own additional facilities in Kansas City, Missouri,
comprising approximately 1,746,000 square feet, and lease 1,030,000 square
feet in various locations throughout the United States. DST also leases
international properties with an aggregate 190,000 square feet of office
space.

In addition to the above properties, DST and its various subsidiaries own or
lease a number of surface parking lots in downtown Kansas City, Missouri, nine
properties outside the Kansas City, Missouri metropolitan area used for office
or production space, and office space in the Netherlands, Switzerland, Belgium
and South Africa.

DST owns or leases mainframe computers and significant amounts of auxiliary
computer support equipment (such as disk and tape drives, CRT terminals,
etc.), all of which are necessary for its computer and communications
operations.

Mexrail, Inc., a 49% owned KCSI affiliate, owns 100% of The Texas Mexican
Railway Company ("Tex-Mex") and certain other assets, including the northern
U.S. half of a rail traffic bridge at Laredo, Texas spanning the Rio Grande
river. This bridge is a significant entry point for rail traffic between
Mexico and the U.S. The Tex-Mex operates a 157 mile rail line extending from
Corpus Christi to Laredo, Texas, and also has trackage rights (from UP)
totaling approximately 360 miles between Corpus Christi and Beaumont, Texas.

Transportacion Ferroviaria Mexicana S. de R.L. de C.V. ("TFM") was awarded by
the Mexican Government the right to purchase 80% of the common stock of
Ferrocarril del Noreste, S.A. de C.V. ("FNE"). FNE holds the concession to
operate Mexico's approximate 2,500 mile "Northeast Railway" for the next 50
years, with the option of a 50 year extension (subject to certain conditions).
This railway, a strategically important rail link to Mexico and the North
American Free Trade Agreement corridor, is estimated to be responsible for
transporting approximately 40% of Mexico's rail cargo and is located next to
primary north/south truck routes. FNE will have the exclusive right to
operate the rail, but will not own the land, roadway or associated structures.
However, certain rail equipment, including approximately 370 locomotives and
8,800 freight cars, is included in the purchase price and will be owned by FNE
upon gaining operational control of the railway. In addition to the railway,
TFM (through FNE) also will have rights to office space at which various
operational, accounting, managerial and other activities will be performed.
The primary facilities are located in Mexico City and Monterrey, Mexico. TFM
was a 49% owned KCSI affiliate at December 31, 1996, but this interest may be
reduced to approximately 37% in 1997 if a letter of intent to sell a portion
of TFM to the Mexican Government is finalized. See additional information in
Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, on pages 10 and 11.

The outstanding stock of Gateway Western Railway Company ("Gateway Western")
is beneficially owned by KCS Transportation Company (a wholly-owned subsidiary
of the Company). At December 31, 1996, the Company reported Gateway Western
as an unconsolidated subsidiary. If the Company receives approval for the
acquisition of Gateway Western from the Surface Transportation Board, Gateway
Western will become a consolidated subsidiary of the Company. Gateway Western
operates a 402 mile rail line extending from Kansas City, Missouri to East St.
Louis and Springfield, Illinois. Additionally, Gateway Western has restricted
haulage rights extending to Chicago, Illinois from the Southern Pacific Rail
Corporation. Gateway Western connects with various eastern rail carriers at
East St. Louis.

[Page 5]
Item 3. Legal Proceedings

The information set forth in response to Item 103 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, on pages 34 through 36 of this Form 10-K is
incorporated by reference in response to this Item 3. In addition, see
discussion in Part II Item 8, Financial Statements and Supplementary Data, at
Note 11. Commitments and Contingencies on pages 69 and 70 of this Form 10-K.

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

No matters were submitted to a vote of security holders during the three month
period ended December 31, 1996.

Executive Officers of the Company

Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-K, the following list is included as
an unnumbered Item in Part I of this Form 10-K in lieu of being included in
KCSI's Definitive Proxy Statement which will be filed no later than 120 days
after December 31, 1996. All executive officers are elected annually and
serve at the discretion of the Board of Directors. Certain of the executive
officers have employment agreements with the Company.

Name Age Position(s)
L.H. Rowland 59 President and Chief Executive Officer, Director
M.R. Haverty 52 Executive Vice President, Director
P.S. Brown 60 Vice President and Associate General
Counsel and Assistant Secretary
R.P. Bruening 58 Vice President, General Counsel and
Corporate Secretary
D.R. Carpenter 50 Vice President - Finance
A.P. McCarthy 50 Vice President and Treasurer
J.D. Monello 52 Vice President and Chief Financial Officer
L.G. Van Horn 38 Vice President and Comptroller

Mr. Rowland has continuously served as President since July 1983 and Chief
Executive Officer since January 1987. He has been employed by the Company
since 1980, serving in numerous management positions, and has served as a
Director of the Company continuously since 1983. He also serves as Chairman
of the Board of KCSR and as a Director of Janus and Berger.

Mr. Haverty has continuously served as Executive Vice President and Director
of the Company since May 1995. From 1993 to 1995, he served as Chairman and
Chief Executive Officer of Haverty Corporation. From 1991 to 1993, he was an
independent executive transportation adviser. From 1989 to 1991, he served as
the President and Chief Operating Officer of The Atchison, Topeka & Santa Fe
Railway Company, and for several years prior, held numerous positions within
that organization. He also served as a director of Wisconsin Central Ltd. and
Gateway Western within the last five years. He serves as President and Chief
Executive Officer of KCSR.

Mr. Brown has continuously served as Vice President and Associate General
Counsel and Assistant Secretary since July 1992. From 1981 to July 1992, he
served as Vice President - Governmental Affairs.

[Page 6]
Mr. Bruening has continuously served as Vice President, General Counsel and
Corporate Secretary since July 1995. From May 1982 to July 1995, he served as
Vice President and General Counsel. He also serves as Senior Vice President
and General Counsel of KCSR.

Mr. Carpenter has continuously served as Vice President - Finance since
November 1996. He was Vice President - Finance and Tax from May 1995 to
November 1996. He was Vice President - Tax from June 1993 to May 1995. From
1978 to June 1993, he was a member in the law firm of Watson & Marshall L.C.,
Kansas City, Missouri. He also serves as Vice President - Finance of KCSR.

Mr. McCarthy has continuously served as Vice President and Treasurer since May
1996. He was Treasurer from December 1989 to May 1996. He also serves as
Vice President and Treasurer of KCSR.

Mr. Monello has continuously served as Vice President and Chief Financial
Officer since March 1994. From October 1992 to March 1994, he served as Vice
President - Finance. From January 1992 to October 1992, he served as Vice
President - Finance and Comptroller. From May 1989 to January 1992, he served
as Vice President and Assistant Comptroller. He also serves as Senior Vice
President and Chief Financial Officer of KCSR.

Mr. Van Horn has continuously served as Vice President and Comptroller since
May 1996. He was Comptroller from October 1992 to May 1996. From January
1992 to October 1992, he served as Assistant Comptroller. From January 1989
to January 1992, he served as Manager - Financial Reporting. He also serves
as Vice President and Comptroller of KCSR.

There are no arrangements or understandings between the executive officers and
any other person pursuant to which the executive officer was or is to be
selected as an officer, except with respect to the executive officers who have
entered into employment agreements, which agreements designate the position(s)
to be held by the executive officer.

None of the above officers are related to one another by family.

[Page 7]
Part II

Item 5. Market for the Company's Common Stock and Related Stockholder
Matters

The information set forth in response to Item 201 of Regulation S-K on the
cover (page i) under the heading "Company Stock," and in Part II Item 8,
Financial Statements and Supplementary Data, at Note 14. Quarterly Financial
Data (Unaudited) on pages 76 and 77 of this Form 10-K is incorporated by
reference in partial response to this Item 5.

The Company's Board of Directors authorized a 33% increase in its common stock
dividend in January 1996. The dividend will be reviewed annually and
adjustments considered that are consistent with growth in real earnings and
prevailing business conditions. Unrestricted retained earnings of the Company
at December 31, 1996 were $285.6 million.

At March 3, 1997, there were 6,183 holders of the Company's common stock based
upon an accumulation of the registered stockholder listing.

Item 6. Selected Financial Data
(in millions, except per share and ratio data)

The selected financial data below should be read in conjunction with the
consolidated financial statements and the related notes thereto, and the
Report of Independent Accountants thereon, included under Item 8 of this Form
10-K, and such data is qualified by reference thereto.

1996(i) 1995(ii) 1994 1993 1992

Revenues $ 847.3 $ 775.2 $1,088.4 $ 946.0 $ 722.3

Income from continuing
operations $ 150.9 $ 236.7 $ 104.9 $ 97.0 $ 63.8

Income from continuing
operations per
common share $ 3.92 $ 5.41 $ 2.32 $ 2.16 $ 1.43

Total assets $2,084.1 $2,039.6 $2,230.8 $1,917.0 $1,248.4

Long-term obligations$ 637.5 $ 633.8 $ 928.8 $ 776.2 $ 387.0

Cash dividends per
common share $ .40 $ .30 $ .30 $ .30 $ .30

Ratio of earnings
to fixed charges
(Exhibit 12.1 hereto) 3.30 6.14 (iii) 3.28 3.68 3.40

(i) Includes a one time after-tax gain of $47.7 million (or $1.24 per share),
representing the Company's proportionate share of the one time gain
recognized by DST in connection with the merger of The Continuum
Company, Inc., formerly a DST unconsolidated equity affiliate, with
Computer Sciences Corporation in a tax-free share exchange (see Note 2
to the consolidated financial statements in this Form 10-K).

[Page 8]
(ii) Reflects DST as an unconsolidated affiliate as of January 1, 1995 due to
the DST public offering and associated transactions completed in November
1995, which reduced the Company's ownership of DST to approximately 41%
and resulted in deconsolidation of DST from the Company's consolidated
financial statements. The public offering and associated transactions
resulted in a $144.6 million after-tax gain, or $3.31 per share to the
Company (see Note 2 to the consolidated financial statements included
in this Form 10-K).

(iii) Financial information from which the ratio of earnings to fixed charges
was computed for the year ended December 31, 1995 reflects DST as a
majority owned unconsolidated subsidiary through October 31, 1995, and
an unconsolidated 41% owned affiliate thereafter, in accordance with
applicable U.S. Securities and Exchange Commission rules and regula-
tions. If the ratio was computed to exclude the one time pretax gain
of $296.3 million associated with the November 1995 public offering
and associated transactions, the 1995 ratio of earnings to fixed
charges would have been 3.04.

All years reflect the reclassification of certain income/expense items from
"Revenues" and "Costs and Expenses" to a separate "Other, net" line item in
the Consolidated Statements of Income.

Above amounts reflect the 2-for-1 common stock split to shareholders of record
on February 19, 1993, paid March 17, 1993 and the 2-for-1 common stock split
to shareholders of record on February 14, 1992, paid March 17, 1992.

The information set forth in response to Item 301 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, on pages 9 through 37 of this Form 10-K is incorporated
by reference in partial response to this Item 6.

[Page 9]
Item 7. 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-K,
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-K. The actual
results of operations of Kansas City Southern Industries, Inc. ("KCSI" or
"Company") 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, which has
been filed with the U.S. Securities and Exchange Commission (File No. 1-4717)
and is hereby incorporated by reference herein. Readers are strongly
encouraged to consider these factors when evaluating any such forward-looking
comments.

The discussion herein is intended to clarify and focus on the Company's
results of operations, certain changes in its financial position, liquidity,
capital structure and business developments for the periods covered by the
consolidated financial statements included under Item 8 of this Form 10-K.
This discussion should be read in conjunction with these consolidated
financial statements, the related notes and the Report of Independent
Accountants thereon, and is qualified by reference thereto.

KCSI, a Delaware corporation organized in 1962, is a diversified holding
company with principal operations in rail transportation, through its
subsidiary The Kansas City Southern Railway Company and various equity
investments, and Financial Asset Management, through its subsidiaries Janus
Capital Corporation ("Janus") and Berger Associates, Inc. ("Berger"). 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:

The Kansas City Southern Railway Company - The Kansas City Southern Railway
Company ("KCSR"), a wholly-owned subsidiary of the Company, operates a Class I
Common Carrier railroad system. Also included in this segment is Southern
Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR. SGI is the holding
company for Carland, Inc. ("Carland"), as well as the accounting and loan
portfolio manager for Southern Capital Corporation, LLC ("Southern Capital"),
a 50% owned joint venture. See the "Results of Operations" section below for
information regarding the contribution of the majority of Carland assets and
certain assets of KCSR to Southern Capital in October 1996.

In addition to equity earnings from Southern Capital, the KCSR segment
includes equity earnings in Gateway Western Railway Company ("Gateway
Western"). As discussed below, KCS Transportation Company ("KCSTC," a
wholly-owned subsidiary of the Company) acquired beneficial ownership of the
outstanding stock of Gateway Western in December 1996. Until the Company's
proposed acquisition of Gateway Western is approved by the Surface
Transportation Board ("STB"), which is currently pending, Gateway Western will
be accounted for under the equity method as an unconsolidated subsidiary.

Financial Asset Management - This segment is engaged in the management of
investments for mutual funds, private and other accounts through Janus (an 83%
owned subsidiary) and Berger (an 80% owned subsidiary as of December 31, 1996,
increased to approximately 87% during January 1997).

Corporate & Other - Corporate & Other consists of equity in certain
unconsolidated affiliates, primarily DST Systems, Inc. ("DST," an approximate
41% owned affiliate), Mexrail, Inc. ("Mexrail," a 49% owned affiliate) and
Transportacion Ferroviaria Mexicana S. de R.L. de C.V. ("TFM," a 49% owned
affiliate at December 31, 1996, but which may be reduced to approximately 37%
during 1997 - see below); unallocated holding company expenses; intercompany
eliminations; and other less significant consolidated subsidiaries, including
Pabtex, Inc. ("Pabtex") and Trans-Serve, Inc. Beginning in 1997, equity
earnings from Mexrail and TFM will be included in the KCSR segment.

[Page 10]
As more fully discussed below, the Company and DST completed a public offering
of DST common stock and associated transactions in November 1995, which
reduced the Company's ownership of DST to approximately 41%. Accordingly, the
Company's investment in DST was accounted for under the equity method for the
year ended December 31, 1995 retroactive to January 1, 1995.

RECENT DEVELOPMENTS

Concession to Operate Mexico's Northeast Railway. On December 6, 1996, the
Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), together
with their joint venture, TFM, announced that the Mexican Government
("Government") had awarded to TFM the right to purchase 80% of the common
stock of Ferrocarril del Noreste, S.A. de C.V. ("FNE") for approximately
11.072 billion Mexican pesos (approximately $1.4 billion U.S.). FNE holds the
concession to operate Mexico's approximate 2,500 mile "Northeast Railway" for
the next 50 years, with the option of a 50 year extension (subject to certain
conditions).

The Northeast Railway is a strategically important rail link to Mexico and the
North American Free Trade Agreement ("NAFTA") corridor. The line is estimated
to transport approximately 40% of Mexico's rail cargo and is located next to
primary north/south truck routes. The Northeast Railway directly links Mexico
City and Monterrey, as well as Guadalajara (through trackage rights), with the
ports of Lazaro Cardenas, Veracruz, Tampico, and the cities of Matamoros and
Nuevo Laredo. Nuevo Laredo is a primary transportation gateway between Mexico
and the United States. The Northeast Railway will connect in Laredo, Texas to
the Union Pacific Railroad ("UP") and the Texas-Mexican Railroad Company
("Tex-Mex"), a wholly-owned subsidiary of Mexrail. The Tex-Mex links to KCSR
at Beaumont, Texas through trackage rights. With the KCSR and Tex-Mex
interchange at Beaumont, and through KCSR's connections with major rail
carriers at various other points in the United States, KCSR, together with
TMM, has developed a NAFTA rail system which is expected to facilitate the
economic integration of the North American marketplace.

TFM deposited approximately $560 million U.S. with the Government on January
31, 1997 (representing approximately 40% of the purchase price) as the initial
installment under the agreement to purchase FNE. The Company funded its
proportionate amount (approximately $277 million U.S.) of the initial
installment as a capital contribution to TFM using borrowings under existing
lines of credit. The Government has transferred to TFM 32% of the stock of
FNE and deposited an additional 48% of the stock in trust pending receipt of
the final installment of the purchase price from TFM. The remaining 20% of
FNE will be retained by the Government. The Government has the option of
selling its 20% interest through a public offering, or selling it to TFM
subsequent to October 31, 2003 at the share price paid by TFM indexed for
inflation at the Mexican Base Rate (i.e., the Unidad de Inversiones (UDI)
published by Banco de Mexico). In the event that TFM does not purchase the
Government's 20% interest, TMM and KCSI are obligated to purchase the
interest in proportion to their ownership interest in TFM.

The remaining 60% of the purchase price will be paid when TFM gains
operational control of the Northeast Railway, but in no case later than July
16, 1997. TFM (through FNE) has entered into a letter of intent with an
investment banking institution to finance the majority of this remaining
amount through a combination of a senior bank facility, a high yield note
offering, and (if necessary) a high yield bridge loan facility. Together with
a line of credit, the arrangements are expected to make available to TFM
approximately $875 million. The terms of the letter of intent include a
possible capital call of $150 million from TMM and the Company if certain
performance benchmarks, to be agreed upon, are not met. The Company would be
responsible for approximately $74 million of the capital call.

[Page 11]
The proceeds from the Government will be used to finance a
portion of the FNE purchase price. Upon completion of the transaction, the
Company's interest in TFM would be reduced from 49% to approximately 37%, and
the Company would account for its investment in TFM under the equity method.

In the event that the proceeds from the proposed debt financing and sale of
24.5% of TFM to the Government do not provide funds sufficient for TFM to make
the final installment of the purchase price, the Company may be required to
make additional capital contributions. In order to hedge against a portion of
the Company's exposure to a strengthening Mexican peso, in February and March
1997, the Company entered into two separate forward contracts to purchase
Mexican pesos - $98 million to mature in July 1997 and $100 million to mature
in May 1997. Any gains or losses associated with these contracts will be
deferred until maturity and accounted for as components of the Company's
investment in TFM. These contracts are intended to hedge only a portion of
the Company's exposure related to the final installment of the purchase price
and not any other transactions or balances. Additionally, TFM has entered
into approximately $600 million in forward contracts to hedge against its
exposure to a strengthening Mexican peso. See "Foreign Exchange Matters"
below.

Upon completion of TFM's purchase of 80% of FNE, the Company expects that its
investment in TFM will total approximately $300 million.

In addition to the initial contribution to TFM in connection with the
acquisition of FNE, the Company expects that TFM will require substantial
funding as it begins its efforts to upgrade the Northeast Railway's equipment,
systems, procedures and marketing capabilities in order to meet the growing
needs of Mexico's domestic and foreign trade. The Company believes the
anticipated financing arrangements discussed above will be sufficient to fund
these expected investments.(1)

Gateway Western Purchase. In December 1996, KCSTC (a wholly-owned subsidiary
of the Company) acquired beneficial ownership of the outstanding stock of
Gateway Western, a regional rail carrier with operations from Kansas City,
Missouri to East St. Louis and Springfield, Illinois. Gateway Western also
has restricted haulage rights between Springfield and Chicago from the
Southern Pacific Rail Corporation ("SP"). The acquisition will be accounted
for as a purchase. The consideration paid for Gateway Western (including
various acquisition costs and liabilities) was approximately $12.2 million,
which, based on initial purchase price allocations, exceeded the fair value of
the underlying net assets by approximately $12.1 million. The resulting
intangible will be amortized over a period of 40 years.

The stock acquired by KCSTC will be held in an independent voting trust until
the Company receives approval from the STB on the proposed transaction. The
approval process is expected to take approximately five months. If approved,
the voting trust will be dissolved and the shares transferred to KCSTC;
however, if the acquisition is not approved, the shares would have to be
disposed to a non-affiliated third party. While the Gateway Western stock is
held in trust, the Company will account for Gateway Western under the equity
method as a majority-owned unconsolidated subsidiary. If the shares are
transferred to KCSTC, purchase price allocations will be completed and Gateway
Western will become a consolidated subsidiary reported under the KCSR segment.

Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company,
Burlington Northern Santa Fe Corporation has the option of purchasing the
assets of Gateway Western (based on a fixed formula in the agreement) through
the year 2004.

Panama Railroad Concession. On July 1, 1996, the Panamanian Government
notified the Company and its partner, Mi-Jack Products, Inc., that they had
been awarded the exclusive right to negotiate a definitive agreement for the
concession to operate the Panama Railroad Company. The current route of the
Panama Railroad Company runs parallel to the Panama Canal. The Company is in
the process of evaluating the various alternatives available with respect to
the concession.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 12]
RESULTS OF OPERATIONS

Consolidated operating results during 1994-1996 were affected by the following
significant developments.

Southern Capital Joint Venture. On October 21, 1996, the Company and GATX
Capital Corporation ("GATX") completed the formation and financing of a joint
venture to perform certain leasing and financing activities. The venture,
Southern Capital, was formed through a GATX contribution of $25 million in
cash, and a Company contribution (through its subsidiaries KCSR and Carland)
of $25 million in net assets, comprising a negotiated fair value of
locomotives and rolling stock and long-term indebtedness owed to KCSI and its
subsidiaries. In an associated transaction, Southern Leasing Corporation (an
indirect wholly-owned subsidiary of the Company prior to dissolution in
October 1996), sold to Southern Capital approximately $75 million of loan
portfolio assets and rail equipment.

As a result of these transactions and subsequent repayment by Southern Capital
of indebtedness owed to KCSI and its subsidiaries, the Company received cash
which exceeded the net book value of its assets by approximately $47.2
million. Concurrent with the formation of the joint venture, KCSR entered
into operating leases with Southern Capital for the majority of the rail
equipment acquired by or contributed to Southern Capital. Accordingly, this
excess fair value over book value is being recognized over the terms of the
leases.

The cash received by the Company was used to reduce outstanding indebtedness
by approximately $217 million, after consideration of applicable income taxes,
through repayments on various lines of credit and subsidiary indebtedness.
The Company reports its 50% ownership interest in Southern Capital under the
equity method of accounting.

DST's Investment in Continuum. On August 1, 1996, The Continuum Company, Inc.
("Continuum"), formerly an approximate 23% owned DST unconsolidated equity
affiliate, merged with Computer Sciences Corporation ("CSC," a publicly traded
company) in a tax-free share exchange. In exchange for its ownership interest
in Continuum, DST received approximately 4.3 million shares (representing an
approximate 6% interest) of CSC common stock.

As a result of the transaction, the Company's 1996 earnings include
approximately $47.7 million (after-tax), or $1.24 per share, representing the
Company's proportionate share of the one time gain recognized by DST in
connection with the merger. Continuum ceased to be an equity affiliate of
DST, thereby eliminating any future Continuum equity affiliate earnings or
losses. DST recognized equity losses in Continuum of $4.9 million for the
first six months of 1996 and $1.1 million for the year ended December 31,
1995. DST recognized $5.0 million in equity earnings from Continuum in 1994.
CSC did not pay any dividends in 1996, consistent with historical practice.

Railroad Industry Trends and Competition. During the period from 1994 to
1996, the railroad industry has experienced ongoing consolidation.
Specifically, Burlington Northern, Inc. and Santa Fe Pacific Corporation
("BN/SF") merged in 1995, as did the UP and the Chicago and North Western
Transportation Company ("UP/CNW"). Also in 1995, the UP announced its
intentions to merge with SP, and the STB issued its formal approval of this
merger in August 1996 ("UP/SP"). In March 1997, CSX Corporation and Norfolk
Southern Corporation announced that they would each be purchasing parts of
Conrail, Inc.

As these transactions are not completed or have only recently been completed,
the Company cannot predict their ultimate outcome or effect on KCSR. However,
the Company believes that KCSR revenues are being negatively affected by
increased competition from the BN/SF and UP/CNW consolidations as a result of
diversions of rail traffic away from KCSR lines. When taken together with the
UP/SP merger, management believes that the recent railroad consolidations will
negatively impact KCSR revenues by approximately $25 million to $50 million
annually given current operating conditions and traffic patterns.(1)

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 13]
In addition to competition within the railroad industry, highway carriers
compete with KCSR throughout its operating area. Since deregulation of the
railroad industry, competition has resulted in extensive downward pressure on
freight rates. Truck carriers have eroded the railroad industry's share of
total transportation revenues. However, rail carriers, including KCSR, have
placed an emphasis on competing in the intermodal marketplace, working
together to provide end-to-end transportation of products.

Mississippi and Missouri River barge traffic, among others, also competes with
KCSR in the transportation of bulk commodities such as grains, steel, and
petroleum products.

See "Union Labor Negotiations" below for a discussion of the impact of labor
issues and regulations on competition in the transportation industry.

Stock Repurchase Program. The Company's Board of Directors ("Board") has
authorized management to repurchase a total of eleven million shares of KCSI
common stock as market conditions permit. During 1996, approximately 3.3
million shares were repurchased at an aggregate cost of approximately $151.3
million. Cumulatively, in excess of 8.2 million shares had been repurchased
under the program as of December 31, 1996. The repurchases were financed
through borrowings from existing lines of credit, and proceeds received from
issuance of Debentures in December 1995 and in connection with the November
1995 DST public offering and debt repayment to KCSI. In connection with this
program, the Company entered into a forward stock purchase contract for the
repurchase of shares. See discussion in "Financial Instruments and Purchase
Commitments" below.

Berger Joint Venture. Berger entered into a joint venture agreement with Bank
of Ireland Asset Management (U.S.) Limited, a subsidiary of Bank of Ireland,
to develop and market a series of international and global mutual funds. The
new venture, named BBOI Worldwide LLC ("BBOI"), is headquartered in Denver,
Colorado. Regulatory approvals were received in October 1996, and the first
no-load mutual fund product - the Berger/BIAM International Fund - was
introduced in fourth quarter 1996. Berger accounts for its 50% investment in
BBOI under the equity method.

Union Labor Negotiations. Approximately 86% of KCSR's employees are covered
under various collective bargaining agreements. In 1996, the Company
effectively settled labor contract disputes with all major railroad unions,
including the United Transportation Union, the Brotherhood of Locomotive
Engineers, the Transportation Communications International Union, the
Brotherhood of Maintenance of Way Employees, and the International Association
of Machinists and Aerospace Workers. The provisions of the various labor
agreements, which extend to December 31, 1999, generally include periodic
general wage increases, lump-sum payments to workers, and greater work rule
flexibility, among other provisions. Settlement of these labor issues
effectively mitigates the possibility of a work stoppage and did not have a
material effect on the Company's consolidated results of operations or
financial position.

As a result of these labor agreements, which will result in operating
efficiencies, management believes the Company is better positioned to compete
effectively with alternative forms of transportation, as well as other
railroads. However, railroads remain restricted by certain remaining
antiquated operating rules and are thus prevented from achieving optimum
productivity with existing technology and systems.(1)

KCSR and other railroads continue to be affected by labor regulations which
are more burdensome than those governing non-rail industries, such as trucking
competitors. The Railroad Retirement Act requires up to a 23.75% contribution
by railroad employers on eligible wages, while the Social Security and
Medicare Acts only require a 7.65% employer contribution on similar wage
bases. Other programs, such as The Federal Employees Liability Act (FELA),
when compared to worker's compensation laws, vividly illustrate the
competitive disadvantage placed upon the rail industry by federal labor
regulations.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 14]
Senior Management Employment Agreements. On January 16, 1996, the Company
announced the adoption of a performance based compensation plan for KCSI and
KCSR senior management. Senior officers agreed to freeze their salaries for
three years effective January 1, 1996, and to forego cash incentive
compensation for the same period, in exchange for performance stock options,
which provide returns based upon appreciation in the market value of the
Company's stock.

DST Public Offering. On October 31, 1995, DST and the Company effected an
initial public offering for a total of 22 million shares of DST common stock.
In conjunction with the offering, the Company completed an exchange of DST
shares for 1.8 million shares of KCSI common stock held by The Employee Stock
Ownership Plan ("ESOP"). On November 6, 1995, an over-allotment option was
exercised by the underwriters of the DST common stock offering for an
additional 3.3 million shares of DST common stock held by KCSI, effectively
completing the public offering. The Company recorded an after-tax gain of
approximately $144.6 million during the fourth quarter of 1995 from this
transaction, representing $3.45 per share in fourth quarter 1995 and $3.31 per
share for the year ended December 31, 1995. As a result of the offering and
associated transactions, the Company's ownership in DST decreased to
approximately 41%, and the DST investment was accounted for under the equity
method retroactive to January 1, 1995.

The purpose of the offering was to achieve market recognition of DST's
performance as a stand-alone entity and to obtain proceeds for the retirement
of debt, repurchase of Company common stock and general corporate purposes.
The net proceeds to the Company from the offering and repayment of
indebtedness by DST totaled approximately $200 million, after applicable
income taxes.

Mexrail Investment. In November 1995, the Company purchased 49% of the common
stock of Mexrail from TMM. Mexrail owns 100% of the Tex-Mex, as well as
certain other assets. The Tex-Mex operates a 157 mile rail line extending
from Corpus Christi to Laredo, Texas. The purchase price of $23 million was
financed through existing lines of credit. Upon completion of purchase price
allocations in 1996, approximately $9.8 million of intangibles were recorded
as the purchase price exceeded the fair value of the underlying net assets.
The intangible amounts are being amortized over a period of 40 years. The
investment is being accounted for under the equity method.

As a result of efforts by the Company in connection with the UP/SP merger, the
STB, as a condition for approval of the merger, granted the Tex-Mex trackage
rights to operate over UP lines between Corpus Christi and Beaumont, Texas.
In Beaumont, the Tex-Mex interchanges with KCSR, effectively extending the
KCSR rail network to the Mexican border, where it connects with the Northeast
Railway. As noted earlier, this interchange, together with KCSR's connections
with major rail carriers at various other points in the United States and the
Company's partial ownership of the Northeast Railway (through its equity
investment, TFM), positions KCSR to be an integral component of the economic
integration of the North American marketplace.

New KCSR Management. In May 1995, the Company's Board of Directors elected
Michael R. Haverty to the offices of President and Chief Executive Officer of
KCSR, and Executive Vice President of KCSI. He was also appointed a Director
of KCSI. With more than 25 years of railroad experience, the addition of Mr.
Haverty demonstrates the Company's renewed focus on its railroad operations.
The Company also filled several other important KCSR senior management
positions, bringing numerous years of relevant industry experience to the
organization.

KCSR Unusual Costs. During the first and second quarters of 1995, KCSR
recorded approximately $19.2 million (after-tax), or approximately $0.44 per
share, of unusual costs and expenses related to employee separations and other
personnel related activities, unusual system operational related expenses, and
reserves for contracts, leases and property.

[Page 15]
Debt Securities Registration and Offerings. The U.S. Securities and Exchange
Commission declared the Company's Registration Statement on Form S-3 (File No.
33-69648, originally filed on September 29, 1993) effective April 22, 1996,
registering $500 million in securities. However, no securities have been
issued. The securities may be offered in the form of Common Stock, New Series
Preferred Stock $1 par value, Convertible Debt Securities, or other Debt
Securities (collectively, "the Securities"). Net proceeds from the sale of
the Securities would be added to the general funds of the Company and used
principally for general corporate purposes, including working capital, capital
expenditures, and acquisitions of or investments in businesses and assets.

On December 18, 1995, the Company issued $100 million of 7% Debentures due
2025. The Debentures are redeemable at the option of the Company at any time,
in whole or in part, at a redemption price equal to the greater of (a) 100% of
the principal amount of such Debentures or (b) the sum of the present values
of the remaining scheduled payments of principal and interest thereon
discounted to the date of redemption on a semiannual basis at the Treasury
Rate (as defined in the Debentures agreement) plus 20 basis points, and in
each case accrued interest thereon to the date of redemption. The net
proceeds of this transaction were used to repay indebtedness on the Company's
existing lines of credit and for acquisition of KCSI common stock.

KCSI Credit Agreements. On May 5, 1995, the Company established a credit
agreement in the amount of $400 million. The credit agreement replaced
approximately $420 million of then existing Company credit agreements which
had been in place for varying periods since 1992. Proceeds of the facility
have been and are anticipated to be used for general corporate purposes. The
agreement contains a facility fee ranging from .07-.25% per annum, interest
rates below prime and terms ranging from one to five years. The Company also
has various other lines of credit totaling $120 million. These additional
lines, which are available for general corporate purposes, have interest rates
below prime and terms of less than one year. At December 31, 1996, the
Company had $40 million outstanding under its various lines of credit.

As discussed earlier, the Company funded its proportionate amount
(approximately $277 million) of the initial FNE purchase price payment made by
TFM to the Mexican Government using borrowings under its lines of credit.

KCSR Equipment Trust Certificates. In late 1994, KCSR completed the private
placement of financing for locomotives and rolling stock using Equipment Trust
Certificates ("ETC's"). The ETC's were placed for an aggregate of $54.7
million representing 31 locomotives, 625 boxcars and 300 covered hoppers,
which had been placed in service during 1993 and 1994. The financing
represents 85% of equipment value, bears interest at a rate of 8.56% and
matures in 2006.

Berger Acquisition. In October 1994, the Company acquired a controlling
interest in Berger. Berger is the investment advisor to The Berger One
Hundred Fund, The Berger Growth and Income Fund (formerly The Berger One
Hundred and One Fund), The Berger Small Company Growth Fund and The Berger New
Generation Fund, as well as to private and other accounts. In 1994, the
Company made payments of $47.5 million in cash, pursuant to a Stock Purchase
Agreement (the "Agreement"). The Agreement also provides for additional
purchase price payments totaling approximately $62.4 million, contingent upon
Berger attaining certain levels (up to $10 billion) of assets under
management, as defined in the Agreement, over a five year period. Any
additional payments made under the contingency clause of the Agreement will be
reflected as an adjustment to the purchase price.

The acquisition, which was accounted for as a purchase, increased the
Company's ownership in Berger from approximately 18% (acquired in 1992) to
over 80%. Adjustments to appropriate asset and liability balances were
recorded based upon estimated fair values of such assets and liabilities. The
transaction resulted in the recording of intangibles as the purchase price
exceeded the fair value of underlying tangible assets. In 1996 and 1995,
contingent payments were made totaling $23.9 and $3.1 million, respectively,
resulting in adjustment to the purchase price. The intangible amounts are
being amortized over their estimated economic life of 15 years.

[Page 16]
The financial statements of Berger were consolidated into the Company
effective with the closing of the transaction. Assuming the transaction had
been completed on January 1, 1994, the addition of Berger's revenues and net
income (including adjustments to reflect the effects of the acquisition on a
pro forma basis) as of and for the year ended December 31, 1994, would not
have had a material effect on the Company's consolidated results of
operations.

In January 1997, Berger purchased for treasury the common stock of a minority
shareholder. This transaction increased the Company's ownership in Berger to
approximately 87%, and resulted in approximately $8.7 million of intangibles,
which will be amortized over their estimated economic life of 15 years.

Termination of Janus Compensation Arrangements/Berger Minority Stock
Transaction. In fourth quarter 1994, the Company recorded certain one time
charges to earnings from its Financial Asset Management businesses. These one
time items were a result of the early termination of employment and earnings
related compensation arrangements for certain Janus key employees, and the
establishment of additional minority stock ownership of Berger for key Berger
employees.

The Janus compensation arrangements, which began in 1991, permitted
individuals to earn units which vested over time based upon Janus earnings.
These arrangements were scheduled to be fully vested at the end of 1996 and
would have continued to accrue benefits in subsequent years. The Company
negotiated the early termination of the arrangements, resulting in payments by
Janus of $48 million in cash, of which approximately $21 million had been
accrued. Termination of the arrangements resulted in a net reduction in
Janus' 1994 contribution to KCSI's consolidated earnings of $13.6 million or
$0.30 per share. By terminating this program, 1995 Janus operating expenses
were approximately $10 million lower than what they would have been if the
compensation arrangements were still in effect. Future years should continue
to benefit from this transaction through savings in compensation expense that
would have been incurred if these arrangements were still in effect.

The Berger stock transaction established minority stock ownership for certain
key Berger employees and resulted in a one time pretax increase in Berger's
operating expenses of $1.8 million. The additional minority stock was
intended to provide ownership incentive to these key employees for future
growth of Berger, and was anticipated in the Berger acquisition discussed
earlier.

Together, these Janus and Berger transactions reduced KCSI's consolidated 1994
earnings by $0.32 per share.

Completion of KCSR Track and Structure Rebuilding Program/Acceleration of
MidSouth Corporation Rebuilding Program. During 1994, KCSR concluded the
major portions of a rail track and structure program which began in 1986.
This program was implemented to upgrade the roadway in order to reduce
operating costs, improve safety, increase the capabilities of KCSR and
increase quality of service to customers. In addition, as part of the
MidSouth Corporation ("MidSouth") acquisition in July 1993, a planned upgrade
of the existing MidSouth roadbed was added to the program. Increased traffic
levels on both the original KCSR route and the MidSouth, however, accentuated
the need to accelerate the MidSouth portion of the program. By the end of
1994, KCSR had essentially completed the MidSouth upgrade program thereby
improving the capacity, efficiency and safety of the East/West MidSouth route.
Accordingly, KCSR capital expenditures for 1994 were $191 million.
Acceleration of the MidSouth program and completion of the majority of the
KCSR program in 1994 resulted in a reduction of railway capital expenditures
to $110 million in 1995. This roadway rebuilding program was funded with
internally generated cash flows.

[Page 17]
MidSouth Net Operating Loss Carryovers. In connection with the Company's
1993 purchase of MidSouth, the Company acquired operating loss carryovers
totaling $54 million, of which $22 million remained at December 31, 1996 (with
expiration dates beginning in the year 2004). Annual utilization of these
loss carryovers may be limited by the Internal Revenue Code as a result of a
change in ownership. Anticipated future tax benefits associated with the loss
carryovers were recorded as a reduction of recorded intangibles.

Safety and Quality Programs. KCSR continued the implementation of important
safety and quality programs during 1996. Related benefits are expected to be
recurring in nature and realizable over future years.(1) "Safety" and "Quality"
programs comprise two important ongoing elements of KCSR management's goal of
reducing employee injuries. Associated program expenses are not anticipated
to have a material impact on operating results in future years.

INDUSTRY SEGMENT RESULTS

The Company's major business activities are classified as follows (in
millions):

1996 1995(i) 1994

Revenues
KCSR $ 492.5 $ 502.1 $ 472.5
Financial Asset Management 329.9 239.8 186.3
Information & Transaction Processing 401.7
Corporate & Other 24.9 33.3 27.9

Total $ 847.3 $ 775.2 $1,088.4

% Change from Prior Year 9.3% (28.8)% 15.1%

Operating Income (Loss)
KCSR $ 74.1 $ 66.6 $ 106.7
Financial Asset Management 142.3 92.7 51.1
Information & Transaction Processing 31.2
Corporate & Other (12.5) (0.1) (1.8)

Total $ 203.9 $ 159.2 $ 187.2

% Change from Prior Year 28.1% (15.0)% (7.2)%

(i) Financial information for the year ended December 31, 1995 was restated to
reflect DST as an unconsolidated affiliate as of January 1, 1995 as a result
of the DST public offering and associated transactions completed in November
1995, which reduced the Company's ownership in DST to approximately 41%.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 18]
The presentation above presents 1996 and 1995 with DST as an unconsolidated
affiliate versus historical 1994. If 1994 was restated to a comparable basis
(i.e., DST would be reflected as an unconsolidated affiliate), consolidated
revenues and operating income would have been as follows (in millions):

1996 1995 1994

Revenues $ 847.3 $ 775.2 $ 691.2

% Change from Prior Year 9.3% 12.2% 13.7%

Operating Income $ 203.9 $ 159.2 $ 155.9

% Change from Prior Year 28.1% 2.1% (9.3)%

The Kansas City Southern Railway Company

The Kansas City Southern Railway Company segment includes KCSR, KCSR's
wholly-owned subsidiary, SGI (which owns Carland), and equity investments in
Southern Capital and Gateway Western.

KCSR operates a rail system of 2,954 main and branch line route miles and
4,147 total track miles in a nine state region, including Missouri, Kansas,
Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, and Texas.
KCSR has the shortest rail route between Kansas City and the Gulf of Mexico,
serving the ports of Beaumont and Port Arthur, Texas; and New Orleans, Baton
Rouge, Reserve and West Lake Charles, Louisiana. Through haulage rights, KCSR
accesses the states of Nebraska and Iowa, and serves the ports of Houston and
Galveston, Texas. Kansas City, Missouri, as the second largest rail center in
the United States, represents an important interchange gateway for KCSR. KCSR
also has interchange gateways in New Orleans and Shreveport, Louisiana; Dallas
and Beaumont, Texas; and Jackson and Meridian, Mississippi.

Major commodities moved by KCSR include coal, grain and farm products,
petroleum, chemicals, paper and forest products, as well as other general
commodities. KCSR competes in the intermodal traffic market, including an
East/West line running from Dallas, Texas to Meridian, Mississippi, which has
allowed KCSR to be more competitive in transcontinental intermodal
transportation. Additionally, in November 1994, KCSR began dedicated through
train service between Dallas, Texas and Meridian, Mississippi for intermodal
traffic, which competes directly with truck carriers along the Interstate 20
corridor, offering service times which are competitive with both truck and
other rail carriers.

In 1996, The Kansas City Southern Railway Company segment contributed $17.1
million to the Company's consolidated earnings as compared to $11.4 million in
1995. The increase in 1996 over 1995 is primarily attributable to the 1995
unusual costs and expenses discussed in "Results of Operations" above, which
reduced KCSR net income by approximately $19.2 million in 1995. Exclusive of
the 1995 unusual costs and expenses, KCSR 1996 earnings were lower than 1995,
mainly due to reduced revenues and higher operating costs attributable to
adverse winter weather (in first quarter 1996), train derailment expenses
(primarily in second quarter 1996), and expenditures associated with KCSR's
continuing emphasis on providing improved and reliable customer service.

The following summarizes components of KCSR's revenues (in millions):

1996 1995 1994

General Commodities $ 327.3 $ 339.8 $ 324.6
Coal 101.4 102.6 101.7
Intermodal 40.3 39.0 25.5
Other 23.5 20.7 20.7

Total $ 492.5 $ 502.1 $ 472.5

[Page 19]
1996 KCSR revenues were lower than 1995 due to a 4% reduction in general
commodities revenues. In particular, revenues decreased in grain traffic
(26%), bulk commodities (such as non-metallic minerals and petroleum coke -
9%), and paper/forest products (4%). These lower general commodities revenues
were primarily a result of an 8% decrease in carloading volumes, offset
partially by slightly improved revenue per carload average rates. KCSR
revenues were 6% higher in 1995 than 1994 from increased volumes in general
commodities (3%), coal (4%) and intermodal (48%).

Lower KCSR carloading volumes in 1996 were primarily a result of competitive
pressures from the various mergers recently completed in the railroad
industry. However, overall 1996 revenue per carload average rates were
slightly better than 1995 largely due to changes in the mix of general
commodities traffic (e.g., fewer carloadings of paper/forest products compared
to chemical and petroleum products in 1996 versus 1995). As noted earlier, the
recent mergers could negatively impact KCSR revenues by approximately $25
million to $50 million annually given current operating conditions and traffic
patterns.(1)

In contrast to 1996, rates in the last several years have experienced downward
pressures, largely due to competition from over the road truck transportation.
Changing regulations, subsidized highway improvement programs and favorable
labor regulations have improved the competitive position of trucks as an
alternative mode of surface transportation for many commodities. In recent
years, railroad industry management has sought avenues for improving its
competitive positions and forged alliances with truck companies in order to
provide faster, safer and more efficient service to its customers. KCSR
joined this industry trend and entered into agreements with several truck
companies for through train intermodal service between Dallas, Texas and
Meridian, Mississippi in November 1994 as noted above. In 1995, business
volumes benefited from a full year associated with this new intermodal
service, resulting in a $13.5 million (53%) increase in revenues over
comparable 1994. KCSR's 1996 intermodal revenues continued this growth trend
increasing 3% over 1995, despite a flat intermodal market in general.

In terms of carloadings, coal continues to be the largest single commodity
handled by KCSR, generating 22% of total revenue carloadings in 1996. KCSR
delivers coal to six electric generating plants, located at Amsterdam,
Missouri; Flint Creek, Arkansas; Welsh, Texas; Mossville, Louisiana; Kansas
City, Missouri; and Pittsburg, Kansas. Two coal customers, Southwestern
Electric Power Company and Gulf States Utility Company, comprised
approximately 83% of total coal revenues generated by KCSR in 1996. KCSR also
delivers lignite to an electric generating plant at Monticello, Texas
("TUMCO"). 1996 unit coal revenues were essentially equal to 1995, reflecting
historical tendencies of unit coal revenues to equalize on an annual basis.

Petroleum and chemicals, serviced via tank and hopper cars primarily to
markets in the Southeast and Northeast through interchange with other rail
carriers, as a combined group represents the largest commodity to KCSR in
terms of revenue ($116 million in 1996 versus $114 million in 1995). The
increase in 1996 is a result of increased volumes. Further, these carloading
volumes and revenues could grow in future years if the STB approves KCSR's
petition seeking approval for construction of a nine mile rail line from
KCSR's main line into the Geismar, Louisiana industrial area, which is
supported by three major chemical manufacturers.(1) The Geismar area is a
large industrial corridor with several companies engaged in the petro-chemical
industry, and is currently served by only one rail carrier. However, initial
construction will be delayed until the Company receives approval from the STB
(which is still pending).

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 20]
Paper and forest products carloadings decreased 6% versus comparable 1995 as a
result of business related volume declines. KCSR, the third largest railroad
in terms of pulp and paper carload originations in the U.S., serves eleven
paper mills directly (including International Paper Co. and Georgia Pacific,
among others) and six others indirectly through short-line connections, and
transports pulpwood, woodchips and raw fiber used in the production of paper,
pulp and paperboard.

Revenues from grain, farm and food products declined 16% compared to 1995,
largely from significantly reduced export grain traffic. This decline is
attributable to traffic diversions resulting from the various rail mergers and
the impact of weaker harvest conditions in fall 1995.

Despite the decrease in total KCSR revenues in 1996 versus 1995, KCSR 1996
operating income increased $7.5 million as a result of a 5% decrease in costs
and expenses (to $359.3 million) compared to 1995. This decrease is
attributable to the 1995 unusual costs and expenses. Exclusive of the 1995
unusual items, 1996 costs and expenses were higher than 1995 primarily due to
adverse winter weather (in first quarter 1996), train derailment expenses, and
KCSR's continuing emphasis on providing improved and reliable customer
service. Increased costs were evident in salaries and wages, material and
supplies and casualties/insurance. KCSR management implemented various cost
containment measures during third quarter, which stabilized expenses somewhat
in the second half of 1996, particularly in salaries and wages and car hire
costs.

KCSR depreciation and amortization expense increased 7% to $59.1 million in
1996 (versus $55.3 million in 1995) due to capital expenditures. The
depreciation savings associated with KCSR's October 1996 contribution of
locomotives and rolling stock to Southern Capital was minimal in 1996, but
will be greater in 1997 due to a full year of savings (although depreciation
on any 1997 capital expenditures will partially offset these savings).
Interest expense was slightly lower (3%) compared to 1995 due to a reduction
in debt as a result of the Southern Capital joint venture formation and
associated transactions.

Equity earnings from Southern Capital and Gateway Western were immaterial in
1996. See further discussion of equity earnings in the "Unconsolidated
Affiliates" section below.

KCSR's operating ratio, a common efficiency measurement among Class I
railroads, decreased to 84.5% for the year ended December 31, 1996 versus
84.8% for 1995. Excluding unusual costs and expenses, the 1995 operating
ratio would have been 78.9%, with the increase in 1996 largely due to lower
revenues and higher costs and expenses as discussed above. Additionally, the
Southern Capital joint venture transaction, while slightly increasing KCSR's
overall net income in 1996, raised the operating ratio by approximately
one-half percent for the year ended 1996 as a result of higher equipment lease
expense. The operating ratio for 1997 and thereafter will continue to be
affected by higher equipment lease expense resulting from the operating leases
entered into by KCSR with Southern Capital.

Revenue growth in 1995 was largely driven by a 5% increase in petroleum and
chemical carloadings over 1994. KCSR also experienced an 18% increase in
pulp/paper revenues in 1995 compared to 1994, due to a strong market for
paper, coupled with reduced 1994 revenues attributable to service interruption
caused by a Soo Line strike. Revenues for farm products increased
approximately 12% in 1995 versus 1994, largely a result of the Company's
increased focus on the domestic market in 1995 and weak results in 1994 as a
result of slow export grain traffic. 1995 unit coal revenues were slightly
higher than comparable 1994 due to increased volumes, primarily from the
resumption of shipments to TUMCO, which had been out of service since late
1993 and returned on line in June 1995.

The increased traffic levels in 1995, together with the unusual costs and
expenses through second quarter 1995, increased costs and expenses to $380.2
million versus $318.0 million in 1994. Higher costs were particularly evident
in the transportation, maintenance of way and maintenance of equipment areas,
mainly due to increases in the number of employees (e.g., train crews to
manage higher volumes). Also, during fourth quarter 1995, KCSR recorded an
expense of approximately $3.1 million (pretax) for expected payments to
employees upon ratification of new labor agreements. KCSR depreciation and
amortization expense increased 16% to $55.3 million in 1995 versus $47.8 in
1994 due to the completion, in late 1994, of KCSR's substantial track and
roadbed rebuilding program. 1995 interest expense was

[Page 21]
29% higher than 1994 primarily from higher average debt levels related to
capital programs. KCSR's operating ratio increased to 84.8% for the year
ended December 31, 1995 versus 76.2% for 1994, primarily as a result of the
unusual first and second quarter 1995 costs and expenses discussed earlier.
Excluding these unusual costs and expenses, the operating ratio would have
been 78.9%, with the increase over 1994 largely due to increased depreciation.

KCSR operations are faced with substantial costs related to fuel, labor, and
maintenance of its roadbed and equipment. KCSR locomotive fuel usage
represented 8% of KCSR operating costs in 1996 (7% in 1995). Fuel costs are
affected by traffic levels, efficiency of operations and equipment, and
petroleum market conditions. Control of fuel expenses is a constant concern
of management, and fuel savings remains a top priority. Based on favorable
market conditions at the end of 1995 and to help control fuel costs, the
Company entered into purchase commitments for approximately 50% of expected
1996 diesel fuel usage. As a result of increasing fuel prices during 1996,
these commitments saved KCSR approximately $3.7 million. Due to higher fuel
prices in 1996, minimal commitments have been made for 1997. If fuel prices
throughout 1997 remain relatively consistent with prices as of year end 1996,
KCSR operating expenses are expected to be higher.(1) See "Financial
Instruments and Purchase Commitments" below.

Portions of roadway maintenance costs are capitalized and other portions
expensed, as appropriate. Expenses aggregated $51, $49 and $43 million for
1996, 1995 and 1994, respectively. Maintenance and capital improvement
programs are in conformity with the Federal Railroad Administration's track
standards and are accounted for in accordance with the regulatory accounting
rules. Management expects to continue to fund roadway maintenance
expenditures with internally generated cash flows.(1)

Assuming no major economic deterioration occurs in the region serviced by
KCSR, management expects 1997 revenues to be relatively consistent with 1996,
indicative of the competitive pressures resulting from the various rail
mergers. Intermodal volumes should continue to grow, benefiting from
investment in and modernization of the Company's intermodal facilities, but
revenue growth will be at a slower rate due to increased price competition.
Additionally, KCSR cost containment initiatives implemented during 1996 will
continue into 1997. Beginning in 1997, the Company's equity investments in
TFM and Mexrail will be included in the KCSR segment. Management expects to
record losses associated with its investment in TFM during the initial years
of TFM's operation of the Northeast Railway; however, these losses will be
partially offset by equity earnings from the Southern Capital and Mexrail
investments.(1)

Financial Asset Management

Financial Asset Management contributed $69.1 million to 1996 consolidated
earnings, a 58% increase over the $43.8 million for comparable 1995. Assets
under management at December 31, 1996 were 46% higher than year end 1995,
fueling a 38% growth in 1996 revenues. Although variable operating expenses
increased in 1996, the increase was at a lower proportionate rate than
revenues, resulting in a 54% improvement in operating income over 1995 ($142.3
million in 1996 versus $92.7 million in 1995). The increase in variable
operating expenses was associated with higher business volumes, as well as
higher Janus performance-based compensation.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 22]
In 1995, Financial Asset Management contributed $43.8 million to consolidated
earnings, a 79% increase over comparable 1994. Excluding from 1994 earnings
the one time charge of $14.5 million from the early termination of employment
and earnings related compensation arrangements at Janus and establishment of
additional minority ownership at Berger, discussed earlier, 1995 Financial
Asset Management results were 12% higher than 1994. Increases in assets under
management, coupled with successful cost containment initiatives, helped to
improve operating income to $92.7 million, an increase of approximately 24%
over 1994 (exclusive of the one time charges discussed above).

The following table highlights assets under management and revenues:

1996 1995 1994

Assets Under Management (in billions):
Janus No-Load Funds $ 35.7 $ 24.2 $ 17.2
Janus Aspen Series (i) 1.4 0.4 0.1
IDEX Load Funds (ii) 1.4 1.1 0.9
Institutional and Separately
Managed Accounts (iii) 8.2 5.4 4.7

Total Janus 46.7 31.1 22.9
Berger Funds 3.6 3.4 3.0

Total $ 50.3 $ 34.5 $ 25.9

Revenues (in millions):
Janus $ 295.3 $ 207.8 $ 178.5

Berger $ 34.6 $ 32.0 $ 7.8 (iv)

(i) The Janus Aspen Series currently consists of nine portfolios offered
through variable annuity and variable life insurance policies, and
certain qualified pension plans
(ii) Janus serves as subadvisor to five of the IDEX Funds, whose assets are
included herein
(iii) 1994 includes Cash Equivalent Funds of $0.8 billion, which were serviced
by Janus, but advised by an unaffiliated party. In February 1995, Janus
introduced its own line of Money Market funds, replacing the Cash
Equivalent Funds
(iv) since October 1994 acquisition

Financial Asset Management revenue and operating income increases are a direct
result of increases in assets under management. Assets under management and
shareholder accounts have grown in recent years from a combination of new
money investments (i.e., fund sales) and market appreciation. Fund sales have
risen in response to marketing efforts, favorable fund performance,
introduction and market reception of new products, and the current popularity
of no-load mutual funds. Market appreciation has resulted from increases in
investment values.

Janus. Janus 1996 revenues, operating income and net income increased
significantly over 1995, largely due to 50% growth in assets under
management since December 31, 1995. Fund sales (net of redemptions) of $9.3
billion, coupled with market appreciation, raised total assets under
management to $46.7 billion at December 31, 1996. The value of net assets
in the Janus Funds (Janus No-Load Funds and Janus Aspen Series) increased
51% to $37.1 billion at December 31, 1996 versus $24.6 billion at December
31, 1995. Shareowner accounts grew to 2.3 million, a 9% increase over 1995.

[Page 23]
Operating expenses increased as a result of higher business volumes,
together with increases in incentive and variable compensation as a result
of strong investment and financial performance. However, operating expenses
declined as a percent of revenue due to successful cost containment efforts,
including a $5.1 million decrease in promotional and marketing expenses from
1995 due to a more focused marketing approach. Additionally, depreciation
and amortization costs declined approximately $1.9 million due to the
disposal of equipment during 1996.

The Janus Funds are marketed to pension plan sponsors through alliance
arrangements with record keeping organizations and by participating in
mutual fund "supermarkets," such as Charles Schwab's Mutual Fund "OneSource"
service and a similar program offered by Fidelity Investments. At December
31, 1996 and 1995, approximately 23% and 16%, respectively, of Janus' total
assets under management were generated through such alliance arrangements
and mutual fund "supermarkets."

Janus also markets advisory services directly to insurance companies, banks
and brokerage firms for their proprietary investment products, and directly
with private individuals, foundations, defined benefit pension plans and
other organizations. These areas accounted for $9.6, $6.5 and $4.8 billion
in assets under management at December 31, 1996, 1995 and 1994,
respectively.

In May 1996, the Janus Aspen High Yield Portfolio was introduced. In June
1996, Janus began managing the Janus Equity Income Fund. Janus introduced
the Janus Special Situations Fund, an equity fund, in December 1996.

Janus' 1995 performance reflects the results experienced by the mutual funds
market, in general. 1995 operating income increased significantly over 1994
due to growth in assets under management, coupled with depressed results in
1994 as a result of the one time charge of $13.6 million ($27.1 million
pretax increase in operating expenses) from the early termination of
employment and earnings related compensation arrangements, as discussed
earlier. Janus assets under management rebounded from slower growth
throughout 1994, increasing 36% to $31.1 billion at December 31, 1995
compared to $22.9 billion at December 31, 1994. Total fund sales were
$11.4 billion during fiscal 1995 versus $6.5 billion in 1994. These
improved earnings were partially offset by higher promotional and marketing
expenses (up $4.2 million over 1994), as a result of efforts to increase
recognition of the Janus brand name and to reach a class of potential
investors who have not typically used mutual funds as an investment
alternative.

In December 1995, the Janus Olympus Fund (equity fund) and Janus High Yield
Fund (bond fund) were introduced. On November 1, 1995, the Janus Twenty
Fund reopened to new share sales for the first time since February 1993.
Additionally, Janus introduced its own line of Money Market funds in 1995.

Berger. The Company made its first investment in Berger in 1992, when it
acquired an 18% interest. In October 1994, the Company acquired a
controlling interest in Berger (over 80%), and Berger became a consolidated
subsidiary of KCSI. In January 1997, KCSI's ownership in Berger increased
to approximately 87% due to Berger's repurchase of its common stock (for
treasury) from a minority shareholder.

Berger contributed a net loss of $1.2 million to consolidated earnings in
1996. Assets under management increased 6% to $3.6 billion at December 31,
1996 (compared to $3.4 billion at December 31, 1995), leading to an 8%
increase in revenues. However, increased operating costs, partially due to
amortization associated with intangibles, more than offset this increase in
revenues. Amortization increased as a result of the $23.9 million payment
made in May 1996 pursuant to the Berger Stock Purchase Agreement (as
discussed in "Results of Operations" above). Additionally, 1996 interest
expense was higher than 1995 due to indebtedness incurred to fund the May
1996 contingency payment. Shareholder accounts totaled 379,500 at December
31, 1996, a slight decrease from year end 1995.

[Page 24]
Each of Berger's newer product offerings, The Berger Small Company Growth
Fund and The Berger New Generation Fund, reported steady growth in assets
under management throughout 1996 (cumulatively increasing 55% from year end
1995). However, The Berger One Hundred Fund and The Berger Growth and
Income Fund, together representing over 64% of total Berger assets under
management, performed below their respective peer groups, and their total
assets under management decreased 7% since December 31, 1995.

In February 1997, Berger announced that Patrick Adams, formerly a fund
manager at Zurich Kemper Investments, Inc., would assume the
responsibilities as Portfolio Manager for The Berger One Hundred Fund, as
well as co-manage The Berger Growth and Income Fund with Mark McKinney,
formerly a senior analyst with Berger.

At December 31, 1996, approximately 27% of Berger's total assets under
management were generated through mutual fund "supermarkets."

Berger contributed essentially break-even results to the Company's 1995
consolidated earnings. An increase in revenues over 1994 (from a 13% gain
in assets under management) was offset by amortization and interest expense
increases (up $2.4 million and $2.3 million, respectively, over 1994)
associated with the additional acquisition made in 1994. Berger shareholder
accounts remained stable from 1994 to 1995, totaling approximately 381,000
at December 31, 1995. Berger expenses in 1995 were comparable to 1994.

Management believes Berger has name recognition in the industry, has had
favorable fund performance for certain products and, through the use of
marketing and promotional efforts, has attracted increasing fund sales and
investors. As discussed in "Results of Operations" above, Berger entered
into a joint venture (BBOI) to introduce a series of international and
global mutual funds. The first no-load mutual fund product, an international
equity fund, was introduced in fourth quarter 1996. Berger will account for
its 50% investment in BBOI under the equity method.

Future growth of the Company's Financial Asset Management revenues and
operating income will be largely dependent on prevailing financial market
conditions, relative performance of Janus' and Berger's products, introduction
and market reception of new products, as well as other factors, including
declines in the stock and bond markets, increases in the rate of return of
alternative investments, increasing competition as the number of mutual funds
continues to grow, and changes in marketing and distribution channels. Costs
and expenses should continue at operating levels consistent with the rate of
growth, if any, in revenues.(1)

Corporate & Other

The Corporate & Other segment in 1996 and 1995 consisted of equity in earnings
of DST, Midland Data Systems, Inc. / Midland Loan Services, L.P. (collectively
"Midland") and other less material unconsolidated affiliates; earnings of less
significant consolidated subsidiaries; unallocated KCSI Holding Company
operating expenses; intercompany eliminations; and miscellaneous other
investment activities. Additionally, the Company's equity investments in TFM
and Mexrail are included in the Corporate & Other segment in 1996. The
Company sold its investment in Midland in April 1996, resulting in a one time
after-tax gain of $1.7 million. For 1994, DST was reported as a consolidated
entity and its results included as a separate segment, Information &
Transaction Processing (see discussion below).

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 25]
Consolidated subsidiaries in this segment include, among others:

* Trans-Serve, Inc., an owner of a railroad wood tie treating facility and a
vehicle maintenance operation;
* Pabtex (located in Port Arthur, Texas with deep water access to the Gulf
of Mexico), an owner and operator of a bulk materials handling facility
which stores and transfers coal and petroleum coke from trucks and rail
cars to ships and barges primarily for export;
* Mid-South Microwave, Inc., which owns and leases a 1,600 mile industrial
frequency microwave transmission system that is the primary communications
facility used by KCSR;
* Rice-Carden Corporation and Tolmak, Inc., both owning and operating
various industrial real estate and spur rail trackage contiguous to the
KCSR right-of-way; and
* Southern Development Company, the owner of the executive office building
in downtown Kansas City, Missouri used by KCSI and KCSR.

Corporate & Other earnings for the year ended December 31, 1996 were $64.7
million compared to $181.5 million in 1995. 1995 earnings include the $144.6
million after-tax gain resulting from the DST stock offering. 1996 earnings
were favorably impacted ($47.7 million after-tax) by KCSI's proportion of the
DST one time gain on the Continuum merger discussed previously.

Exclusive of these non-recurring items in 1996 and 1995, Corporate & Other
1996 earnings decreased approximately $19.9 million from 1995. This decrease
is attributable to the following factors:

i) increased KCSI Holding Company costs due to the Company's activities
related to the UP/SP merger ($2.9 million after-tax during 1996);
ii) reduced equity earnings from DST due to a lower ownership percentage
throughout 1996 (i.e., 1995 DST earnings were reported at 100% until the
public offering in October 1995);
iii) lower equity earnings from other investments, primarily Midland; and
iv) a $2.2 million decrease in Pabtex earnings for the year ended December 31,
1996 as a result of the loss of a major customer in December 1995.

These decreases in net income were partially offset by reduced interest
expense in 1996 compared to 1995 due to lower average debt balances in 1996,
largely because of lower balances in early 1996 as a result of debt repayments
made from the proceeds received by the Company in connection with the DST
stock offering in November 1995.

Corporate & Other contributed $181.5 million to the Company's 1995
consolidated earnings versus $6.0 million in 1994, reflecting the $144.6
million after-tax gain associated with the DST public offering and associated
transactions. Additionally, equity in earnings of DST totaling $24.6 million
were included for the year ended December 31, 1995 as if DST was an
unconsolidated affiliate as of January 1, 1995. In 1994, equity in earnings
included in the Corporate & Other segment represent only minor investments.
See additional discussion in "Unconsolidated Affiliates" below.

Earnings of consolidated subsidiaries included in the Corporate & Other
segment were not material in 1995. Pabtex experienced an earnings increase in
1995 of approximately $1.5 million compared to 1994 associated with increased
volumes at the petroleum coke export facility.

The Company expects any earnings in this segment to derive primarily from its
equity ownership in DST. As a result of the 1996 Continuum merger, DST
earnings will no longer include equity earnings from Continuum. Future
earnings for other subsidiaries and affiliates are expected to be relatively
consistent with historical performance and not material to the Company's
consolidated results of operations.(1)

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 26]
Information & Transaction Processing (1994)

The Company's previously wholly-owned subsidiary, DST, comprised the
Information & Transaction Processing segment in 1994. Equity earnings from
DST are currently reported under "Unconsolidated Affiliates" (see below).
DST, formed in 1968, together with its subsidiaries and joint ventures,
provides sophisticated information processing and computer software services
and products, primarily to mutual funds, insurance providers, banks and other
financial services organizations. Historically, the majority of DST revenue
was generated from full-service and remote-service record keeping for the
mutual fund industry. Output Technologies, Inc., a DST subsidiary, is
involved in the financial printing, mailing, output processing and related
business lines. DST's principal product lines include: Mutual Fund
Shareowners Accounting System, Securities Transfer and Portfolio Accounting
Systems, Automated Work Distributor TM, and products/services for
international markets. A significant amount of DST's net income has
historically been derived from the operations of its various joint ventures.

Unconsolidated Affiliates

In 1996 and 1995, earnings from unconsolidated affiliates consisted
principally of DST, Midland (a 45% owned affiliate prior to its sale in April
1996), and Mexrail. Also, equity earnings from Southern Capital for its first
two months of operations are included in 1996, as are minimal results of
operations from the Company's Gateway Western and TFM investments. In 1994,
earnings from unconsolidated affiliates were attributable to DST's equity in
the earnings of Investors Fiduciary Trust Company Holdings, Inc. ("IFTC," a
50% owned DST affiliate prior to its sale discussed below), Boston Financial
Data Services, Inc. (a 50% owned DST affiliate), Continuum (a 29% owned DST
affiliate in 1994), Argus Health Systems, Inc. (a 50% owned DST affiliate) and
Midland. During 1995, DST sold its interest in Midland to the Company, and
accordingly, Midland earnings were included in the Company's earnings from
unconsolidated affiliates.

1996. Equity in net earnings of DST totaled $68.1 million for the year ended
December 31, 1996. This total includes KCSI's proportionate share of the DST
one time gain on the Continuum merger discussed in "Results of Operations"
above. Exclusive of this non-recurring item, equity earnings from DST
decreased approximately 33% from 1995. This decrease is attributable to a
lower percentage ownership of DST in 1996 versus 1995 as discussed earlier.
In addition to the gain on the Continuum merger, comparisons of DST earnings
in 1996 versus 1995 were affected by several factors, including: i) the 1995
after-tax gain of $4.7 million associated with DST's sale of IFTC (discussed
below); ii) lower fourth quarter 1995 equity earnings due to acquisition
related expenses of DST's Continuum investment (discussed below); iii) the
first quarter 1996 effect of a $4.1 million non-recurring charge related to
Continuum; iv) a 20% increase in revenues over 1995; v) a 13% increase in
mutual fund shareowner accounts serviced; and vi) a $15 million decline in
interest costs from 1995.

Equity earnings from the Company's investments in Southern Capital, Mexrail,
Gateway Western and TFM were immaterial in 1996. However, as noted earlier,
management expects to record losses from its investment in TFM during the
initial years of TFM's operation (through FNE) of the Northeast Railway until
the Company is able to implement more efficient railroad operations consistent
with plans.(1) Additionally, the investment in TFM has certain risks associated
with operating in Mexico, including, among others, foreign currency exchange,
cultural differences, varying labor and operating practices, and differences
between the U.S. and Mexican economies. TFM losses are expected, however, to
be offset somewhat by equity earnings from the Southern Capital and Mexrail
investments.(1)

Prior to the sale of Midland in April 1996, the Company recorded equity in
earnings from Midland of $0.7 million versus $5.2 million in 1995.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 27]
1995. Equity earnings from DST of $24.6 million were included for the year
ended December 31, 1995 as if DST had been an unconsolidated affiliate as of
January 1, 1995. DST's 1995 results were impacted by two significant
transactions:

In fourth quarter 1995, Continuum recorded a non-recurring charge related
to its December 1995 acquisition of SOCS Groupe, S.A., a French insurance
software firm. DST recognized an estimated $8.4 million loss for its
share of Continuum's non-recurring charge, of which the Company's
approximate 41% share is included in 1995 equity in earnings from
unconsolidated affiliates.

On January 31, 1995, DST completed the sale of its 50% interest in IFTC
to State Street Boston Corporation ("State Street"). At closing, DST
received 2,986,111 shares of State Street common stock in a tax-free
exchange (representing an approximate 4% ownership interest in State
Street). As a result of this transaction, the Company recognized a net
gain of $4.7 million in first quarter 1995. With the closing of the
transaction, IFTC ceased to be an unconsolidated affiliate of DST and no
further equity in earnings of IFTC were recorded by DST. The Company
recognized equity in earnings from IFTC of $6.5 million in 1994. DST
received approximately $2.2 and $1.5 million in dividends from State
Street during 1996 and 1995, respectively.

In addition to these transactions, DST's 1995 earnings reflect a 20% increase
in revenues over 1994, a 14% increase in mutual fund shareowner accounts
serviced, and continued efforts to develop and integrate developmental and
international business units.

Midland equity in earnings were $5.2 million in 1995 versus $1.7 million in
1994. The significant increase in 1995 was due to the receipt of incentive
payments under certain contracts during fourth quarter 1995.

Equity in earnings from Mexrail were immaterial to the Company's consolidated
results of operations during 1995 as they were included as an equity
investment for less than two months in 1995.

Interest Expense

Consolidated interest expense decreased 9% in 1996 to $59.6 million versus
$65.5 million in 1995. This decrease resulted from lower average debt
balances throughout 1996, largely due to lower year end 1995 debt balances as
a result of the repayment of indebtedness using the proceeds received in
connection with the DST public offering and associated transactions.
Additionally, interest savings from the October 1996 Southern Capital joint
venture formation and associated transactions substantially offset interest
associated with borrowings throughout 1996 used to repurchase Company common
stock.

Consolidated interest expense increased 22% in 1995 to $65.5 million compared
to $53.6 million in 1994. This increase was a result of higher average debt
balances throughout 1995 (although ending balances were lower due to repayment
of credit lines using the proceeds received from the DST public offering and
associated transactions). Higher 1995 debt balances were due to the
acquisition of a controlling interest in Berger in late 1994, the purchase of
additional ownership in Janus in early 1995, and the Company's stock
repurchase program.

Management expects interest expense to be higher in 1997 compared to 1996 due
to borrowings under the Company's lines of credit to fund its investment in
TFM.(1) However, as a significant portion of the Company's debt at December
31, 1996 represents fixed rate debt instruments, the Company's risk to
increasing interest rates is somewhat mitigated.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 28]
Other, Net

Generally, modest fluctuations have occurred within this component from 1994
to 1996. The increase in 1996 from 1995 is largely due to the one time gain
of approximately $2.9 million recorded by KCSR in connection with the sale of
real estate, partially offset by higher 1995 interest income from advances to
DST throughout the first nine months of 1995. The increase in 1995 from 1994
primarily relates to interest income earned by the Company from advances to
DST during 1995, partially offset by the exclusion of DST interest income
resulting from the deconsolidation of DST from KCSI's consolidated results in
1995.

LIQUIDITY

Operating Cash Flows. The Company's cash flow from operations has
historically been positive and sufficient to fund operations, KCSR roadway
capital improvements, and debt service. External sources of cash -
principally negotiated bank debt, public debt and sales of investments - have
typically been used to fund acquisitions, new investments, equipment additions
and Company stock repurchases.

The following table summarizes operating cash flow information. Financial
information for the year ended December 31, 1995 was restated to reflect DST
as an unconsolidated affiliate as of January 1, 1995 due to the DST public
offering and associated transactions completed in November 1995, which reduced
the Company's ownership in DST to approximately 41%. Financial information
for the year ended December 31, 1994 reflects historical results which include
DST as a consolidated entity. Certain reclassifications have been made to
prior years' information to conform to current year presentation.

(in millions):

1996 1995 1994

Net income $ 150.9 $ 236.7 $ 104.9
Depreciation and amortization 76.1 75.0 119.1
Equity in undistributed earnings (66.4) (29.8) (23.9)
Gain on sale of equity investment, net (144.6) (i)
Dividend from DST Systems, Inc. 150.0
Change in working capital items (74.2) 20.2 (ii) 13.5
Deferred income taxes 18.6 25.9 (ii) 20.0
Other 16.0 18.5 3.8

Net operating cash flow $ 121.0 $ 351.9 $ 237.4

(i) Gain associated with DST public offering
(ii) Exclusive of the tax components related to the gain on sale of equity
investment

1996 operating cash flows decreased by $230.9 million from 1995, largely
attributable to the $150 million dividend paid by DST to the Company in 1995,
together with a significant decrease in accrued liabilities as a result of the
payment (in 1996) of approximately $74 million in federal and state income
taxes associated with the taxable gains from the DST stock offering in
November 1995. Operating cash flows in 1995 were $351.9 million, a 48%
increase over 1994. The improved operating cash flow in 1995 was primarily
due to the $150 million dividend paid by DST in May 1995, partially offset by
lower net income, after adjustment for the net gain on the sale of DST, and
non-cash depreciation and amortization. Depreciation and amortization
decreased in 1995 due to the deconsolidation of DST, offset somewhat by
increased amortization associated with the purchase of additional ownership
interests in Berger and Janus, and higher depreciation at KCSR due to capital
expenditures.

[Page 29]
Summary cash flow data is as follows (in millions):

1996 1995 1994

Cash flows provided by (used for):
Operating activities $ 121.0 $ 351.9 $ 237.4
Investing activities 20.9 69.3 (335.7)
Financing activities (150.8) (402.1) 104.4
Net increase (decrease) in
cash and equivalents (8.9) 19.1 6.1
Cash and equivalents at beginning of year 31.8 12.7 6.6

Cash and equivalents at end of year $ 22.9 $ 31.8 $ 12.7

Investing Cash Flows. Cash was used for the following investing activities:
i) property acquisitions of $144.0, $121.1 and $287.7 million in 1996, 1995
and 1994, respectively; and ii) investments in and loans with affiliates of
$41.9, $94.5, and $24.6 million in 1996, 1995 and 1994, respectively. In
addition, due to growth throughout 1996, Janus had approximately $39.2 million
in short-term investments, representing invested cash at December 31, 1996.
Cash received in connection with the Southern Capital joint venture formation
and associated transactions (approximately $217 million, after consideration
of related income taxes) is included as proceeds from disposal of property and
from disposal of other investments based on the underlying assets
contributed/sold to Southern Capital.

In 1995, the DST stock offering and debt repayment to KCSI resulted in $276.2
million of proceeds to the Company (prior to payment of income taxes, which
occurred in 1996).

Generally, operating cash flows and borrowings under lines of credit have been
used to finance property acquisitions and investments in and loans with
affiliates during the period from 1994 to 1996.

Financing Cash Flows. Financing cash flows include: (i) borrowings of $234,
$98 and $201 million in 1996, 1995 and 1994, respectively; (ii) repayment of
indebtedness in the amounts of $233, $371 and $66 million in 1996, 1995 and
1994, respectively; and (iii) cash dividends of $15, $10 and $13 million in
1996, 1995 and 1994, respectively.

Proceeds from the issuance of debt in 1996 were used for stock repurchases
($151 million), additional investment in Berger ($24 million), and for working
capital purposes ($59 million, including payments of federal and state income
taxes associated with the DST public offering). Debt proceeds in 1995 were
used for stock repurchases ($12 million) and subsidiary refinancing and
working capital ($86 million). Proceeds from the issuance of debt in 1994
were used for KCSR equipment purchases ($64 million), DST property additions
($59 million), the Berger acquisition ($48 million), DST Continuum stock
purchases ($18 million), and ESOP contributions ($12 million).

Repayment of indebtedness includes scheduled maturities. In 1996, proceeds
(approximately $217 million, after consideration of income taxes) received in
connection with the Southern Capital joint venture formation and associated
transactions were used to repay outstanding amounts under the Company's lines
of credit. In 1995, proceeds received from the DST public offering and
repayment by DST of indebtedness to KCSI were used to repay outstanding
amounts under existing lines of credit and repurchase Company common stock.

As discussed earlier, in January 1997, the Company made an approximate $277
million capital contribution to TFM, representing the Company's proportionate
amount of the initial payment required of TFM by the Mexican Government for
the purchase of FNE. The Company funded this contribution through its
existing lines of credit. Based on the anticipated financing plan developed
by TFM, TMM and

[Page 30]
the Company, significant additional contributions to TFM should not be
necessary in the near future. However, if circumstances develop in which a
contribution may be requested, the Company will evaluate the contribution
based on the merits of the specific underlying need. In any such instance,
the contribution would be funded using the Company's currently available
financing resources.(1)

See discussion under "Financial Instruments and Purchase Commitments" for
information relative to certain anticipated 1997 cash expenditures.

CAPITAL STRUCTURE

Capital Requirements. The Company has traditionally funded KCSR capital
expenditures using Equipment Trust Certificates for major purchases of
locomotive and rolling stock, and negotiated term financing or used internally
generated cash flows for other equipment. Capital improvements for KCSR
roadway track structure have historically been funded with cash flows from
operations. For Janus and Berger operations, and other subsidiary and Holding
Company capital needs, the Company has generally used cash flows from
operations and negotiated term financing, when necessary. With the formation
of Southern Capital, the Company has the ability to finance equipment through
the joint venture.

Capital programs from 1994 to 1996 included the accelerated completion of the
KCSR and MidSouth track structure rebuilding program, discussed in "Results of
Operations" above. By the end of 1994, the major portions of the MidSouth
program were complete. The 1994 capital expenditures (totaling $191 million)
were financed through internally generated cash flows. These same sources
were used to finance KCSR capital expenditures in 1996 ($135 million) and 1995
($110 million). In addition, KCSR acquired locomotives and rolling stock
during 1994 through the issuance of $55 million in privately placed Equipment
Trust Certificates.

Relative to 1994, DST capital requirements typically consisted of mainframe,
peripheral and other data processing computer equipment. DST began a physical
expansion of its Winchester Data Center during 1994 to accommodate customer
growth demands. The Data Center expansion, completed in 1995, effectively
doubled the size of the facility. During 1994, DST terminated certain
mainframe computer equipment leases and purchased other mainframe equipment in
the amount of $11 million, which was funded through vendor arranged financing.

In the last several years, Janus has upgraded its customer service
capabilities through new equipment and technology enhancements, generally
funded with existing cash flows and negotiated indebtedness, when necessary.
Overall, however, the Company's Financial Asset Management businesses require
minimal capital for operations.

Capital. Components of capital are shown as follows (in millions):

1996 1995 1994

Debt due within one year $ 7.6 $ 10.4 $ 56.4
Long-term debt 637.5 633.8 928.8
Total debt 645.1 644.2 985.2

Stockholders' equity 715.7 695.2 667.2

Total debt plus equity $ 1,360.8 $ 1,339.4 $ 1,652.4

Total debt as a percent of
total debt plus equity 47.4% 48.1% 59.6%

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 31]
The Company's consolidated debt ratio (total debt as a percent of total debt
plus equity) decreased slightly as of December 31, 1996 to 47.4% versus 48.1%
at December 31, 1995. Total debt at December 31, 1996 of $645.1 million was
$0.9 million higher than 1995. Significant repurchases of Company common
stock ($151.3 million) using borrowings under the Company's lines of credit
were essentially offset by the reduction in debt resulting from the Southern
Capital joint venture formation and associated transactions. Equity increased
as a result of net income, issuance of common stock from option exercises and
other stock plans, and a positive non-cash equity adjustment related to
unrealized gains (net of tax) on "available-for-sale" securities held by
affiliates, primarily DST. These increases were largely offset by the
Company's common stock repurchases and dividends. The decrease in the debt
ratio as of December 31, 1996 compared to 1995 was due to this increase in
equity, together with essentially unchanged debt levels.

The debt ratio as of December 31, 1995 declined significantly to 48.1% versus
59.6% on December 31, 1994. Total debt at December 31, 1995 ($644.2 million)
declined $341.0 million (or 35%) from December 31, 1994, primarily due to the
repayment of lines of credit using the $150 million dividend from DST and
proceeds from the DST public offering and repayment by DST of indebtedness
owed to KCSI. The decrease in the debt ratio was attributable to this decline
in debt together with the gain on the sale of DST common stock, offset
partially by significant repurchases of the Company's common stock
(approximately $223.7 million including the exchange of DST common stock for
KCSI common stock owned by the ESOP).

As a result of the Company's approximate $277 million capital contribution to
TFM in January 1997, which was funded using borrowings under the Company's
lines of credit, the Company's debt ratio increased to 56.7% as of January 31,
1997. Management anticipates that the debt ratio will increase slightly
during the remainder of 1997 as a result of continued repurchases of Company
common stock, partially offset by profitable operations, which are expected to
generate positive cash flow for debt retirement.(1)

Minority Purchase Agreements. Agreements between KCSI and certain Janus
minority owners contain, among other provisions, mandatory stock purchase
provisions whereby under certain circumstances, KCSI would be required to
purchase the minority interest of Janus. In late 1994, the Company was
notified that certain Janus minority owners made effective the mandatory
purchase provisions for a certain percentage of their ownership. In the
aggregate, the value of the shares made effective for mandatory purchase
totaled $59 million.

In early 1995, the individuals whose compensation arrangements were terminated
(as discussed earlier) used their after-tax net proceeds to purchase certain
portions of the shares made available due to the mandatory purchase
notification discussed above. In addition, the Janus minority group was
restructured to allow for minority ownership by other key Janus employees to
establish a greater emphasis on the growth of Janus. These employees also
purchased portions of the minority shares (available as a result of the
mandatory purchase notification) through payment of $10.5 million in cash and
recourse loans financed by KCSI. The remaining minority shares made effective
for mandatory purchase were purchased by Janus ($6.1 million, as treasury
stock) and KCSI ($12.7 million).

As a result of the KCSI acquisition of additional Janus shares and the
reduction of outstanding shares with Janus' treasury purchase, KCSI increased
its ownership in Janus from approximately 81% to 83% in January 1995.
Additional purchases were made by minority holders during 1995, financed
through recourse loans by KCSI in the amount of $8.8 million. The Company
also purchased shares in 1995 thereby maintaining its respective ownership
percentage. The KCSI share purchases resulted in the recording of intangibles
as the purchase price exceeded the value of underlying tangible assets. The
intangibles are being amortized over their estimated economic lives.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Codnition and Results of Operations
(page 9), regarding forward-looking comments

[Page 32]
The purchase prices of these mandatory stock purchase provisions are based
upon a multiple of earnings and/or fair market value determinations depending
upon specific agreement terms. If all of the provisions of the Janus
minority owner agreements became effective, KCSI would be required to purchase
the respective minority interests at a cost currently estimated at
approximately $220 million.

Agreements between KCSI and Berger minority owners contain mandatory stock
purchase provisions, which under certain circumstances require Berger or KCSI
to purchase the minority interest at a purchase price based upon a multiple of
Berger's net investment company advisory fees. If all of the provisions
relative to mandatory stock repurchase became effective, KCSI would be
required to purchase the respective minority interests at a cost currently
estimated at approximately $11 million (exclusive of the minority shareholder
whose shares were repurchased by Berger in January 1997).

Overall Liquidity. During the 1994 to 1996 period, the Company continued to
strengthen its strategic positions in the KCSR and Financial Asset Management
businesses. Completion of the DST stock offering improved the Company's
financial position while providing an investment with market liquidity. Based
on DST's stated dividend policy, the Company does not anticipate receiving any
dividends from DST in the foreseeable future. Additionally, the Southern
Capital joint venture transactions, which resulted in repayment of the
majority of borrowings then outstanding under the Company's lines of credit,
provided the Company with flexibility as to future financing requirements
(e.g., the January 1997 TFM capital contribution).

The Company's credit agreements contain, among other provisions, various
financial covenants. The Company was in compliance with these various
provisions, including the financial covenants, as of December 31, 1996.
Because of certain financial covenants contained in the credit agreements,
however, maximum utilization of the Company's available lines of credit may be
restricted.

The Company believes it has adequate resources available - including
sufficient lines of credit (within the financial covenants referred to above),
businesses which have historically been positive cash flow generators, and the
$500 million Shelf Registration Statement - to meet anticipated operating,
capital and debt service requirements. Further, any additional investment in
TFM (if necessary) as it proceeds in its development of Mexico's Northeast
Railway are anticipated to be funded through existing financial resources of
the Company or TFM.(1)

OTHER

Financial Instruments and Purchase Commitments. During 1995, the Company
entered into a forward stock purchase contract as a means of securing a
potentially favorable price for the repurchase of its common stock. During
1996, the Company purchased 1.2 million shares under this contract at an
aggregate price of $56 million (including transaction premium). During
January 1997, the Company repurchased an additional 400,000 shares for
approximately $19 million using borrowings under the Company's existing lines
of credit. The contract allows the Company to purchase the 400,000 shares
remaining under the contract in 1997 for approximately $19 million. The
contract also contains provisions which allow the Company to elect a net cash
or net share settlement in lieu of physical settlement of the shares.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 33]
In 1995, the Company entered into forward purchase commitments for diesel fuel
as a means of securing volumes and reducing overall cost. The contracts
required the Company to purchase certain quantities of diesel fuel at defined
prices established at the origination of the contract. As noted earlier,
these commitments saved KCSR approximately $3.7 million in operating expenses
in 1996. Based on higher fuel prices in 1996, minimal commitments were
negotiated for 1997. If prices during 1997 remain relatively consistent with
year end 1996 prices, operating expenses would be higher in 1997.(1)

In general, the Company enters into transactions such as those discussed above
in limited situations based on management's assessment of current market
conditions and perceived risks. Historically, the Company has engaged in very
few such transactions and their impact has been insignificant. However, the
Company intends to respond to evolving business and market conditions in order
to manage risks and exposures associated with the Company's various
operations, and in doing so, may enter into transactions similar to those
discussed above.

Foreign Exchange Matters. In connection with the Company's investment in TFM,
a Mexican company, matters arise with respect to financial accounting and
reporting for foreign currency transactions and for translating foreign
currency financial statements from Mexican pesos into U.S. dollars. The
Company expects to follow the requirements outlined in Statement of Financial
Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and
related authoritative guidance.

The purchase price to be paid by TFM for 80% of the common stock of FNE is
fixed in Mexican pesos; accordingly, the U.S. dollar equivalent fluctuates as
the U.S. dollar/Mexican peso exchange rate changes. The Company's capital
contribution (approximately $277 million U.S.) to TFM in connection with the
initial installment of the FNE purchase price was made based on the U.S.
dollar/Mexican peso exchange rate on January 31, 1997.

TFM must pay the remaining 60% of the purchase price in Mexican pesos no later
than July 16, 1997. As discussed above, the final installment is expected to
be funded using proceeds from the proposed debt financing and sale of 24.5% of
TFM to the Mexican Government. In the event that the proceeds from these
arrangements do not provide funds sufficient for TFM to make the final
installment of the purchase price, the Company may be required to make
additional capital contributions.

In order to hedge a portion of the Company's exposure to a strengthening of
the Mexican peso versus the U.S. dollar, in February and March 1997, the
Company entered into two forward contracts to purchase Mexican pesos - $98
million to mature in July 1997 and $100 million to mature in May 1997. The
Company intends to defer any gains or losses from changes in the market value
of these contracts and to record the net gains or losses as components of its
investment in TFM. These contracts are intended to hedge only a portion of
the Company's exposure related to the final installment of the purchase price
and not any other transactions or balances. Additionally, TFM has entered
into approximately $600 million in forward contracts to hedge against its
exposure to a strengthening Mexican peso.

Mexico's economy is currently classified as "highly inflationary" as defined
in SFAS 52. Accordingly, any gains or losses from translating TFM's financial
statements into U.S. dollars will be included in the determination of TFM's
net income. Any equity earnings or losses from TFM included in the Company's
results of operations will reflect the Company's share of such translation
gains and losses.

Upon completion of the TFM purchase of 80% of FNE, the Company expects that
its investment in TFM will be approximately $300 million. The Company will
evaluate existing alternatives with respect to utilizing foreign currency
instruments to hedge its U.S. dollar investment in TFM as market conditions
change or exchange rates fluctuate.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 34]
New Accounting Pronouncements. The Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") effective
January 1, 1996. The statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill, as well as for long-lived assets and certain identifiable
intangibles which are to be disposed. If events or changes in circumstances
of a long-lived asset indicate that the carrying amount of an asset may not be
recoverable, the Company must estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest) is lower
than the carrying amount of the asset, an impairment loss must be recognized
to the extent that the carrying amount of the asset exceeds its fair value.
The adoption of SFAS 121 did not have a material impact on the Company's 1996
results of operations or financial position.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") in October 1995. The new statement allows companies to continue under
the approach set forth in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt the new accounting method based on the estimated fair value
of employee stock options. The Company has elected to retain its current
accounting approach under APB 25, and has presented the applicable pro forma
disclosures pursuant to the requirements of SFAS 123 in Note 8, Stockholders'
Equity, to the consolidated financial statements included under Item 8 of this
Form 10-K. Had compensation cost for the Company's stock-based compensation
plans been determined in accordance with SFAS 123 for options issued after
December 31, 1994, the Company's net income and earnings per share, on a pro
forma basis, would have been $146.5 million and $3.79 per share, respectively,
for the year ended December 31, 1996 and $231.8 million and $5.31 per share,
respectively, for the year ended December 31, 1995.

Litigation. The Company and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of business.
While the ultimate outcome of the various legal proceedings involving the
Company and its subsidiaries cannot be predicted with certainty, it is the
opinion of management (after consultation with legal counsel) that the
Company's litigation reserves are adequate and that these legal actions
currently are not material to the Company's consolidated results of operations
or financial position.

Environmental Matters. The Company and certain of its subsidiaries are
subject to extensive regulation under environmental protection laws
concerning, among other things, discharges to waters and the generation,
handling, storage, transportation and disposal of waste and other materials
where environmental risks are inherent. In particular, the Company is subject
to various laws and certain legislation including, among others, the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA," also known as the Superfund law), the Toxic Substances Control
Act, the Federal Water Pollution Control Act, and the Hazardous Materials
Transportation Act. This legislation generally imposes joint and several
liability for clean up and enforcement costs, without regard to fault or
legality of the original conduct, on current and predecessor owners and
operators of a site. The Company does not foresee that compliance with the
requirements imposed by the environmental legislation will impair its
competitive capability or result in any material additional capital
expenditures, operating or maintenance costs.(1) As part of serving the
petroleum and chemicals industry, KCSR transports hazardous materials and has
a Shreveport, Louisiana-based hazardous materials emergency team available to
handle environmental issues which might occur in the transport of such
materials. Additionally, the Company performs ongoing review and evaluation
of the various environmental issues that arise in the Company's operations,
and, as necessary, takes actions to limit the Company's exposure to potential
liability.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 35]
The Company has identified a property for which it is performing clean up
activities on a voluntary basis. The Company is not under any directive to
clean up this property. Anticipated costs to complete this voluntary clean up
have been provided for in the Company's consolidated financial statements and
the resolution is not expected to have a material impact on the Company's
consolidated results of operations or financial position.(1)

As previously reported, KCSR has been named as a "potentially responsible
party" by the Louisiana Department of Environmental Quality in a state
environmental proceeding, Louisiana Department of Environmental Quality,
Docket No. IAS 88-0001-A, involving a location near Bossier City, Louisiana,
which was the site of a wood preservative treatment plant (Lincoln
Creosoting). KCSR is a former owner of part of the land in question. This
matter was the subject of a trial in the U.S. District Court in Shreveport,
Louisiana which was concluded in July 1993. The court found that Joslyn
Manufacturing Company ("Joslyn"), an operator of the plant, was and is
required to indemnify KCSR for damages arising out of plant operations.
(KCSR's potential liability is as a property owner rather than as a generator
or transporter of contaminants.) The case was appealed to the U.S. Court of
Appeals for the Fifth Circuit, which Court affirmed the U.S. District Court
ruling in favor of KCSR.

In early 1994, the Environmental Protection Agency added the Lincoln
Creosoting site to its CERCLA national priority list. Since major remedial
work has been performed at this site by Joslyn, and KCSR has been held by the
Federal District and Appeals Courts to be entitled to indemnity for such
costs, it would appear that KCSR should not incur significant remedial
liability.(1) At this time, it is not possible to evaluate the potential
consequences of further remediation at the site.

The Louisiana Department of Transportation ("LDOT") has sued KCSR and a number
of other defendants in Louisiana state court to recover clean up costs
incurred by LDOT while constructing Interstate Highway 20 at Shreveport,
Louisiana (Louisiana Department of Transportation v. The Kansas City Southern
Railway Company, et al., Case No. 417190-B in the First Judicial District
Court, Caddo Parish, Louisiana). The clean up was associated with an old oil
refinery site, operated by the other named defendants. KCSR's main line was
adjacent to that site, and KCSR was included in the suit because LDOT claims
that a 1966 derailment on the adjacent track released hazardous substances
onto the site. However, because the derailment occurred on the side of the
track opposite from the refinery site, management believes the Company's
exposure is limited.(1)

In another proceeding, Louisiana Department of Environmental Quality, Docket
No. IE-0-91-0001, KCSR was named as a party in the alleged contamination of
Capitol Lake in Baton Rouge, Louisiana. During 1994, the list of potentially
responsible parties was significantly expanded to include the State of
Louisiana, and the City and Parish of Baton Rouge, among others. Studies
commissioned by KCSR indicate that contaminants contained in the lake were not
generated by KCSR. Management and counsel do not believe this proceeding will
have a material effect on the Company.(1)

In the Ilada Superfund Site located in East Cape Girardeau, Ill., KCSR was
cited for furnishing one carload of used oil to this petroleum recycling
facility. Counsel advises that KCSR's liability, if any, should fall within
the "de minimus" provisions of the Superfund law, representing minimal
exposure.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 36]
The Mississippi Department of Environmental Quality ("MDEQ") initiated a
demand on all railroads operating in Mississippi to clean up their refueling
facilities and investigate any soil and groundwater impacts resulting from
past refueling activities. KCSR has six facilities located in Mississippi.
KCSR has developed a plan, together with the State of Mississippi, that will
satisfy the MDEQ's initiative. Estimated costs to complete the studies and
expected remediation have been provided for in the Company's consolidated
financial statements and the resolution is not expected to have a material
impact on the Company's consolidated results of operations or financial
position.(1)

The Company has recorded liabilities with respect to various environmental
issues, which represent its best estimates of remediation and restoration
costs that may be required to comply with present laws and regulations. At
December 31, 1996, these recorded liabilities were not material. Although
these costs cannot be predicted with certainty, management believes that the
ultimate outcome of identified matters will not have a material adverse effect
on the Company's consolidated results of operations or financial condition.(1)

Regulatory Influence. In addition to the environmental agencies mentioned
above, KCSR operations are regulated by the STB, various state regulatory
agencies, and the Occupational Safety and Health Administration ("OSHA").
Prior to January 1, 1996, the Interstate Commerce Commission ("ICC") had
jurisdiction over interstate rates charged, routes, service, issuance or
guarantee of securities, extension or abandonment of rail lines, and
consolidation, merger or acquisition of control of rail common carriers. As
of January 1, 1996, Congress abolished the ICC and transferred regulatory
responsibility to the STB. State agencies regulate some aspects of rail
operations with respect to health and safety and in some instances, intrastate
freight rates. OSHA has jurisdiction over certain health and safety features
of railroad operations.

Financial Asset Management businesses are subject to a variety of regulatory
requirements including, but not limited to, the rules and regulations of the
U.S. Securities and Exchange Commission, and the guidelines set forth by the
National Association of Securities Dealers.

The Company does not foresee that compliance with the requirements imposed by
these agencies' standards under present statutes will impair its competitive
capability or result in any material effect on operations.(1)

Stockholder Rights Plan. In September 1995, the Company's Board of Directors
approved a Stockholder Rights Plan. The Board declared a dividend of one
right for each share of the Company's common stock outstanding. Each right
entitles the holder to purchase from the Company 1/1000th of a share of Series
A Preferred Stock or in some circumstances, common stock, other securities,
cash or other assets as the case may be, at a price of $210 per share, subject
to adjustment. Distributions of the rights under the plan have no dilutive
effect, do not affect reported earnings per share, are not taxable to the
Company or stockholders and do not change the manner in which the Company's
shares are presently traded. The rights will not be exercisable and will be
inseparable from and trade automatically with the Company's common stock until
certain events occur (as defined in the plan) which would trigger provisions
of the rights. The full terms of the rights and associated Series A Preferred
Stock are set forth in the Stockholder Rights Plan approved by the Board. The
previous plan was terminated in 1994.

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 37]
Inflation. Inflation has not had a significant impact on the Company's
operations in the past three years. Generally accepted accounting principles
require the use of historical costs. Replacement cost and related
depreciation expense of the Company's property would be substantially higher
than the historical costs reported. Any increase in expenses from these fixed
costs, coupled with variable cost increases due to significant inflation,
would be difficult to recover through price increases given the competitive
environments of the Company's principal subsidiaries. See "Foreign Exchange
Matters" above with respect to inflation in Mexico.

Strategic Review. KCSI, as a holding company, is responsible for the
management of its primary assets - investments in its subsidiaries.
Accordingly, KCSI management continually evaluates how to utilize the
strength of the Company's business lines and capabilities, provide for future
growth opportunities, and achieve the Company's financial objectives. This
process has resulted in many significant actions, including: the Company's
ongoing activities with respect to the Mexican rail privatization process; the
December 1996 Gateway Western acquisition; the October 1996 Southern Capital
joint venture transactions; the current common stock repurchase program; a
continuing commitment to the mutual fund industry; and the October 1995 DST
public offering. 1994 through 1996 have been, and future years will be,
affected by these strategic activities. KCSI management's analysis and
evaluation of the Company's strategic alternatives are expected to continue to
present growth opportunities in future years.(1)

(1) See the first paragraph of "Overview" section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations
(page 9), regarding forward-looking comments

[Page 38]
Item 8. Financial Statements and Supplementary Data

Index to Financial Statements
Page

Management Report on Responsibility for Financial Reporting. . . . 39

Financial Statements:

Report of Independent Accountants. . . . . . . . . . . . . . . 39
Consolidated Statements of Income for the three
years ended December 31, 1996 . . . . . . . . . . . . . . . 40
Consolidated Balance Sheets at December 31, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Cash Flows for the three
years ended December 31, 1996 . . . . . . . . . . . . . . . 42
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 1996. . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . 44

Financial Statement Schedules:

All schedules are omitted because they are not applicable, insignificant or
the required information is shown in the consolidated financial statements
or notes thereto.

The consolidated financial statements and related notes, together with the
Report of Independent Accountants, of DST Systems, Inc. (an approximate 41%
owned affiliate of the Company accounted for under the equity method) for
the year ended December 31, 1996, which are included in the DST Systems,
Inc. Form 10-K for the year ended December 31, 1996 (Commission File No.
1-14036) and have been incorporated by reference in this Form 10-K as
Exhibit 99.1, are hereby incorporated herein by reference.

[Page 39]

Management Report on Responsibility for Financial Reporting

The accompanying consolidated financial statements and related notes of Kansas
City Southern Industries, Inc. and its subsidiaries were prepared by
management in conformity with generally accepted accounting principles
appropriate in the circumstances. In preparing the financial statements,
management has made judgments and estimates based on currently available
information. Management is responsible for not only the financial
information, but also all other information in this Annual Report on Form
10-K. Representations contained elsewhere in this Annual Report on Form 10-K
are consistent with the consolidated financial statements and related notes
thereto.

The Company has a formalized system of internal accounting controls designed
to provide reasonable assurance that assets are safeguarded and that its
financial records are reliable. Management monitors the system for
compliance, and the Company's internal auditors measure its effectiveness and
recommend possible improvements thereto. In addition, as part of their audit
of the consolidated financial statements, the Company's independent
accountants, who are selected by the stockholders, review and test the
internal accounting controls on a selective basis to establish the extent of
their reliance thereon in determining the nature, extent and timing of audit
tests to be applied.

The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee. This
committee, composed solely of non-management directors, meets regularly with
the independent accountants, management and internal auditors to monitor the
proper discharge of responsibilities relative to internal accounting controls
and to evaluate the quality of external financial reporting.

Report of Independent Accountants

To the Board of Directors and Stockholders of
Kansas City Southern Industries, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Kansas City Southern Industries, Inc. and its subsidiaries at December 31,
1996, 1995 and 1994, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP
Kansas City, Missouri
February 20, 1997

[Page 40]
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
Dollars in Millions, Except per Share Amounts

1996 1995 1994

Revenues $ 847.3 $ 775.2 $ 1,088.4

Costs and expenses 567.3 541.0 782.1
Depreciation and amortization 76.1 75.0 119.1

Operating income 203.9 159.2 187.2

Gain on sale of equity investment (Note 2) 296.3

Equity in net earnings of unconsolidated
affiliates (Notes 4, 13):
DST Systems, Inc. 68.1 24.6
Other 2.0 5.2 24.8
Interest expense (59.6) (65.5) (53.6)
Other, net 22.9 20.3 15.3

Pretax income 237.3 440.1 173.7

Income tax provision (Note 7) 70.6 192.9 63.5
Minority interest in consolidated
earnings (Note 9) 15.8 10.5 5.3

Net income $ 150.9 $ 236.7 $ 104.9

Per Share Data:
Primary earnings per share $ 3.92 $ 5.41 $ 2.32

Weighted average primary common
shares outstanding (in thousands) 38,427 43,737 45,061

Dividends per share
Preferred $ 1.00 $ 1.00 $ 1.00
Common $ .40 $ .30 $ .30

See accompanying notes to consolidated financial statements.

[Page 41]
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
at December 31
Dollars in Million

1996 1995 1994
ASSETS

Current Assets:
Cash and equivalents $ 22.9 $ 31.8 $ 12.7
Accounts receivable, net (Note 5) 138.1 135.6 232.3
Inventories 39.3 39.8 46.6
Other current assets (Note 5) 91.8 74.0 88.5

Total current assets 292.1 281.2 380.1

Investments held for
operating purposes (Notes 2, 4) 335.2 272.1 214.6

Properties, net (Note 5) 1,219.3 1,281.9 1,415.3

Intangibles and Other
Assets, net (Notes 2, 5) 237.5 204.4 220.8

Total assets $ 2,084.1 $ 2,039.6 $ 2,230.8

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Debt due within one year (Note 6) $ 7.6 $ 10.4 $ 56.4
Accounts and wages payable 102.6 96.9 140.8
Accrued liabilities (Note 5) 134.4 213.1 142.4

Total current liabilities 244.6 320.4 339.6

Other Liabilities:
Long-term debt (Note 6) 637.5 633.8 928.8
Deferred income taxes (Note 7) 337.7 303.6 204.2
Other deferred credits (Note 2) 129.8 73.1 80.5
Commitments and contingencies
(Notes 2, 6, 7, 8, 9, 11, 12)

Total other liabilities 1,105.0 1,010.5 1,213.5

Minority Interest in consolidated
subsidiaries (Note 9) 18.8 13.5 10.5

Stockholders' Equity:
$25 par, 4% noncumulative,
Preferred stock 6.1 6.1 6.1
$1 par, Series B convertible,
Preferred stock (Note 8) 1.0 1.0 1.0
$.01 par, Common stock (Notes 1, 8) 0.4 0.4 0.4
Capital surplus 127.5 339.8
Retained earnings 883.3 753.8 530.1
Net unrealized gain (loss)
on investments 24.9 6.4 (1.8)
Shares held in trust (Note 8) (200.0) (200.0) (200.0)
ESOP deferred compensation (8.4)

Total stockholders'
equity (Notes 1, 6, 8) 715.7 695.2 667.2

Total liabilities and
stockholders' equity $ 2,084.1 $ 2,039.6 $ 2,230.8

See accompanying notes to consolidated financial statements.

[Page 42]
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
Dollars in Millions

1996 1995 1994
CASH FLOWS PROVIDED BY (USED FOR):

Operating Activities:
Net income $ 150.9 $ 236.7 $ 104.9
Adjustments to net income:
Depreciation and amortization 76.1 75.0 119.1
Deferred income taxes 18.6 99.0 20.0
Equity in undistributed earnings (66.4) (29.8) (23.9)
Dividend from DST Systems, Inc. 150.0
Gain on sale of equity investment (296.3)
Employee benefit and deferred compensation
expenses not requiring operating cash 18.3 8.4 4.3
Changes in working capital items:
Accounts receivable (2.5) (2.4) (35.8)
Inventories 0.5 1.3 1.6
Accounts and wages payable 7.2 (5.5) 69.8
Accrued liabilities (73.4) 106.7 (20.6)
Other current assets (6.0) (1.3) (1.5)
Other, net (2.3) 10.1 (0.5)
Net 121.0 351.9 237.4

Investing Activities:
Property acquisitions (144.0) (121.1) (287.7)
Proceeds from disposal of property 187.0 9.9 19.2
Investments in and loans with affiliates (41.9) (94.5) (24.6)
Net proceeds from DST Systems, Inc.
public offering 112.1
DST Systems, Inc. loan repayments 164.1
Purchase of companies, net of cash acquired (42.6)
Purchase of short-term investments (39.2) (0.8)
Proceeds from disposal of other investments 55.7 5.4
Other, net 3.3 (0.4) (5.4)
Net 20.9 69.3 (335.7)

Financing Activities:
Proceeds from issuance of long-term debt 233.7 97.8 200.6
Repayment of long-term debt (233.1) (370.9) (66.3)
Proceeds from stock plans 14.6 7.1 4.9
Stock repurchased (151.3) (127.0) (10.3)
Cash dividends paid (14.8) (9.9) (13.3)
Other, net 0.1 0.8 (11.2)
Net (150.8) (402.1) 104.4

Cash and Equivalents:
Net increase (decrease) (8.9) 19.1 6.1
At beginning of year 31.8 12.7 6.6
At end of year (Note 3) $ 22.9 $ 31.8 $ 12.7

See accompanying notes to consolidated financial statements.

[Page 43]
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Millions

Net un-
realized
$1 Par $.01 gain ESOP
$25 Par Series Par (loss) Shares de-
Pre- B Pre- Com- Capi- Re- on held ferred
ferred ferred mon tal tained invest- in compen-
stock stock stock surplus earnings ments trust sation Total

Balance at Dec-
ember 31, 1993 $6.1 $1.0 $30.9 $301.8 $439.0 $ 2.1 $(200.0) $(18.2) $562.7

Net income 104.9 104.9
Dividends (13.3) (13.3)
Stock repurchased (10.3) (10.3)
Options exercised and
stock subscribed 0.3 13.1 13.4
Stock plan shares issued
from treasury 0.2 4.4 4.6
Establishment of a par
value of common stock (31.0) 31.0 -
Redemption of common
stock rights (0.5) (0.5)
Contribution accruals 9.8 9.8
Unrealized losses on
investments, net (3.9) (3.9)
Other (0.2) (0.2

Balance at Dec-
ember 31, 1994 6.1 1.0 0.4 339.8 530.1 (1.8) (200.0) (8.4) 667.2

Net income 236.7 236.7
Dividends (13.0) (13.0)
Stock repurchased (138.9) (138.9)
Options exercised and
stock subscribed 11.9 11.9
Exchange of DST stock
for KCSI stock held by
ESOP (Notes 2, 3) (84.8) (84.8)
Contribution accruals 8.4 8.4
Unrealized gains on
investments, net 8.2 8.2
Other (0.5) (0.5)

Balance at Dec-
ember 31, 1995 6.1 1.0 0.4 127.5 753.8 6.4 (200.0) - 695.2

Net income 150.9 150.9
Dividends (15.3) (15.3)
Stock repurchased (145.2) (6.1) (151.3)
Stock plan shares issued
from treasury 5.9 5.9
Options exercised and
stock subscribed 11.8 11.8
Unrealized gains on
investments, net 18.5 18.5

Balance at Dec-
ember 31, 1996 $6.1 $1.0 $ 0.4 $ - $883.3 $24.9 $(200.0) $ - $715.7

See accompanying notes to consolidated financial statements.

[Page 44]
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Kansas City Southern Industries, Inc. ("Company" or "KCSI") is a diversified
holding company, comprising businesses engaged in railroad transportation,
through The Kansas City Southern Railway Company ("KCSR"), and Financial Asset
Management, through its subsidiaries Janus Capital Corporation ("Janus") and
Berger Associates, Inc. ("Berger"), as well as significant equity investments.
Note 13 further describes the operations of the Company.

The accounting and financial reporting policies of the Company conform with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Use of the term "Company" as described in these Notes to Consolidated
Financial Statements means Kansas City Southern Industries, Inc. as a holding
company and all of its consolidated subsidiary companies. Significant
accounting and reporting policies are described below.

As a result of the public offering of DST Systems, Inc. ("DST"), formerly a
wholly-owned and consolidated subsidiary of the Company, and associated
transactions completed in November 1995, the Company reduced its ownership in
DST to approximately 41% (see Note 2). Accordingly, the Company accounted for
its investment in DST under the equity method for the year ended December 31,
1995 retroactive to January 1, 1995. Additionally, the Company realigned its
business segments to reflect its ongoing focus on the KCSR and Financial Asset
Management operations. In connection with this realignment, several of the
Company's less significant consolidated subsidiaries are included in the
Corporate & Other segment, together with the Company's equity investment in
DST and other unconsolidated affiliates. DST is included as a consolidated
subsidiary for the year ended December 31, 1994.

Principles of Consolidation. The consolidated financial statements generally
include all majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain amounts in the prior
years' consolidated financial statements have been reclassified to conform to
the current year presentation.

The equity method of accounting is used for all entities in which the Company
or its subsidiaries have significant influence, but not more than 50% voting
control interest; the cost method of accounting is generally used for
investments of less than 20% voting control interest. In 1996, Gateway
Western Railway Company ("Gateway Western"), whose stock is beneficially owned
by KCS Transportation Company ("KCSTC," a wholly-owned subsidiary of the
Company), has been accounted for under the equity method as a majority-owned
unconsolidated subsidiary. If approval of the Company's purchase of Gateway
Western is received from the Surface Transportation Board ("STB"), Gateway
Western will become a consolidated subsidiary of the Company. See Note 2 for
additional information on the Gateway Western acquisition.

Cash Equivalents. Short-term liquid investments with a maturity of generally
three months or less are considered cash equivalents. Carrying value
approximates market value due to the short-term nature of these investments.

Inventories. Materials and supplies inventories for transportation operations
are valued at average cost.

[Page 45]
Properties and Depreciation. Properties are stated at cost. Additions and
renewals constituting a unit of property are capitalized and all properties
are depreciated over the estimated remaining life of such assets. Ordinary
maintenance and repairs are charged to expense as incurred.

The cost of transportation equipment and road property normally retired, less
salvage value, is charged to accumulated depreciation. Conversely, the cost
of industrial and other property retired, and the cost of transportation
property abnormally retired, together with accumulated depreciation thereon,
are eliminated from the property accounts and the related gains or losses are
reflected in earnings.

Depreciation for transportation operations is computed using composite
straight-line rates for financial statement purposes. The STB approves the
depreciation rates used by KCSR. KCSR evaluates depreciation rates for
properties and equipment and implements approved rates. Periodic revisions of
rates have not had a material effect on operating results. Unit depreciation
methods, employing both accelerated and straight-line rates, are employed in
other business segments. Accelerated depreciation is used for income tax
purposes. The ranges of annual depreciation rates for financial statement
purposes are:

Transportation
Road and structures 1% - 20%
Rolling stock and equipment 1% - 24%
Other equipment 5% - 33%
Capitalized leases 5% - 20%

The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121") effective January 1, 1996. The new statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill, as well as for long-lived
assets and certain identifiable intangibles which are to be disposed. If
events or changes in circumstances of a long-lived asset indicate that the
carrying amount of an asset may not be recoverable, the Company must estimate
the future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest) is lower than the carrying amount of the
asset, an impairment loss must be recognized to the extent that the carrying
amount of the asset exceeds its fair value. In accordance with SFAS 121, the
Company will periodically evaluate the recoverability of its operating
properties. The adoption of SFAS 121 did not have a material effect on the
Company's financial position or results of operations.

Revenue Recognition. Revenue is recognized by KCSR based upon the percentage
of completion of a commodity movement. Revenue is recognized by Janus and
Berger primarily as a percentage of the assets under management. Other
subsidiaries, in general, recognize revenue when the product is shipped or as
services are performed.

Software Development. Purchased software is recorded at cost and amortized
over the estimated economic life. DST expenses, as incurred, development and
maintenance expenditures for its proprietary software. Capitalizable costs of
internally developed software that will be exclusively sold or licensed to
third parties have not been material and have been expensed as incurred.

Advertising. The Company expenses all advertising as incurred. Direct
response advertising for which future economic benefits are probable and
specifically attributable to the advertising is not material.

[Page 46]
Intangibles. Intangibles principally represent the excess of cost over the
fair value of net underlying assets of acquired companies using purchase
accounting and are amortized using the straight-line method over periods
ranging from 5 to 40 years. On an annual basis, the Company reviews the
recoverability of goodwill. The measurement of possible impairment is based
primarily on the ability to recover the balance of the goodwill for each
investment from expected future operating cash flows of each of the
investments on a discounted basis.

Income Taxes. Deferred income tax effects of transactions reported in
different periods for financial reporting and income tax return purposes are
recorded under the liability method of accounting for income taxes. This
method gives consideration to the future tax consequences of the deferred
income tax items and immediately recognizes changes in income tax laws upon
enactment. The income statement effect is generally derived from changes in
deferred income taxes on the balance sheet.

Treasury Stock. The excess of par over cost of the Preferred shares held in
Treasury is credited to capital surplus. Common shares held in Treasury are
accounted for as if they were retired and the excess of cost over par value of
such shares is charged to capital surplus, if available, and then to retained
earnings.

Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the year
they are exercised.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") in October 1995. The new statement allows companies to continue under
the approach set forth in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt the new accounting method based on the estimated fair value
of employee stock options. If a company elects to retain the current method
under APB 25, pro forma disclosures of net income and earnings per share as if
they had adopted the fair value accounting method under SFAS 123 are required.
The Company has elected to retain its current accounting approach under APB
25, and has presented the applicable pro forma disclosures in Note 8 to the
consolidated financial statements for the years ended December 31, 1996 and
1995 pursuant to the requirements of SFAS 123.

Indebtedness with respect to the leveraged Employee Stock Ownership Plan
("ESOP") was retired in full during 1995. Prior to its retirement, ESOP loan
principal payments were accounted for as employee benefit expense, interest
payments recorded as interest expense, and quarterly dividends paid from
retained earnings on the ESOP stock used to partially service the ESOP loan.
Because the ESOP loan was guaranteed by KCSI, the borrowings were reported as
long-term debt and corresponding amounts, representing "ESOP deferred
compensation," were reduced as the related compensation expense was recognized
by the Company. All shares held in the ESOP are treated as outstanding for
purposes of computing the Company's earnings per share.

Earnings Per Share. The Company uses the Primary method for computing
earnings per share. The difference between the Primary and Fully-Diluted
methods is not material.

[Page 47]
Stockholders' Equity. Information regarding the Company's capital stock at
December 31, 1996 follows:

Shares Shares
Authorized Issued

$25 Par, 4% noncumulative,
Preferred stock 840,000 649,736
$1 Par, Preferred stock 2,000,000 None
$1 Par, Series A, Preferred stock 150,000 None
$1 Par, Series B, Preferred stock 1,000,000 1,000,000
$.01 Par, Common stock 400,000,000 48,402,192

The Company's Series B Preferred stock, issued in 1993, has a $200 per share
liquidation preference and is convertible to common stock at a ratio of 4 to 1
(see Note 8).

Shares outstanding are as follows at December 31, (in thousands):

1996 1995 1994

$25 Par, 4% noncumulative, Preferred stock 242 242 243
$.01 Par, Common stock 36,306 39,063 43,518

Retained earnings include equity in unremitted earnings of unconsolidated
affiliates of $99.2, $34.7 and $78.3 million at December 31, 1996, 1995 and
1994, respectively.

Note 2. Acquisitions and Dispositions

Transportacion Ferroviaria Mexicana. In June 1996, the Company and
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") formed Transportacion
Ferroviaria Mexicana S. de R.L. de C.V. ("TFM"). TFM was formed to
participate in the privatization of the Mexican rail industry. At December
31, 1996, the Company owned 49% of TFM. As discussed below, in January 1997,
TMM and the Company entered into a letter of intent to sell approximately
24.5% of TFM to the Mexican Government ("Government"), which, upon completion
of the sale, would reduce the Company's interest in TFM to approximately 37%.
The Company accounts for TFM under the equity method.

On December 6, 1996, TFM, TMM and the Company announced that the Government
had awarded to TFM the right to purchase 80% of the common stock of
Ferrocarril del Noreste, S.A. de C.V. ("FNE") for approximately 11.072 billion
Mexican pesos (approximately $1.4 billion U.S.). FNE holds the concession to
operate Mexico's approximate 2,500 mile "Northeast Railway" for the next 50
years, with the option of a 50 year extension (subject to certain conditions).

The Northeast Railway is a strategically important rail link to Mexico and the
North American Free Trade Agreement ("NAFTA") corridor. The line is estimated
to transport approximately 40% of Mexico's rail cargo and is located next to
primary north/south truck routes. The Northeast Railway directly links Mexico
City and Monterrey, as well as Guadalajara (through trackage rights), with the
ports of Lazaro Cardenas, Veracruz, Tampico, and the cities of Matamoros and
Nuevo Laredo. Nuevo Laredo is a primary transportation gateway between Mexico
and the United States. The Northeast Railway will connect in Laredo, Texas to
the Union Pacific Railroad and the Texas-Mexican Railroad Company ("Tex-Mex").
The Tex-Mex is a wholly-owned subsidiary of Mexrail, Inc. ("Mexrail"), a 49%
owned equity investment of the Company. The Tex-Mex links to KCSR at
Beaumont, Texas through trackage rights. With the KCSR and Tex-Mex
interchange at Beaumont, and through KCSR's connections with major rail
carriers at various other points, KCSR has developed a NAFTA rail system which
is expected to facilitate the economic integration of the North American
marketplace.

[Page 48]
TFM deposited approximately $560 million U.S. with the Government on January
31, 1997 (representing approximately 40% of the purchase price) as the initial
installment under the agreement to purchase FNE. The Company funded its
proportionate amount (approximately $277 million U.S.) of the initial
installment as a capital contribution to TFM using borrowings under existing
lines of credit. The Government has transferred to TFM 32% of the stock of
FNE and deposited an additional 48% of the stock in trust pending receipt of
the final installment of the purchase price from TFM. The remaining 20% of
FNE will be retained by the Government. The Government has the option of
selling its 20% interest through a public offering, or selling it to TFM
subsequent to October 31, 2003 at the share price paid by TFM indexed for
inflation at the Mexican Base Rate (i.e., the Unidad de Inversiones (UDI)
published by Banco de Mexico). In the event that TFM does not purchase the
Government's 20% interest, TMM and KCSI are obligated to purchase the
interest in proportion to their ownership interest in TFM.

Concurrent with the arrangement of financing for TFM, TMM and the Company
entered into a letter of intent to sell approximately 24.5% of TFM to the
Government for approximately $200 million U.S. The letter of intent
contemplates that the Government's interest would have limited voting rights,
and that TMM and the Company would have a call option, which could be
exercised at the share price paid by the Government plus a (U.S.
dollar-denominated) interest factor based on one-year U.S. Treasury
securities. The proceeds from the Government will be used to finance a
portion of the FNE purchase price. As noted above, upon completion of the
transaction, the Company's interest in TFM would be reduced from 49% to
approximately 37%.

In the event that the proceeds from the proposed debt financing and sale of
24.5% of TFM to the Government do not provide funds sufficient for TFM to make
the final installment of the purchase price, the Company may be required to
make additional capital contributions. In order to hedge against a portion of
the Company's exposure to a strengthening Mexican peso, in February 1997,
the Company entered into a $98 million forward contract to purchase Mexican
pesos. The contract matures in July 1997. Any gain or loss associated with
this contract will be deferred until maturity and accounted for as a component
of the Company's investment in TFM. This contract is intended to hedge only a
portion of the Company's exposure related to the final installment of the
purchase price and not any other transactions or balances. See Note 11 for
additional information.

Upon completion of TFM's purchase of 80% of FNE, the Company expects that its
investment in TFM will total approximately $300 million.

Management expects to record losses associated with its investment in TFM
during the initial years of TFM's operation (through FNE) of the Northeast
Railway.

Gateway Western Acquisition. In December 1996, KCSTC (a wholly-owned
subsidiary of the Company) acquired beneficial ownership of the outstanding
stock of the Gateway Western, a regional rail carrier with operations from
Kansas City, Missouri to East St. Louis and Springfield, Illinois. Gateway
Western also has restricted haulage rights between Springfield and Chicago
from the Southern Pacific Rail Corporation. The acquisition will be accounted
for under the purchase method. The consideration paid for Gateway Western
(including various acquisition costs and liabilities) was approximately $12.2
million, which, based on initial purchase price allocations, exceeded the fair
value of the underlying net assets by approximately $12.1 million. The
resulting intangible will be amortized over a period of 40 years.

[Page 49]
The stock acquired by KCSTC will be held in an independent voting trust until
the Company receives approval from the STB on the proposed transaction. The
approval process is expected to take approximately five months. If approved,
the voting trust will be dissolved and the shares transferred to KCSTC;
however, if the acquisition is not approved, the shares would have to be
disposed to a non-affiliated third party. While the Gateway Western stock is
held in trust, the Company will account for Gateway Western under the equity
method as a majority-owned unconsolidated subsidiary. If the shares are
transferred to KCSTC, final purchase price allocations will be completed and
Gateway Western will become a consolidated subsidiary reported within the KCSR
segment.

Assuming the transaction had been completed January 1, 1996, inclusion of
Gateway Western results on a pro forma basis, as of and for the year ended
December 31, 1996, would not have been material to the Company's consolidated
results of operations.

Southern Capital Corporation, LLC Joint Venture. On October 21, 1996, the
Company and GATX Capital Corporation ("GATX") completed the transactions for
the formation and financing of a joint venture to perform certain leasing and
financing activities. The venture, Southern Capital Corporation, LLC
("Southern Capital"), was formed through a GATX contribution of $25 million in
cash, and a Company contribution (through its subsidiaries KCSR and Carland,
Inc.) of $25 million in net assets, comprising a negotiated fair value of
locomotives and rolling stock and long-term indebtedness owed to KCSI and its
subsidiaries. In an associated transaction, Southern Leasing Corporation (an
indirect wholly-owned subsidiary of the Company prior to dissolution in
October 1996), sold to Southern Capital approximately $75 million of loan
portfolio assets and rail equipment at fair value which approximated
historical cost.

As a result of these transactions and subsequent repayment by Southern Capital
of indebtedness owed to KCSI and its subsidiaries, the Company received cash
which exceeded the net book value of its assets by approximately $47.2
million. Concurrent with the formation of the joint venture, KCSR entered
into operating leases with Southern Capital for the majority of the rail
equipment acquired by or contributed to Southern Accordingly, this excess fair
value over book value is being recognized over the terms of the leases.

DST Public Offering. On October 31, 1995, DST and the Company effected an
initial public offering for a total of 22 million shares of DST common stock.
The initial offering price was $21 per share. Of the 22 million shares,
19,450,000 and 2,550,000 were offered by DST and the Company, respectively.
On November 6, 1995, an over-allotment option, granted by the Company to the
underwriters, for an additional 3,300,000 DST shares owned by the Company was
exercised, effectively completing the DST offering. The approximate $384.0
million net proceeds received by DST were used to reduce outstanding
indebtedness to the Company, borrowings on bank credit lines, and for working
capital. The approximate $276 million in proceeds received by the Company
from sale of DST stock and repayment of indebtedness by DST have been used for
repayment of debt, repurchase of Company common stock and general corporate
purposes. In conjunction with the offering, the Company completed an exchange
of 4,253,508 shares of DST common stock for 1,820,000 shares of Company common
stock held by the DST portion of the ESOP. The 1,820,000 shares received in
the exchange have been accounted for as treasury shares by the Company. With
the completion of all associated transactions, the Company's ownership in DST
was reduced to approximately 41%, and a pretax gain of approximately $296.3
million was recognized during fourth quarter 1995. The Company recorded
approximately $78.6 million in income taxes currently payable and $73.1
million in deferred income taxes in connection with the public offering and
associated transactions, resulting in an after-tax gain of approximately
$144.6 million.

[Page 50]
Upon completion of the public offering, DST was no longer included in the
Company's consolidation, and was accounted for as an equity investment (in
accordance with the Company's accounting policy described more fully in Note
1) in the Consolidated Statement of Income for the year ended December 31,
1995 as if it was an unconsolidated subsidiary as of January 1, 1995. The
Consolidated Statement of Income for the year ended December 31, 1994 reflects
DST as a consolidated subsidiary of the Company.

In order to provide a more relevant comparison of the current operations of
the Company to 1994, selected financial information for the year ended
December 31, 1994 has been reclassified below to reflect DST as a 100% owned
unconsolidated subsidiary accounted for under the equity method. The
information reflected below was derived by: i) eliminating all DST assets,
liabilities and the various income statement line items from historical
consolidated KCSI results; ii) considering the effects of elimination entries
required for consolidation; and iii) including only the Company's investment
in DST (as an equity investment) and the equity in earnings of DST for the
year ended December 31, 1994. This information does not include any pro forma
adjustments which would be required to fully reflect the effects of the DST
stock offering as if it had occurred on January 1, 1994.

1994
(in millions)

Financial Condition:

Current assets $ 256.0
Investments held for operating purposes 397.6
Properties, net 1,233.9
Intangibles and other assets, net 169.8

Total assets $ 2,057.3

Current liabilities $ 218.8
Long-term debt 895.3
Other non-current liabilities 276.0
Stockholders' equity 667.2

Total liabilities and stockholders' equity $ 2,057.3

Operating results:

Revenues $ 691.2
Costs and expenses 473.5
Depreciation and amortization 61.8

Operating Income 155.9
Equity in net earnings of unconsolidated affiliates 32.3
Interest expense (48.0)
Other, net 20.2

Pretax income 160.4
Income tax provision 49.1
Minority interest in consolidated earnings 6.4

Net income $ 104.9

[Page 51]
Mexrail Investment. In November 1995, the Company purchased 49% of the common
stock of Mexrail from TMM. Mexrail owns 100% of the Tex-Mex, as well as
certain other assets. The Tex-Mex operates a 157 mile rail line extending
from Corpus Christi to Laredo, Texas, with trackage rights to Beaumont, Texas.
The purchase price of $23 million was financed through the Company's existing
lines of credit. The investment is accounted for under the equity method.
The transaction resulted in the recording of intangibles (approximately $9.8
million) as the purchase price exceeded the fair value of underlying net
assets. The intangible amounts are being amortized over a period of 40 years.
Assuming the transaction had been completed January 1, 1995, inclusion of
Mexrail results on a pro forma basis, as of and for the year ended December
31, 1995, would not have been material to the Company's consolidated results
of operations.

Berger. In October 1994, the Company completed the acquisition of a
controlling interest in Berger. The Company made payments of $47.5 million in
cash, pursuant to a Stock Purchase Agreement (the "Agreement"). The Agreement
also provides for additional purchase price payments, totaling approximately
$62.4 million, contingent upon attaining certain levels (up to $10 billion) of
assets under management, as defined in the Agreement, over a five year period.
Any contingent payments will be reflected as an adjustment to the purchase
price.

The acquisition, which was accounted for as a purchase, increased the
Company's ownership in Berger from approximately 18% to over 80%. Adjustments
to appropriate asset and liability balances were recorded based upon estimated
fair values of such assets and liabilities. The transaction resulted in the
recording of intangibles as the purchase price exceeded the fair value of
underlying tangible assets. In 1996 and 1995, contingent payments were made
totaling $23.9 and $3.1 million, respectively, resulting in adjustment to the
purchase price recorded, and therefore, an increase in intangibles. The
intangible amounts are being amortized over their estimated economic life of
15 years.

The financial statements of Berger were consolidated into the Company
effective with the closing of the transaction. Assuming the transaction had
been completed on January 1, 1994, the addition of Berger's revenues and net
income, including adjustments to reflect the effects of the acquisition on a
pro forma basis, as of and for the year ended December 31, 1994, would not
have been material to the Company's consolidated results of operations.

In January 1997, KCSI's ownership in Berger increased to approximately 87% due
to Berger's repurchase of its common stock (for treasury) from a minority
shareholder. The Company recorded $8.7 million in intangibles in connection
with this transaction, which will be amortized over 15 years.

DST Transactions. On August 1, 1996, The Continuum Company, Inc.
("Continuum"), formerly an approximate 23% owned DST equity affiliate, merged
with Computer Sciences Corporation ("CSC," a publicly traded company) in a
tax-free share exchange. In exchange for its ownership interest in Continuum,
DST received approximately 4.3 million shares (representing an approximate 6%
interest) of CSC common stock.

As a result of the transaction, the Company's earnings for the year ended
December 31, 1996 include approximately $47.7 million (after-tax), or $1.24
per share, representing the Company's proportionate share of the one time gain
recognized by DST in connection with the merger. Continuum ceased to be an
equity affiliate of DST, thereby eliminating any future Continuum equity
affiliate earnings or losses. DST recognized equity losses in Continuum of
$4.9 million for the first six months of 1996 and $1.1 million for the year
ended December 31, 1995. DST recognized $5.0 million in equity earnings from
Continuum in 1994. DST did not receive any dividends from CSC in 1996,
consistent with historical CSC practice.

[Page 52]
On January 31, 1995, DST completed the sale of its 50% interest in Investors
Fiduciary Trust Company Holdings, Inc. ("IFTC"), which wholly-owns Investors
Fiduciary Trust Company, to State Street Boston Corporation ("State Street").
At closing, DST received 2,986,111 shares of State Street common stock in a
tax-free exchange (representing an approximate 4% ownership interest in State
Street). As a result of this transaction, equity earnings from DST include a
net gain of $4.7 million, after consideration of appropriate tax effects.
With the closing of the transaction, IFTC ceased to be an unconsolidated
affiliate of DST and no further equity in earnings of IFTC have been recorded
by DST. The Company recognized equity in earnings from IFTC of $6.5 million
in 1994. DST received approximately $2.2 and $1.5 million in dividends from
State Street during 1996 and 1995, respectively.

Note 3. Supplemental Cash Flow Disclosures

Supplemental Disclosures of Cash Flow Information.

1996 1995 1994

Cash payments (in millions):
Interest $ 56.0 $ 72.0 $ 67.5
Income taxes 121.0 20.0 15.5

Supplemental Schedule of Noncash Investing and Financing Activities. In
connection with the Southern Capital joint venture formation, the Company
(through its subsidiaries KCSR, Carland, Inc. and Southern Leasing
Corporation) contributed/sold to Southern Capital rail equipment, current and
non-current loan portfolio assets, and long-term indebtedness owed to KCSI and
its subsidiaries (see Note 2). Southern Capital repaid the indebtedness owed
KCSI and its subsidiaries with borrowings under Southern Capital's credit
facility. Cash received by KCSI from Southern Capital of approximately $224
million is reflected in the Consolidated Statement of Cash Flows for the year
ended December 31, 1996 as proceeds from disposal of property ($184 million)
and proceeds from disposal of other investments ($40 million). The Company
accrued for expected income taxes on the transaction and, as described in Note
2, deferred the excess cash received over the book value of the assets
contributed and sold.

The Company accrued a liability for the donation of 300,000 shares of DST
common stock to a charitable trust in December 1995. These shares were
delivered to the charitable trust in January 1996, resulting in a reduction in
the Company's investment in DST and associated liabilities.

Company subsidiaries and affiliates hold various investments which are
accounted for as "available for sale" securities as defined in 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 taxes, in stockholders' equity. Stockholders' equity
increased $18.5 and $8.2 million in 1996 and 1995, respectively, and decreased
$3.9 million in 1994, as a result of unrealized gains or losses related to
these investments.

The Company's Board of Directors declared a quarterly dividend on November 14,
1996 totaling approximately $3.6 million, payable on January 2, 1997.
Accordingly, the dividend declaration reduced retained earnings and
established a liability as of December 31, 1996, requiring no cash outlay
until 1997.

On November 15, 1995, the Company's Board of Directors declared a quarterly
dividend totaling approximately $3.1 million, payable on January 2, 1996. The
dividend declaration reduced retained earnings and established a liability as
of December 31, 1995.

[Page 53]
In first quarter 1996, the Company issued approximately 101,800 shares of KCSI
common stock under the Eighth Offering of the Employee Stock Purchase Plan
("ESPP"). These shares, totaling a purchase price of approximately $3.8
million, were subscribed and paid for through employee payroll deductions in
1994 and 1995.

In fourth quarter 1995, KCSI issued approximately 53,950 shares of common
stock under the Eighth Offering of the ESPP. These shares, totaling a
purchase price of approximately $2.1 million, were subscribed and paid for
through employee payroll deductions in 1994 and 1995.

In first quarter of 1994, KCSI issued approximately 234,000 shares of common
stock under the Seventh Offering of the ESPP. These shares, totaling a
purchase price of approximately $4.6 million, were subscribed and paid for
through employee payroll deductions in 1993.

In connection with the DST public offering in fourth quarter 1995, the Company
exchanged DST shares for 1,820,000 shares of KCSI common stock owned by the
ESOP with a value of approximately $84.8 million. No cash was exchanged in
connection with this transaction.

At December 31, 1995, the Company had repurchased $11.9 million of its common
stock for which cash had not been exchanged prior to year end. The Company
recorded a liability for these repurchases, with an offsetting reduction of
stockholders' equity.

As described in greater detail in Note 6, the Company issued $100 million in
Debentures in 1995. As part of this transaction, the Company incurred $2.2
million in discount and underwriting fees which were transferred directly to
the underwriter. The discount and underwriting fees represent non-cash
amounts, which are being amortized over the term of the Debentures.

Property acquired under capital leases was $3.4 million for 1994. Such
acquisitions require no direct outlay of cash.

Note 4. Investments

Investments held for operating purposes include investments in unconsolidated
affiliates as follows (in millions):

Percentage
Ownership
Company Name December 31, 1996 Carrying Value
1996 1995 1994

DST (a) 41% $ 283.5 $ 189.9 $ -
Southern Capital 50% 25.5
Mexrail (b) 49% 14.1 22.4
TFM (c) 49% 2.7
Gateway Western (d) 100% 0.1
Midland (e) 10.2 4.8
Various DST investments (f) 149.7
Equipment finance receivables 41.8 40.0
Other 11.3 10.8 23.0
Market valuation allowances (2.0) (3.0) (2.9)
Total (g) $ 335.2 $ 272.1 $ 214.6

[Page 54]
(a) As a result of the DST public offering and associated transactions
completed in November 1995 (discussed in Note 2), the Company's investment
in DST was reduced to approximately 41%. Fair market value at December
31, 1996 (based on the New York Stock Exchange closing market price) was
approximately $633.7 million

(b) During 1996, purchase price allocations were completed, and resulted in
reclassification of $9.1 million from investments to intangibles,
representing excess purchase price over fair value of underlying net
assets

(c) In January 1997, the Company, together with TMM, entered into a letter of
intent to sell approximately 24.5% of TFM to the Mexican Government. Upon
completion of the sale, the Company's ownership in TFM would be reduced to
approximately 37% (see Note 2)

(d) Gateway Western will be reported as an unconsolidated subsidiary until
the Company receives approval for the purchase from the STB, which is
still pending (see Note 2)

(e) Midland, comprising Midland Data Systems, Inc. and Midland Loan Services,
L.P., both formerly 45% owned KCSI affiliates, was sold in April 1996

(f) Owned by DST or a subsidiary of DST. DST was consolidated in 1994

(g) Fair market value is not readily determinable for investments other than
noted above, and in the opinion of management, market value approximates
carrying value

Additionally, DST holds investments in the common stock of State Street and
CSC, which are accounted for as "available for sale" securities as defined by
SFAS 115. The Company records its proportionate share of any unrealized DST
gains or losses related to State Street and CSC, net of taxes, in
stockholders' equity.

Transactions With and Between Unconsolidated Affiliates. In connection with
the October 1996 formation of the Southern Capital joint venture, KCSR entered
into operating leases with Southern Capital for locomotives and rolling stock
at rental rates management believes reflect market. KCSR paid Southern
Capital $4.5 million under these operating leases in 1996. Additionally,
Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, entered into
a contract with Southern Capital to manage the loan portfolio assets held by
Southern Capital, as well as to perform general administrative and accounting
functions for the venture. Payments under this contract were not material to
the Company in 1996.

Throughout 1996, the Company repurchased KCSI common stock owned by DST's
portion of the ESOP and DST's Profit Sharing Plan. In total, 535,000 shares
were repurchased for approximately $24.2 million.

Together, Janus and Berger recognized approximately $5.4 and $4.5 million in
1996 and 1995, respectively, in expenses associated with various services
provided by DST and its subsidiaries and affiliates.

DST had loans outstanding to the Company throughout the first ten months of
1995, which were repaid in connection with the public offering. The Company
recognized approximately $8.8 million in interest income related to this
indebtedness during 1995. Additionally, DST paid a special dividend of $150
million to the Company in May 1995.

During 1995, DST sold its interest in Midland to the Company. In April 1996,
the Company sold its Midland investments, resulting in an after-tax gain of
$1.7 million.

DST revenues associated with its unconsolidated affiliates were $76 million
for 1994. Accounts receivable in 1994 include amounts due from unconsolidated
affiliates of $14 million related to services provided by DST in the ordinary
course of business and payable at usual trade terms.

[Page 55]
Financial Information. Combined financial information of all unconsolidated
affiliates, principally DST in 1996 and 1995 and DST-related affiliates in
1994, which the Company and its subsidiaries account for under the equity
method, is as follows (in millions):

1996 1995 1994

Investment in unconsolidated affiliates $ 325.9 $ 221.3 $ 166.5

Equity in net assets of
unconsolidated affiliates 320.4 209.5 159.1

Dividends and distributions received
from unconsolidated affiliates 3.7 150.0 0.9

Financial condition:

Current assets $ 236.9 $ 250.3 $ 1,129.7
Non-current assets 1,256.2 569.9 143.6

Assets $ 1,493.1 $ 820.2 $ 1,273.3

Current liabilities $ 157.7 $ 178.4 $ 933.9
Non-current liabilities 564.8 162.6 73.2
Equity of stockholders and partners 770.6 479.2 266.2

Liabilities and equity $ 1,493.1 $ 820.2 $ 1,273.3

Operating results:

Revenues $ 657.2 $ 542.0 $ 652.1

Costs and expenses $ 585.8 $ 477.1 $ 597.3

Net Income $ 172.1 (i) $ 40.0 $ 54.8

(i) Significant increase over 1995 and 1994 is attributable to the one time
gain recorded by DST as a result of the merger of its Continuum investment
in third quarter 1996 (see Note 2)

Generally, the difference between the carrying amount of the Company's
investment in unconsolidated affiliates and the underlying equity in net
assets is attributable to certain equity investments whose carrying amounts
have been reduced to zero, and report a net deficit. However, in 1995, the
larger difference between the carrying amount and the underlying equity in net
assets of unconsolidated affiliates was a result of initial purchase price
allocations related to the Mexrail acquisition. Upon completion of the
purchase price allocation in 1996, $9.1 million was reclassified from
investments to intangibles, representing excess purchase price over fair value
of underlying net assets (see Note 2).

[Page 56]
Financial information with respect to DST in 1996 and 1995 and for IFTC in
1994, which are included in the amounts shown above, is as follows (in
millions):

DST IFTC
1996 1995 1994

Financial condition:
Current assets $ 201.3 $ 188.5 $ 814.0
Non-current assets 920.3 561.0 4.5

Assets $ 1,121.6 $ 749.5 $ 818.5

Current liabilities $ 129.3 $ 133.2 $ 712.6
Non-current liabilities 297.1 150.0

Equity of stockholders 695.2 466.3 105.9

Liabilities and equity $ 1,121.6 $ 749.5 $ 818.5

Operating results:
Revenues $ 580.8 $ 484.1 $ 63.6

Costs and expenses $ 523.8 $ 443.3 $ 50.7

Net income $ 167.2 (i) $ 27.7 $ 12.9

(i) Significant increase over 1995 is attributable to the one time gain
recorded by DST as a result of the merger of its Continuum investment in
third quarter 1996 (see Note 2)

Other. Interest income on cash and equivalents and short-term investments was
$4.9, $2.8 and $2.5 million in 1996, 1995 and 1994, respectively.

Note 5. Other Balance Sheet Captions

Accounts Receivable. Accounts receivable include the following allowances (in
millions):

1996 1995 1994

Accounts receivable $ 141.4 $ 140.2 $ 237.6
Allowance for doubtful accounts (3.3) (4.6) (5.3)

Accounts receivable, net $ 138.1 $ 135.6 $ 232.3
Doubtful accounts expense $ 1.4 $ 1.8 $ 3.3

Other Current Assets. Other current assets include the following items (in
millions):

1996 1995 1994

Maturities of equipment finance receivables
(Southern Leasing Corporation) $ - $ 27.0 $ 25.4
Deferred income taxes 8.6 10.6 17.9
Marketable investments
(cost approximates market) 67.8 26.8 17.7
Other 15.4 9.6 27.5

Total $ 91.8 $ 74.0 $ 88.5

[Page 57]
Properties. Properties and related accumulated depreciation and amortization
are summarized below (in millions):

1996 1995 1994

Properties, at cost
KCSR
Road properties $ 1,274.3 $ 1,206.2 $ 1,173.3
Equipment, including
$15.4, $15.4 and $15.5
financed under capital leases 286.5 459.3 431.3
Land and Facilities 3.6 2.8 2.8
Financial Asset Management, including
$1.4, $1.4 and $1.6 equipment
financed under capital leases 35.4 35.0 30.1
Information & Transaction Processing,
including $5.9 equipment financed
under capital leases in 1994 351.0
Corporate & Other 110.8 116.7 112.8

Total $ 1,710.6 $ 1,820.0 $ 2,101.3

Accumulated depreciation and amortization
KCSR
Road properties $ 309.5 $ 281.7 $ 280.2
Equipment, including $10.2,
$9.5 and $8.9 for capital leases 106.0 187.8 178.4
Facilities 0.7 0.4 0.4
Financial Asset Management,
including $1.4, $1.0 and $0.8
for equipment capital leases 26.8 21.8 14.5
Information & Transaction Processing,
including $4.4 for equipment
capital leases in 1994 169.6
Corporate & Other 48.3 46.4 42.9

Total $ 491.3 $ 538.1 $ 686.0

Net Properties $ 1,219.3 $ 1,281.9 $ 1,415.3

Intangibles and Other Assets. Intangibles and other assets include the
following items (in millions):

1996 1995 1994

Intangibles $ 250.3 $ 202.9 $ 244.9
Accumulated amortization (40.6) (29.2) (39.8)
Net 209.7 173.7 205.1
Other assets 27.8 30.7 15.7

Total $ 237.5 $ 204.4 $ 220.8

[Page 58]
Accrued Liabilities. Accrued liabilities include the following items (in
millions):

1996 1995 1994

Prepaid freight charges due other railroads $ 26.1 $ 36.8 $ 35.1
Current interest payable on indebtedness 15.2 16.3 25.4
Federal income taxes currently payable 0.8 66.4 0.3
Contract allowances 14.0 5.1 3.4
Other 78.3 88.5 78.2

Total $ 134.4 $ 213.1 $ 142.4

Note 6. Long-Term Debt

Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in
millions):

1996 1995 1994

KCSI
Competitive Advance & Revolving Credit
Facilities, through May 2000 $ 40.0 $ - $ 319.0
Rates: Below Prime
Notes and Debentures, due July
1998 to December 2025 500.0 500.0 400.0
Unamortized discount (3.0) (3.4) (2.3)
Rates: 5.75% to 8.80%
ESOP secured term loan 13.2
KCSR
Equipment trust indebtedness, due
serially to June 2009 96.1 104.7 115.4
Rates: 7.15% to 15.00%
Subordinated and senior notes and short-term
renewable lease financing working capital lines 1.6 19.6
DST
Secured and unsecured term loans,
promissory and mortgage notes 59.2
Other
Short-term renewable lease
financing working capital lines 29.0 38.7
Subordinated and senior notes,
and industrial revenue bonds, due
November 1997 to May 2004 12.0 12.3 22.4
Rates: 7.13% to 9.93%

Total 645.1 644.2 985.2

Less: debt due within one year 7.6 10.4 56.4

Long-term debt $ 637.5 $ 633.8 $ 928.8

[Page 59]
KCSI Credit Agreements. The Company's lines of credit at December 31, 1996
follow (in millions):

Commitment Lines of Credit
Fee Total Unused

KCSI .07 to .25% $ 515.0 $ 475.0
KCSR .1875% 5.0 5.0
Total $ 520.0 $ 480.0

On May 5, 1995, the Company established a new credit agreement in the amount
of $400 million. The credit agreement replaced approximately $420 million of
then existing Company credit agreements which had been in place for varying
periods since 1992 (see below). Proceeds of the facility have been and are
anticipated to be used for general corporate purposes. The agreement contains
a facility fee ranging from .07 - .25% per annum, interest rates below prime
and terms ranging from one to five years. The Company also has various other
lines of credit lines totaling $120 million. These additional lines, which
are available for general corporate purposes, have interest rates below prime
and terms of less than one year. At December 31, 1996, the Company had $40
million outstanding under its various lines of credit. Among other
provisions, the agreements limit subsidiary indebtedness and sale of
assets, and require certain coverage ratios to be maintained.

As discussed in Note 2, in January 1997, the Company made an approximate $277
million capital contribution to TFM, representing the Company's proportionate
amount of the initial payment required of TFM by the Mexican Government for
the purchase of FNE. This payment was funded using borrowings under the
Company's lines of credit.

During 1994 and 1993, the Company established or increased credit agreements
with several lending institutions, which increased the Company's borrowing
ability to approximately $450 million. The agreements bore interest rates
below prime. Proceeds from these agreements were used to finance the Berger
and MidSouth Corporation ("MidSouth") acquisitions, refinance certain MidSouth
indebtedness, and for general corporate purposes. All of these agreements
were replaced by the new credit agreement established on May 5, 1995 as
discussed above.

Public Debt Transactions. On December 18, 1995, the Company issued $100
million of 7% Debentures due 2025. The Debentures are redeemable at the
option of the Company at any time, in whole or in part, at a redemption price
equal to the greater of (a) 100% of the principal amount of such Debentures or
(b) the sum of the present values of the remaining scheduled payments of
principal and interest thereon discounted to the date of redemption on a
semiannual basis at the Treasury Rate (as defined in the Debentures agreement)
plus 20 basis points, and in each case accrued interest thereon to the date of
redemption. The net proceeds of this transaction were used to repay
indebtedness on the Company's existing lines of credit and for the repurchase
of KCSI common stock.

Other Company public indebtedness includes $100 million of 5.75% Notes due in
1998; $100 million of 6.625% Notes due in 2005; $100 million of 7.875% Notes
due 2002; and $100 million of 8.8% Debentures due 2022. The various Notes are
not redeemable prior to their respective maturities. The 8.8% Debentures are
redeemable on or after July 1, 2002 at a premium of 104.04%, which declines to
par on or after July 1, 2012.

These various debt transactions were issued at a total discount of $4.1
million. This discount is being amortized over the respective debt maturities
on a straight-line basis, which is not materially different from the interest
method. Deferred debt issue costs incurred in connection with these various
transactions (totaling approximately $4.8 million) are also being amortized on
a straight-line basis over the respective debt maturities.

[Page 60]
KCSI ESOP. In 1988, the Company established a $39 million leveraged ESOP (see
Note 8). Related indebtedness was guaranteed by the Company.

In 1995, the Company retired the remaining ESOP indebtedness through
contributions totaling $13.2 million, which included $9.0 million in
accelerated payments.

KCSR Indebtedness. KCSR has purchased rolling stock under conditional sales
agreements, equipment trust certificates and capitalized lease obligations,
which equipment has been pledged as collateral for the related indebtedness.

Other Agreements, Guarantees, Provisions and Restrictions. As of December 31,
1996, the Company is a guarantor of approximately $40 million principal
indebtedness of Gateway Western. As discussed in Note 2, if the Company
receives approval for the acquisition of Gateway Western from the STB, the
assets and liabilities, including this indebtedness, of Gateway Western will
be included in the Company's consolidated financial statements.

As previously noted, the Company has debt agreements containing restrictions
on subsidiary indebtedness, advances and transfers of assets, and sale and
leaseback transactions, as well as requiring compliance with various financial
covenants. At December 31, 1996, the Company was in compliance with the
provisions and restrictions of these agreements. Because of certain financial
covenants contained in the credit agreements, however, maximum utilization of
the Company's available lines of credit may be restricted. Unrestricted
retained earnings at December 31, 1996 were $285.6 million.

Leases and Debt Maturities. The Company and its subsidiaries lease
transportation equipment, and office and other operating facilities under
various capital and operating leases. Rental expenses under operating leases
were $42, $30 and $53 million for the years 1996, 1995 and 1994, respectively.
As more fully described in Note 2, in connection with the Southern Capital
joint venture transactions completed in October 1996, KCSR entered into
operating leases with Southern Capital for locomotives and railroad rolling
stock. Accordingly, 1997 and future years' rental expenses under operating
leases are expected to increase.

Minimum annual payments and present value thereof under existing capital
leases, other debt maturities, and minimum annual rental commitments under
noncancellable operating leases, are as follows (in millions):

Capital Leases
Minimum Net
Lease Less Present Other Operating
Payments Interest Value Debt Total Leases

1997 $ 1.4 $ 0.4 $ 1.0 $ 6.6 $ 7.6 $ 53.9
1998 0.9 0.4 0.5 109.8 110.3 51.1
1999 0.8 0.4 0.4 9.8 10.2 43.3
2000 0.8 0.3 0.5 9.7 10.2 39.5
2001 0.8 0.3 0.5 11.4 11.9 37.4
Later years 4.2 1.1 3.1 491.8 494.9 155.4

Total $ 8.9 $ 2.9 $ 6.0 $ 639.1 $ 645.1 $ 380.6

Fair Value of Long-Term Debt. Based upon the borrowing rates currently
available to the Company and its subsidiaries for indebtedness with similar
terms and average maturities, the fair value of long-term debt was
approximately $663, $679 and $959 million at December 31, 1996, 1995 and 1994,
respectively.

[Page 61]
Note 7. Income Taxes

Under the liability method of accounting for income taxes specified by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," the deferred tax liability is determined based on the difference
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse. Generally, deferred tax expense is the result of changes
in the liability for deferred taxes.

Tax Expense. Income tax expense attributable to continuing operations
consists of the following components (in millions):

1996 1995 1994

Current
Federal $ 45.6 $ 78.7 $ 40.2
State and local 6.4 15.2 3.3

Total current 52.0 93.9 43.5

Deferred
Federal 15.7 86.2 16.0
State and local 2.9 12.8 4.0

Total deferred 18.6 99.0 20.0

Total income tax provision $ 70.6 $ 192.9 $ 63.5

Deferred Taxes. Deferred taxes are recorded based upon differences between
the financial statement and tax basis of assets and liabilities, and available
tax credit carryovers. Temporary differences which give rise to a significant
portion of federal deferred tax expense (benefit) applicable to continuing
operations are as follows (in millions):

1996 1995 1994

Depreciation $ 5.4 $ 19.8 $ 16.7
DST investment 4.3 56.3
Alternative Minimum Tax ("AMT")
credit and Net Operating
Loss ("NOL") carryovers 9.9 6.6 (5.9)
Other, net (3.9) 3.5 5.2

Total $ 15.7 $ 86.2 $ 16.0

[Page 62]
The federal and state deferred tax liabilities (assets) recorded on the
Consolidated Balance Sheets at December 31, 1996, 1995 and 1994, respectively,
follow (in millions):

1996 1995 1994

Liabilities:
Depreciation $ 302.7 $ 281.1 $ 259.2
Equity, unconsolidated affiliates 93.4 74.0 5.1
Other, net 0.5

Gross deferred tax liabilities 396.1 355.6 264.3

Assets:
NOL and AMT credit carryovers (14.6) (26.5) (31.7)
Book reserves not currently deductible
for tax (34.7) (26.4) (20.0)
Deferred compensation and other
employee benefits (7.7) (2.5) (13.1)
Deferred revenue (4.2) (4.6) (5.0)
Vacation accrual (2.7) (2.6) (3.5)
Other, net (3.1) (4.7)
Gross deferred tax assets (67.0) (62.6) (78.0)

Net deferred tax liability $ 329.1 $ 293.0 $ 186.3

Based upon the Company's history of operating earnings and its expectations
for the future, management has determined that operating income of the Company
will, more likely than not, be sufficient to recognize fully the above gross
deferred tax assets.

Tax Rates. Differences between the Company's effective income tax rates
applicable to continuing operations and the U.S. federal income tax statutory
rates of 35% in 1996, 1995 and 1994, are as follows (in millions):

1996 1995 1994

Income tax expense using the
statutory rate in effect $ 83.0 $ 154.1 $ 60.8
Tax effect of:
Earnings of equity investees (19.5) (1.4) (6.3)
1995 DST transactions 20.5
Charitable contributions of
appreciated property (3.2)
Other, net (2.2) (5.1) 1.7

Federal income tax expense 61.3 164.9 56.2
State and local income tax expense 9.3 28.0 7.3

Total $ 70.6 $ 192.9 $ 63.5

Effective tax rate 29.7% 43.8% 36.6%

[Page 63]
Tax Carryovers. At December 31, 1996, the Company had $3.4 million of
alternative minimum tax credit carryover generated by the MidSouth prior to
its acquisition by the Company. This credit can be carried forward
indefinitely and is available on a "tax return basis" to reduce future federal
income taxes payable.

The amount of federal NOL carryover generated by the MidSouth prior to its
acquisition was $54.0 million. The Company utilized approximately $31.9
million of these NOL's in 1996, leaving approximately $22.1 million of
carryover available, with expiration dates beginning in the year 2004. The
use of preacquisition net operating losses and tax credit carryovers is
subject to limitations imposed by the Internal Revenue Code. The Company does
not anticipate that these limitations will affect utilization of the
carryovers prior to their expiration.

Tax Examinations. Examinations of the consolidated federal income tax returns
by the Internal Revenue Service ("IRS") have been completed for the years
1984-1989 and the IRS has proposed certain tax assessments for these years.
In addition, other taxing authorities have also completed examinations
principally through 1992, and have proposed additional tax assessments for
which the Company believes it has recorded adequate reserves.

Since most of these asserted tax deficiencies represent temporary differences,
subsequent payments of taxes will not require additional charges to income tax
expense. In addition, accruals have been made for interest (net of tax
benefit) for estimated settlement of the proposed tax assessments. Thus,
management believes that final settlement of these matters will not have a
material adverse effect on the Company's consolidated results of operations or
financial condition.

Note 8. Stockholders' Equity

Pro Forma Fair Value Information for Stock-Based Compensation Plans. At
December 31, 1996, the Company had several stock-based compensation plans,
which are described separately below. The Company applies APB 25, and related
interpretations, in accounting for its plans. No compensation cost has been
recognized for its fixed stock option plans and its ESPP. Had compensation
cost for the Company's stock-based compensation plans been determined in
accordance with the fair value accounting method prescribed by SFAS 123 for
options issued after December 31, 1994, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:

1996 1995

Net income (in millions):
As reported $ 150.9 $ 236.7
Pro Forma 146.5 231.8

Primary earnings per share:
As reported $ 3.92 $ 5.41
Pro Forma 3.79 5.31

Stock Option Plans. Employee Stock Option Plans established in 1978, 1983,
1987 and 1991, as amended, provide for the granting of options to purchase up
to 19.6 million shares (after stock splits) of the Company's common stock by
officers and other designated employees. In addition, the Company established
a 1993 Directors' Stock Option Plan with a maximum of 120,000 shares for
grant. Such options have been granted at 100% of the average market price of
the Company's stock on the date of grant and generally may not be exercised
sooner than one year, nor longer than ten years following the date of the
grant, except that options outstanding for six months or more, with limited
rights, become immediately exercisable upon certain defined circumstances
constituting a change in control of the Company. The Plans include provisions
for stock appreciation rights and limited rights ("LRs"). All outstanding
options include LRs, except for options granted to non-employee Directors.

[Page 64]
For purposes of computing the pro forma effects of option grants under the
fair value accounting method prescribed by SFAS 123, the fair value of each
option grant is estimated on the date of grant using a version of the
Black-Scholes option pricing model. The following assumptions were used for
the various grants depending on the date of grant, nature of vesting and term
of option:

1996 1995

Dividend Yield .81% to .93% .87% to 1.19%
Expected Volatility 30% to 32% 31% to 33%
Risk-free Interest Rate 5.27% to 6.42% 5.65% to 7.69%
Expected Life 3 years 3 years

A summary of the status of the Company's stock option plans as of December 31,
1996, 1995 and 1994, and changes during the years then ended, is presented
below:

1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price

Outstanding at
January 1 3,675,372 $29.03 3,280,515 $18.12 3,935,800 $15.02
Exercised (518,189) 16.44 (664,543) 13.47 (904,235) 12.95
Canceled/Expired (11,190) 43.72 (372,600) 16.79 (30,000) 39.31
Granted 315,390 46.71 1,432,000 43.63 278,950 47.31

Outstanding at
December 31 3,461,383 32.48 3,675,372 29.03 3,280,515 18.12

Exercisable at
December 31 1,918,183 2,146,372 2,488,665

Weighted-Average Fair Value
of options granted
during the year $12.29 $11.93 N/A

The following table summarizes the information about stock options outstanding
at December 31, 1996:

OUTSTANDING EXERCISABLE
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Contractual Life Price at 12/31/96 Price

$ 8 - 20 1,077,986 5 years $12.55 1,067,986 $12.49
21 - 40 730,197 6 30.29 595,197 28.57
41 - 50 1,653,200 4.5 46.44 255,000 47.97

8 - 50 3,461,383 5 32.48 1,918,183 22.20

Shares available for future grants at December 31, 1996 aggregated 3,955,646.

[Page 65]
Stock Purchase Plan. The ESPP, established in 1977, provides to substantially
all full-time employees of the Company, certain subsidiaries and certain other
affiliated entities, the right to subscribe to an aggregate of 7.6 million
shares of common stock. The purchase price for shares under any stock
offering is to be 85% of the average market price on either the exercise date
or the offering date, whichever is lower, but in no event less than the par
value of the shares. At December 31, 1996, there were approximately 3.9
million shares available for future offerings.

The following table summarizes activity related to the various ESPP offerings:

Date Shares Shares Date
Initiated Subscribed Price Issued Issued

Tenth Offering 1996 83,693 $40.06 N/A N/A
Ninth Offering 1995 97,137 38.20 82,533 1996/1997
Eighth Offering 1993 220,576 38.20 160,643 1994 to 1996
Seventh Offering 1992 247,254 18.75 237,970 1993/1994

For purposes of computing the pro forma effects of employees' purchase rights
under the fair value accounting method prescribed by SFAS 123, the fair value
of the Tenth and Ninth Offerings under the ESPP are estimated on the date of
grant using a version of the Black-Scholes option pricing model. The
following weighted-average assumptions were used:

1996 1995

Dividend Yield .85% .88%
Expected Volatility 30% 32%
Risk-free Interest Rate 5.50% 5.45%
Expected Life 1 year 1 year

The weighted-average fair value of purchase rights granted under the Tenth and
Ninth Offerings of the ESPP were $10.67 and $10.48, respectively.

Restricted Stock. The Company issued 7,300 shares of restricted stock in 1993
to senior management executives of KCSI and certain subsidiaries at then
current market prices ranging between $39.25 and $41.56 per share. These
shares vest ratably over a five year period.

Forward Stock Purchase Contract. During 1995, the Company entered into a
forward stock purchase contract ("the contract") as a means of securing a
potentially favorable price for the repurchase of its common stock in
connection with the stock repurchase program authorized by the Company's Board
of Directors on April 24, 1995. During 1996, the Company purchased 1.2
million shares under this arrangement at an aggregate price of $56 million
(including transaction premium). In January 1997, the Company purchased
400,000 shares for approximately $19 million. The contract, which is not held
for trading purposes, allows the Company to purchase from a financial
institution an additional 400,000 shares of the Company's common stock at an
aggregate price of approximately $19 million (including an escalating
transaction premium which approximates $1.5 million). The contract also
contains provisions which allow the Company to elect a net cash or net share
settlement in lieu of physical settlement of the shares. The transaction will
be recorded in the Company's financial statements upon settlement of the
contract in accordance with the Company's accounting policies described in
Note 1. If either the net cash or net share settlement provisions are elected
by the Company, any appreciation or depreciation associated with the forward
contract will be reflected as an equity component upon settlement of the
contract. At February 20, 1997, the fair value of 400,000 shares of the
Company's common stock was $21 million, based on quoted market prices.

The contract involves, to varying degrees, elements of credit and market risk;
however, the Company does not anticipate any material adverse effect on its
financial position resulting from its involvement in this contract, nor does
it anticipate nonperformance by the counter party. The contract is unsecured.

[Page 66]
Employee Stock Ownership Plan. In 1987 and 1988, KCSI and DST established
leveraged ESOPs for employees not covered by collective bargaining agreements
by collectively purchasing $69 million of KCSI common stock from Treasury at a
then current market price of $49 per share ($12.25 per share effected for
stock splits). During 1990, the two plans were merged into one plan known as
the KCSI ESOP. The indebtedness was retired in full during 1995. In October
1995, the ESOP became a multiple employer plan covering both KCSI employees
and DST employees, and was renamed The Employee Stock Ownership Plan. KCSI
contributions to its portion of the ESOP are based on a percentage (determined
by the Compensation Committee of the Board of Directors) of wages earned by
eligible employees.

The Company's employee benefit expense for the ESOP aggregated $2.4, $5.7 and
$15.5 million in 1996, 1995 and 1994, respectively. Interest incurred on the
indebtedness was $0.8 and $1.2 million in 1995 and 1994, respectively.
Dividends used to service the ESOP indebtedness were $1.6 and $1.3 million in
1995 and 1994, respectively.

Certain of the Company's ESOP shares are grandfathered under the provisions of
Statement of Position No. 93-6 "Employers Accounting for Employee Stock
Ownership Plans" ("SOP 93-6"). In 1994, the Company contributed $11.5 million
to the ESOP which was used by the trustee to purchase 352,000 shares of KCSI
common stock in the open market for allocation to plan participants. These
ESOP shares were not grandfathered under the provisions of SOP 93-6.
Disclosures regarding the Company's ESOP plan follow, (in millions at December
31, 1996):

Number of grandfathered KCSI common shares allocated
to plan participants 2.8
Number of not grandfathered KCSI common shares
allocated to plan participants 0.4
Total number of KCSI common shares allocated
to plan participants 3.2

Employee Plan Funding Trust. On October 1, 1993, KCSI transferred one million
shares of KCSI Series B Convertible Preferred Stock (the "Series B Preferred
Stock") to the Kansas City Southern Industries, Inc. Employee Plan Funding
Trust ("the Trust"), a grantor trust established by KCSI. The purchase price
of the stock (based upon an independent valuation) was $200 million, which the
Trust financed through KCSI. The indebtedness of the Trust to KCSI is
repayable over 27 years with interest at 6% per year, with no principal
payments in the first three years. The Trust, which is administered by an
independent bank trustee and consolidated into the Company's financial
statements, will repay the indebtedness to KCSI utilizing dividends and other
investment income, as well as other cash obtained from KCSI. As the debt is
reduced, shares of the Series B Preferred Stock, or shares of common stock
acquired on conversion, may be released and available for distribution to
various KCSI employee benefit plans, including its ESOP, Stock Option Plan and
Stock Purchase Plans. Principal payments totaling $14.1 million have been
made since inception; however, no shares have been released or are available
for distribution to these plans. Only shares that have been released and
allocated to employees are considered for purposes of computing fully-diluted
earnings per share.

The Series B Preferred Stock, which has a $10 per share (5%) annual dividend
and a $200 per share liquidation preference, is convertible into common stock
at an initial ratio of four shares of common stock for each share of Series B
Preferred Stock. The Series B Preferred Stock is redeemable after April 1,
1995 at a specified premium and under certain other circumstances.

The Series B Preferred Stock can be held only by the Trust or its
beneficiaries - the employee benefit plans of KCSI. The full terms of the
Series B Convertible Preferred Stock are set forth in a Certificate of
Designations approved by the Board of Directors and filed in Delaware.

Treasury Stock. The Company issued shares of common stock from Treasury -
519,268 in 1996, 523,320 in 1995 and 721,431 in 1994 - to fund the exercise of
options and subscriptions under various employee stock option and purchase
plans. Treasury stock previously acquired had been accounted for as if
retired. The Company purchased shares as follows: 3,276,533 in 1996,
4,978,457 in 1995 and 1,376 in 1994.

[Page 67]
Establishment of Par Value for Common Stock. In May 1994, the Company amended
its certificate of incorporation to set a par value for the common stock and
increase its authorized shares. The amendment established a par value of $.01
per common share, which had previously been no par, and had the effect of
reallocating amounts between categories within stockholders' equity, but had
no overall effect upon the total amount of stockholders' equity. In addition,
the number of authorized common shares was increased from 100 million to 400
million.

Note 9. Minority Interest

Purchase Agreements. Agreements between KCSI and Janus minority owners
contain, among other provisions, mandatory stock purchase provisions whereby
under certain circumstances, KCSI would be required to purchase the minority
interest of Janus.

In late 1994, the Company was notified that certain Janus minority owners made
effective the mandatory purchase provisions for a certain percentage of their
ownership. In the aggregate, the value of the shares made effective for
mandatory purchase totaled $59 million. Concurrent with the notification of
these mandatory purchase provisions, the Company negotiated the early
termination of certain Janus compensation arrangements, which began in 1991.
These compensation arrangements, which were scheduled to be fully vested at
the end of 1996, permitted individuals to earn units (which vested over time)
based upon Janus earnings, and would have continued to accrue benefits in
subsequent years. The negotiated termination resulted in payments of $48
million in cash by Janus, of which approximately $21 million had been accrued.

In early 1995, the individuals whose compensation arrangements were terminated
used their after-tax net proceeds to purchase certain portions of the shares
made available due to the mandatory purchase notification discussed above. In
addition, the Janus minority group was restructured to allow for minority
ownership by other key Janus employees. These employees also purchased
portions of the minority shares (available as a result of the mandatory
purchase notification) through payment of $10.5 million in cash and recourse
loans financed by KCSI. The remaining minority shares made effective for
mandatory purchase were purchased by Janus ($6.1 million, as treasury stock)
and KCSI ($12.7 million).

As a result of KCSI's acquisition of additional Janus shares and the reduction
of total outstanding Janus shares (from Janus' treasury purchase), KCSI
increased its ownership in Janus from approximately 81% to 83% in January
1995. Additional purchases were made by minority holders during 1995,
financed through recourse loans by KCSI in the amount of $8.8 million. The
Company also purchased shares, thereby maintaining its respective ownership
percentage. The KCSI share purchases resulted in the recording of intangibles
as the purchase price exceeded the value of underlying tangible assets. The
intangibles are being amortized over their estimated economic lives.

The purchase prices of these mandatory stock purchase provisions are based
upon a multiple of earnings and/or fair market value determinations depending
upon specific agreement terms. If all of the provisions of the Janus minority
owner agreements became effective, KCSI would be required to purchase the
respective minority interests at a cost currently estimated at approximately
$220 million.

[Page 68]
Note 10. Profit Sharing and Other Postretirement Benefits

Profit Sharing. Qualified profit sharing plans are maintained for most
employees not included in collective bargaining agreements. Contributions for
the Company and its subsidiaries are made at the discretion of the Boards of
Directors in amounts not to exceed the maximum allowable for federal income
tax purposes. Profit sharing expense was $1.8 million in 1996. There was no
profit sharing expense for the year ended December 31, 1995. Profit sharing
expense was $0.8 million in 1994.

Employee Savings Plan. Effective January 1, 1996, the Company transferred its
participating employees from the DST 401(k) Employee Savings Plan into the
Kansas City Southern Industries, Inc. 401(k) Plan and Trust Agreement
("employee savings plan"). The Company's employee savings plan permits
participants to make contributions by salary reduction pursuant to section
401(k) of the Internal Revenue Code. The Company matches contributions up to
a maximum of 3% of compensation. In connection with the required match, the
Company's contribution to the plan was $1.2 million in 1996.

Other Postretirement Benefits. The Company adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"), effective January 1, 1993. The
Company and several of its subsidiaries provide certain medical, life and
other postretirement benefits other than pensions to its retirees. The
medical and life plans are available to employees not covered under collective
bargaining arrangements, who have attained age 60 and rendered ten years of
service. Individuals employed as of December 31, 1992 were excluded from a
specific service requirement. The medical plan is contributory and provides
benefits for retirees, their covered dependents and beneficiaries. Benefit
expense begins to accrue at age 40. The medical plan was amended effective
January 1, 1993 to provide for annual adjustment of retiree contributions, and
also contains, depending on the plan coverage selected, certain deductibles,
copayments, coinsurance and coordination with Medicare. The life insurance
plan is non-contributory and covers retirees only. The Company's policy, in
most cases, is to fund benefits payable under these plans as the obligations
become due. However, certain plan assets (e.g., money market funds) do exist
with respect to life insurance benefits.

The following table displays a reconciliation of the plans' obligations and
assets at December 31 (in millions):

1996 1995 1994

Accumulated postretirement
benefit obligation:
Retirees $ 8.1 $ 7.7 $ 7.9
Fully eligible active plan participants 0.6 0.9 1.1
Other active plan participants 2.2 1.9 1.4
Plan assets (1.3) (1.7) (1.3)
Accrued postretirement
benefit obligation $ 9.6 $ 8.8 $ 9.1

Net periodic postretirement benefit cost included the following components (in
millions):

1996 1995 1994

Service cost $ 0.2 $ 0.3 $ 0.4
Interest cost 0.7 0.7 0.8
Return on plan assets (0.1) (0.1) (0.1)

Net periodic postretirement benefit cost $ 0.8 $ 0.9 $ 1.1

[Page 69]
The Company's health care costs are limited to the increase in the Consumer
Price Index ("CPI") with a maximum annual increase of 5%. Accordingly, health
care costs in excess of the CPI limit will be borne by the plan participants,
and therefore assumptions regarding health care cost trend rates are not
applicable.

The following assumptions were used to determine the postretirement
obligations and costs for the years ended December 31:

1996 1995 1994

Annual increase in the CPI 3.00% 3.00% 4.00%
Expected rate of return on life
insurance plan assets 6.50 6.50 6.50
Discount rate 7.75 7.25 8.50
Salary increase 4.00 4.00 5.00

Note 11. Commitments and Contingencies

Litigation Reserves. In the opinion of management, claims or lawsuits
incidental to the business of the Company and its subsidiaries have been
adequately provided for in the consolidated financial statements.

Purchase Commitments. As of December 31, 1995, the Company had commitments to
purchase approximately $14 million of diesel fuel over the subsequent twelve
month period, representing approximately 50% of projected fuel requirements
for 1996. The Company entered into minimal commitments for 1997.

In order to hedge a portion of the Company's exposure to a strengthening of
the Mexican peso versus the U.S. dollar, in February 1997, the Company entered
into a $98 million forward contract to purchase Mexican pesos. The contract
matures in July 1997. The Company intends to defer any gain or loss from
changes in the market value of this contract and to record the net gain or
loss as a component of its investment in TFM. This contract is intended to
hedge only a portion of the Company's exposure related to the final
installment of the purchase price and not any other transactions or balances.
The Company or TFM may enter into additional contracts as market conditions
change or exchange rates fluctuate.

[Page 70]
Mexico's economy is currently classified as "highly inflationary" as defined
in SFAS 52. Accordingly, any gains or losses from translating TFM's financial
statements into U.S. dollars will be included in the determination of TFM's
net income. Any equity earnings or losses from TFM included in the Company's
results of operations will reflect the Company's share of such translation
gains and losses.

Environmental Liabilities. The Company's transportation operations are
subject to extensive regulation under environmental protection laws and its
land holdings have been used for transportation purposes or leased to
third-parties for commercial and industrial purposes. The Company records
liabilities for remediation and restoration costs related to past activities
when the Company's obligation is probable and the costs can be reasonably
estimated. Costs of ongoing compliance activities to current operations are
expensed as incurred.

The Company's recorded liabilities for these issues represent its best
estimates (on an undiscounted basis) of remediation and restoration costs that
may be required to comply with present laws and regulations. At December 31,
1996, these recorded liabilities were not material. Although these costs
cannot be predicted with certainty, management believes that the ultimate
outcome of identified matters will not have a material adverse effect on the
Company's consolidated results of operations or financial condition.

Note 12. Control

Subsidiaries and Affiliates. In connection with its acquisition of an
interest in Janus, the Company entered into an agreement which provides for
preservation of a measure of management autonomy at the subsidiary level and
for rights of first refusal on the part of minority stockholders, Janus and
the Company with respect to certain sales of Janus stock by the minority
stockholders. The agreement also requires the Company to purchase the shares
of minority stockholders in certain circumstances. In addition, in the event
of a "change of ownership" of the Company, as defined in the agreement, the
Company may be required to sell its stock of Janus to the minority
stockholders or to purchase such holders' Janus stock. Purchase and sales
transactions under the agreements are to be made based upon a multiple of the
net earnings of Janus and/or fair market value determinations, as defined
therein. See Note 9 for further details.

Under the Investment Company Act of 1940, certain changes in ownership of
Janus or Berger may result in termination of its investment advisory
agreements with the mutual funds and other accounts it manages, requiring
approval of fund shareholders and other account holders to obtain new
agreements.

DST, an approximate 41% owned unconsolidated affiliate of the Company, has a
Stockholders' Rights Agreement. 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.

The Company is party to certain agreements with TMM covering the TFM and Mexrail
ventures, which contain "change of control" provisions, provisions intended
to preserve the proportionate ownership of the Company and TMM, 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 TFM or Mexrail. Under
certain circumstances, such agreements could affect the Company's ownership
percentage and rights in these equity affiliates.

[Page 71]
Employees. The Company and certain of its subsidiaries have entered into
agreements with employees whereby, upon defined circumstances constituting a
change in control of the Company or subsidiary, certain stock options become
exercisable, certain benefit entitlements are automatically funded and such
employees are entitled to specified cash payments upon termination of
employment.

Assets. The Company and certain of its subsidiaries have established trusts
to provide for the funding of corporate commitments and entitlements of
officers, directors, employees and others in the event of a specified change
in control of the Company or subsidiary. Assets held in such trusts at
December 31, 1996 were not material. Depending upon the circumstances at the
time of any such change in control, the most significant factor of which would
be the highest price paid for KCSI common stock by a party seeking to control
the Company, funding of the Company's trusts could be very substantial.

Debt. Certain loan agreements and debt instruments entered into or guaranteed
by the Company and its subsidiaries provide for default in the event of a
specified change in control of the Company or particular subsidiaries of the
Company.

Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the
Company declared a dividend distribution of one Right for each outstanding
share of the Company's common stock, $.01 par value per share (the "Common
Stock"), to the stockholders of record on October 12, 1995. Each Right
entitles the registered holder to purchase from the Company 1/1,000th of a
share of Series A Preferred Stock (the "Preferred Stock") or in some
circumstances, Common Stock, other securities, cash or other assets as the
case may be, at a price of $210 per share, subject to adjustment.

The Rights, which are automatically attached to the Common Stock, are not
exercisable or transferable apart from the Common Stock until the tenth
calendar day following the earlier to occur of (unless extended by the Board
of Directors and subject to the earlier redemption or expiration of the
Rights): (i) the date of a public announcement that an acquiring person
acquired, or obtained the right to acquire, beneficial ownership of 20 percent
or more of the outstanding shares of the Common Stock of the Company (or 15
percent in the case that such person is considered an "adverse person"), or
(ii) the commencement or announcement of an intention to make a tender offer
or exchange offer that would result in an acquiring person beneficially owning
20 percent or more of such outstanding shares of Common Stock of the Company
(or 15 percent in the case that such person is considered an "adverse
person"). Until exercised, the Right will have no rights as a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends. In connection with certain business combinations resulting in the
acquisition of the Company or dispositions of more than 50% of Company assets
or earnings power, each Right shall thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, that
number of shares of the highest priority voting securities of the acquiring
company (or certain of its affiliates) that at the time of such transaction
would have a market value of two times the exercise price of the Right. The
Rights expire on October 12, 2005, unless earlier redeemed by the Company as
described below.

At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial ownership
of 20 percent (or 15 percent in some instances) or more of the outstanding
shares of the Common Stock of the Company, the Company may redeem the Rights
in whole, but not in part, at a price of $0.005 per Right . In addition, the
Company's right of redemption may be reinstated following an inadvertent
trigger of the Rights (as determined by the Board) if an acquiring person
reduces its beneficial ownership to 10 percent or less of the outstanding
shares of Common Stock of the Company in a transaction or series of
transactions not involving the Company.

The Series A Preferred shares purchasable upon exercise of the Rights will
have a cumulative quarterly dividend rate set by the Board of Directors or
equal to 1,000 times the dividend declared on the Common Stock for such
quarter. Each share will have the voting rights of one vote on all matters
voted at a meeting of the stockholders for each 1/1,000th share of preferred
stock held by such stockholder. In the

[Page 72]
event of any merger, consolidation or other transaction in which the common
shares are exchanged, each Series A Preferred share will be entitled to
receive an amount equal to 1,000 times the amount to be received per common
share. In the event of a liquidation, the holders of Series A Preferred
shares will be entitled to receive $1,000 per share or an amount per share
equal to 1,000 times the aggregate amount to be distributed per share to
holders of Common Stock. The shares will not be redeemable. The vote of
holders of a majority of the Series A Preferred shares, voting together as a
class, will be required for any amendment to the Company's Certificate of
Incorporation which would materially and adversely alter or change the powers,
preferences or special rights of such shares.

Note 13. Industry Segments

The Company's three segments, aligned to reflect the Company's current
operations, are as follows:

The Kansas City Southern Railway Company. The Company operates a Class I
Common Carrier railroad system through its wholly-owned subsidiary, KCSR. As
a common carrier, KCSR's customer base includes utilities and a wide range of
companies in the petroleum/chemical, agricultural and paper processing
industries, among others. The railroad system operates primarily in the
United States, from the Midwest to the Gulf of Mexico and on an East-West axis
from Dallas, Texas to Meridian, Mississippi. Also included in this industry
segment is Southern Group, Inc., a wholly-owned subsidiary of KCSR, and equity
investments in Southern Capital and Gateway Western.

KCSR's revenues and earnings are dependent on providing reliable service to
its customers at competitive rates, the general economic conditions in the
geographic region it serves, and its ability to effectively compete against
alternative forms of surface transportation, such as over-the-road truck
transportation. KCSR's ability to construct and maintain its roadway in order
to provide safe and efficient transportation service is important to its
ongoing viability as a rail carrier. As has been evident during 1996,
consolidation in the rail industry places increased competitive pressure on
KCSR to effectively maintain its presence as an alternative route for the
movement of commodities. Additionally, the containment of costs and expenses
is important in maintaining a competitive market position, particularly
with respect to employee costs as approximately 86% of the KCSR's employees
are covered under various collective bargaining agreements.

Financial Asset Management. Janus (an 83% owned subsidiary) and Berger (an
80% owned subsidiary as of December 31, 1996, subsequently increased to 87% as
discussed in Note 2) manage investments for mutual funds and private accounts.
Both companies operate throughout the United States, as well as in parts of
Europe, with headquarters in Denver, Colorado. Janus assets under management
at December 31, 1996, 1995 and 1994 were $46.7, $31.1 and $22.9 billion,
respectively. Berger assets under management at December 31, 1996, 1995 and
1994 were $3.6, $3.4 and $3.0 billion, respectively.

Financial Asset Management revenues and operating income are driven primarily
by growth in assets under management, and a decline in the stock and bond
markets and/or an increase in the rate of return of alternative investments
could negatively impact results. In addition, the mutual fund market, in
general, faces increasing competition as the number of mutual funds continues
to increase, marketing and distribution channels become more creative and
complex, and investors place greater emphasis on published fund
recommendations and investment category rankings.

Corporate & Other. Earnings of various immaterial consolidated subsidiaries
(e.g., Pabtex, Inc., Trans-Serve, Inc., etc.), the Company's equity in
earnings from investments in certain unconsolidated affiliates (including DST,
TFM and Mexrail), unallocated holding company expenses, intercompany
eliminations, and miscellaneous investment activities are reported in the
Corporate & Other industry segment. In 1996 and 1995, DST is included as an
equity investment (see Note 1 for further discussion). In 1994, DST was
reported as a separate segment, Information & Transaction Processing, as
discussed below.

[Page 73]
The earnings of DST, the Company's largest unconsolidated affiliate, are
dependent in part upon the further growth of the mutual fund industry in the
United States, DST's ability to continue to adapt its technology to meet
increasingly complex and rapidly changing requirements and various other
factors including, but not limited to: reliance on a centralized processing
facility; further development of international businesses; continued equity in
earnings from joint ventures; and competition from other third party providers
of similar services and products as well as from in-house providers.

Information & Transaction Processing (1994). DST, and its subsidiaries and
affiliates, provide sophisticated information processing and computer software
services and products, primarily to mutual funds, insurance providers, banks
and other financial services organizations. DST operates throughout the
United States with its base of operations in the Midwest and, through certain
of its subsidiaries and affiliates, internationally in Canada, Europe, Africa
and the Pacific Rim. As discussed in Note 2, DST and the Company completed a
public offering of DST common stock and associated transactions in November
1995, resulting in the reduction of the Company's ownership in DST to
approximately 41%. Accordingly, Information & Transaction Processing is
reported as a separate segment in 1994 only.

Segment Financial Information. Sales between segments were not material in
1996, 1995 or 1994. The year ended December 31, 1995 reflects DST as an
unconsolidated affiliate as of January 1, 1995 as a result of the DST public
offering and associated transactions completed in November 1995, as discussed
in Note 2. The year ended December 31, 1994 presents DST as a consolidated
subsidiary. Certain amounts in prior years' segment information have been
reclassified to conform to the current year presentation.

[Page 74]
Segment Financial Information, dollars in millions, years ended December 31,

Information
The Kansas Financial & Cor-
City Southern Asset Transaction porate &
Railway Company Management Processing Other Consolidated

1996
Revenues $ 492.5 $ 329.9 $ 24.9 $ 847.3
Costs and expenses 359.3 175.2 32.8 567.3
Depreciation and
amortization 59.1 12.4 4.6 76.1

Operating income 74.1 142.3 (12.5) 203.9
Equity in net earnings of
unconsolidated affiliates 0.4 (0.1) 69.8 70.1
Interest expense (49.4) (5.7) (4.5) (59.6)
Other, net 6.1 5.9 10.9 22.9
Pretax income 31.2 142.4 63.7 237.3
Income taxes 14.1 57.5 (1.0) 70.6
Minority interest 15.8 15.8
Net income $ 17.1 $ 69.1 $ 64.7 $ 150.9

Capital expenditures $ 135.1 $ 1.4 $ 7.5 $ 144.0

1995
Revenues $ 502.1 $ 239.8 $ 33.3 $ 775.2
Costs and expenses 380.2 133.9 26.9 541.0
Depreciation and
amortization 55.3 13.2 6.5 75.0
Operating income 66.6 92.7 (0.1) 159.2
Gain on sale of equity
investment 296.3 296.3
Equity in net earnings of
unconsolidated affiliates 29.8 29.8
Interest expense (50.7) (4.9) (9.9) (65.5)
Other, net 3.4 4.3 12.6 20.3
Pretax income 19.3 92.1 328.7 440.1
Income taxes 7.9 37.8 147.2 192.9
Minority interest 10.5 10.5
Net income $ 11.4 $ 43.8 $ 181.5 $ 236.7

Capital expenditures $ 110.2 $ 5.6 $ 5.3 $ 121.1

1994
Revenues $ 472.5 $ 186.3 $ 401.7 $ 27.9 $1,088.4
Costs and expenses 318.0 126.2 313.2 24.7 782.1
Depreciation and
amortization 47.8 9.0 57.3 5.0 119.1
Operating income 106.7 51.1 31.2 (1.8) 187.2
Equity in net earnings of
unconsolidated affiliates 24.5 0.3 24.8
Interest expense (39.3) (2.1) (14.0) 1.8 (53.6)
Other, net 3.4 2.0 3.5 6.4 15.3
Pretax income 70.8 51.0 45.2 6.7 173.7
Income taxes 28.4 20.1 14.3 0.7 63.5
Minority interest 6.4 (1.1) 5.3
Net income $ 42.4 $ 24.5 $ 32.0 $ 6.0 $ 104.9

Capital expenditures $ 190.7 $ 7.8(a)$ 102.0(a)$ 17.4 $ 317.9

(a) Exclusive of property additions from acquisitions

[Page 75]
Segment Financial Information, dollars in millions, at December 31,

Information
The Kansas Financial & Corp-
City Southern Asset Transaction orate &
Railway Company Management Processing Other Consolidated

1996
ASSETS
Current assets $ 149.3 $ 162.7 $ (19.9) $ 292.1
Investments held
for operating purposes 29.2 2.0 304.0 335.2
Properties, net 1,148.2 8.5 62.6 1,219.3
Intangible and other
assets, net 153.1 99.2 (14.8) 237.5
Total assets $1,479.8 $ 272.4 $ 331.9 $2,084.1

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 200.2 $ 41.7 $ 2.7 $ 244.6
Long-term debt 484.8 69.1 83.6 637.5
Deferred income taxes 281.5 0.5 55.7 337.7
Other 85.2 25.0 38.4 148.6
Net worth 428.1 136.1 151.5 715.7
Total liabilities and
stockholders' equity $1,479.8 $ 272.4 $ 331.9 $2,084.1

1995
ASSETS
Current assets $ 155.2 $ 93.5 $ 32.5 $ 281.2
Investments held
for operating purposes 9.3 0.9 261.9 272.1
Properties, net 1,198.4 13.2 70.3 1,281.9
Intangible and other
assets, net 103.0 78.4 23.0 204.4
Total assets $1,465.9 $ 186.0 $ 387.7 $2,039.6

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 201.1 $ 25.5 $ 93.8 $ 320.4
Long-term debt 604.2 48.0 (18.4) 633.8
Deferred income taxes 226.2 0.5 76.9 303.6
Other 35.8 12.6 38.2 86.6
Net worth 398.6 99.4 197.2 695.2
Total liabilities and
stockholders' equity $1,465.9 $ 186.0 $ 387.7 $2,039.6

1994
ASSETS
Current assets $ 158.6 $ 70.4 $ 131.6 $ 19.5 $ 380.1
Investments held
for operating purposes 10.6 0.7 167.0 36.3 214.6
Properties, net 1,148.4 15.6 181.4 69.9 1,415.3
Intangible and other
assets, net 106.8 57.3 51.7 5.0 220.8
Total assets $1,424.4 $ 144.0 $ 531.7 $ 130.7 $2,230.8

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 201.1 $ 32.5 $ 129.4 $ (23.4) $ 339.6
Long-term debt 597.1 48.2 175.8 107.7 928.8
Deferred income taxes 200.3 3.9 204.2
Other 29.5 11.1 19.8 30.6 91.0
Net worth 396.4 52.2 206.7 11.9 667.2
Total liabilities and
stockholders' equity $1,424.4 $ 144.0 $ 531.7 $ 130.7 $2,230.8

[Page 76]
Note 14. Quarterly Financial Data (Unaudited)

Quarterly financial data follows. Certain amounts in the quarterly financial
data have been reclassified to conform to the current year presentation.

Third Quarter 1996 includes a one time after-tax gain of $47.7 million (or
$1.23 per share), representing the Company's proportionate share of the one
time gain recognized by DST in connection with the merger of Continuum,
formerly a DST unconsolidated equity affiliate, with Computer Sciences
Corporation in a tax-free share exchange (see Note 2).

(in millions, except per share amounts):

1996
Fourth Third Second First
Quarter Quarter Quarter Quarter

Revenues $ 220.9 $ 218.2 $ 206.9 $ 201.3

Costs and expenses 145.2 138.3 142.0 141.8
Depreciation and amortization 18.2 19.7 19.2 19.0

Operating income 57.5 60.2 45.7 40.5

Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. 4.9 56.3 5.0 1.9
Other 0.3 0.2 0.2 1.3
Interest expense (16.4) (16.1) (14.2) (12.9)
Other, net 10.6 2.4 5.3 4.6

Pretax income 56.9 103.0 42.0 35.4

Income taxes 19.9 22.5 15.7 12.5
Minority interest 4.5 4.4 3.9 3.0

Net income $ 32.5 $ 76.1 $ 22.4 $ 19.9

Primary earnings per share (i) $ 0.87 $ 2.00 $ 0.57 $ 0.50

Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .10 $ .10 $ .10 $ .10

Stock Price Ranges:
Preferred - High $17.000 $18.750 $19.250 $18.000
- Low 15.750 15.375 17.250 15.500

Common - High 51.000 44.125 49.875 47.750
- Low 42.250 38.500 42.250 42.250

(i) The accumulation of 1996's four quarters for primary earnings per share
is greater than the primary earnings per share for the year ended
December 31, 1996 due to significant repurchases of Company common
stock throughout the year.

[Page 77]
The four quarters for 1995 were restated to reflect DST as an unconsolidated
affiliate as of January 1, 1995 due to the DST public offering and associated
transactions completed in November 1995, which reduced the Company's ownership
in DST to approximately 41% and resulted in an after-tax gain of $144.6
million, or $3.45 per share (see Note 2).

(in millions, except per share amounts):

1995

Fourth Third Second First
Quarter Quarter Quarter Quarter

Revenues $ 198.0 $ 199.2 $ 188.8 $ 189.2

Costs and expenses 137.2 125.9 148.3 129.6
Depreciation and amortization 19.0 18.9 19.1 18.0

Operating income 41.8 54.4 21.4 41.6

Gain on sale of equity
investment 296.3

Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. 1.7 4.6 5.3 13.0
Other 4.7 0.2 0.2 0.1
Interest expense (16.3) (15.6) (16.2) (17.4)
Other, net 5.5 5.4 5.6 3.8

Pretax income 333.7 49.0 16.3 41.1

Income taxes 158.9 16.9 5.1 12.0
Minority interest 2.9 3.2 2.7 1.7

Net income $ 171.9 $ 28.9 $ 8.5 $ 27.4

Primary earnings
per share (i) $ 4.11 $ 0.65 $ 0.19 $ 0.61

Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .075 $ .075 $ .075 $ .075

Stock Price Ranges:
Preferred - High $ 19.000 $ 20.000 $ 15.500 $ 16.000
- Low 15.500 14.500 14.500 14.500

Common - High 48.625 47.375 41.250 40.875
- Low 44.625 35.750 35.875 31.000

(i) The accumulation of 1995's four quarters for primary earnings per share
is greater than the primary earnings per share for the year ended
December 31, 1995 due to significant repurchases of Company common
stock in fourth quarter 1995.

[Page 78]
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

[Page 79]
Part III

The Company has incorporated by reference certain responses to the Items of
this Part III pursuant to Rule 12b-23 under the Exchange Act and General
Instruction G(3) to Form 10-K. The Company's definitive proxy statement for
the annual meeting of stockholders scheduled for May 1, 1997 ("Proxy
Statement") will be filed no later than 120 days after December 31, 1996.

Item 10. Directors and Executive Officers of the Company

(a) Directors of the Company

The information set forth in response to Item 401 of Regulation S-K under the
heading "Proposal 1 - Election of Three Directors" and "The Board of
Directors" in the Company's Proxy Statement is incorporated herein by
reference in partial response to this Item 10.

(b) Executive Officers of the Company

The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Company," an unnumbered Item in Part I (immediately
following Item 4, Submission of Matters to a Vote of Security Holders), on
pages 5 and 6 of this Form 10-K is incorporated herein by reference in partial
response to this Item 10.

The information set forth in response to Item 405 of Regulation S-K under the
heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934"
in the Company's Proxy Statement is incorporated herein by reference in
partial response to this Item 10.

Item 11. Executive Compensation

The information set forth in response to Item 402 of Regulation S-K under
"Management Compensation" in the Company's Proxy Statement, (other than The
Compensation and Organization Committee Report on Executive Compensation and
the Stock Performance Graph), is incorporated by reference in response to this
Item 11.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders" and "Stock Owned Beneficially by Directors
and Certain Executive Officers" in the Company's Proxy Statement is hereby
incorporated by reference in response to this Item 12.

The Company has no knowledge of any arrangement the operation of which may at
a subsequent date result in a change of control of the Company.

Item 13. Certain Relationships and Related Transactions

The information set forth in response to Item 404 of Regulation S-K under the
heading "Transactions with Management" in the Company's Proxy Statement is
incorporated herein by reference in response to this Item 13.

[Page 80][Page]

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

All information provided under Part IV Item 14, Exhibits, Financial Statement
Schedules and Reports on Form 8-K, except for the information within this Form
10-K/A as provided below, remains unchanged from the Form 10-K filed with the
Securities and Exchange Commission on March 20, 1997.

(a) List of Documents filed as part of this Report

(1) Financial Statements

The financial statements and related notes, together with the report of Price
Waterhouse LLP dated February 20, 1997, appear in Part II Item 8, Financial
Statements and Supplementary Data, on pages 38 through 77 of this Form 10-K.

(2) Financial Statement Schedules

The schedules and exhibits for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission appear in Part
II Item 8, Financial Statements and Supplementary Data, under the Index to
Financial Statements on page 38 of this Form 10-K.

(3) List of Exhibits

(a) Exhibits

The Company has incorporated by reference herein certain exhibits as specified
below pursuant to Rule 12b-32 under the Exchange Act.

(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(Inapplicable)

(3) Articles of Incorporation and Bylaws

Articles of Incorporation

3.1 Exhibit 4 to Company's Registration Statement on Form S-8
originally filed September 19, 1986 (Commission File No.
33-8880), Certificate of Incorporation as amended through
May 14, 1985, is hereby incorporated by reference as Exhibit 3.1

3.2 Exhibit 4.1 to Company's Current Report on Form 8-K dated October
1, 1993 (Commission File No. 1-4717), Certificate of Designation
dated September 29, 1993 Establishing Series B Convertible
Preferred Stock, par value $1.00, is hereby incorporated by
reference as Exhibit 3.2

3.3 Exhibit 3.1 to Company's Form 10-K for the fiscal year ended
December 31, 1994 (Commission File No. 1-4717),Amendment to
Company's Certificate of Incorporation to set par value for common
stock and increase the number of authorized common shares dated
May 6, 1994, is hereby incorporated by reference as Exhibit 3.3

3.4 The Amended Certificate of Designation Establishing the New Series
A Preferred Stock, par value $1.00, dated November 7, 1995, is
attached to this Form 10-K10-K/A as Exhibit 3.4

3.5 The Certificate of Amendment dated May 12, 1987 of the Company's
Certificate of Incorporation adding the Sixteenth paragraph, is
attached to this Form 10-K10-K/A as Exhibit 3.5

[Page 81]

Bylaws

3.6 The Company's By-Laws, as amended and restated May 1, 1996, are
attached to this Form 10-K10-K/A as Exhibit 3.6

(4) Instruments Defining the Right of Security Holders, Including Indentures

4.1 The Fourth, Seventh, Eighth, Twelfth, Thirteenth, Fifteenth and
Sixteenth paragraphs of Exhibit 3.1 hereto are incorporated by
reference as Exhibit 4.1

4.2 Article I, Sections 1,3 and 11 of Article II, Article V and
Article VIII of Exhibit 3.6 hereto are incorporated by reference
as Exhibit 4.2

4.3 The Certificate of Designation dated September 29, 1993
establishing Series B Convertible Preferred Stock, par value
$1.00, which is attached hereto as Exhibit 3.2, is incorporated by
reference as Exhibit 4.3

4.4 The Amended Certificate of Designation dated November 7, 1995
establishing the New Series A Preferred Stock, par value $1.00,
which is attached hereto as Exhibit 3.4, is incorporated by
reference as Exhibit 4.4

4.5 Exhibit 4 to Company's Form S-3 filed June 19, 1992 (Commission
File No. 33-47198), the Indenture to a $300 million Shelf
Registration of Debt Securities dated July 1, 1992, is hereby
incorporated by reference as Exhibit 4.5

4.6 Exhibit 4(a) to Company's Form S-3 filed March 29, 1993
(Commission File No. 33-60192), the Indenture to a $200 million
Medium Term Notes Registration of Debt Securities dated July 1,
1992, is hereby incorporated by reference as Exhibit 4.6

4.7 Exhibit 99 to Company's Form 8-A dated October 24, 1995
(Commission File No. 1-4717), which is the Stockholder Rights
Agreement by and between the Company and Harris Trust and Savings
Bank dated as of September 19, 1995, is hereby incorporated by
reference as Exhibit 4.7

(9) Voting Trust Agreement
(Inapplicable)

(10) Material Contracts

10.1 Exhibit I to Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Director
Indemnification Agreement, is hereby incorporated by reference as
Exhibit 10.1

10.2 Exhibit B to Company's Definitive Proxy Statement for 1987 Annual
Stockholder Meeting dated April 6, 1987, The Director
Indemnification Agreement, is hereby incorporated by reference as
Exhibit 10.2

10.3 The Indenture dated July 1, 1992 to a $300 million Shelf
Registration of Debt Securities, which is incorporated by
reference as Exhibit 4.5 hereto, is hereby incorporated by
reference as Exhibit 10.3

10.4 Exhibit H to Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Officer
Indemnification Agreement, is hereby incorporated by reference as
Exhibit 10.4

[Page 82]
10.5 Exhibit O to Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Kansas City
Southern Railway Company Directors' Deferred Fee Plan as adopted
August 20, 1982 and the amendment thereto effective January 1,
1987 to such plan, is hereby incorporated by reference as
Exhibit 10.5

10.6 Exhibit 10.4 to Company's Form 10-K for the fiscal year ended
December 31, 1990 (Commission File No. 1-4717), Description of
the Company's 1991 incentive compensation plan, is hereby
incorporated by reference as Exhibit 10.6

10.7 The Indenture dated July 1, 1992 to a $200 million Medium Term
Notes Registration of Debt Securities, which is incorporated as
Exhibit 4.6 hereto, is hereby incorporated by reference as
Exhibit 10.7

10.8 Exhibit 10.1 to the Company's Form 10-Q for the quarterly period
ended June 30, 1995 (Commission File No. 1-4717), Five-Year
Competitive Advance and Revolving Credit Facility Agreement dated
May 5, 1995, by and between the Company and the lenders named
therein, is hereby incorporated by reference as Exhibit 10.8

10.9 Exhibit 10.4 in the DST Systems, Inc. Registration Statement on
Form S-1 dated October 30, 1995, as amended (Registration No.
33-96526), Tax Disaffiliation Agreement, dated October 23, 1995,
by and between the Company and DST Systems, Inc., is hereby
incorporated by reference as Exhibit 10.9

10.10 Exhibit 10.6 to the DST Systems, Inc. Annual Report on Form 10-K
for the year ended December 31, 1995 (Commission File No.
1-14036), the 1995 Restatement of The Employee Stock Ownership
Plan and Trust Agreement, is hereby incorporated by reference as
Exhibit 10.10

10.11 Exhibit 4.1 to the DST Systems, Inc. Registration Statement on
Form S-1 dated October 30, 1995, as amended (Registration No.
33-96526), The Registration Rights Agreement dated October 24,
1995 by and between DST Systems, Inc. and the Company, is hereby
incorporated by reference as Exhibit 10.11

10.12 Exhibit 10.1 to Company's Form 10-K for the year ended December
31, 1995 (Commission File No. 1-4717), Employment Agreement, as
amended and restated January 1, 1996, by and between the Company,
The Kansas City Southern Railway Company and Michael R. Haverty,
is hereby incorporated by reference as Exhibit 10.12

10.13 Exhibit 10.2 to Company's Form 10-K10-K/A for the year ended December
31, 1995 (Commission File No. 1-4717), Employment Agreement, dated
January 1, 1996, by and between the Company and Joseph D. Monello,
Jr., is hereby incorporated by reference as Exhibit 10.13

10.14 The Company's 1983 Employee Stock Option Plan, as amended and
restated September 26, 1996, is attached to this Form 10-K10-K/A as
Exhibit 10.14

10.15 The Company's 1987 Employee Stock Option Plan, as amended and
restated September 26, 1996, is attached to this Form 10-K10-K/A as
Exhibit 10.15

10.16 The Company's 1991 Stock Option and Performance Award Plan, as
amended and restated September 26, 1996, is attached to this Form
10-K10-K/A as Exhibit 10.16
[Page]

10.17 Employment Agreement, dated January 1, 1997, by and between the
Company and Landon H. Rowland, is attached to this Form 10-K10-K/A as
Exhibit 10.17

[Page 83]

10.18 The Company's Directors Deferred Fee Plan, adopted August 20,
1982, amended and restated February 1, 1997, is attached to this
Form 10-K10-K/A as Exhibit 10.18

10.19 The Kansas City Southern Industries, Inc. Executive Plan
(restated), as restated JanauryJanuary 1, 1992, is attached to this Form
10-K10-K/A as Exhibit 10.19

10.20 Amendment No. 1 as of May 15, 1995, to the Kansas City Southern
Industries, Inc. Executive Plan (restated), as restated January 1,
1992, is attached to this Form 10-K10-K/A as Exhibit 10.20

10.21 Amendment No. 2 dated January 23, 1997, to the Kansas City
Southern Industries, Inc. Executive planPlan (restated), as restated
January 1, 1992, is attached to this Form 10-K10-K/A as Exhibit 10.21

(11) Statement Re Computation of Per Share Earnings
(Inapplicable)

(12) Statements Re Computation of Ratios

12.1 The Computation of Ratio of Earnings to Fixed Charges prepared
pursuant to Rule 14(a)(3) under the Exchange Act is attached to
this Form 10-K10-K/A as Exhibit 12.1

(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders
(Inapplicable)

(16) Letter Re Change in Certifying Accountant
(Inapplicable)

(18) Letter Re Change in Accounting Principles
(Inapplicable)

(21) Subsidiaries of the Company

21.1 The list of the Subsidiaries of the Company prepared pursuant to
Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K10-K/A
as Exhibit 21.1

(22) Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)

(23) Consents of Experts and Counsel

23.1 The Consent of Independent Accountants prepared pursuant to Rule
14(a)(3) under the Exchange Act is attached to this Form 10-K10-K/A as
Exhibit 23.1

(24) Power of Attorney
(Inapplicable)

(27) Financial Data Schedule

27.1 The Financial Data Schedule prepared pursuant to Rule 14(a)(3)
under the Exchange Act is attached to this Form 10-K10-K/A as Exhibit
27.1

(28) Information from Reports Furnished to State Insurance Regulatory
Authorities
(Inapplicable)

[Page 84]
(99) Additional Exhibits

99.1 The consolidated financial statements of DST Systems, Inc.
(including the notes thereto and the Report of Independent
Accountants thereon) set forth under Item 8 of the DST Systems, Inc.
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 1-14036), as listed under Item 14(a)(2)
herein, are hereby incorporated by reference as Exhibit 99.1

(b) Reports on Form 8-K

The Company filed the following Current Reports on Form 8-K during the three
months ended December 31, 1996:

- - Dated November 12, 1996 under items 5 and 7, reporting cautionary
statements identifying significant factors that could cause the Company's
actual operating results to materially differ from the projections in
forward-looking statements made by, or on behalf of, the Company.

- - Dated November 13, 1996 under items 5 and 7, reporting selected unaudited
pro forma consolidated condensed balance sheet information of the Company
as if the completion of the Southern Capital Corporation, LLC joint
venture formation and associated transactions had occurred on September
30, 1996.

- - Dated December 23, 1996 under item 5, announcing that the Mexican
Government had awarded to Transportacion Ferroviaria Mexicana S. de R.L.
de C.V. (a joint venture of the Company and Transportacion Maritima
Mexicana, S.A. de C.V.) the right to purchase 80% of Ferrocarril del
Noreste, S.A. de C.V. (who holds the concession to operate Mexico's
"Northeast Railway") based upon the highest economic bid.

In addition, the Company filed a Current Report on Form 8-K dated February 21,
1997, reporting the payment of 40% of the purchase price for Ferrocarril del
Noreste, S.A. de C.V. (who holds the concession to operate Mexico's "Northeast
Railway") by Transportacion Ferroviaria Mexicana S. de R.L. de C.V. (a joint
venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V.),
and the Company's funding of its proportionate amount of the initial
installment. Also, anticipated financing arrangements for the remaining 60%
of the FNE purchase price were disclosed.

[Page 85][Page]
SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

Kansas City Southern Industries, Inc.

March 19, 1997 By: /s/ L. H. Rowland
L.H. Rowland, President,
Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Companyauthorized and in the capacities indicated,
on March 19,25, 1997.

Signature CapacityKansas City Southern Industries, Inc.

By: /s/ P.H. Henson Chairman and Director
P.H. Henson

/s/ L.H. Rowland President, Chief Executive Officer
L.H. Rowland and Director

/s/ M.R. Haverty Executive Vice President and Director
M.R. Haverty

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

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

/s/ A.E. Allinson Director
A.E. Allinson

/s/ P.F. Balser Director
P.F. Balser

/s/ J.E. Barnes Director
J.E. Barnes

/s/ M.G. Fitt Director
M.G. Fitt

/s/ J.F. Serrano Director
J.F. Serrano

/s/ M.I. Sosland Director
M.I. Sosland

[Unnumbered Page]
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1996 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 14(a)(3)
No. Document Exhibit No.

3.4 The Amended Certificate of Designation Establishing
the New Series A Preferred Stock, par value $1.00,
dated November 7, 1995 3

3.5 The Certificate of Amendment dated May 12, 1987
of the Company's Certificate of Incorporation
adding the Sixteenth paragraph 3

3.6 The Company's By-Laws, as amended and restated
May 1, 1996 3

10.14 The Company's 1983 Employee Stock Option Plan,
as amended and restated September 26, 1996 10

10.15 The Company's 1987 Employee Stock Option Plan,
as amended and restated September 26, 1996 10

10.16 The Company's 1991 Stock Option and Performance
Award Plan, as amended and restated September 26, 1996 10

10.17 Employment Agreement, dated January 1, 1997,
by and between the Company and Landon H. Rowland 10

10.18 The Company's Directors Deferred Fee Plan, adopted
August 20, 1982,amended and restated February 1, 1997 10

10.19 The Kansas City Southern Industries, Inc. Executive
Plan (restated), as restated January 1, 1992 10

10.20 Amendment No. 1 as of May 15, 1995, to the Kansas City
Southern Industries, Inc. Executive Plan (restated),
as restated January 1, 1992 10

10.21 Amendment No. 2 dated January 23, 1997, to the Kansas
City Southern Industries, Inc. Executive Plan (restated),
as restated January 1, 1992 10

12.1 Computation of Ratio of Earnings to Fixed Charges 12

21.1 Subsidiaries of the Company 21

23.1 Consent of Independent Accountants 23

27.1 Financial Data Schedule 27