FILED PURSUANT TO RULE 424(B)(3)
                                                     REGISTRATION NO. 333-107573


PROSPECTUS


                                400,000 SHARES OF
                              KANSAS CITY SOUTHERN
   4.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES C
                     (LIQUIDATION PREFERENCE $500 PER SHARE)
                                       AND
          13,389,120 SHARES OF COMMON STOCK (PAR VALUE $0.01 PER SHARE)
                         ISSUABLE UPON CONVERSION OF THE
      REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES C


     This  prospectus  relates  to  the  offering  for  resale  of  Kansas  City
Southern's 4.25% Redeemable  Cumulative  Convertible  Perpetual Preferred Stock,
Series C (liquidation preference $500 per share), or "Series C Preferred Stock,"
and the shares of our common stock (including  attached preferred stock purchase
rights)  issuable upon conversion of the Series C Preferred  Stock. The Series C
Preferred  Stock was offered to  qualified  institutional  buyers in reliance on
Rule 144A in  transactions  exempt  from the  registration  requirements  of the
Securities  Act of 1933,  through the initial  purchasers,  Morgan Stanley & Co.
Incorporated  and Deutsche Bank  Securities Inc. This prospectus will be used by
selling  securityholders  to resell their shares of Series C Preferred Stock and
shares of our common stock issuable upon  conversion of their Series C Preferred
Stock.   We  will  not   receive  any   proceeds   from  sales  by  the  selling
securityholders.

                 CONVERTIBILITY OF THE SERIES C PREFERRED STOCK

     Holders may convert their Series C Preferred  Stock into 33.4728  shares of
our common stock only under  certain  circumstances  related to: (i) the trading
price of our common  stock;  (ii) a credit rating  downgrade;  (iii) the trading
price per share of the Series C Preferred Stock; (iv) redemption of the Series C
Preferred Stock; and (v) the occurrence of certain corporate  transactions.  The
conversion rate may be adjusted upon the occurrence of certain events.  There is
no  established  trading  market for the Series C Preferred  Stock and we do not
intend to list the Series C Preferred Stock on any national securities exchange.
Our common stock is listed and traded on the New York Stock  Exchange  under the
symbol  "KSU." On October 26,  2004,  the closing sale price of our common stock
was $16.25.

              REDEMPTION OR REPURCHASE OF SERIES C PREFERRED STOCK

     Subject to certain  conditions,  on or after May 20, 2008, we will have the
option to redeem  some or all of the  shares  of Series C  Preferred  Stock at a
redemption  price of 100% of the liquidation  preference,  plus  accumulated and
unpaid dividends,  including special dividends,  if any, to the redemption date.
Under certain circumstances, we may be required to purchase shares of the Series
C  Preferred  Stock at the option of the holder at a price  equal to 100% of the
liquidation  preference  plus any accumulated  and unpaid  dividends,  including
special dividends, if any, to, but excluding, the purchase date.

                            -----------------------

     INVESTING IN OUR SERIES C PREFERRED  STOCK OR COMMON STOCK INVOLVES  RISKS.
PLEASE READ CAREFULLY THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 12.

                            -----------------------

     NEITHER THE  SECURITIES AND EXCHANGE  COMMISSION  NOR ANY STATE  SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS  IS TRUTHFUL OR  COMPLETE.  ANY  REPRESENTATION  TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                 THE DATE OF THIS PROSPECTUS IS OCTOBER 29, 2004




     You  should  rely only on the  information  contained  or  incorporated  by
reference in this prospectus.  We have not authorized anyone to provide you with
different  information.  You should not assume that the information contained in
this  prospectus  is accurate as of any date other than the date on the front of
this prospectus.

                                TABLE OF CONTENTS

                                                                          PAGE

About this Prospectus.....................................................    i
Prospectus Summary........................................................    1
Risk Factors..............................................................   12
Use of Proceeds...........................................................   29
Business .................................................................   29
Description of the Acquisition............................................   31
Description of the Series C Preferred Stock...............................   48
Description of KCS Capital Stock..........................................   65
Description of The Class A Convertible Common Stock.......................   69
Certain United States Federal Tax Considerations..........................   73
Selling Securityholders...................................................   76
Plan of Distribution......................................................   80
Financial Statements of Grupo TFM.........................................   83
Pro Forma Financial Information...........................................   84
Legal Matters.............................................................   96
Experts  .................................................................   96
Where You Can Find More Information.......................................   96
Forward-Looking Statements................................................   97

                              ABOUT THIS PROSPECTUS

     This prospectus is part of a registration  statement that we filed with the
Securities and Exchange  Commission,  or SEC,  utilizing a "shelf"  registration
process or continuous offering process.  Under this shelf registration  process,
the  selling  securityholders  may,  from  time to  time,  sell  the  securities
described in this prospectus in one or more offerings.  This prospectus provides
you with a general  description  of the  securities  which may be offered by the
selling  securityholders.  Each time a selling  securityholder sells securities,
the selling  securityholder is required to provide you with this prospectus and,
in certain cases, a prospectus  supplement containing specific information about
the selling  securityholder and the terms of the securities being offered.  That
prospectus  supplement  may include  additional  risk  factors or other  special
considerations  applicable to those  securities.  Any prospectus  supplement may
also add,  update,  or change  information in this  prospectus.  If there is any
inconsistency  between the  information  in this  prospectus  and any prospectus
supplement,  you should rely on the information in that  prospectus  supplement.
You should read both this prospectus and any prospectus supplement together with
additional information described under "Where You Can Find More Information."

     UNLESS WE HAVE INDICATED OTHERWISE,  REFERENCES IN THIS PROSPECTUS TO "KCS"
MEAN KANSAS CITY SOUTHERN (FORMERLY KANSAS CITY SOUTHERN  INDUSTRIES,  INC.) AND
REFERENCES TO THE  "COMPANY,"  "WE," "US," "OUR," AND SIMILAR TERMS REFER TO KCS
AND OUR CONSOLIDATED SUBSIDIARIES,  EXCLUDING THE DISCONTINUED OPERATIONS OF ITS
FORMER FINANCIAL SERVICES BUSINESS STILWELL FINANCIAL,  INC. (NOW KNOWN AS JANUS
CAPITAL GROUP INC. ("JANUS")). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES
IN THIS PROSPECTUS TO "KCSR" MEAN THE KANSAS CITY SOUTHERN RAILWAY COMPANY,  THE
PRINCIPAL  SUBSIDIARY OF KCS, AND INCLUDES FOR ALL PERIODS PRESENTED THE GATEWAY
WESTERN RAILWAY COMPANY,  WHICH WAS MERGED INTO KCSR EFFECTIVE  OCTOBER 1, 2001.
REFERENCES TO "GRUPO TFM" MEAN GRUPO TRANSPORTACION  FERROVIARIA MEXICANA,  S.A.
DE C.V.,  THE PARENT  COMPANY OF TFM,  S.A.  DE C.V.  AND AN  AFFILIATE  OF KCS.
REFERENCES TO "TFM" MEAN TFM, S.A. DE C.V., THE RAILWAY OPERATING  SUBSIDIARY OF
GRUPO TFM AND AN AFFILIATE OF KCS.  REFERENCES TO "MEXRAIL"  MEAN MEXRAIL,  INC,
THE 51% OWNED  SUBSIDIARY  OF KCS, THE SHARES OF WHICH ARE  CURRENTLY  HELD IN A
TRUST PENDING  SURFACE  TRANSPORTATION  BOARD APPROVAL OF KCS' COMMON CONTROL OF
KCSR, THE GATEWAY EASTERN RAILWAY COMPANY AND THE TEXAS MEXICAN RAILWAY COMPANY.
REFERENCES TO "TEX-MEX" MEAN THE TEXAS MEXICAN RAILWAY  COMPANY,  A WHOLLY OWNED
RAILWAY OPERATING  SUBSIDIARY OF MEXRAIL,  INC. . REFERENCES TO "GRUPO TMM" MEAN
GRUPO TMM, S.A. (THE  SURVIVING  ENTITY IN A MERGER OF  TRANSPORTACION  MARITIMA
MEXICANA, S.A. DE




C.V. AND THE FORMER GRUPO SERVIA, S.A. DE C.V. AND WHICH, AFTER A REORGANIZATION
THAT ELIMINATED THE VARIABLE  PORTION OF GRUPO TMM, S.A. DE C.V.  CAPITAL STOCK,
BECAME A FIXED CAPITAL CORPORATION WITH THE NAME GRUPO TMM, S.A.), CURRENTLY THE
LARGEST SHAREHOLDER OF GRUPO TFM. REFERENCES TO "TMM HOLDINGS" AND " MULTIMODAL"
MEAN TMM HOLDINGS, S.A. DE C.V. AND TMM MULTIMODAL,  S.A. DE C.V., RESPECTIVELY,
SUBSIDIARIES  OF GRUPO  TMM.  REFERENCES  TO "KARA SUB" MEAN KARA SUB,  INC.,  A
WHOLLY-OWNED  SUBSIDIARY OF KCS.  REFERENCES TO "NAFTA" MEAN THE NORTH  AMERICAN
FREE TRADE AGREEMENT 7



                               PROSPECTUS SUMMARY

     This summary may not contain all the  information  that may be important to
you. You should read this entire  prospectus  and the documents to which we have
referred you before making an investment decision. You should carefully consider
the information set forth under "Risk Factors." In addition,  certain statements
include forward-looking  information that involves risks and uncertainties.  See
"Forward-Looking Statements."

                                   OUR COMPANY

We,  along with our  subsidiaries  and  affiliates,  own and  operate a uniquely
positioned  North  American  rail network  strategically  focused on the growing
north/south freight corridor that connects key commercial and industrial markets
in the central  United  States  with major  industrial  cities in Mexico.  KCS's
principal  subsidiary,  KCSR, which was founded in 1887, is one of seven Class I
railroads in the United States  (railroads with annual revenues of at least $272
million,  as indexed  for  inflation).  Our rail  network  (KCSR,  an  equitable
interest in TFM, and a controlling interest in Tex-Mex that is currently subject
to a  trust))  comprises  approximately  6,000  miles of main and  branch  lines
extending from the midwest  portions of the United States south into Mexico.  We
have  further  expanded  our rail  network  through  marketing  alliances  and a
strategic alliance.

     Our expanded network includes:

     o    KCSR,  which  operates  approximately  3,100  miles of main and branch
          lines running on a north/south axis from Kansas City,  Missouri to the
          Gulf of Mexico and on an east/west axis from Meridian,  Mississippi to
          Dallas,  Texas (our "Meridian  Speedway") and from Kansas City to East
          St.  Louis,  Illinois and  Springfield,  Illinois,  and 1,250 miles of
          other tracks in a ten state  region that  includes  Missouri,  Kansas,
          Arkansas, Oklahoma, Mississippi,  Alabama, Tennessee, Louisiana, Texas
          and Illinois;

     o    our affiliate,  TFM, which operates  approximately 2,650 miles of main
          and branch lines running from the U.S./Mexico border at Laredo,  Texas
          to Mexico City and serves most of Mexico's principal industrial cities
          and three of its major shipping ports;

     o    our indirect subsidiary  Tex-Mex,  which operates a 157-mile rail line
          extending  from Laredo to the port city of Corpus  Christi,  Texas and
          through  trackage  rights  over the  Union  Pacific  Railroad  between
          Robbstown and  Beaumont,  Texas  connects the  operations of KCSR with
          TFM;

     o    marketing  agreements with Norfolk Southern Railway Company  ("Norfolk
          Southern") that allows us to gain  incremental  traffic volume between
          the  southeast  and  the  southwest  United  States  and  a  marketing
          agreement with I&M Rail Link, now known as the Iowa, Chicago & Eastern
          Railroad  Corporation  ("IC&E"),  that  provides  us  with  access  to
          Minneapolis, Minnesota and Chicago, Illinois and to the origination of
          corn and other grain in Iowa, Minnesota and Illinois;

     o    a strategic alliance with Canadian National Railway Company ("CN") and
          Illinois  Central  Corporation  ("IC," and together with CN, "CN/IC"),
          through  which  we  have  access  to  a  contiguous  rail  network  of
          approximately 25,000 miles of main and branch lines connecting Canada,
          the United States and Mexico;

     o    a joint  marketing  alliance,  entered  into in  April  2002  with The
          Burlington  Northern and Santa Fe Railway  Company  ("BNSF")  aimed at
          promoting  cooperation,  revenue  growth and  extending  market reach,
          principally to enhance chemical,  grain and forest product traffic for



          both railroads in the United States and Canada. The marketing alliance
          is also expected to improve  operating  efficiencies for both carriers
          in key  market  areas,  as well as  provide  customers  with  expanded
          service options; and

     o    our affiliate,  the Panama Canal Railway Company ("PCRC"), which holds
          the  concession  to  operate  the  Panama  Canal  Railway,  a  47-mile
          coast-to-coast  railroad  located  adjacent to the Panama Canal.  This
          railroad has been  reconstructed for the purpose of performing freight
          and  passenger  operations.  Its  wholly-owned  subsidiary,   Panarail
          Tourism Company ("Panarail"),  operates a commuter and tourist railway
          service over the lines of the Panama Canal Railway.

COMPANY INFORMATION

     KCS is  incorporated  in  Delaware.  Our  principal  executive  offices are
located at 427 West 12th Street,  Kansas City,  Missouri  64105.  Our  telephone
number is 816-983-1303.

                              PROPOSED ACQUISITION

     GENERAL

     Since 1997,  pursuant to a joint venture  agreement,  and other agreements,
entered into by KCS and Grupo TMM, subsidiaries of KCS and Grupo TMM have owned,
along with Mexican governmental  agencies,  interests in Grupo TFM, which is the
owner of 80% of the voting  stock of TFM. TFM holds the  concession  to operate,
and operates,  a major rail system in Mexico,  formerly  known as the "Northeast
Rail Lines".  In 1995,  KCS acquired from Grupo TMM 49% of the stock of Mexrail,
owner of 100% of the voting  stock of Tex-Mex.  Mexrail  also owns the  northern
half of the international  railway bridge at Laredo,  Texas.  Tex-Mex operates a
157 mile rail line from Laredo to Corpus Christi, Texas, which connects with the
KCSR through trackage rights over the Union Pacific Railroad between  Robbstown,
Texas and  Beaumont,  Texas.  In  March,  2002,  KCS and  Grupo  TMM sold  their
interests in Mexrail to TFM, with KCS receiving  approximately $31.4 million for
its 49% interest in Mexrail.  On August 16, 2004,  KCS purchased from TFM 51% of
the  shares  of  Mexrail   and  placed  them  into  a  trust   pending   Surface
Transportation  Board approval of KCS' petition to exercise  common control over
KCSR, the Gateway Eastern Railway Company ("Gateway  Eastern") and Tex-Mex.  The
structure of this ownership prior to the execution of the Acquisition  Agreement
(defined below) (with intermediate  subsidiaries,  other than KCSR, eliminated),
including  imputed ownership from TFM's ownership of 24.6% of Grupo TFM, appears
in the following diagram:



     [Organizational  chart type diagram appears here showing ownership of Grupo
     TFM by KCS (46.6%, indirectly through its 100% ownership of KCSR) and Grupo
     TMM  (48.5%)(including in both cases imputed ownership from TFM's ownership
     of 24.6% of Grupo TFM), Grupo TFM's ownership of 80% of TFM (with the other
     20% held by the Mexican Government), TFM's ownership of 100% of Mexrail and
     Mexrail's ownership of 100%of Tex-Mex]


     On  April  20,  2003,  KCS  entered  into an  agreement  (the  "Acquisition
Agreement")  with Grupo TMM and other parties to ultimately  acquire  control of
TFM through the purchase of Grupo TMM's shares of Grupo TFM (the "Acquisition").
Under the terms of the  Acquisition  Agreement,  KCS  would  acquire  all of the
interest of Grupo TMM (held by its subsidiary, Multimodal) in Grupo TFM for $200
million in cash and  18,000,000  shares of a new class of common  securities  of
KCS, to be designated "Class A Convertible  Common Stock." Grupo TFM owns an 80%
economic  interest in TFM and all of the shares of stock with full voting rights
of TFM (the  "TFM  Voting  Stock").  KCS has the right to elect to pay up to $80
million of the cash portion of the purchase  price by delivering up to 6,400,000
shares of KCS Class A  Convertible  Common  Stock or KCS common  stock.  KCS and
Grupo TMM have been in  dispute  over  Grupo  TMM's  attempt  to  terminate  the
Acquisition  Agreement.  See  "--Recent   Developments,"   "Description  of  the
Acquisition--Recent Developments."

     The following diagram  illustrates the ownership structure resulting if the
Acquisition of TFM is completed (eliminating intermediate subsidiaries)

     [Organizational  chart type diagram  appears here showing  ownership by KCS
     (to be renamed  "NAFTA  Rail") of 100% of Grupo TFM,  as well as KCS's 100%
     ownership of KCSR); Grupo TFM's ownership of 80% of TFM (with the other 20%
     held by the Mexican  Government and footnoted  with the  information in (1)
     below),  TFM's ownership of 100% of Mexrail and Mexrail's ownership of 100%
     of Tex-Mex]



(1) Limited Voting.  Mexican government has certain "put" rights discussed under
"Risk  Factors--KCS  Risk  Factors--Risks  Related  to Our  Business--We  may be
required  to  make  additional  investments  in  TFM"  and  "Description  of the
Acquisition--Summary     of    the    Acquisition    Agreement    and    Related
Agreements--Agreement  of  Assignment  and  Assumption  of  Rights,  Duties  and
Obligations."

     In addition,  provided the Acquisition has occurred and neither KCS nor any
of its subsidiaries has purchased TFM shares held by the Mexican government upon
exercise of the Mexican  government's  right to compel  purchase of those shares
(referred  to as the  "Put"),  KCS  would be  obligated  to pay to Grupo  TMM an
additional  amount (referred to as the "VAT Contingency  Payment") of up to $180
million in cash in the event that a pending  Value Added Tax claim  (referred to
as the "VAT  Claim")  against  the  Mexican  government  by TFM is  successfully
resolved and the amount  received is greater than the purchase price of the Put.
See "Description of the  Acquisition--Summary  of the Acquisition  Agreement and
Related Agreements--The  Acquisition  Agreement--VAT  Contingency Payment." Upon
completion of the Acquisition,  KCS will assume Grupo TMM's  obligations to make
any payment  upon the  exercise by the  Mexican  government  of the Put and will
indemnify  Grupo  TMM  and  its  affiliates,   and  their  respective  officers,
directors,  employees  and  shareholders,  against  obligations  or  liabilities
relating  thereto.   See  "Description  of  the   Acquisition--Summary   of  the
Acquisition  Agreement  and  Related  Agreements--Agreement  of  Assignment  and
Assumption of Rights, Duties and Obligations."

     In  connection  with the  Acquisition,  KCS would  enter into a  consulting
agreement with a consulting company organized by Jose Serrano Segovia,  Chairman
of the Board of Grupo TMM, Grupo TFM and TFM, pursuant to which it would provide
consulting services to KCS in connection with the portion of the business of KCS
in Mexico for a period of three years. As consideration for these services,  the
consulting  company would receive an annual fee of $600,000 per year and a grant
of 2,100,000  shares of restricted stock of KCS. The restricted stock would vest
over a period of time subject to certain  conditions.  The consulting  agreement
may be extended for an additional year at the option of KCS, upon delivery of an
additional  525,000  shares of  common  stock.  The  consulting  agreement  also
provides for up to an additional 1,350,000 common shares to be issued contingent
upon  the   achievement  of  certain   objectives.   See   "Description  of  the
Acquisition--Summary     of    the    Acquisition    Agreement    and    Related
Agreements--Consulting Agreement."

     The  obligations  of KCS and  Grupo TMM to  complete  the  Acquisition  are
subject to a number of conditions.  See "Description of the Acquisition--Summary
of  the   Acquisition   Agreement   and  Related   Agreements--The   Acquisition
Agreement--Conditions to Obligations to Complete the Acquisition."

     RECENT DEVELOPMENTS

     CLOSING ON NEW CREDIT FACILITY

     During March 2004,  the Company  used cash  on-hand to repay  approximately
$98.5 million  relating to the Company's  former credit  facility.  On March 30,
2004, the Company closed on a new credit facility ("2004 Credit Facility").  The
2004 Credit Facility consists of a $100 million revolving credit facility ("2004
Revolving Credit Facility") maturing on March 30, 2007 and a $150 million Term B
loan facility  ("Term B Loan  Facility")  maturing on March 30, 2008. The Term B
Loan Facility was fully funded on the closing date and the proceeds are expected
to be used to pay transaction  costs, and for other general corporate  purposes,
including additional investments in the Company's Mexican affiliates. There were
no funds drawn under the previous  revolving  credit  facility and the full $100
million borrowing capacity under the 2004 Revolving Credit Facility is currently
available  to the  Company.  Up to $25  million  of the  2004  Revolving  Credit
Facility is  available  for letters of credit and up to $15 million is available
for swing  line  loans.  The  proceeds  from  future  borrowings  under the 2004
Revolving  Credit  Facility  may be used for  working  capital  and for  general
corporate purposes,  including additional investments in our Mexican affiliates.
The letters of credit may be used for  general  corporate  purposes.  Borrowings
under the 2004 Credit Facility are secured by substantially all of the Company's
assets and are guaranteed by the majority of its subsidiaries.



     DISPUTE OVER ACQUISITION AGREEMENT

     On August 18, 2003, Grupo TMM shareholders voted not to approve the sale of
Grupo TMM's interests in Grupo TFM to KCS. On August 23, 2003,  Grupo TMM sent a
notice to KCS claiming to terminate the Acquisition Agreement, because the Grupo
TMM shareholders had failed to approve the Acquisition Agreement. KCS's position
has been and remains  that the  Acquisition  Agreement  does not provide  that a
negative  shareholder vote by Grupo TMM shareholders is a basis for termination.
KCS  maintains  that the  Acquisition  Agreement  is still  valid and remains in
effect  until  December  31,  2004  (unless  otherwise  validly   terminated  in
accordance with its terms).

     KCS has taken  actions to resolve this dispute and to preserve the parties'
positions  while it seeks to resolve the dispute.  In August 2003, KCS initiated
the dispute  resolution  process,  which included an informal 60-day negotiation
period  between  the  parties.  The  parties  were unable to resolve the dispute
within that period of time. KCS filed a complaint in the Delaware Chancery Court
alleging  that Grupo TMM had breached the  Acquisition  Agreement  and seeking a
preliminary  injunction  requiring Grupo TMM not to take any action in violation
of the terms of the Acquisition Agreement.  KCS also filed in the Delaware Court
of  Chancery  a motion  for a  preliminary  injunction,  which was  granted,  to
preserve  the  parties'  positions  while KCS seeks to resolve its dispute  over
Grupo TMM's attempt to terminate the Acquisition Agreement.

     On October 31, 2003, KCS initiated  binding  arbitration in accordance with
the terms of the Acquisition  Agreement.  In its Arbitration Demand, KCS seeks a
determination  that the  Acquisition  Agreement  is in full  force  and  effect,
specific performance of the Acquisition  Agreement,  and damages for Grupo TMM's
breach of the terms of the  Acquisition  Agreement  and failure to  negotiate in
good  faith  during the  60-day  negotiation  period.  By the  agreement  of the
parties, the arbitration has been bifurcated. The first stage of the arbitration
only  addressed  the  question  of  whether  Grupo  TMM's   purported   negative
shareholder  vote  gave  Grupo  TMM  the  right  to  terminate  the  Acquisition
Agreement.  On March  22,  2004,  the  Company  announced  that the panel of the
American  Arbitration  Association  International  Centre for Dispute Resolution
hearing the dispute  between the Company and Grupo TMM issued its interim  award
on March 19, 2004 finding that the Acquisition Agreement remains in force and is
binding on KCS and Grupo TMM in accordance with its terms. The arbitration panel
concluded  that the  rejection  of the  Acquisition  Agreement  by  Grupo  TMM's
shareholders  did  not  authorize  Grupo  TMM's  purported  termination  of  the
Acquisition  Agreement.  The second  phase of the  arbitration  will  decide the
remaining  issues,  including  remedies and damages.  On April 7, 2004,  KCS and
Grupo TMM announced that they have agreed not to move immediately in to the next
phase of arbitration.  Both KCS and Grupo TMM have reserved the right to proceed
with the next phase of arbitration at any time.

     In connection  with certain  actions taken by Grupo TMM, KCS filed a motion
to enforce  injunction and hold Grupo TMM in contempt in the dispute between KCS
and Grupo TMM over the  Acquisition  Agreement.  In January  2004,  the Delaware
Court of Chancery issued a ruling, which held Grupo TMM in contempt of court for
taking action inconsistent with the court's previous order granting KCS's motion
for  preliminary  injunction.  The  court  held that by Grupo  TMM  causing  its
subsidiary  Grupo TFM to revoke powers of attorney  requiring the signature of a
KCS  representative  for  transactions in excess of $2.5 million and in granting
new powers of attorney to Grupo TMM  directors,  Jose Serrano and Mario Mohar to
act on behalf of the company,  Grupo TMM violated  provisions of the Acquisition
Agreement. The previous order of the court required Grupo TMM to cause Grupo TFM
to conduct its business in accordance with past practices and not to directly or
indirectly amend its  organizational  documents.  The court ordered Grupo TMM to
take the actions necessary to revoke the new powers of attorney, to re-enact the
original  powers of attorney,  and to pay KCS its costs and  attorneys  fees for
bringing the motion for contempt.

     On  April  4,  2004,  KCS and  Grupo  TMM  agreed  to and  signed,  and the
arbitration panel approved,  a stipulation  agreement in which KCS and Grupo TMM
have agreed to discharge in good faith



all of the obligations of the Acquisition Agreement.  On September 16, 2004, KCS
and Grupo TMM announced their agreement to extend the ultimate  termination date
of the Acquisition Agreement to June 15, 2005.

     For a more  detailed  description  of actions  taken in this  dispute,  see
"Description of the Acquisition--Recent  Developments--Dispute  Over Acquisition
Agreement."

     MCC AND MNFIC AUTHORIZATION

     On October 7, 2004, KCS and GTMM announced that KCS was notified by the MCC
that the MCC had  extended  KCS'  authority to puchase  TMM's  interest in Grupo
Transportacion  Ferroviaria  Mexicana,  S.A. de C.V. for an additional 180 days.
MCC  originally  authorized the purchase in a ruling dated May 19, 2003, and the
new ruling extends that  authorization to April 5, 2005. On October 5, 2004, the
Mexican National Foreign  Investment  Commission  ("MNFIC")  notified KCS of its
decision  authorizing  KCS' acquisition of Grupo TMM's interest in Grupo TFM and
exercise control over TFM. MNFIC's authorization will expire on October 5, 2005,
unless  the  authorization  is  renewed  by  the  MNFIC  or the  transaction  is
consummated  prior to that date. The  authorization of the MCC and MNFIC are the
only Mexican  governmental  approvals  necessary to consummate  the  Acquisition
Agreement.

     STB REVIEW STATUS

     KCS filed with the STB a Railroad Control  Application,  seeking permission
to exercise common control over KCSR,  Gateway Eastern Railway Company ("Gateway
Eastern")  and Tex-Mex.  The STB issued its decision,  effective  June 13, 2003,
finding  that  the  transaction  proposed  in  KCS's  application  is  a  "minor
transaction" under 49 CFR 1180.2(c), although KCS was required to supplement its
application as discussed in the decision, to address some of the implications of
KCS's acquisition of control of TFM. The STB also outlined a procedural schedule
for consideration of KCS's application to exercise common control over KCSR, the
Gateway  Eastern  and  Tex-Mex.  The STB has  issued  an  order  suspending  the
procedural  schedule pending a resolution of the uncertainties that now surround
KCS's  efforts to acquire  control of Tex-Mex,  and requiring KCS to file status
reports  regarding  developments  in its  efforts to acquire  control of TFM and
Tex-Mex.  In accordance with the STB order, KCS filed its first status report on
November 3, 2003 and follow-up status reports were filed on February 2, 2004 and
March 23, 2004. On August 16, 2004, KCS filed a status report  notifying the STB
of KCS,  TFM and Grupo TMM's entry into a new  agreement  for the sale of 51% of
Mexrail to KCS and of the closure of that sale and the  placement  of the shares
into a trust  pending  approval by the STB. KCS requested in its notice that the
STB reactivate the  proceeding and establish a new procedural  schedule.  In its
order dated August 30,  2004,  the STB  established  a new  procedural  schedule
requiring  the  submission  of comments by  interested  parties by September 30,
2004. In accordance with the procedural  schedule,  KCS submitted its replies to
the comments on October 15, 2004.  The STB must rule on KCS' petition  within 45
days after the final pleading in this case is filed, which would be on or before
November 29, 2004.

     DECLARATION OF DIVIDEND ON SERIES C PREFERRED STOCK

     The KCS Board of  Directors  has  declared a cash  dividend  of $5.3125 per
share on the outstanding Series C Preferred Stock. This dividend will be payable
on November  15,  2004,  to  stockholders  of record at the close of business on
November 1, 2004.



                                  THE OFFERING

     On May 5, 2003,  we completed a private  offering of the Series C Preferred
Stock.  We  entered  into a  registration  rights  agreement  with  the  initial
purchasers  in the private  offering in which we agreed,  for the benefit of the
holders of the Series C Preferred  Stock, to file a registration  statement with
the SEC by August 3, 2003 with  respect to  resales  of the  Series C  Preferred
Stock and common  stock  issued  upon the  conversion  of the Series C Preferred
Stock.  We also agreed to use our best  efforts to cause the shelf  registration
statement to be declared  effective under the Securities Act of 1933 by November
1, 2003 and to keep the shelf registration statement effective until the earlier
of (i) the sale to the public  pursuant  to Rule 144 (or any  similar  provision
then in force,  but not Rule 144A) under the Securities Act or the  registration
statement of which this prospectus forms a part of all the securities registered
thereunder,  and (ii) the  expiration of the holding  period  applicable to such
securities  held by persons that are not our affiliates  under Rule 144(k) under
the Securities Act or any successor provision, subject to permitted exceptions.

Securities
offered...........  400,000 shares of Series C Preferred Stock.

Liquidation
preference........  $500 per share of Series C Preferred Stock.

Dividends.........  Holders of Series C Preferred Stock are entitled to receive,
                    when, as and if, declared by our board of directors,  out of
                    funds legally available therefor, cash dividends at the rate
                    of 4.25% per annum, payable quarterly in arrears on February
                    15,  May  15,  August  15  and  November  15 of  each  year,
                    commencing  August  15,  2003.  Dividends  on the  Series  C
                    Preferred  Stock will be cumulative from the date of initial
                    issuance.   Accumulated   but  unpaid   dividends   cumulate
                    dividends at the annual rate of 4.25%.

                    We will also pay  "special  dividends"  if we fail to comply
                    with  certain  obligations  under  the  registration  rights
                    agreement discussed above.

                    For  so  long  as  the  Series  C  Preferred  Stock  remains
                    outstanding, (1) we will not declare, pay or set apart funds
                    for the payment of any dividend or other  distribution  with
                    respect to any junior  stock or parity stock and (2) neither
                    we,  nor any of or  subsidiaries  will,  subject  to certain
                    exceptions,   redeem,  purchase  or  otherwise  acquire  for
                    consideration junior stock or parity stock through a sinking
                    fund or  otherwise,  in each case unless we have paid or set
                    apart  funds for the payment of all  accumulated  and unpaid
                    dividends, including special dividends, if any, with respect
                    to the  shares of Series C  Preferred  Stock and any  parity
                    stock for all preceding  dividend periods.  See "Description
                    of the Series C Preferred Stock--Dividends."

Conversion........  A holder may  convert  its Series C  Preferred  Stock into a
                    number of shares of our common stock equal to the conversion
                    rate only under the following circumstances:



                    o    in any fiscal quarter commencing after June 30, 2003 if
                         the closing sale price of our common stock for at least
                         20 trading days in a period of 30  consecutive  trading
                         days ending on the last  trading  day of the  preceding
                         fiscal  quarter  is  more  than  110%  of  the  initial
                         conversion  price  (initially  110%  of  $14.9375,   or
                         $16.4313);

                    o    after  the  earlier  of  (1)  the  date  the  Series  C
                         Preferred  Stock is  assigned  a credit  rating by both
                         Standard & Poor's  Rating  Services,  a division of The
                         McGraw-Hill Companies,  Inc. and its successors ("S&P")
                         and  Moody's  Investor   Services  and  its  successors
                         ("Moody's") and (2) May 31, 2003,  during any period in
                         which  the  credit  rating  assigned  to the  Series  C
                         Preferred  Stock by S&P is  below  CCC,  or the  credit
                         rating  assigned  to the  Series C  Preferred  Stock by
                         Moody's is below Caa3,  or no rating is assigned to the
                         Series C  Preferred  Stock by either  S&P or Moody's or
                         any rating is  suspended  or withdrawn by either S&P or
                         Moody's;

                    o    during  the five  business  day  period  after any five
                         consecutive  trading  day  period in which the  trading
                         price per share of  Series C  Preferred  Stock for each
                         day of that  period was less than 98% of the product of
                         the  closing  sale  price of our  common  stock and the
                         conversion rate on each such day;

                    o    if the  Series C  Preferred  Stock has been  called for
                         redemption; or

                    o    upon the occurrence of certain  corporate  transactions
                         described under  "Description of the Series C Preferred
                         Stock--Conversion Rights--Conversion Upon Occurrence of
                         Certain Corporate Transactions."


                    For each share of Series C Preferred  Stock  surrendered for
                    conversion,  a holder  will  receive  33.4728  shares of our
                    common stock. This represents an initial conversion price of
                    $14.9375 per share of common stock.  The conversion rate may
                    be adjusted  for certain  reasons,  but will not be adjusted
                    for accumulated and unpaid  dividends or special  dividends,
                    if any. Upon  conversion,  holders will not receive any cash
                    payment representing accumulated dividends, if any. Instead,
                    accumulated  dividends,  if any,  will be deemed paid by the
                    common stock received by holders on conversion.

Optional
redemption........  We may not redeem any shares of Series C Preferred  Stock at
                    any time before May 20, 2008.  On or after May 20, 2008,  we
                    may redeem some or all of the Series C Preferred  Stock at a
                    redemption   price   equal   to  100%  of  the   liquidation
                    preference, plus accumulated but unpaid dividends, including
                    special dividends,  if any, to the redemption date, but only
                    if the closing sale price of our common stock for 20 trading
                    days within a



                    period of 30 consecutive  trading days ending on the trading
                    day before the date we give the  redemption  notice  exceeds
                    135% of the  conversion  price  of the  Series  C  Preferred
                    Stock, subject to adjustment in a number of circumstances as
                    described  under  "Description  of the  Series  C  Preferred
                    Stock--Adjustments to the Conversion Rate." We may choose to
                    pay  the  redemption  price  in  cash,  common  stock,  or a
                    combination of cash and common stock. If we elect to pay all
                    or a  portion  of the  redemption  price in shares of common
                    stock, the common stock will be valued at a discount of 2.5%
                    below the  average of the  closing  sale prices for the five
                    trading  days  ending on the third  trading day prior to the
                    redemption  date. The terms of our debt  instruments  and/or
                    bank  facilities  currently  restrict  our ability to redeem
                    shares of Series C Preferred Stock for cash.

                    If full cumulative dividends on the Series C Preferred Stock
                    have not been paid, the Series C Preferred  Stock may not be
                    redeemed  and we may not  purchase  or acquire any shares of
                    Series  C  Preferred  Stock  otherwise  than  pursuant  to a
                    purchase  or  exchange  offer  made on the same terms to all
                    holders of Series C Preferred Stock.

                    The Series C Preferred Stock is not subject to any mandatory
                    redemption or sinking fund provision.

Fundamental
change............  If we become subject to a fundamental change, each holder of
                    shares of Series C  Preferred  Stock  will have the right to
                    require  us to  purchase  any  or all  of  its  shares  at a
                    purchase price equal to 100% of the liquidation  preference,
                    plus  accumulated and unpaid  dividends,  including  special
                    dividends, if any, to the date of purchase. We may choose to
                    pay  the  purchase  price  in  cash,   common  stock,  or  a
                    combination of cash and common stock. If we elect to pay all
                    or a  portion  of the  purchase  price in  shares  of common
                    stock, the common stock will be valued at a discount of 2.5%
                    below the  average of the  closing  sale prices for the five
                    trading  days  ending on the third  trading day prior to the
                    purchase  date.  Our ability to purchase all or a portion of
                    Series  C  Preferred  Stock  for  cash  is  subject  to  our
                    obligation  to  repay or  repurchase  any  outstanding  debt
                    required to be repaid or  repurchased  in connection  with a
                    fundamental change and to any contractual  restrictions then
                    contained in our debt. If,  following a fundamental  change,
                    we are  prohibited  from  paying the  purchase  price of the
                    Series C Preferred Stock in cash under the terms of our debt
                    instruments,  but are not  prohibited  under  applicable law
                    from  paying  such  purchase  price in shares of our  common
                    stock,  we will  pay the  purchase  price  of the  Series  C
                    Preferred Stock in shares of our common stock.

Voting rights.....  Holders of Series C  Preferred  Stock do not have any voting
                    rights except as set forth below, as  specifically  provided
                    for in  our  restated  certificate  of  incorporation  or as
                    otherwise  from time to time  required by law.  Whenever (1)
                    dividends on the



                    Series C  Preferred  Stock or any  other  class or series of
                    stock ranking on a parity with the Series C Preferred  Stock
                    with respect to the payment of dividends  are in arrears for
                    dividend periods, whether or not consecutive,  containing in
                    the  aggregate a number of days  equivalent  to six calendar
                    quarters,  or (2) we fail to pay the redemption price on the
                    date  shares of Series C  Preferred  Stock  are  called  for
                    redemption  or the purchase  price on the purchase  date for
                    shares of Series C Preferred  Stock  following a fundamental
                    change,  then,  in  each  case,  the  holders  of  Series  C
                    Preferred Stock (voting separately as a class with all other
                    series of Series C  Preferred  Stock upon which like  voting
                    rights  have been  conferred  and are  exercisable)  will be
                    entitled to vote for the  election of two of the  authorized
                    number  of our  directors  at the  next  annual  meeting  of
                    stockholders  and  at  each  subsequent  meeting  until  all
                    dividends  accumulated on the Series C Preferred  Stock have
                    been fully paid or set apart for payment. The term of office
                    of  all  directors  elected  by  the  holders  of  Series  C
                    Preferred   Stock  will  terminate   immediately   upon  the
                    termination  of  the  rights  of  the  holder  of  Series  C
                    Preferred Stock to vote for directors.  Holders of shares of
                    Series C  Preferred  Stock will have one vote for each share
                    of Series C Preferred Stock held.

Ranking...........  The Series C Preferred  Stock are,  with respect to dividend
                    rights  and   rights   upon   liquidation,   winding  up  or
                    dissolution:

                    o    junior to all our existing and future debt obligations;

                    o    junior  to our $25 par value  preferred  stock and each
                         other class or series of our  capital  stock other than
                         (a) our common  stock and any other  class or series of
                         our capital  stock the terms of which provide that such
                         class  or  series  will  rank  junior  to the  Series C
                         Preferred  Stock and (b) any  other  class or series of
                         our capital  stock the terms of which provide that such
                         class or series will rank on a parity with the Series C
                         Preferred Stock;

                    o    on a parity  with any  other  class  or  series  of our
                         capital  stock  the  terms of which  provide  that such
                         class or series will rank on a parity with the Series C
                         Preferred Stock;

                    o    senior  to our  common  stock  and any  other  class or
                         series of our capital  stock the terms of which provide
                         that  such  class or  series  will  rank  junior to the
                         Series C Preferred Stock; and

                    o    effectively  junior  to all of  our  subsidiaries'  (i)
                         existing and future  liabilities and (ii) capital stock
                         held by others.


Trading...........  We do not intend to list the Series C Preferred Stock on any
                    national  securities  exchange.

NYSE  symbol for
our common stock..  Our common  stock is traded on the New York  Stock  Exchange
                    under the symbol "KSU."



       RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS

     For purposes of determining the ratio of earnings to combined fixed charges
and  preferred  dividends,  earnings  are  defined  as (i) the sum of (a) pretax
income from continuing  operations before  adjustment for minority  interests in
consolidated  subsidiaries  or income or loss from equity  investees,  (b) fixed
charges,  (c) amortization of capitalized  interest,  (d) distributed  income of
equity  investees,  and (e) our share of pretax  losses of equity  investees for
which charges arising from  guarantees are included in fixed charges,  less (ii)
the  sum  of  (x)  interest   capitalized,   (y)  preference  security  dividend
requirements  of  consolidated  subsidiaries,  and (z) the minority  interest in
pretax  income of  subsidiaries  that have not  incurred  fixed  charges.  Fixed
charges  consist  of  interest  (whether  expensed  or  capitalized),  amortized
premiums,  discounts  and  capitalized  expenses  related to  indebtedness,  and
estimate of the interest within rental expense, and preference security dividend
requirements of consolidated subsidiaries. Preference security dividend consists
of the  amount of pretax  earnings  that is  required  to pay the  dividends  on
outstanding preference securities.



                                                                                         

                                                         SIX MONTHS
                                                            ENDED
                                                          JUNE 30,               YEAR ENDED DECEMBER 31,

                                                                        ------------------------------------------
                                                            2004         2003    2002     2001    2000     1999
                                                            ----         ----    ----     ----    ----     ----
Ratio of earnings to combined fixed charges and
   preferred dividends                                      1.41         --(1)    1.28     1.07    1.03     1.15




----------
(1)  For the year ended  December  31,  2003,  the ratio of earnings to combined
     fixed  charges  and  preferred  dividends  was less than 1:1.  The ratio of
     earnings to combined fixed charges and preferred  dividends would have been
     1:1 if a deficiency of $18.2 million was eliminated.


                                  RISK FACTORS

     An  investment  in the Series C Preferred  Stock or the  underlying  common
stock involves certain risks that a potential investor should carefully evaluate
prior to  making  an  investment  in the  Series C  Preferred  Stock.  See "Risk
Factors."




                                  RISK FACTORS

KCS RISK FACTORS

RISKS RELATED TO THE SERIES C PREFERRED STOCK

THE SERIES C PREFERRED  STOCK RANKS JUNIOR TO ALL OF OUR  LIABILITIES AND TO OUR
$25 PAR VALUE PREFERRED STOCK.

     The Series C Preferred  Stock ranks junior to all of our  liabilities.  The
Series C Preferred  Stock also ranks junior to our $25 par value preferred stock
("Preferred Stock"). In the event of our bankruptcy,  liquidation or winding-up,
our assets will be available to pay obligations on the Series C Preferred Stock,
including  the purchase of your shares of the Series C Preferred  Stock for cash
upon a change in control,  only after all our indebtedness and other liabilities
and our  Preferred  Stock have been paid.  In  addition,  the Series C Preferred
Stock will effectively rank junior to all existing and future liabilities of our
subsidiaries  and any  capital  stock of our  subsidiaries  held by others.  The
rights  of  holders  of the  Series  C  Preferred  Stock to  participate  in the
distribution of assets of our subsidiaries  will rank junior to the prior claims
of that  subsidiary's  creditors  and any other equity  holders.  As of June 30,
2004, we had total  consolidated  liabilities  of  approximately  $1.25 billion.
Consequently,  if we are forced to liquidate our assets to pay our creditors, we
may not have sufficient assets remaining to pay amounts due on any or all of the
Series C Preferred Stock then  outstanding.  We and our  subsidiaries  may incur
substantial  amounts of  additional  debt and other  obligations  that will rank
senior to the Series C Preferred Stock.

WE MAY NOT BE ABLE TO PAY THE PURCHASE PRICE OF THE SERIES C PREFERRED  STOCK IN
CASH UPON A FUNDAMENTAL CHANGE. WE ALSO COULD BE PREVENTED FROM PAYING DIVIDENDS
ON SHARES OF THE SERIES C PREFERRED STOCK.

     In the event of a fundamental  change you will have the right to require us
to purchase  your shares of Series C Preferred  Stock.  We may pay the  purchase
price in cash, shares of our common stock, or a combination  thereof. We may not
have  sufficient cash to purchase your shares of Series C Preferred Stock upon a
fundamental change or may in certain  circumstances  either be forced to pay the
purchase  price  in  shares  of our  common  stock or may be  unable  to pay the
purchase  price in cash or may be legally  prohibited  from paying the  purchase
price in shares of our common stock.

     Under the terms of our current  debt  instruments  we are  prohibited  from
paying the purchase price of the Series C Preferred  Stock in cash.  Even if the
terms  of the  instruments  governing  our  indebtedness  allow  us to pay  cash
dividends  and to redeem and purchase the Series C Preferred  Stock in cash,  we
can only make such payments from legally  available  funds, as determined by our
board of directors, and such funds may not be available to pay cash dividends to
you or to redeem or purchase your shares of Series C Preferred Stock.

     In addition,  because we are a holding company, our ability to purchase the
Series C Preferred  Stock for cash or to pay dividends on the Series C Preferred
Stock may be limited by  restrictions  on our  ability to obtain  funds for such
repurchase through dividends from our subsidiaries.

YOU MAY BE UNABLE TO CONVERT THE SERIES C PREFERRED  STOCK INTO OUR COMMON STOCK
AND, IF YOU ARE ABLE AND DO CONVERT, YOU WILL EXPERIENCE IMMEDIATE DILUTION.

     You may convert  your shares of Series C Preferred  Stock into common stock
only if (1) the closing sale price of our common stock  reaches,  or the trading
price of the Series C Preferred Stock falls below, specified thresholds, (2) the
Series C  Preferred  Stock is called for  redemption,  (3)  specified  corporate



transactions  have occurred or (4) upon certain credit  downgrade  events.  Your
inability  to convert  the Series C  Preferred  Stock may  adversely  affect its
value.

     If you  convert  your  shares of Series C  Preferred  Stock into  shares of
common  stock,  you will  experience  immediate  dilution  because the per share
conversion price of the Series C Preferred Stock immediately after this offering
will be higher  than the net  tangible  book value per share of the  outstanding
common  stock.  In addition,  you will also  experience  dilution when and if we
issue  additional  shares of common  stock,  which we may be  required  to issue
pursuant to the Acquisition or related  ancillary  agreements or otherwise issue
pursuant  to  options,  warrants,  our stock  option  plan or other  employee or
director compensation plans.

THE PRICE OF OUR COMMON STOCK,  AND  THEREFORE OF THE SERIES C PREFERRED  STOCK,
MAY FLUCTUATE  SIGNIFICANTLY,  WHICH MAY MAKE IT DIFFICULT FOR YOU TO RESELL THE
SERIES C PREFERRED STOCK, OR COMMON STOCK ISSUABLE UPON CONVERSION OF THE SERIES
C PREFERRED STOCK, WHEN YOU WANT OR AT PRICES YOU FIND ATTRACTIVE.

     The price of our  common  stock on the New York Stock  Exchange  constantly
changes.  We expect that the market price of our common  stock will  continue to
fluctuate.  Because the Series C Preferred Stock is convertible  into our common
stock,  volatility or depressed prices for our common stock could have a similar
effect on the trading  price of the Series C Preferred  Stock.  Holders who have
received  common  stock  upon  conversion  will also be  subject  to the risk of
volatility and depressed prices.

     Our stock price can fluctuate as a result of a variety of factors,  many of
which are beyond our control. These factors include:

     o    quarterly variations in our operating results;

     o    operating  results  that vary  from the  expectations  of  management,
          securities analysts and investors;

     o    changes  in  expectations  as to  our  future  financial  performance,
          including financial estimates by securities analysts and investors;

     o    developments generally affecting our industry;

     o    announcements  by us or  our  competitors  of  significant  contracts,
          acquisitions, joint marketing relationships, joint ventures or capital
          commitments;

     o    announcements  by third parties of  significant  claims or proceedings
          against us;

     o    our dividend policy;

     o    future sales of our equity or equity-linked securities;

     o    our dispute with Grupo TMM over Grupo TMM's  attempt to terminate  the
          Acquisition Agreement;

     o    the Mexican Government's audit of Grupo TFM's past tax returns and its
          preliminary determination to disallow Grupo TFM's and its consolidated
          subsidiaries  right to  depreciate  the  concession  and other  assets
          purchased  by  TFM  from  the  Mexican   Government  as  part  of  the
          privatization of the Mexican National railway system; and

     o    general domestic and international economic conditions.



     In addition, the stock market in general has experienced extreme volatility
that has often been  unrelated  to the  operating  performance  of a  particular
company.  These broad market  fluctuations may adversely affect the market price
of our common stock.

THE TRADING PRICE FOR THE SERIES C PREFERRED STOCK WILL BE DIRECTLY  AFFECTED BY
THE TRADING PRICES FOR OUR COMMON STOCK, WHICH IS IMPOSSIBLE TO PREDICT.

     The price of our common  stock could be  affected by possible  sales of our
common  stock  by  investors  who view the  Series C  Preferred  Stock as a more
attractive  means of equity  participation  in KCS and by hedging  or  arbitrage
activity that may develop  involving the common stock.  The arbitrage  could, in
turn, affect the trading prices of the Series C Preferred Stock.

OUR RIGHTS AGREEMENT AND AMENDED CHARTER DOCUMENTS MAY MAKE IT HARDER FOR OTHERS
TO  OBTAIN  CONTROL  OF US EVEN  IF  SOME  STOCKHOLDERS  MIGHT  CONSIDER  SUCH A
DEVELOPMENT FAVORABLE, WHICH MAY ADVERSELY AFFECT OUR STOCK PRICE.

     Our rights agreement and provisions of our amended and restated certificate
of  incorporation  and our by-laws may delay,  inhibit or prevent  someone  from
gaining  control  of us  through a tender  offer,  business  combination,  proxy
contest or some other method even if some of our  stockholders  might  believe a
change in control is desirable.

ISSUANCE OF CLASS A CONVERTIBLE COMMON STOCK AND COMMON STOCK IN CONNECTION WITH
THE ACQUISITION COULD CAUSE THE PRICE OF OUR COMMON STOCK TO FALL.

     Under the terms of the Acquisition Agreement, KCS, at its option, may elect
to pay up to $80 million of the $200  million cash  consideration  for the Grupo
TFM  shares  by  delivering  a  number  of  shares  of  common  stock or Class A
Convertible  Common Stock  determined  by dividing the amount that KCS elects to
pay other than in cash by $12.50. Assuming KCS elects to pay $80 million in this
manner,  KCS would deliver  6,400,000  shares.  In addition,  shares of KARA Sub
purchased  by  Multimodal   during  the  course  of  the  Acquisition  would  be
automatically converted into 18,000,000 shares of our Class A Convertible Common
Stock upon the successful completion of the Acquisition. The Class A Convertible
Common Stock would be convertible into an equal number of shares of common stock
at any time, upon the option of holders, and mandatorily, upon the occurrence of
certain conditions.

     In  connection  with the  Acquisition,  KCS would  enter into a  consulting
agreement pursuant to which 2,100,000 shares of restricted common stock would be
granted to the consulting firm. The restricted common stock,  subject to certain
performance  conditions  under the  consulting  agreement,  would  vest over the
course of three years following the date the Acquisition is consummated. If KCS,
in its sole discretion, chooses to extend the consulting agreement at the end of
its three-year  term, an additional  525,000  shares of restricted  common stock
would be granted and would immediately vest.

     KCS would,  pursuant to a registration  rights  agreement,  be obligated to
register  the  shares of common  stock  issued  upon  conversion  of the Class A
Convertible  Common Stock,  pursuant to the Acquisition  Agreement to the extent
that KCS elects to pay a portion of the cash consideration  through the issuance
of shares of common stock,  pursuant to the consulting  agreement,  or otherwise
acquired by Grupo TMM, TMM Holdings,  Multimodal, certain Grupo TMM stockholders
or any of their respective affiliates upon the exercise of pre-emptive rights in
compliance with the Stockholders' Agreement.

     We cannot predict whether any actual or potential  increase in availability
of our common stock for sale as a result of these  transactions  will  adversely
affect the market price of our common stock.



OUR ABILITY TO PAY DIVIDENDS  MAY BE LIMITED,  AND WE DO NOT  ANTICIPATE  PAYING
CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.

     We are  restricted  in our ability to pay  dividends  to the holders of our
common stock by the terms of our  outstanding  Series C Preferred  Stock and our
credit  facilities  and senior  notes.  In the  future,  we may agree to further
restrictions  on our ability to pay  dividends.  In  addition,  to maintain  our
credit ratings, we may be limited in our ability to pay dividends so that we can
maintain an  appropriate  level of debt.  During the first quarter of 2000,  our
board of directors  suspended our common stock  dividends.  We do not anticipate
making any cash dividend payments to our common stockholders for the foreseeable
future.

SUBSTANTIAL  SALES OF OUR COMMON STOCK COULD  ADVERSELY  AFFECT OUR STOCK PRICE.
SALES OF  SUBSTANTIAL  AMOUNTS OF OUR COMMON  STOCK IN THE PUBLIC  MARKET  COULD
ADVERSELY AFFECT THE PREVAILING MARKET PRICE OF OUR COMMON STOCK.

     As of June 30,  2004,  we had  828,736  remaining  shares of  common  stock
reserved  for issuance  under our stock  option  plan.  Sales of common stock by
stockholders upon exercise of their options, sales by our executive officers and
directors  subject to compliance with Rule 144 under the Securities Act of 1933,
or the perception that such sales could occur,  may adversely  affect the market
price of our common stock.

WE HAVE PROVISIONS IN OUR CHARTER, BYLAWS AND RIGHTS AGREEMENT THAT COULD DETER,
DELAY OR PREVENT A THIRD PARTY FROM  ACQUIRING US AND THAT COULD  DEPRIVE YOU OF
AN OPPORTUNITY TO OBTAIN A TAKEOVER PREMIUM FOR SHARES OF OUR COMMON STOCK.

     We have  provisions  in our  charter  and bylaws  that may delay or prevent
unsolicited  takeover bids from third parties.  These provisions may deprive our
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices. For example, our restated  certificate of incorporation  provides
for a classified board of directors. It further provides that the vote of 70% of
the shares  entitled to vote in the  election of  directors is required to amend
our restated certificate of incorporation to increase the number of directors to
more than  eighteen,  abolish  cumulative  voting for  directors and abolish the
classification  of the  board.  The same  vote  requirement  is  imposed  by our
restated certificate of incorporation on certain transactions involving mergers,
consolidations, sales or leases of assets with or to certain owners of more than
5% of our outstanding  stock entitled to vote in the election of directors.  Our
bylaws provide that a stockholder must provide us with advance written notice of
its intent to  nominate a director  or raise a matter at an annual  meeting.  In
addition,  we have adopted a rights agreement which under certain  circumstances
would significantly impair the ability of third parties to acquire control of us
without prior approval of our board of directors.


RISKS RELATED TO OUR BUSINESS

WE COMPETE AGAINST OTHER RAILROADS AND OTHER TRANSPORTATION PROVIDERS.

     We are subject to competition from other railroads,  many of which are much
larger  and  have  significantly  greater  financial  and  other  resources.  In
addition, we are subject to competition from truck carriers and from barge lines
and other  maritime  shipping.  Increased  competition  has resulted in downward
pressure on freight rates.  Competition  with other railroads and other modes of
transportation  is  generally  based  on the  rates  charged,  the  quality  and
reliability of the service  provided and the quality of the carrier's  equipment
for  certain  commodities.  While we must  build or  acquire  and  maintain  our
infrastructure,  truck carriers and maritime shippers and barges are able to use
public  rights-of-way.  Continuing  competitive pressures and declining margins,
future   improvements   that  increase  the  quality  of  alternative  modes  of
transportation  in the  locations  in  which we  operate,  or  legislation  that
provides motor



carriers with additional advantages, such as increased size of vehicles and less
weight  restrictions,  could have a material  adverse  effect on our  results of
operations, financial condition and liquidity.

WE MAY BE REQUIRED TO MAKE ADDITIONAL INVESTMENTS IN TFM.

     The Mexican  government has put rights with respect to the shares of TFM it
holds  to  compel  the  purchase  of those  shares  by Grupo  TFM.  The  Mexican
government  provided Grupo TFM with notice of its intention to sell its interest
in TFM. Grupo TFM has responded to the Mexican  government's  notice reaffirming
its right and interest in purchasing the Mexican government's remaining interest
in TFM,  but also  advising  the Mexican  government  that it would not take any
action until its lawsuit seeking a declaratory judgment was resolved.  Grupo TFM
filed a lawsuit seeking a declaratory  judgment concerning its interpretation of
its  obligation  to purchase  the Mexican  government's  shares of TFM, and that
lawsuit is ongoing.  KCS and Grupo TMM have been made parties to the lawsuit. In
the event that Grupo TFM does not purchase the Mexican government's 20% interest
in TFM and Grupo TFM's lawsuit is resolved in favor of Mexican government,  then
Grupo  TMM and KCS,  or  either  of Grupo  TMM or KCS  alone,  would,  following
notification  by the  Mexican  government  in  accordance  with the terms of the
applicable  agreements,  be  obligated  to  purchase  the  Mexican  government's
remaining interest in TFM. If the Acquisition is completed prior to the purchase
of the Mexican government's  interest in TFM, KCS will be solely responsible for
purchasing  the  Mexican  government's  20%  interest  in TFM.  If KCS had  been
required to purchase this interest as of June 30, 2004, the total purchase price
would have been approximately  $464 million.  Based upon public disclosures made
by Grupo TMM, it is not in a position to make this purchase.

WE MAY BE UNABLE TO COMPLETE THE ACQUISITION.

     KCS and Grupo TMM have been in a dispute  over the  Acquisition  Agreement.
KCS has initiated binding  arbitration with respect to the dispute and has filed
pleadings and obtained  rulings from the Delaware  Court of Chancery to preserve
the parties' positions pending resolution of the dispute.  However, there can be
no  assurance  that the parties  will  resolve  their  disputes  relating to the
Acquisition  Agreement,  or that the  arbitrators or the courts will resolve the
disputes,  in favor of KCS. The American Arbitration  Association  International
Centre for Dispute  Resolution hearing the dispute between the Company and Grupo
TMM issued its interim  award on March 19,  2004  finding  that the  Acquisition
Agreement  remains in force and is  binding  on KCS and Grupo TMM in  accordance
with its terms.  The second phase of the  arbitration  will decide the remaining
issues, including remedies and damages.  Although KCS and Grupo TMM entered into
a stipulation agreement on April 4, 2004 under which they agreed to discharge in
good faith all of the obligations of the Acquisition Agreement, the consummation
of the  Acquisition  is  subject  to a number  of  conditions.  There  can be no
assurance that all of the conditions to the  Acquisition  will be satisfied.  If
the  Acquisition is not  consummated,  the value of the Company's  investment in
Grupo TFM may become impaired.

     As of June 30, 2004 and  December 31, 2003,  costs of  approximately  $13.0
million and $9.3 million,  respectively,  related to the  Acquisition  have been
deferred , which have been reflected in our  consolidated  balance sheet pending
completion of the Acquisition. We expect that we will incur and defer additional
costs related to the Acquisition.  If we are unable to complete the Acquisition,
these  deferred  costs  would  be  reflected  as a  charge  to  earnings  in our
consolidated income statement in the period in which such determination is made.



IF THE MEXICAN  GOVERNMENT'S  PRELIMINARY  FINDINGS AND CONCLUSIONS ARISING FROM
ITS TAX AUDIT OF TFM'S 1997 TAX RETURNS ARE SUSTAINED,  IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF
TFM. AS A RESULT,  THE VALUE OF OUR  INVESTMENT IN GRUPO TFM COULD BE MATERIALLY
ADVERSELY affected.

     On January 19, 2004,  TFM received a Special  Certificate  from the Mexican
Federal  Treasury  in the amount of 2.1  billion  pesos (the same  amount as the
value added tax ("VAT") refund claimed by TFM in 1997). On January 20, 2004, TFM
was served with an official  letter  notifying  TFM of the Mexican  government's
preliminary  findings and  conclusions  arising from its tax audit of TFM's 1997
tax returns (the "Tax Audit  Summary").  In the Tax Audit  Summary,  the Mexican
government  notified TFM of its preliminary  conclusion  that the  documentation
provided by TFM in support of the VAT refund credit shown on the 1997 tax return
and TFM's basis in the Concession  title,  locomotives and rail  equipment,  and
capital leases  purchased by TFM's  predecessor in interest prior to Grupo TFM's
purchase  of 80% of the  shares  of TFM,  do not  comply  with  the  formalities
required by the applicable tax legislation. If sustained, the conclusions of the
Tax Audit Summary  would prevent TFM from  depreciating  the  Concession  title,
locomotives and rail  equipment,  and capital leases that represent the majority
of the value of the assets owned by TFM. The Tax Audit Summary also attached the
Special  Certificate pending resolution of the audit, as a potential asset to be
used to satisfy any tax obligations owed by TFM as a result of the audit. If TFM
is unable to depreciate  the Concession  title and the other assets  reported on
its 1997 tax return,  this could have a material adverse effect on the financial
condition,  results of operations and business of TFM. As a result, the value of
our  investment  in  Grupo  TFM  could be  materially  adversely  affected.  See
"Description  of the  Acquisition--Summary  of  the  Acquisition  Agreement  and
Related Agreements--The Acquisition Agreement--VAT Contingency Payment" below.

OUR  BUSINESS  STRATEGY,  OPERATIONS  AND  GROWTH  RELY  SIGNIFICANTLY  ON JOINT
VENTURES AND OTHER STRATEGIC ALLIANCES.

     Operation  of our  integrated  rail  network  and our plans for  growth and
expansion rely  significantly  on joint ventures and other strategic  alliances.
Unless the  Acquisition  is  consummated,  we will  continue to hold an indirect
minority  interest TFM. As a minority  shareholder,  we are not in a position to
control operations, strategies or financial decisions without the concurrence of
Grupo  TMM,  the  largest  shareholder  in Grupo  TFM.  In  addition,  conflicts
currently exist and may arise in the future between our business  objectives and
those of Grupo TMM.  We have been in a dispute  with Grupo TMM over Grupo  TMM's
attempt to terminate the Acquisition Agreement.  Although we have entered into a
stipulation  agreement with Grupo TMM, as discussed above, we cannot assure that
the  Acquisition  will be consummated.  If the  Acquisition is not  consummated,
resolution  of any future  conflicts in our favor may be difficult or impossible
given our minority ownership position.

     In addition, our operations are dependent on interchange,  trackage rights,
haulage rights and marketing  agreements  with other railroads and third parties
that enable us to  exchange  traffic  and  utilize  trackage we do not own.  Our
ability to provide  comprehensive rail service to our customers depends in large
part upon our ability to maintain  these  agreements  with other  railroads  and
third parties.  The  termination of, or the failure to renew,  these  agreements
could  adversely  affect  our  business,  financial  condition  and  results  of
operations.  We are  also  dependent  in part  upon  the  financial  health  and
efficient performance of other railroads. For example, much of Tex-Mex's traffic
moves over the UP's lines via  trackage  rights,  a  significant  portion of our
grain shipments originate with IC&E pursuant to our marketing agreement with it,
and BNSF is our largest partner in the interchange of rail traffic. There can be
no assurance that we will not be materially affected adversely by operational or
financial difficulties of other railroads.



OUR MEXICAN AND  PANAMANIAN  INVESTMENTS  SUBJECT US TO  POLITICAL  AND ECONOMIC
RISKS.

     Our  investment  in Grupo  TFM  involves  a number of  risks.  The  Mexican
government  exercises  significant  influence  over the Mexican  economy and its
actions could have a significant  impact on TFM. Our Mexican investment may also
be adversely affected by currency  fluctuations,  price instability,  inflation,
interest rates, regulations, taxation, cultural differences, social instability,
labor  disputes  and other  political,  social and economic  developments  in or
affecting  Mexico.  Moreover,  TFM's commercial  success is heavily dependent on
expected  increases in U.S.-Mexico trade and will be strongly  influenced by the
effect  of NAFTA on such  trade.  Downturns  in either  of the U.S.  or  Mexican
economies  or in trade  between the United  States and Mexico would be likely to
adversely impact TFM's business,  financial condition and results of operations.
Additionally,  the  Mexican  government  may  revoke  the  exclusivity  of TFM's
Concession   after  20  years  if  it  determines  that  there  is  insufficient
competition  and may terminate the Concession as a result of certain  conditions
or events.  TFM's assets and its rights under the  Concession may also be seized
temporarily  by  the  Mexican  government.  Revocation  or  termination  of  the
Concession would materially adversely affect TFM's operations and its ability to
make  payments on its debt.  Our  investment in PCRC has risks  associated  with
operating in Panama,  including,  among others,  cultural  differences,  varying
labor and operating  practices,  political risk and differences between the U.S.
and  Panamanian  economies.  There can be no  assurances  that the various risks
associated  with  operating  in  Mexico  can  be  effectively  and  economically
mitigated by TFM or that the risks  associated  with  operating in Panama can be
effectively and economically mitigated by PCRC.

OUR LEVERAGE COULD  ADVERSELY  AFFECT OUR ABILITY TO FULFILL  OBLIGATIONS  UNDER
VARIOUS DEBT  INSTRUMENTS  AND OPERATE OUR  BUSINESS.  WE ARE LEVERAGED AND WILL
HAVE  SIGNIFICANT  DEBT  SERVICE  OBLIGATIONS.  IN  ADDITION,  GRUPO TFM IS ALSO
LEVERAGED  AND THE  ACQUISITION  OF A  CONTROLLING  INTEREST  IN GRUPO TFM WOULD
INCREASE OUR CONSOLIDATED INDEBTEDNESS AND LEVERAGE.

     Our level of debt could make it more  difficult  for us to borrow  money in
the future,  will reduce the amount of money available to finance our operations
and other  business  activities,  exposes us to the risk of  increased  interest
rates,  makes us more  vulnerable  to general  economic  downturns  and  adverse
industry conditions, could reduce our flexibility in planning for, or responding
to, changing business and economic  conditions,  and may prevent us from raising
the funds  necessary  to  repurchase  all of certain  senior notes that could be
tendered upon the occurrence of a change of control,  which would  constitute an
event of default, or all of the Series C Preferred Stock that could be put to us
under certain circumstances.  Our failure to comply with the financial and other
restrictive  covenants  in our debt  instruments,  which,  among  other  things,
require us to maintain specified financial ratios and limit our ability to incur
debt and sell assets,  could result in an event of default that, if not cured or
waived, could have a material adverse effect on our business or prospects. If we
do not have  enough cash to service our debt,  meet other  obligations  and fund
other  liquidity  needs,  we may be required to take actions such as reducing or
delaying capital expenditures,  selling assets, restructuring or refinancing all
or part of our existing debt or seeking  additional  equity  capital.  We cannot
assure that any of these  remedies  can be effected on  commercially  reasonable
terms or at all. In  addition,  the terms of existing or future debt  agreements
may restrict us from adopting any of these alternatives.

WE MAY BE ADVERSELY  AFFECTED BY CHANGES IN GENERAL  ECONOMIC,  WEATHER OR OTHER
CONDITIONS.

Our operations may be adversely  affected by changes in the economic  conditions
of the industries and geographic areas that produce and consume the freight that
we transport.  The relative strength or weakness of the United States economy as
well as various international and regional economies also affects the businesses
served by us. Grupo TFM,  Panama  Canal  Railway  Company and  Panarail  Tourism
Company  are  more  directly   affected  by  their   respective  local  economy.
Historically,  a stronger  economy has resulted in improved results for our rail
transportation operations. Conversely, when the economy has slowed, results have
been less  favorable.  Our  revenues  may be  affected  by  prevailing  economic
conditions and, if an economic  slowdown or recession occurs in our key markets,
the  volume  of rail



shipments is likely to be reduced.  Additionally, our operations may be affected
by adverse weather conditions.  A weak harvest in the Midwest,  for example, may
substantially  reduce the volume of business handled for  agricultural  products
customers.  Additionally,  many  of  the  goods  and  commodities  we  transport
experience cyclical demand. Our results of operations can be expected to reflect
this cyclical demand because of the significant fixed costs inherent in railroad
operations.  Our  operations  may  also be  affected  by  natural  disasters  or
terrorist  acts.  Significant  reductions in our volume of rail shipments due to
economic,  weather or other  conditions  could have a material adverse effect on
our business, financial condition, results of operations and cash flows.

WE ARE SUBJECT TO REGULATION BY FEDERAL,  STATE AND LOCAL  REGULATORY  AGENCIES.
OUR FAILURE TO COMPLY WITH VARIOUS FEDERAL,  STATE AND LOCAL  REGULATIONS  COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.

     We are  subject to  governmental  regulation  by  federal,  state and local
regulatory  agencies  with  respect  to our  railroad  operations,  as well as a
variety of health, safety, labor,  environmental,  and other matters. Government
regulation  of  the  railroad  industry  is a  significant  determinant  of  the
competitiveness  and  profitability  of  railroads.  Our  failure to comply with
applicable  laws and  regulations  could have a material  adverse  effect on our
operations,  including  limitations on our operating activities until compliance
with applicable requirements is completed.  These government agencies may change
the  legislative  or  regulatory  framework  within  which  we  operate  without
providing any recourse for any adverse  effects on our business that occurs as a
result of this  change.  Additionally,  some of the  regulations  require  us to
obtain and maintain various licenses,  permits and other authorizations,  and we
cannot assure that we will continue to be able to do so.

WE ARE SUBJECT TO  ENVIRONMENTAL  LAWS AND REGULATIONS  THAT COULD REQUIRE US TO
INCUR MATERIAL COSTS AND  TEMPORARILY  SUSPEND ANY OPERATIONS  THAT ARE FOUND TO
VIOLATE ENVIRONMENTAL LAWS.

     Our  operations  are  subject  to  extensive   federal,   state  and  local
environmental laws and regulations concerning,  among other things, emissions to
the air,  discharges  to  waters,  the  handling,  storage,  transportation  and
disposal  of waste and other  materials  and  cleanup of  hazardous  material or
petroleum  releases,  decommissioning of underground  storage tanks and soil and
groundwater   contamination.   We  incur,  and  expect  to  continue  to  incur,
environmental  compliance costs,  including,  in particular,  costs necessary to
maintain compliance with requirements  governing chemical and hazardous material
shipping operations,  refueling  operations and repair facilities.  New laws and
regulations, stricter enforcement of existing requirements, new spills, releases
or violations or the discovery of previously unknown contamination could require
us to incur  costs or become  the basis for new or  increased  liabilities  that
could have a material  adverse  effect on our business,  results of  operations,
financial condition and cash flows.

WE ARE VULNERABLE TO RISING FUEL COSTS AND  DISRUPTIONS  IN FUEL  SUPPLIES.  ANY
SIGNIFICANT INCREASE IN THE COST OF FUEL, OR SEVERE DISRUPTION OF FUEL SUPPLIES,
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,  RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

     We incur substantial fuel costs in our railroad  operations and these costs
represent  a  significant  portion of our  transportation  expenses.  During the
three-year  period ended  December  31, 2003,  and the six months ended June 30,
2004,  locomotive  fuel  expenses  represented  an  average  of 8.1%  and  9.8%,
respectively,  of KCSR's total operating  costs.  Fuel  represented  8.6% of our
total  operating  costs in 2003.  Fuel costs are  affected  by  traffic  levels,
efficiency of operations and equipment,  and petroleum  market  conditions.  The
supply and cost of fuel is subject to market  conditions  and is  influenced  by
numerous  factors beyond our control,  including  general  economic  conditions,
world markets, government programs and regulations and competition.  Significant
price  increases  for fuel may have a material  adverse  effect on our operating
results.  Additionally,  fuel prices and supplies  could also be affected by any
limitation in the fuel supply or by any  imposition  of mandatory  allocation or
rationing  regulations.  In the event of a



severe disruption of fuel supplies  resulting from supply  shortages,  political
unrest, a disruption of oil imports,  war or otherwise,  the resulting impact on
fuel prices and subsequent price increases could materially adversely affect our
operating results, financial condition and cash flows.

A MAJORITY OF THE COMPANY'S  EMPLOYEES  BELONG TO LABOR  UNIONS,  AND STRIKES OR
WORK STOPPAGES COULD ADVERSELY AFFECT THE COMPANY'S OPERATIONS.

We are a party to collective  bargaining agreements with various labor unions in
the United States.  Approximately  84% of KCSR employees are covered under these
agreements. We may be subject to, among other things, strikes, work stoppages or
work  slowdowns  as a result  of  disputes  with  regard  to the  terms of these
collective  bargaining  agreements  or  our  potential  inability  to  negotiate
acceptable  contracts with these unions.  Moreover,  because such agreements are
generally negotiated on an industry-wide  basis,  determination of the terms and
conditions  of future  labor  agreements  could be beyond our control  and, as a
result,  we may be subject to terms and  conditions  in amended or future  labor
agreements  that  could  have  a  material  adverse  affect  on our  results  of
operations,  financial position and cash flows. If the unionized workers were to
engage in a strike, work stoppage or other slowdown,  or other employees were to
become  unionized or the terms and  conditions in future labor  agreements  were
renegotiated, we could experience a significant disruption of our operations and
higher ongoing labor costs.

ONE OF OUR COAL CUSTOMERS ACCOUNTS FOR APPROXIMATELY 10% OF OUR TOTAL REVENUES.

Our largest coal customer,  Southwestern  Electric Power Company  ("SWEPCO"),  a
subsidiary of American Electric Power Company, Inc., accounted for approximately
61.7% of our coal revenues and approximately  9.8% of our total revenues for the
year ended December 31, 2003. The loss of all or a significant  part of SWEPCO's
business,  or a service outage at one or both of SWEPCO's  facilities  that KCSR
serves, could materially  adversely affect our financial  condition,  results of
operations and cash flows.

WE MAY BE SUBJECT TO VARIOUS CLAIMS AND LAWSUITS.

     The nature of the railroad business exposes us to the potential for various
claims and  litigation  related  to labor and  employment,  personal  injury and
property  damage,   environmental  and  other  matters.  We  maintain  insurance
(including   self-insurance)  consistent  with  the  industry  practice  against
accident-related risks involved in the operation of the railroad. However, there
can be no assurance that such insurance would be sufficient to cover the cost of
damages  suffered  or that such  insurance  will  continue  to be  available  at
commercially reasonable rates. Any material changes to current litigation trends
could have a material  adverse  effect on our results of  operations,  financial
condition and cash flows.

WE MAY BE AFFECTED BY FUTURE ACTS OF TERRORISM OR WAR.

     Terrorist  attacks,  such as those that occurred on September 11, 2001, any
government  response  thereto  and war or risk of war may  adversely  affect our
results of operations,  financial condition, and cash flows. These acts may also
impact our ability to raise capital or our future  business  opportunities.  Our
rail lines and facilities  could be direct targets or indirect  casualties of an
act or acts of terror, which could cause significant  business  interruption and
result in increased  costs and liabilities  and decreased  revenues.  These acts
could have a material  adverse  effect on our results of  operations,  financial
condition,  and cash flows. In addition,  insurance premiums charged for some or
all of the coverage  currently  maintained by us could increase  dramatically or
certain coverage may not be available in the future.



TFM RISK FACTORS

TFM'S  SUBSTANTIAL   INDEBTEDNESS  COULD  ADVERSELY  AFFECT  ITS  BUSINESS  AND,
CONSEQUENTLY, ITS ABILITY TO PAY INTEREST AND REPAY ITS INDEBTEDNESS.

     TFM has a significant  amount of indebtedness,  which requires  significant
debt  service.  As of June 30,  2004,  Grupo  TFM,  which  owns an 80%  economic
interest in TFM and all of the shares of stock with full  voting  rights of TFM,
had total outstanding indebtedness of $959.6 million, consisting of TFM's senior
unsecured  indebtedness under its outstanding notes and debentures,  obligations
under capital leases and its new bank facilities  (its commercial  paper program
and its term loan facility).  TFM has no secured indebtedness.  Under U.S. GAAP,
Grupo  TFM's  shareholders'  equity  was  $822.5  million  as of June 30 , 2004,
resulting in a debt to equity ratio of 116.6%.  In addition,  TFM may incur more
debt,  subject to the  restrictions  contained in the  indentures  governing the
existing notes and the outstanding notes and the credit agreements governing its
new commercial paper program and term loan facility.

     The level of TFM's  indebtedness  could have  important  consequences.  For
example, it could:

     o    limit cash flow  available  for  capital  expenditures,  acquisitions,
          working  capital  and  other  general  corporate  purposes  because  a
          substantial  portion  of  TFM's  cash  flow  from  operations  must be
          dedicated to servicing debt;

     o    increase TFM's  vulnerability to general adverse economic and industry
          conditions;

     o    expose TFM to risks  inherent in interest  rate  fluctuations  because
          some borrowings are at variable rates of interest,  which could result
          in higher  interest  expenses  in the event of  increases  in interest
          rates;

     o    expose  TFM to  risks  in  exchange  rate  fluctuations,  because  any
          devaluation   of  the   peso   would   cause   the   cost   of   TFM's
          dollar-denominated debt to increase;

     o    limit TFM's  flexibility in planning for, or reacting to,  competitive
          and  other  changes  in its  business  and the  industry  in  which it
          operates;

     o    place TFM at a competitive  disadvantage  compared to its  competitors
          that have less debt and greater  operating and  financing  flexibility
          than TFM does; and

     o    limit, through covenants in its indebtedness,  TFM's ability to borrow
          additional funds.

     TFM's ability to pay interest and to repay or refinance  indebtedness  will
depend  upon future  operating  performance,  including  the ability to increase
revenues  significantly  and  control  expenses.  Future  operating  performance
depends  upon  prevailing   economic,   financial,   competitive,   legislative,
regulatory, business and other factors that are beyond its control.

     There can be no assurance that TFM's business will generate sufficient cash
flow  from  operations,   that  currently  anticipated  revenues  and  operating
performance  will be realized or that future  borrowings will be available to it
in amounts  sufficient to enable it to pay its indebtedness or to fund its other
liquidity  needs. If TFM is unable to meet its debt service  obligations or fund
its other  liquidity  needs,  it could attempt to  restructure  or refinance its
indebtedness,  seek  additional  equity capital or sell assets.  There can be no
assurance  that TFM will be able to  accomplish  those  actions on  satisfactory
terms, if at all.



     The  indentures  relating  to TFM's  debt  securities  contain  a number of
restrictive  covenants and any additional financing  arrangements it enters into
may  contain  additional  restrictive  covenants.  These  covenants  restrict or
prohibit many actions, including TFM's ability to:

     o    incur debt;

     o    create or suffer to exist liens;

     o    make prepayments of particular debt;

     o    pay dividends;

     o    make investments;

     o    engage in transactions with stockholders and affiliates;

     o    use assets as security in other transactions;

     o    create any unrestricted subsidiary;

     o    sell assets; and

     o    engage   in   mergers   and   consolidations   or  in   sale-leaseback
          transactions.

     If TFM fails to comply with these restrictive covenants,  its obligation to
repay its debt may be accelerated.

TFM'S  BUSINESS IS VERY CAPITAL  INTENSIVE AND IT MUST MAKE  ADDITIONAL  CAPITAL
EXPENDITURES;  FAILURE TO MAKE SUCH  CAPITAL  EXPENDITURES  COULD  RESULT IN THE
REVOCATION OF TFM'S CONCESSION.

     TFM's  business  is capital  intensive  and  requires  substantial  ongoing
expenditures  for, among other things,  improvements to roadway,  structures and
technology, acquisitions, leases and repair of equipment, and maintenance of its
rail system.  TFM's failure to make necessary capital  expenditures could impair
its ability to accommodate  increases in traffic volumes or service its existing
customers.  In addition,  TFM's railroad  concession from the Mexican government
requires TFM to make  investments  and  undertake  capital  projects,  including
capital  projects  described in a business  plan filed every five years with the
Mexican  government.  TFM may defer  capital  expenditures  with  respect to its
five-year  business plan with the  permission of the Ministry of  Communications
and  Transports  ("Ministry  of  Transportation").   However,  the  Ministry  of
Transportation  may not grant this permission,  and TFM's failure to comply with
the  commitments  in its business  plan could  result in the Mexican  government
revoking the Concession.

TFM'S   CONCESSION  IS  SUBJECT  TO  REVOCATION   OR   TERMINATION   IN  CERTAIN
CIRCUMSTANCES.

     The Mexican  government  may terminate the  Concession  granted to TFM as a
result of TFM's surrender of its rights under the Concession,  or for reasons of
public  interest,  by revocation or upon TFM's  liquidation or  bankruptcy.  The
Mexican  government may also temporarily seize TFM's assets and its rights under
the Concession.  The Mexican railroad services law and regulations  provide that
the Ministry of Transportation  may revoke the Concession upon the occurrence of
specified events, some of which will trigger automatic revocation. Revocation or
termination of the Concession  would prevent TFM from operating its railroad and
would  materially  adversely  affect  TFM's  operations  and its ability to make
payments  on its debt.  In the  event  that the  Concession  is  revoked  by the
Ministry of Transportation,  TFM



will receive no  compensation,  and its interest in its rail lines and all other
fixtures covered by the Concession, as well as all improvements made by it, will
revert to the Mexican government.

TFM'S RESULTS FROM OPERATIONS ARE HEAVILY DEPENDENT ON FUEL EXPENSES.

     Approximately 98% of the locomotives TFM operates are  diesel-powered,  and
TFM's fuel  expenses  are  significant.  TFM  currently  meets,  and  expects to
continue to meet, its fuel requirements  almost exclusively through purchases at
market  prices from  Petroleos  Mexicanos,  the  national  oil company of Mexico
("PEMEX"),   a   government-owned   entity   exclusively   responsible  for  the
distribution  and sale of diesel  fuel in Mexico.  TFM is party to a fuel supply
contract  with PEMEX of  indefinite  duration.  Either party may  terminate  the
contract  upon 30 days  written  notice to the  other at any  time.  If the fuel
contract is terminated  and TFM is unable to acquire  diesel fuel from alternate
sources on acceptable  terms,  TFM's  operations  could be materially  adversely
affected. In addition,  instability in the Middle East may result in an increase
in fuel prices. Since TFM's fuel expense represents a significant portion of its
operating expenses, significant increases in the price of diesel fuel could have
a material adverse effect on TFM's results of operations.

TFM MAY BE UNABLE TO GENERATE SUFFICIENT CASH TO SERVICE OR REFINANCE ITS DEBT.

     TFM's ability to satisfy its obligations  under its debt in the future will
depend upon TFM's future performance, including its ability to increase revenues
significantly and control expenses.  TFM's future operating  performance depends
upon prevailing  economic,  financial,  business and competitive  conditions and
other factors, many of which are beyond its control.

     If  TFM's  cash  flow  from  operations  is  insufficient  to  satisfy  its
obligations,  TFM may take  specific  actions,  including  delaying  or reducing
capital  expenditures,  attempting  to  refinance  its  debt at or  prior to its
maturity  or, in the  absence of such  refinancing,  attempting  to sell  assets
quickly in order to make up for any  shortfall in payments  under  circumstances
that might not be favorable to getting the best price for the assets, or seeking
additional  equity  capital.  TFM's ability to refinance its debt and take other
actions will depend on, among other things, its financial condition at the time,
the  restrictions  in the  instruments  governing  its debt and  other  factors,
including market conditions, beyond TFM's control. TFM may be unable to take any
of these actions on satisfactory  terms or in a timely manner.  Further,  any of
these actions may not be  sufficient to allow TFM to meet its debt  obligations.
TFM's indentures and commercial paper credit agreement limit its ability to take
certain of these actions.  TFM's failure to successfully  undertake any of these
actions or to earn enough revenues to pay its debts, or significant increases in
the peso cost to service  its  dollar-denominated  debt,  could  materially  and
adversely affect TFM's business or operations.

TFM HAS SOUGHT WAIVERS UNDER ITS CREDIT  AGREEMENTS  AND MAY REQUIRE  ADDITIONAL
WAIVERS IN THE FUTURE.

     TFM would not have met certain  required  maintenance  covenants  under its
bank credit facilities during 2003. Accordingly, TFM sought and received waivers
from  the  lenders   under  its  bank  credit   facilities   for  such  expected
non-compliance. It is possible that TFM may require additional waivers under its
bank credit facilities. If TFM requires such waivers in the future, there can be
no  assurance  that such  waivers  will be  obtained.  If such  waivers  are not
obtained,  TFM would be in default  under its bank  credit  facilities  and such
default  could  result in  acceleration  of  amounts  due under the bank  credit
facilities and in cross-defaults under other obligations.



CERTAIN  REGULATORY AND MARKET FACTORS COULD  ADVERSELY  AFFECT TFM'S ABILITY TO
EXPAND ITS RAIL TRANSPORTATION OPERATIONS.

     The trucking  industry is TFM's primary  competition.  In February  2001, a
North American Free Trade Agreement  ("NAFTA")  tribunal ruled in an arbitration
between the United  States and Mexico that the United  States must allow Mexican
trucks to cross the  border  and  operate  on U.S.  highways.  NAFTA  called for
Mexican trucks to have unrestricted  access to highways in U.S. border states by
1995 and full access to all U.S. highways by January 2000.  However,  the United
States has not followed the timetable because of concerns over Mexico's trucking
safety  standards.  On March 14, 2002, as part of its agreement under NAFTA, the
U.S.  Department  of  Transportation  issued  safety  rules that  allow  Mexican
truckers to apply for operating  authority to transport goods beyond the 20-mile
commercial  zones along the  U.S.-Mexico  border.  These  safety  rules  require
Mexican  carriers  seeking to operate in the United States to pass,  among other
things,  safety  inspections,  obtain  valid  insurance  with a U.S.  registered
insurance company,  conduct alcohol and drug testing for drivers and to obtain a
U.S.  Department of Transportation  identification  number.  Mexican  commercial
vehicles with authority to operate beyond the commercial zones will be permitted
to enter the United States only at commercial  border  crossings and only when a
certified  motor carrier  safety  inspector is on duty. The Supreme Court of the
United  States  ruled June 7, 2004 that  President  Bush can open United  States
highways to Mexican  trucks,  bringing the United States into  compliance with a
provision of NAFTA. Given these recent  developments,  there can be no assurance
that truck  transport  between  Mexico and the United  States will not  increase
substantially  in the future.  Such an increase  could affect  TFM's  ability to
continue  converting  traffic to rail from truck transport because it may result
in an expansion of the  availability,  or an improvement of the quality,  of the
trucking services offered in Mexico.

     In recent years, there has been significant consolidation among major North
American rail  carriers.  The resulting  merged  railroads  could attempt to use
their size and  pricing  power to block  other  railroads'  access to  efficient
gateways  and routing  options  that are  currently  and have been  historically
available. There can be no assurance that further consolidation will not have an
adverse effect on TFM.

     Approximately  50% of TFM's  expected  revenue  growth  during the next few
years is expected  to result from  increased  truck-to-rail  conversion.  If the
railroad  industry in  general,  and TFM in  particular,  are unable to preserve
their competitive  advantages  VIS-A-VIS the trucking  industry,  TFM's business
plan may not be achieved  and its  projected  revenue  growth could be adversely
affected.  Additionally,  TFM's revenue growth could be affected by, among other
factors,   its  inability  to  grow  its  existing   customer   base,   negative
macroeconomic  developments  impacting the United States and Mexican  economies,
and failure to capture additional cargo transport market share from the shipping
industry and other railroads.

SIGNIFICANT   COMPETITION   COULD  ADVERSELY   AFFECT  TFM'S  FUTURE   FINANCIAL
PERFORMANCE.

     TFM faces  significant  competition  from trucks and other rail carriers as
well  as  limited   competition  from  the  shipping  industry  in  its  freight
operations.  TFM faces significant  competition from some industry segments from
other railroads,  in particular Ferrocarril Mexicano, S.A. de C.V. ("Ferromex"),
which operates the Pacific-North Rail Lines. In particular, TFM has experienced,
and  continues to  experience,  competition  from  Ferromex  with respect to the
transport of grain,  minerals  and steel  products.  The rail lines  operated by
Ferromex run from Guadalajara and Mexico City to four U.S. border crossings west
of Laredo,  Texas,  providing a potential  alternative  to TFM's  routes for the
transport  of freight from those cities to the U.S.  border.  Ferromex  directly
competes  with TFM in some areas of its service  territory,  including  Tampico,
Saltillo,  Monterrey  and Mexico City.  Ferrocarril  del  Sureste,  S.A. de C.V.
("Ferrosur"),  which operates the Southeast Rail Lines,  also competes  directly
with TFM for traffic to and from southeastern Mexico. Ferrosur, like TFM, serves
Mexico City,  Puebla and  Veracruz.  Ferromex and Ferrosur are  privately  owned
companies  that may have  greater  financial  resources  than TFM.  Among  other
things,  this advantage may give them greater  ability to reduce freight prices.
Price  reductions  by



competitors  would make TFM's freight  services less  competitive  and we cannot
assure you that TFM would be able to match these rate reductions.

     Under TFM's  Concession,  TFM must grant to  Ferromex  the right to operate
over a north-south portion of its rail lines between Ramos Arizpe near Monterrey
and the city of Queretaro  that  constitutes  over 600  kilometers of TFM's main
track.  Using these  trackage  rights,  Ferromex may be able to compete with TFM
over its rail lines for traffic between Mexico City and the United States. TFM's
Concession  also  requires  it to grant  rights to use  certain  portions of its
tracks to Ferrosur and the "belt  railroad"  operated in the greater Mexico City
area by the FERROCARRIL Y TERMINAL DEL VALLE DE MEXICO, S.A. DE C.V. (the Mexico
City Railroad and  Terminal),  thereby  providing  Ferrosur with more  efficient
access  to  certain  Mexico  City  industries.  As a result  of  having to grant
trackage rights to other railroads,  TFM incurs additional maintenance costs and
also loses the flexibility of using its tracks at all times.

     In February 2002,  Ferromex and Ferrosur  announced that they agreed to the
acquisition  of  Ferrosur  by  Ferromex.  TFM  filed a notice  with the  Mexican
Antitrust Commission ("MAC")objecting to the proposed acquisition on the grounds
that it would limit competition.  The acquisition was reviewed by the MAC and on
May 16,  2002 the MAC  announced  that it notified  Ferromex  that it had denied
authorization  to consummate  the  acquisition  on antitrust  grounds.  Ferromex
subsequently filed an appeal for review of the order, and on September 18, 2002,
the MAC confirmed its prior ruling denying  authorization to consummation of the
acquisition.  Ferromex  requested  that the Federal  Courts in Mexico review the
decision of the MAC. TFM also  requested a Federal Court in Mexico to review its
complaint against the acquisition, requesting to be recognized as a party to the
proceedings of the MAC, and obtained a favorable  ruling.  Ferromex and Ferrosur
subsequently  withdrew  their  petition  before the MAC,  which  terminated  the
acquisition request in October 2003.

THE RATES FOR  TRACKAGE  RIGHTS SET BY THE  MINISTRY OF  TRANSPORTATION  MAY NOT
ADEQUATELY COMPENSATE TFM.

     Pursuant  to TFM's  Concession,  TFM is  required  to grant  rights  to use
portions of its tracks to Ferromex,  Ferrosur  and the Mexico City  Railroad and
Terminal.  Applicable law stipulates that Ferromex, Ferrosur and the Mexico City
Railroad  and  Terminal  are  required to grant to TFM rights to use portions of
their tracks.  Applicable  law provides that the Ministry of  Transportation  is
entitled  to set the  rates in the  event  that TFM and the  party to whom it is
granting the rights cannot agree on a rate.  TFM and Ferromex have not been able
to agree upon the rates each of them is required to pay the other for  interline
services and haulage and trackage  rights.  Therefore,  in accordance with TFM's
rights  under the Mexican  railroad  services law and  regulations,  in February
2001, TFM initiated an administrative  proceeding  requesting a determination of
such rates by the Ministry of Transportation, which subsequently issued a ruling
establishing rates using the criteria set forth in the Mexican railroad services
law and  regulations.  TFM and Ferromex  appealed the rulings before the Mexican
Federal Courts due to, among other things,  a disagreement  with the methodology
employed by the Ministry of  Transportation  in calculating  the trackage rights
and interline  rates.  TFM and Ferromex also requested and obtained a suspension
of the effectiveness of the ruling pending  resolution of this appeal. We cannot
predict whether TFM will  ultimately  prevail in this proceeding and whether the
rates TFM is  ultimately  allowed to charge will be adequate to  compensate  it.

TERRORIST  ACTIVITIES  AND  GEOPOLITICAL  EVENTS  AND THEIR  CONSEQUENCES  COULD
ADVERSELY AFFECT TFM'S  OPERATIONS.

     As a result of the terrorist  attacks in the United States on September 11,
2001, and the continuation of armed  hostilities  involving,  among others,  the
United States and Iraq, there has been increased  short-term market  volatility,
and there may be long-term effects on U.S. and world economies and markets.

     Terrorist  attacks may negatively  affect TFM's  operations.  The continued
threat of terrorism  within the United  States and abroad and the  potential for
military action and heightened  security measures in



response to such threat may cause significant  disruption to commerce throughout
the world,  including  restrictions  on  cross-border  transport  and trade.  In
addition,  related  political  events may cause a lengthy  period of uncertainty
that may adversely affect TFM's business.  Political and economic instability in
other regions of the world,  including  the United  States and Canada,  may also
result  and could  negatively  impact  TFM's  operations.  The  consequences  of
terrorism and the responses  thereto are unpredictable and could have an adverse
effect on TFM's operations.

DOWNTURNS IN THE U.S.  ECONOMY OR IN TRADE  BETWEEN THE UNITED STATES AND MEXICO
AND  FLUCTUATIONS  IN THE  PESO-DOLLAR  EXCHANGE  RATE WOULD LIKELY HAVE ADVERSE
EFFECTS ON TFM'S BUSINESS AND RESULTS OF OPERATIONS.

     The level and timing of TFM's business  activity is heavily  dependent upon
the  level of  U.S.-Mexican  trade  and the  effects  of  NAFTA  on such  trade.
Downturns in the U.S. or Mexican  economy or in trade  between the United States
and Mexico would likely have  adverse  effects on TFM's  business and results of
operations.  TFM's  business  depends on the U.S.  and  Mexican  markets for the
products TFM transports,  the relative  position of Mexico and the United States
in these markets at any given time and tariffs or other barriers to trade. TFM's
revenues were  affected by the downturn in U.S.  economy in the first six months
of 2003.  However,  the U.S.  economy started to reflect a recovery in the third
quarter of 2003,  and  confirmed  its  up-trend in the latter part of 2003.  Any
future  downturn in the U.S.  economy  could have a material  adverse  effect on
TFM's results of operations and its ability to meet its debt service obligations
as described above.  Also,  fluctuations in the peso-dollar  exchange rate could
lead to shifts in the types and volumes of Mexican imports and exports. Although
a  decrease  in the  level  of  exports  of some  of the  commodities  that  TFM
transports  to the  United  States  may be offset by a  subsequent  increase  in
imports  of  other  commodities  TFM  hauls  into  Mexico  and vice  versa,  any
offsetting  increase  might  not  occur on a  timely  basis,  if at all.  Future
developments  in  U.S.-Mexican  trade  beyond  TFM's  control  may  result  in a
reduction of freight  volumes or in an unfavorable  shift in the mix of products
and commodities TFM carries.

DOWNTURNS IN CERTAIN CYCLICAL  INDUSTRIES IN WHICH TFM'S CUSTOMERS OPERATE COULD
HAVE ADVERSE EFFECTS ON ITS RESULTS OF OPERATIONS.

     The  transportation  industry is highly  cyclical,  generally  tracking the
cycles of the world  economy.  Although  transportation  markets are affected by
general  economic  conditions,  there are numerous  specific factors within each
particular market segment that may influence  operating  results.  Some of TFM's
customers do business in industries that are highly cyclical,  including the oil
and gas,  automotive  and  agricultural  sectors.  Any downturn in these sectors
could have a material adverse effect on TFM's operating  results.  Also, some of
the products TFM transports have had a historical  pattern of price  cyclicality
which has typically been influenced by the general  economic  environment and by
industry capacity and demand. For example, global steel and petrochemical prices
have  decreased  in the past.  We cannot  assure you that  prices and demand for
these  products  will not  decline  in the  future,  adversely  affecting  those
industries and, in turn, TFM's financial results.

TFM FACES POTENTIAL ENVIRONMENTAL LIABILITY.

     TFM's  operations  are  subject  to  Mexican  federal  and  state  laws and
regulations  relating  to  the  protection  of  the  environment.   The  primary
environmental  law in  Mexico  is the  General  Law of  Ecological  Balance  and
Environmental  Protection (the "Ecological  Law"). The Mexican federal agency in
charge  of  overseeing   compliance   with  and   enforcement   of  the  federal
environmental  law is the  Ministry  of  Environmental  Protection  and  Natural
Resources ("Semarnat"). As part of its enforcement powers, Semarnat is empowered
to bring  administrative and criminal  proceedings and impose economic sanctions
against  companies  that violate  environmental  laws,  and  temporarily or even
permanently  close  non-



complying  facilities.  Under the  Ecological  Law, the Mexican  government  has
implemented  a  program  to  protect  the  environment  by  promulgating   rules
concerning water, land, air and noise pollution,  and hazardous substances.  TFM
is  also  subject  to  the  laws  of  various  jurisdictions  and  international
conferences with respect to the discharge of materials into the environment.  We
cannot  predict the effect,  if any,  that the  adoption of  additional  or more
stringent  environmental  laws and  regulations  would have on TFM's  results of
operations, cash flows or financial condition.

     TFM's  railroad  operations are subject to the provisions of the Ecological
Law. The regulations issued under the Ecological Law and technical environmental
requirements issued by the Semarnat have promulgated  standards for, among other
things, water discharge,  water supply,  emissions,  noise pollution,  hazardous
substances and transportation and handling of hazardous and solid waste.

     In  addition,   TFM's   ownership  of  Mexrail  may  also  create   certain
environmental  liabilities  with respect to U.S.  environmental  laws.  The U.S.
Comprehensive  Environmental Response,  Compensation and Liability Act ("CERCLA"
or  "Superfund")  and  similar  state  laws  (known as  Superfund  laws)  impose
liability for the cost of remedial or removal actions, natural resources damages
and  related  costs at  certain  sites  identified  as  posing  a threat  to the
environment or public health.  CERCLA imposes strict liability on the owners and
operators of facilities in which hazardous waste and other hazardous  substances
are  deposited or from which they are released or are likely to be released into
the  environment.  Liability  may be  imposed,  without  regard  to fault or the
legality of the activity,  on certain classes of persons,  including the current
and certain  prior owners or  operators of a site and persons that  arranged for
the disposal or treatment  of  hazardous  substances.  Liability is imposed on a
joint and several basis. In addition,  other  potentially  responsible  parties,
adjacent landowners or other third parties may initiate cost recovery actions or
toxic tort litigation against sites subject to CERCLA or similar state laws.

FACTORS RELATING TO MEXICO

MEXICO IS AN EMERGING MARKET  ECONOMY,  WITH ATTENDANT RISKS TO TFM'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.

     The  Mexican   government  has   exercised,   and  continues  to  exercise,
significant   influence   over  the  Mexican   economy.   Accordingly,   Mexican
governmental  actions  concerning the economy and state-owned  enterprises could
have a significant  impact on Mexican  private sector entities in general and on
TFM in  particular,  as well as on market  conditions,  prices  and  returns  on
Mexican  securities,  including  TFM's  outstanding  notes and  debentures.  The
national  elections  held  on  July  2,  2000  ended  71  years  of  rule by the
Institutional Revolutionary Party ("PRI") with the election of President Vicente
Fox Quesada, a member of the National Action Party ("PAN"),  and resulted in the
increased  representation  of opposition  parties in the Mexican Congress and in
mayoral  and  gubernatorial  positions.  Although  there  have  not yet been any
material adverse repercussions resulting from this political change,  multiparty
rule is still relatively new in Mexico and could result in economic or political
conditions  that could  materially  and adversely  affect TFM's  operations.  We
cannot  predict the impact that this new  political  landscape  will have on the
Mexican economy.  Furthermore,  TFM's financial condition, results of operations
and prospects and,  consequently,  the market price for TFM's  outstanding notes
and debentures,  may be affected by currency fluctuations,  inflation,  interest
rates, regulation,  taxation, social instability and other political, social and
economic developments in or affecting Mexico.

     The Mexican  economy in the past has suffered  balance of payment  deficits
and  shortages in foreign  exchange  reserves.  There are  currently no exchange
controls in Mexico. However, Mexico has imposed foreign exchange controls in the
past. Pursuant to the provisions of NAFTA, if Mexico experiences serious balance
of payment  difficulties or the threat thereof in the future,  Mexico would have
the right to impose foreign  exchange  controls on  investments  made in Mexico,
including those made by U.S. and Canadian  investors.  Any restrictive  exchange
control  policy could  adversely  affect TFM's  ability to obtain  dollars or to
convert  pesos into  dollars  for  purposes  of making  interest  and  principal
payments due



on its indebtedness, to the extent that it may have to effect those conversions.
This  could have a  material  adverse  effect on TFM's  business  and  financial
condition.

     Securities of companies in emerging market  countries tend to be influenced
by economic and market conditions in other emerging market  countries.  Emerging
market   countries,   including   Argentina  and  Brazil,   have  recently  been
experiencing significant economic downturns and market volatility.  These events
have had an adverse effect on the economic  conditions and securities markets of
emerging market countries, including Mexico.

ANY   DEVALUATION   OF  THE  PESO   WOULD   CAUSE   THE   PESO   COST  OF  TFM'S
DOLLAR-DENOMINATED  DEBT TO INCREASE,  ADVERSELY  AFFECTING  ITS ABILITY TO MAKE
PAYMENTS ON ITS INDEBTEDNESS.

     After a five-year period of controlled devaluation of the peso, on December
19, 1994, the value of the peso dropped sharply as a result of pressure  against
the  currency.  Although the peso had been  appreciating  relative to the dollar
over the past few years,  the peso  depreciated 8.2% against the dollar in 2003.
Any  additional  devaluation  in the peso  would  cause  the peso  cost of TFM's
dollar-denominated  debt to increase.  In  addition,  currency  instability  may
affect the  balance of trade  between the United  States and Mexico.

MEXICO  MAY  EXPERIENCE  HIGH  LEVELS OF  INFLATION  IN THE FUTURE  WHICH  COULD
ADVERSELY AFFECT TFM'S RESULTS OF OPERATIONS.

     Mexico  has a history  of high  levels  of  inflation,  and may  experience
inflation  in the  future.  During  most of the  1980s and  during  the mid- and
late-1990s,  Mexico experienced periods of high levels of inflation.  The annual
rates of  inflation  for the last five  years,  as  measured  by  changes in the
National Consumer Price Index, as provided by Banco de Mexico, were:

                   1997                                       15.72  %
                   1998                                       18.61  %
                   1999                                       12.32  %
                   2000                                         8.96 %
                   2001                                         4.40 %
                   2002                                         5.70 %
                   2003                                         3.98 %

     In 2003, the Mexican inflation rate hit its lowest levels in over 30 years.
We cannot give any assurance  that the Mexican  inflation  rate will continue to
decrease or maintain  its current  level for any  significant  period of time. A
substantial  increase  in the  Mexican  inflation  rate would have the effect of
increasing  some of TFM's  costs,  which could  adversely  affect its results of
operations and financial condition. High levels of inflation may also affect the
balance of trade  between  Mexico and the United  States,  and other  countries,
which could adversely affect TFM's results of operations.



                                 USE OF PROCEEDS

     We will not  receive  any of the  proceeds  from  the sale of the  Series C
Preferred Stock or the common stock contemplated by this prospectus. Please read
"Selling  Securityholders" for a list of the persons receiving proceeds from the
sale of the Series C Preferred Stock or the underlying common stock.

                                    BUSINESS

     We, along with our subsidiaries and affiliates,  own and operate a uniquely
positioned  North  American  rail network  strategically  focused on the growing
north/south freight corridor that connects key commercial and industrial markets
in the  central  United  States  with major  industrial  cities in  Mexico.  Our
principal  subsidiary,  KCSR, which was founded in 1887, is one of seven Class I
railroads in the United States  (railroads with annual revenues of at least $272
million,  as indexed  for  inflation).  KCSR  serves a  ten-state  region in the
midwest and southern parts of the United States and has the shortest north/south
rail route between Kansas City, Missouri and several key ports along the Gulf of
Mexico in Louisiana, Mississippi and Texas.

     Our rail network also  includes an equity  investment in Grupo TFM, a 46.6%
owned unconsolidated affiliate, which owns 80% of the stock of TFM. TFM operates
a strategically  significant  corridor between Mexico and the United States, and
has as its core route a key portion of the shortest, most direct rail passageway
between  Mexico City and Laredo,  Texas.  TFM serves most of Mexico's  principal
industrial  cities and three of its major shipping  ports.  TFM's rail lines are
the only ones which serve Nuevo Laredo,  the largest rail freight exchange point
between the United States and Mexico.

     TFM owns 49% of Mexrail.  The remaining 51% of Mexrail is owned by KCS, but
it is currently  under the control of a trustee  pending STB  approval.  Mexrail
owns 100% of  Tex-Mex.  Tex-Mex  operates a 157-mile  rail line  extending  from
Laredo to the port city of Corpus Christi,  Texas and connects the operations of
KCSR with TFM.  Tex-Mex connects with TFM at Laredo and connects to KCSR through
trackage rights at Beaumont, Texas. TFM, through its concession with the Mexican
government,  has the right to  control  and  operate  the  southern  half of the
rail-bridge  at Laredo,  which  spans the Rio Grande  River  between  the United
States and Mexico.  Mexrail  owns the northern  half of the bridge.  Laredo is a
principal  international  gateway  through  which  more than 50% of all rail and
truck traffic between the United States and Mexico crosses the border.

     Together,  our rail network (KCSR, Tex-Mex (subject to STB approval of KCS'
petition to exercise common control over KCSR,  Gateway Eastern and Tex-Mex) and
an equitable  interest in TFM) comprises  approximately  6,000 miles of main and
branch lines extending from the midwest portions of the United States south into
Mexico. Additionally, through a strategic alliance with CN/IC, we have access to
a contiguous rail network of approximately 25,000 miles of main and branch lines
connecting  Canada,  the United States and Mexico.  The CN/IC alliance  connects
Canadian markets with major midwestern and southern markets in the United States
as well as with major markets in Mexico through KCSR's  connections with Tex-Mex
and TFM.  Management believes that, as a result of the strategic position of our
rail network,  we are poised to continue to benefit from the growing north/south
trade between the United States, Mexico and Canada promoted by NAFTA.

     KCS's rail network is further  expanded through  marketing  agreements with
Norfolk  Southern,  BNSF and the IC&E (formerly I&M Rail Link,  LLC).  Marketing
agreements with Norfolk Southern allow the Company to capitalize on its Meridian
Speedway  to gain  incremental  traffic  volume  between the  southeast  and the
southwest.   The   marketing   alliance  with  BNSF  was  developed  to  promote
cooperation,  revenue  growth and extend market reach for both  railroads in the
United States and Canada. It is also designed to improve operating  efficiencies
for both KCSR and BNSF in key market areas,  as



well as provide  customers  with  expanded  service  options.  KCSR's  marketing
agreement  with IC&E  provides  access to  Minneapolis,  Minnesota  and Chicago,
Illinois  and to the  origination  of corn  and  other  grain  traffic  in Iowa,
Minnesota and Illinois.

     Our  rail  network  interconnects  with all  other  Class I  railroads  and
provides shippers with an effective alternative to other railroad routes, giving
direct  access to Mexico and the  southeastern  and  southwestern  United States
through less congested interchange hubs.

     We also own 50% of the common stock (or a 42% equity interest) of the PCRC,
which holds the concession to operate a 47-mile coast-to-coast  railroad located
adjacent to the Panama Canal. The railroad handles containers in freight service
across the isthmus.  Panarail,  a wholly owned  subsidiary  of PCRC,  operates a
commuter and tourist railway service over the lines of the Panama Canal Railway.
Passenger and freight service commenced during 2001.

     Additional  information  concerning us is included in our reports and other
documents  incorporated by reference in this prospectus.  Please read "Where You
Can Find More Information."



                         DESCRIPTION OF THE ACQUISITION

OVERVIEW

     On April 20, 2003,  KCS entered into the  Acquisition  Agreement with Grupo
TMM under which KCS ultimately would acquire control of TFM through the purchase
of shares of common stock of Grupo TFM. Grupo TFM holds an 80% economic interest
in TFM and all of the TFM Voting Stock.  The remaining 20% economic  interest in
TFM is owned by the Mexican government in the form of shares with limited voting
rights.  KCS currently owns a 46.6% economic  interest in Grupo TFM and 49.0% of
the shares of common  stock of Grupo TFM  entitled  to full  voting  rights.  On
February 27, 2002, KCS, Grupo TMM, and certain of Grupo TMM's affiliates entered
into a stock purchase  agreement with TFM to sell to TFM all of the common stock
of Mexrail.  The sale closed on March 27,  2002 and KCS  received  approximately
$31.4 million for its 49% interest in Mexrail. On May 9, 2003, KCS acquired from
TFM for $32.7  million in cash 51% of the shares of Mexrail,  which owns 100% of
Tex-Mex. KCS deposited the Mexrail shares into a voting trust pending resolution
of KCS's  application  to the STB seeking  authority to exercise  common control
over Tex-Mex and KCS's other rail companies,  KCSR and Gateway Eastern. However,
on  September  30,  2003,  in  accordance  with the terms of the Stock  Purchase
Agreement,  TFM repurchased from KCS the 51% interest in Mexrail acquired by KCS
in May  2003.  Upon  this  repurchase  by  TFM,  the  Stock  Purchase  Agreement
automatically  terminated.  The  repurchase  price was the price paid by KCS for
these  shares in May 2003.  On August 16,  2004,  pursuant to the terms of a new
Mexrail Stock Purchase Agreement of that date, KCS once again acquired from TFM,
for  approximately  $32.7  million in cash,  51% of the shares of  Mexrail.  KCS
deposited  the Mexrail  shares into a voting trust  pending  resolution of KCS's
application to the STB seeking authority to exercise common control over Tex-Mex
and KCS's other rail companies, KCSR and Gateway Eastern.

     According to the terms of the  Acquisition  Agreement  and certain  related
agreements (described in detail below), KCS would issue:

     o    18,000,000  shares of Class A  Convertible  Common Stock to Multimodal
          upon the closing of the Acquisition;

     o    at KCS's option, up to 6,400,000 shares of Class A Convertible  Common
          Stock  or  Common  Stock  in lieu of a  portion  of the  $200  million
          consideration  to be paid in cash at the  closing  of the  Acquisition
          Agreement; and

     o    up to 2,625,000  shares of  restricted  Common  Stock  pursuant to the
          Consulting Agreement.

The securities to be issued in connection with the Acquisition  represent in the
aggregate  more than 20% of the  issued  and  outstanding  shares of KCS  Common
Stock.

SUMMARY OF THE ACQUISITION AGREEMENT AND RELATED AGREEMENTS

     The  following  summary  of the terms  and  provisions  of the  Acquisition
Agreement,  First  Amendment  to  Rights  Agreement,   Stockholders'  Agreement,
Registration  Rights  Agreement,  Consulting  Agreement,  Marketing and Services
Agreement,  Agreement  of  Assignment  and  Assumption  of  Rights,  Duties  and
Obligations  and Stock  Purchase  Agreement  is  qualified  in its  entirety  by
reference  to  each of  those  documents,  each of  which  are  exhibits  to the
registration  statement of which this  prospectus  forms a part. You should read
these agreements  carefully for more details regarding the provisions  described
below and for other provisions that may be important to you.

THE ACQUISITION AGREEMENT



     Upon the terms and subject to the conditions of the Acquisition  Agreement,
dated April 20, 2003,  by and among KCS,  KARA Sub,  Grupo TMM, TMM Holdings and
Multimodal, KCS would acquire all of the interest of Multimodal in Grupo TFM for
consideration to Multimodal of $200 million and 18 million shares of KCS Class A
Convertible  Common Stock. The Acquisition would be accomplished in three steps,
the Stock  Purchase,  the Subsidiary  Investment and the Merger  described below
(and  together  comprising  the  Acquisition),  all occurring  sequentially  and
virtually simultaneously as follows:

     (1) THE STOCK  PURCHASE.  KARA Sub would purchase from Multimodal all Grupo
     TFM shares held by  Multimodal,  consisting  of 25,500 shares of Series "A"
     fixed  capital  stock of Grupo  TFM and  3,842,901  shares  of  Series  "A"
     variable  capital stock of Grupo TFM. The purchase price to be paid by KARA
     Sub to  Multimodal  at the closing for the purchase of the Grupo TFM shares
     is: (i) $200  million  (up to $80  million  of which may be paid,  at KCS's
     option,  in shares of KCS Common  Stock or KCS Class A  Convertible  Common
     Stock);  and  (ii)  a  subordinated  promissory  note  of  KARA  Sub in the
     principal amount of $25 million.  KCS would provide KARA Sub with the funds
     and securities to make these payments.

     (2) THE SUBSIDIARY  INVESTMENT.  Immediately  following the Stock Purchase,
     Multimodal would purchase 10% of the issued and outstanding  shares of KARA
     Sub common stock, in  consideration  for delivery by Multimodal to KARA Sub
     of the KARA Sub subordinated promissory note.

     (3) THE MERGER.  KARA Sub would then be merged into KCS in accordance  with
     the Delaware  Corporation  Law. The Merger would be consummated by filing a
     certificate  of merger with the Delaware  Secretary of State in  accordance
     with the  Delaware  Corporation  Law. At such time,  the shares of KARA Sub
     held by  Multimodal  would be converted  into and  exchanged for 18 million
     shares of KCS Class A Convertible  Common Stock. As a result of the Merger,
     the  separate  corporate  existence  of KARA Sub would  cease and KCS would
     continue  as  the  surviving  corporation.   Subject  to  approval  by  KCS
     stockholders,  upon the date and time of the filing of the  Certificate  of
     Merger,  KCS would change its name to "NAFTA Rail" and the capital stock of
     KCS (including the KCS common stock,  the $25 par value preferred stock and
     the Series C Preferred  Stock) would continue to be issued and  outstanding
     as the capital  stock of NAFTA Rail  without  further  action by any holder
     thereof.  Subject  to  listing  approval  by the New  York  Stock  Exchange
     ("NYSE"),  the NAFTA Rail Common  Stock and $25 par value  preferred  stock
     would trade on the NYSE.

     The closing of the Acquisition is dependent upon the closing of each of the
Stock Purchase,  the Subsidiary Investment and the Merger. If the Acquisition is
consummated,  two new directors, Jose Serrano Segovia, Chairman of Grupo TMM and
Javier Segovia Serrano,  President of Grupo TMM, would be appointed to the NAFTA
Rail Board of Directors to serve until the first Annual Meeting of  Stockholders
of NAFTA Rail following  consummation of the Acquisition.  At that meeting, Jose
Serrano  Segovia  would be  nominated  for  election  to the class of  directors
serving  until the annual  meeting of  stockholders  in 2006 and Javier  Segovia
Serrano would be nominated for election to the class of directors  serving until
the annual meeting of stockholders in 2005.

     KCS and Grupo  TMM have  been in a dispute  over  Grupo  TMM's  attempt  to
terminate the Acquisition Agreement.  For a discussion of recent developments in
connection with the Acquisition, see "--Recent Developments" below.

CONDITIONS TO OBLIGATIONS TO COMPLETE THE ACQUISITION

     The  obligations  of KCS and  Grupo TMM to  complete  the  Acquisition  are
subject to a number of conditions, including, among others:



     o    KCS must have obtained  approval of KCS stockholders of the amendments
          to KCS's  restated  certificate of  incorporation  and the issuance of
          Class A Convertible Common Stock and common stock;

     o    All consents, waivers,  authorizations and approvals required from all
          governmental  authorities to consummate the Acquisition must have been
          obtained  and  remain   effective  as  of  the  closing  date  of  the
          Acquisition Agreement;

     o    The common  stock to be issued must have been  approved for listing by
          the NYSE;

     o    Each of the  Ancillary  Agreements  must have been duly  executed  and
          delivered  by or on behalf of KCS and each of Grupo TMM,  TMM Holdings
          and Multimodal, as the case may be;

     o    Grupo  TMM  must  have  received  consents  from  the  holders  of its
          outstanding Notes due 2003 and Notes due 2006; and

     o    There must not be any  insolvency  or  bankruptcy  proceeding  pending
          against Multimodal, TMM Holdings or TFM that has been pending for more
          than 60 days,  and certain  material  adverse  effects  shall not have
          occurred.

TERMINATION

     The  Acquisition  Agreement may be  terminated  prior to the closing of the
Acquisition as follows:

     o    By written consent of KCS and Grupo TMM;

     o    By  KCS  or  Grupo  TMM if any  order  of any  governmental  authority
          permanently prohibiting the consummation of the Acquisition has become
          final  and   non-appealable   or  if  any  of  the  approvals  of  any
          governmental authority to perform the transactions contemplated by the
          Acquisition  Agreement  imposes  any  condition  or  requirement,  the
          satisfaction of which is reasonably  likely to have a material adverse
          effect on either KCS or Grupo TMM;

     o    By  KCS  if  any  conditions  to the  obligations  of  KCS  under  the
          Acquisition  Agreement  becomes  incapable of  fulfillment  through no
          fault of KCS and is not waived by KCS;

     o    By  Grupo  TMM if any  condition  to the  obligations  of  Grupo  TMM,
          Multimodal and TMM Holdings  (collectively,  the "Sellers")  under the
          Acquisition  Agreement  becomes  incapable of  fulfillment  through no
          fault of Sellers and is not waived by Grupo TMM;

     o    By KCS if Grupo TMM has  experienced a change of control,  or by Grupo
          TMM if KCS has experienced a change of control; and

     o    By KCS or Grupo TMM if the closing of the  Acquisition  does not occur
          on or prior to June  15,  2005  (the  "Termination  Date");  provided,
          however,  that the  Termination  Date may be extended by KCS and Grupo
          TMM by written agreement.

     A termination  fee of $18 million is payable in the event of termination of
the Acquisition  Agreement due to (i) a change of control of either KCS or Grupo
TMM, in which case the party  experiencing  the change of control  shall pay the
termination fee to the other party,  or (ii) the failure of the  stockholders of
KCS or of Grupo TMM to approve the  Acquisition if at or prior to the meeting of
such stockholders to approve the Acquisition,  the Board of Directors of KCS, in
the case of the KCS  stockholders'  meeting,  or the Board of Directors of Grupo
TMM, in the case of the Grupo TMM



stockholders'  meeting,  has  failed  to  recommend  or has  withdrawn  and  not
reinstated  its  recommendation  of  the  Acquisition,   then  the  party  whose
stockholders  shall not have approved the Acquisition  shall pay the termination
fee to the other party.


REQUIRED REGULATORY AND OTHER CONSENTS, APPROVALS AND FILINGS

     Certain regulatory approvals and filings and other consents are required in
connection with the closing of the Acquisition. These include, among others:

     o    Prior approval of the Mexican National Foreign Investments  Commission
          of control of Grupo TFM by a non-Mexican entity;

     o    Clearance  by the Mexican  Antitrust  Commission  of  anti-competitive
          concerns;

     o    Notice to the Mexican Ministry of Communications and Transportation;

     o    Filing with NYSE for listing of common stock issuable upon  conversion
          of Class A Convertible Common Stock;

     o    Grupo TMM note holder consents;

     o    Notice filing under the Hart-Scott-Rodino  Antitrust  Improvements Act
          of 1976 ("HSR")  filing and  clearance of  investment by Multimodal in
          KCS; and

     o    KCS stockholder  approval of amendments to its restated certificate of
          incorporation and issuance of KCS equity.

KCS has  obtained an  amendment  to its Amended and  Restated  Credit  Agreement
allowing:

     o    KCS (NAFTA Rail) investment in further equity interests of Grupo TFM;

     o    KCS (NAFTA Rail)  investment in equity  interests  representing 51% of
          Mexrail's issued and outstanding capital stock;

     o    Use of KCS cash to acquire Mexrail.

     For a discussion  of the filings made and the status of such  filings,  see
"--Regulatory Matters" below.

VAT CONTINGENCY PAYMENT

     The VAT Claim,  which has been  pending in the Mexican  courts  since 1997,
arose out of the Mexican  Treasury's  delivery of a VAT credit  certificate to a
Mexican  governmental  agency  rather than to TFM. On September  25,  2002,  the
Mexican  appellate  court  issued a  judgment  in favor of TFM on the VAT Claim,
vacating a prior  judgment of the Mexican Fiscal Court and remanding the case to
the Fiscal Court with specific  instructions to enter a new decision  consistent
with the guidance provided by the Mexican appellate court's ruling.  The Mexican
appellate court's ruling required the fiscal authorities to issue the VAT credit
certificate  only in the name of TFM. On December 6, 2002,  the upper chamber of
the Fiscal  Court  issued a ruling  denying  TFM's right to receive a VAT refund
from the Mexican  Federal  Government.  On January 8, 2003,  TFM was  officially
notified of the new judgment of the Fiscal Court and on January 29, 2003,  filed
the appropriate  appeal.  On June 11, 2003, the Mexican appellate court issued a
judgment in favor of TFM against the ruling of the Fiscal  Court.  The  judgment
granted TFM



constitutional  protection  against  the  ruling of the Fiscal  Court  issued on
December 6, 2002  denying  TFM's right to receive the VAT refund.  The  judgment
ordered the Fiscal Court to vacate its December 6, 2002  resolution and to issue
a new  resolution  following  the  guidelines of the Mexican  appellate  court's
judgment.  The Mexican appellate court found that the VAT refund certificate had
not been delivered to TFM, and confirmed the Fiscal Court's  determination  that
TFM has the right to receive the VAT refund  certificate.  The Mexican appellate
court's ruling states that the Treasury's  decision  denying delivery of the VAT
refund  certificate  to TFM  violated  the law,  and it  instructs  that the VAT
reimbursement  certificate be issued to TFM on the terms  established by Article
22 of the Federal Fiscal Code in effect at that time. As a result of the Mexican
appellate court's ruling,  the case was remanded to the Mexican Fiscal Court. On
August 14, 2003,  Grupo TMM announced  that in a public  session held August 13,
the Mexican Fiscal Court issued a resolution  regarding TFM's VAT Claim vacating
its previous  resolution of December 6, 2002, and, in strict compliance with the
ruling issued on June 11, 2003 by the Mexican appellate court, resolved that TFM
has proved its case, and that a "ficta denial"  occurred,  declaring such denial
null and void as ordered by the  Mexican  appellate  court.  On October 3, 2003,
Grupo TMM announced  that the Tax Attorney of the Mexican  Government  had filed
for a review of the ruling.

     On January 20, 2004, KCS announced that TFM received,  on January 19, 2004,
a  Special  Certificate  from the  Mexican  Federal  Treasury  in the  amount of
2,111,111,790 pesos. The Special Certificate has the same face amount as the VAT
refund claimed by TFM. On January 21, 2004, KCS announced that TFM was served on
January,  20,  2004  with  an  official  letter  notifying  TFM of  the  Mexican
Government's findings and conclusions arising from its Tax Audit Summary. In the
Tax Audit Summary,  the Mexican  Government  notified TFM of its conclusion that
the documentation  provided by TFM in support of the value added tax payment and
depreciation  of the TFM concession  title and the assets reported on TFM's 1997
tax return do not comply with the  formalities  required by the  applicable  tax
legislation.  The Tax Audit Summary also seized the Special Certificate received
by TFM on January 19, 2004 from the  Mexican  Federal  Treasury in the amount of
2,111,111,790  pesos pending resolution of the audit, as a potential asset to be
used to satisfy any tax  obligations  owed by TFM as a result of the audit.  TFM
has  advised  that it has,  within the time  allowed  by the Tax Audit  Summary,
contested the  conclusions  of the Mexican tax  authorities,  and it has filed a
constitutional  appeal  against  the Tax Audit  Summary,  alleging  the  process
followed by the Mexican government violated TFM's constitutional rights. TFM has
initiated and continues to pursue appropriate legal proceedings  seeking to have
the amount of the Special Certificate adjusted to reflect interest and penalties
in accordance with Mexican law.

     Provided  the  Acquisition  has  occurred  and  neither  KCS nor any of its
subsidiaries has purchased the TFM "Class III" shares  (representing  20% of the
capital stock of TFM) currently held by the Mexican  government upon exercise by
the Mexican  government of its Put to compel  purchase of the shares of TFM held
by it,  as  compensation  for  Grupo  TMM's  services  in  obtaining  the  final
settlement or resolution of TFM's VAT Claim against the Mexican Treasury for the
refund of a VAT payment in the original principal amount of 2,111,111,790 pesos,
KCS will make or cause TFM to make the VAT  Contingency  Payment to Grupo TMM as
set forth below,  following the date of final  resolution of the VAT Claim,  and
the receipt by TFM or its  designee of shares or cash  compensation  received by
TFM or its  designee  from the  Mexican  government  on the VAT Claim  (the "VAT
Payment").  The VAT Payment  must  consist of at least (i) all of the TFM "Class
III" shares  currently held by the Mexican  government or (ii) a cash payment or
other  property  acceptable  to the  parties  which has a fair value equal to or
greater than the Put Purchase Price (as defined in the Acquisition Agreement) as
calculated on the date the VAT Payment is received.  In such event, KCS will, at
its option,  pay or cause TFM to pay to Grupo TMM (iii) $100  million  within 90
days  thereafter or (iv) $50 million within 90 days thereafter and an additional
$55  million  within 365 days  thereafter.  If the VAT  Payment  exceeds the Put
Purchase  Price as calculated on the date the VAT Payment is received,  KCS will
pay or cause TFM to pay to Grupo TMM  within 90 days after the VAT  Payment  and
final  resolution of the VAT Claim the first $25 million  received above the Put
Purchase Price, and 15% of any additional amount received above the Put Purchase
Price  beyond  the  first  $25  million,  not to  exceed  $50  million.  The VAT
Contingency Payment shall be made after reducing the



value of the VAT Payment by the amount of all expenses  incurred by or on behalf
of TFM in  effecting  final  resolution  of the VAT Claim and receipt of the VAT
Payment.



THIRD PARTY MATTERS

     Until the filing of the  Certificate of Merger for the Merger,  neither KCS
nor Sellers can seek or entertain  other  offers with  respect to  acquisitions,
mergers or business  combinations of KCS or KCSR, and TMM Holdings,  Multimodal,
Grupo TFM or any of their respective  subsidiaries,  respectively.  In addition,
Grupo  TMM will not enter  into any  agreement  concerning  any  acquisition  or
purchase of a controlling equity interest in Grupo TMM by any competitor.  These
limitations  are  subject to the  fiduciary  duties of the  respective  Board of
Directors of KCS and Grupo TMM.

INDEMNIFICATION

     The representations and warranties of the Sellers and KCS survive for three
to five years.  The Sellers have jointly and severally  agreed to indemnify KCS,
the surviving  corporation and each of their subsidiaries,  and their respective
officers,   directors,    employees,   members,    stockholders,    agents   and
representatives  harmless  from and against all  losses,  damages,  liabilities,
claims, demands, obligations,  deficiencies,  payments, judgments,  settlements,
costs and expenses of any nature whatsoever ("Losses") resulting from or arising
out of any inaccuracy or misrepresentation  in, or breach of, any representation
or warranty of Sellers in  connection  with the  Acquisition  Agreement,  or any
breach or  nonfulfillment  of any covenant or agreement of any of the Sellers in
connection with the  Acquisition  Agreement,  or any claims,  causes of actions,
rights asserted or demands made by any third parties arising from or relating to
any  of  the  foregoing.  The  Sellers'  indemnification   obligations  for  any
inaccuracy or misrepresentation in, or breach of, any representation or warranty
regarding Grupo TFM or its subsidiaries is limited to 51% of Losses  aggregating
$5 million or more.  This limitation is not applicable to any Losses arising out
of or  resulting  from any action or  omission  on the part of any Seller or its
affiliate that involved a crime, fraud, willful misconduct or gross negligence.

     KCS has agreed to indemnify  the Sellers,  each of their  subsidiaries  and
each of their respective officers, directors,  employees, members, stockholders,
agents and representatives from and against all Losses resulting from or arising
out of any inaccuracy or misrepresentation  in, or breach of, any representation
or warranty of KCS in connection with the Acquisition  Agreement,  or any breach
or  nonfulfillment  of any covenant of KCS in  connection  with the  Acquisition
Agreement,  or any claims, causes of actions, rights asserted or demands made by
any third  parties  arising  from or  relating  to any of the  foregoing.  KCS's
indemnification  obligations  are limited to Losses  aggregating  $10 million or
more.  This  limitation  is not  applicable  to  any  Losses  arising  out of or
resulting  from any action or omission on the part of KCS or its affiliate  that
involved a crime, fraud, willful misconduct or gross negligence.

     Additionally,  KCS's Restated Certificate of Incorporation and Bylaws would
be amended to reflect the agreements contained in the Acquisition  Agreement and
certain  Ancillary  Agreements.  A number of Ancillary  Agreements have been, or
will be prior to the  closing  of the  Acquisition,  entered  into to carry  out
certain  objectives of the Acquisition  Agreement and the  Acquisition.  Each of
these Ancillary Agreements is described below.

FIRST AMENDMENT TO RIGHTS AGREEMENT

     In connection with the Acquisition, KCS and Harris Trust & Savings Bank, as
Rights Agent would enter into a First Amendment to Rights Agreement (the "Rights
Agreement")  dated as of  September  19,  1995.  The Rights  Agreement  would be
amended to prevent any TMM Holder from



becoming an Acquiring Person (as defined in the Rights  Agreement),  which would
otherwise  cause a Triggering  Event (as defined in the Rights  Agreement)  as a
result of the Acquisition.  Accordingly, the First Amendment to Rights Agreement
would amend Section 1(a), the definition of Acquiring Person, to provide that no
person or  affiliate  of such person  shall  become an  "Acquiring  Person" as a
result of the  acquisition  of  beneficial  ownership  of (i)  shares of Class A
Convertible  Common  Stock,  (ii) shares of Common Stock issued or issuable upon
conversion of the Class A Convertible  Common Stock,  (iii) any shares of Common
Stock or Class A Convertible  Common Stock  acquired  pursuant to Section 1.2 of
the  Acquisition  Agreement,  (iv)  any  shares  of  Common  Stock  or  Class  A
Convertible Common Stock acquired pursuant to the Consulting Agreement,  and (v)
shares  of  Common  Stock  or  Class A  Convertible  Common  Stock  acquired  in
compliance  with  the  Stockholders'  Agreement,   including  upon  exercise  of
pre-emptive rights as provided therein.

     The definition of  "Substantial  Block" found at Section 1(z) of the Rights
Agreement would also be amended to lower the threshold beneficial ownership that
constitutes  a  "Triggering  Event"  from 20% to 15% (and from 15% to 13% in the
event the  Acquiring  Person is  declared  by the  Board of  Directors  to be an
Adverse Person (as defined in the Rights Agreement)).

     In  order to  conform  to the  foregoing  amendments,  subsection  (iii) of
Section 3(e) regarding  Restrictions on transfer of Rights to Acquiring  Persons
would be deleted and amended to provide  that no Right (as defined in the Rights
Agreement)  shall be transferable  or transferred  other than as permitted under
Section 1(a) of the Rights Agreement, as amended, to any person who, as a result
of such transfer, would beneficially own 15% or more of the Rights.

     Finally, Section 7(e) of the Rights Agreement would be amended to correct a
clerical error.

STOCKHOLDERS' AGREEMENT

     KCS,  Grupo TMM, TMM Holdings,  Multimodal  and the Principal  Stockholders
plan to enter into a Stockholders'  Agreement,  which would set forth the rights
and duties of the  parties  thereto  arising out or and in  connection  with the
Acquisition Agreement and the transactions contemplated thereby.

STANDSTILL PROVISIONS

     For a period of seven years from the date of the  Stockholders'  Agreement,
Grupo TMM,  TMM  Holdings,  Multimodal  and each of the  Principal  Stockholders
agrees  that,  unless  specifically  invited in writing to do so by the Board of
Directors, such Person (as defined in the Stockholders' Agreement) will not, and
will cause each of its affiliates not to, among other things:

     o    acquire or agree to acquire  aggregate  beneficial  ownership  of more
          than  20%  of  the  Total  Voting  Power  of KCS  (as  defined  in the
          Stockholders' Agreement);

     o    initiate  or  propose  any  matter  for   submission   to  a  vote  of
          stockholders  of KCS or  participate  in the  making  of,  or  solicit
          stockholders for the approval of, any stockholder proposal;

     o    grant any proxy with  respect to any Voting  Securities  to any Person
          not approved in writing by KCS;

     o    except through its  representatives  on the Board of Directors (or any
          committee  thereof) of KCS,  otherwise  act,  alone or in concert with
          others,  to seek to  control or  influence  the  management,  Board of
          Directors or policies of KCS.



     The  standstill  provisions  terminate  upon the earliest to occur of (i) a
Change of Control of KCS (as defined in the  Stockholders'  Agreement),  or (ii)
the first date the TMM Holders  beneficially  own in the aggregate less than 15%
of the outstanding Voting Securities of KCS for at least 30 consecutive days.



TRANSFER RESTRICTIONS

     The TMM  Holders  may not  sell,  assign,  transfer,  pledge,  hypothecate,
otherwise  subject to any lien,  grant an option  with  respect to or  otherwise
dispose of any  interest in (or enter into an agreement  or  understanding  with
respect to the foregoing) any Voting  Securities  beneficially  owned by them (a
"Disposition")  except  in  accordance  with  the  terms  of  the  Stockholders'
Agreement.  For a  period  of five  years  from  the  date of the  Stockholders'
Agreement, the TMM Holders may not effect a Disposition:

     o    to a Competitor (as defined in the Stockholders' Agreement);

     o    to an Affiliate unless such Affiliate agrees in writing to be bound by
          the terms of the  Stockholders'  Agreement  and provided  that the TMM
          Holders  shall  remain  responsible,  jointly and  severally,  for any
          breaches of the Stockholders' Agreement by such Affiliate;

     o    that in the aggregate  represents 5% or more of the outstanding Voting
          Securities  to any Person  other than an 13G Filer (as  defined in the
          Stockholders' Agreement),  and no disposition shall be made to any 13G
          Filer  unless  such 13G Filer  would  continue  to be eligible to file
          reports pursuant to Section 13G under the Exchange Act with respect to
          the Voting Securities after giving effect to the proposed  acquisition
          and KCS has  been  provided  the  right  (but not the  obligation)  to
          purchase such Voting Securities;

     o    to any Person that would,  together with such  person's  Affiliates or
          Associates  (as  defined  in the  Stockholders'  Agreement)  and after
          giving  effect  to  the   acquisition   of  such  Voting   Securities,
          beneficially  own or have the right to acquire 15% of the Total Voting
          Power; and

     o    of any  capital  stock or Voting  Securities  or control of any Person
          that, directly or indirectly,  beneficially owns any Voting Securities
          of KCS to a Competitor.

     Subject to the provisions contained in the Stockholders'  Agreement,  a TMM
Holder may pledge or  hypothecate  as  security  for any  indebtedness  or other
obligations  any or all  Voting  Securities  beneficially  owned by such  Person
provided that KCS shall have a right to purchase the pledged  Voting  Securities
upon the  occurrence  of a  Foreclosure  Event (as defined in the  Stockholders'
Agreement).

     The TMM Holders may  participate  in a tender or exchange  offer made by an
unaffiliated third party, provided the TMM Holders did not solicit the tender or
exchange offer and (i) the same  consideration  is offered to all holders of the
securities  tendered in the tender offer;  (ii) the transaction is approved by a
majority of other KCS  stockholders;  (iii) the tender or exchange  offer is not
conditioned  on financing;  and (iv) the TMM Holders do not tender,  or publicly
disclose their intention to tender,  prior to the last day before  expiration of
the offer.

     The  transfer  restrictions   contained  in  the  Stockholders'   Agreement
terminate  upon the earliest to occur of (i) a Change of Control of KCS, or (ii)
the first date the TMM Holders  beneficially  own in the aggregate less than 15%
of the outstanding Voting Securities of KCS for at least 30 consecutive days.

PRE-EMPTIVE RIGHTS



     TMM  Holders  have  the  right to  purchase  additional  shares  of Class A
Convertible Common Stock to maintain their percentage ownership in the event KCS
authorizes  the issuance or sale of any shares of Common Stock or any securities
containing  options  or rights to  acquire  shares of Common  Stock,  except for
issuances of Common Stock  (including  for this purpose,  options,  warrants and
other securities convertible into or exercisable for Common Stock) issued:

     o    to  KCS's  employees,  directors,   consultants,  agents,  independent
          contractors or other service  providers in connection  with a Plan (as
          defined in the Stockholders' Agreement) existing as of the date of the
          Stockholders'  Agreement or a Plan  approved by the Board of Directors
          and adopted by KCS after the date of the Stockholders' Agreement;

     o    upon the conversion of Class A Convertible Common Stock;

     o    upon  the  exercise  of  any   options,   warrants,   convertible   or
          exchangeable securities which are outstanding as of the date hereof;

     o    in  connection  with  the   acquisition  (by  merger,   consolidation,
          acquisition of assets or equity  interests or otherwise) of the equity
          interests or assets of another Person; or

     o    in the event KCS issues additional equity in lieu of up to $80 million
          in cash at Closing.

CORPORATE GOVERNANCE

     The  Stockholders'  Agreement  provides  for the Board of  Directors  to be
comprised  of  eleven  directors,  to be  selected  as  follows:  (i) the  chief
executive  officer of KCS and another  person  selected by him; (ii) two persons
elected by the holders of the Class A Convertible  Common Stock  (reduced to one
in the event the TMM Holders' ownership falls below 75% of the Voting Securities
initially  acquired  pursuant to the Merger and reduced to zero in the event the
TMM  Holders'  ownership  falls  below 40% of the  Voting  Securities  initially
acquired  pursuant  to  the  Merger);  and  (iii)  seven  independent  directors
designated by the chief  executive  officer of KCS. The Nominating  Committee of
the Board of Directors will consist of three Independent Directors designated by
the chief executive  officer of KCS. The Compensation  Committee will consist of
three Independent Directors designated by the chief executive officer of KCS and
one Independent Director designated by the chief executive officer of Grupo TMM.
The Executive Committee will consist of three Directors  designated by the chief
executive  officer of KCS and one  Director  designated  by the chief  executive
officer of Grupo TMM.

     Each TMM Holder shall vote all of the Voting Securities  beneficially owned
by such Person and entitled to vote in the election of  directors:  (i) in favor
of all nominees of the  Nominating  Committee;  and (ii) against any proposal to
remove any director  nominated by the  Nominating  Committee  and elected to the
Board of Directors.

     The  TMM  Holders'  rights  and  duties  under  the  corporate   governance
provisions of the Stockholders'  Agreement  terminate upon the earliest to occur
of (i) the first date the TMM Holders beneficially own in the aggregate at least
40% of the outstanding  Voting  Securities  initially  acquired  pursuant to the
Merger, or (ii) a Change of Control of Grupo TMM or any of the TMM Holders.

TERMINATION

     Subject to specific  termination  provisions contained in the Stockholders'
Agreement,  the entire Agreement (with a few exceptions) terminates when the TMM
Holders  ownership falls below 40% of the Voting Securities  initially  acquired
pursuant to the Merger,  or in the event the Class A nominees are not elected to
the KCS Board of Directors (except for good cause).



REGISTRATION RIGHTS AGREEMENT

     The Registration Rights Agreement to be entered into by KCS, Grupo TMM, TMM
Holdings,  Multimodal  and certain  principal  stockholders  of Grupo TMM,  will
provide Grupo TMM, TMM Holdings,  Multimodal,  such  principal  stockholders  of
Grupo TMM, and any Permitted  Transferee (as defined in the Registration  Rights
Agreement) who acquires shares of Class A Convertible  Common Stock or shares of
Registrable  Stock (as defined in the Registration  Rights Agreement) and agrees
to be bound by the terms and  conditions of the  Registration  Rights  Agreement
(collectively,  the "Holders") with certain  registration rights with respect to
the shares of KCS Common Stock (i) issuable  upon  conversion of the KCS Class A
Convertible  Common Stock, (ii) issued in lieu of cash at closing,  (iii) issued
pursuant to the Consulting Agreement and (iv) acquired on pre-emptive exercises.

REQUIRED AND INCIDENTAL REGISTRATIONS

     Beginning on the 180th day following the  consummation of the  Acquisition,
the  Holders  shall have the right to  request,  and KCS shall use  commercially
reasonable efforts to effect, six demand registrations.  In the event KCS issues
additional  equity in lieu of up to $80 million in cash at Closing,  the Holders
shall be entitled to one additional  shelf  registration.  Holders shall also be
entitled to unlimited incidental, or "piggy-back," registrations.  KCS can delay
filing registrations upon the occurrence of certain events, including situations
in which KCS is not eligible to use Form S-3 to effect such  registration  or in
the event that KCS furnishes to the Holders a resolution adopted by the Board of
Directors  to the  effect  that in the good  faith  judgment  of KCS it would be
seriously detrimental for a registration statement to be filed at that time.

     In the event  the  managing  underwriters  of a public  offering  furnish a
written  opinion  that the amount of  securities  to be  included in an offering
exceed the maximum amount which can be marketed without materially and adversely
affecting  such  offering,  then the Holders,  KCS and all other  holders of KCS
securities having the right to include such securities in the registration shall
be  subject to  certain  underwriting  cut-backs.  Holders  are also  subject to
certain market standoff  provisions  during the ten days prior to and up to, but
not exceeding,  90 days following the effective date of a registration statement
to the same extent that KCS or its  officers  or  directors  are subject to such
market standoff provisions.

REGISTRATION EXPENSES

     With  respect to the first four  demand  registrations  and any  incidental
registrations,   KCS  shall  pay  all  registration   expenses,   including  all
registration,  qualification and filing fees,  printing  expenses,  escrow fees,
fees and  disbursements or counsel for KCS and blue sky fees and expenses.  With
respect to demand  registrations  effected  beyond the first  four,  the Holders
whose  shares  are  included  in  the  applicable  registration  shall  pay  all
registration expenses.

CONSULTING AGREEMENT

     KCS and the consulting firm controlled by Jose Serrano Segovia ("Consulting
Firm") plan to enter into a  Consulting  Agreement,  which calls for  Consulting
Firm to provide  certain  consulting  services to the KCS Board of Directors and
Chief  Executive  Officer  relating to the Mexican portion of KCS's rail network
operations,  including  its  customers  and  suppliers,  regulatory  matters and
regarding  the Mexican  railroad  industry in general.  Jose Serrano  Segovia is
required under the terms of the Consulting  Agreement to be personally  involved
in the provision of services by the Consulting Firm. Jose Serrano Segovia is the
current  Chairman  of the Board of  Directors  of Grupo TMM and  certain  of its
subsidiaries,  including  TFM and Grupo  TFM,  and will  become a  director  and
Vice-Chairman of KCS.



TERM

     The  Consulting  Agreement has an initial term of three years  beginning on
the closing date of the Acquisition  Agreement.  KCS has the option of extending
the term of the Consulting  Agreement for an additional  year. In the event of a
Change of Control  (as defined in the  Consulting  Agreement),  Consulting  Firm
agrees to continue its  engagement  with KCS for a period equal to the longer of
(i) one year from the date of such Change of Control;  or (ii) the  remainder of
the term and KCS  agrees  to  continue  to engage  Consulting  Firm  during  the
remainder of the term.

     Notwithstanding  the initial three-year term, the Consulting  Agreement and
Consulting  Firm's  engagement shall terminate  automatically  upon the death or
disability of Jose Serrano  Segovia or  dissolution  or bankruptcy of Consulting
Firm.  Consulting  Firm may  terminate the  Consulting  Agreement at any time by
giving  at least 30 days'  advance  written  notice  to KCS or in the event of a
material  breach,  and failure to cure the same, by KCS.  Additionally,  KCS may
terminate the Consulting  Agreement and Consulting  Firm's engagement for cause,
or other  than  for  cause,  subject  to  certain  conditions  specified  in the
Consulting Agreement.

COMPENSATION

     Under the Consulting  Agreement,  KCS will pay to Consulting Firm an annual
fee of $600,000. In addition, KCS will grant to Consulting Firm 2,100,000 shares
of KCS restricted  Common Stock (the  "Consulting  Firm Stock"),  subject to the
following vesting provisions:

     o    525,000 shares shall become vested with ten days after TFM enters into
          a renegotiated  or extended  labor  agreement with the El Sindicato de
          Trabajadores Ferrocarrileros de la Republica Mexicana;

     o    250,000  shares shall become  vested on each of the first,  second and
          third anniversary dates of the Consulting Agreement;

     o    125,000  shares shall become vested in the event KCS or any subsidiary
          receives  the  Certificate  of  Devolution  of Taxes  (Certificado  de
          Devolucion  de  Impuestos)  issued  by the  Treasury  of  the  Mexican
          Federation  (Tesoreria de la  Federacion) in the term of Article 22 of
          the  Tax  Code  of  the  Mexican   Federation  (Codigo  Fiscal  de  la
          Federacion); and

     o    700,000  shares shall become vested in the event KCS or any subsidiary
          receives the shares or cash compensation  from the Mexican  government
          as a result of TFM's claim against the Mexican Treasury for the refund
          of a value  added tax  payment.  See  Section  6(i) of the  Consulting
          Agreement attached as Appendix F to the proxy statement filed June 26,
          2003  and  Section  7.13  of the  Acquisition  Agreement  attached  as
          Appendix B to such proxy statement.

As a condition to the vesting of Consulting Firm Stock on the first,  second and
third anniversary  dates,  KCS's Board of Directors shall review the compliance,
good faith  performance and existence of triggering  events that would terminate
the  Agreement.  If the  Board  determines  that  the  Consulting  Firm  has not
satisfied the requisite standard during any one-year period, the Consulting Firm
Stock subject to vesting at such one-year period shall be forfeited.

     If KCS extends the initial term of the Consulting Agreement, KCS will grant
to Consulting  Firm on the first day of the extended term an additional  525,000
shares of KCS restricted Common Stock which will vest immediately upon issuance.

TRANSFER RESTRICTIONS



     Consulting Firm may not sell, transfer, assign, pledge or otherwise dispose
of (whether with or without  consideration  and whether voluntary or involuntary
or by  operation of law) any  interest in any shares of  Consulting  Firm Stock,
except in accordance with the terms of the  Stockholders'  Agreement  (described
above).

MARKETING AND SERVICES AGREEMENT

     The  Marketing  and  Services  Agreement  to be  entered  into by Grupo TMM
(together with its subsidiaries and affiliates),  TFM and KCS (together with its
subsidiaries  and  affiliates),  provides  for the parties to enter into various
most favored  nations  provisions,  requiring,  among other  things,  (i) KCS to
provide certain  services to Grupo TMM on terms which are no less favorable than
the terms provided to third or fourth party logistics companies; (ii) that Grupo
TMM shall have the right to be the  exclusive  provider of  Road-Railer  freight
services  over TFM's rail system within  Mexico;  (iii) Grupo TMM shall have the
right,  but not the  obligation,  to operate KCS's  intermodal  terminals to the
extent  that KCS  determines  to utilize a third  party to operate  such  within
Mexico,  the terms of such operations  subject to mutual  agreement of Grupo TMM
and KCS;  and (iv) that  Grupo  TMM  shall  have the right to make a bid for the
provision of certain specified transportation related services normally provided
by Grupo TMM or its affiliates, if TFM determines to have such services provided
by  any  unaffiliated   third  party  in  Mexico  or  the  United  States.   The
relationships among KCS and Grupo TMM shall be those of independent  contractors
and  neither  KCS nor  Grupo TMM  shall be or  represent  itself to be an agent,
employee or joint venturer of the other. Neither KCS nor Grupo TMM shall have or
represent  itself to have any power or authority to act for,  bind or commit the
other party.

     The initial term of the Marketing and Services Agreement is five years from
the  Effective  Date (as  defined  in the  Acquisition  Agreement),  subject  to
automatic renewal for periods of one year unless terminated by Grupo TMM or KCS.
Notwithstanding  the  foregoing,  the  Marketing  and Services  Agreement  shall
terminate  automatically  in the event that (i) TMM  Logistics,  a subsidiary of
Grupo TMM, files any voluntary  proceeding  under any bankruptcy laws, or if TMM
Logistics has filed against it any involuntary  proceeding  under any bankruptcy
law which is not  dismissed or stayed within 30 days or (ii) a change of control
of Grupo TMM  occurs  and the  party  effecting  such  change  of  control  is a
Competitor (as defined in the Marketing and Services Agreement).

AGREEMENT OF ASSIGNMENT AND ASSUMPTION OF RIGHTS, DUTIES AND OBLIGATIONS.

     This agreement is to be entered into by and among Grupo TMM, KCS, and Grupo
TFM (a form of which is attached as Exhibit C to the Acquisition Agreement),  by
which Grupo TMM will assign and transfer to KCS, and KCS will accept and assume,
all of Grupo TMM's rights,  duties and obligations  with respect to the purchase
of the Put Shares (defined below) under the Put Agreement  described  below. KCS
shall have the right to designate  another  party to be the purchaser of the Put
Shares,  however, no such designation shall relieve KCS of its obligation to pay
the  purchase  price  for such  Put  Shares  or to  indemnify  Grupo  TMM or its
Affiliates.

     According to the terms of the original  share  purchase  agreement  for the
Northeast  Rail lines and an  Agreement,  dated  June 9, 1997,  by and among the
Federal Government of the Mexican States, Grupo TFM, Grupo TMM and KCS (the "Put
Agreement"),  the Mexican  government  had the right to sell its 20% interest in
TFM through a public offering on October 31, 2003 (or prior to October 31, 2003,
with the consent of Grupo TFM). If on October 31, 2003,  the Mexican  government
had not sold all of its capital stock in TFM, Grupo TFM was obligated  under the
Put  Agreement  following  receipt  of notice  from the  Mexican  government  to
purchase the Mexican government's 20% interest in TFM (the "Put Shares").  As of
October 31, 2003,  the Mexican  government had not sold any of its remaining 20%
interest in TFM. Prior to October 31, 2003,  Grupo TFM filed suit in the Federal
District  Court of Mexico



City seeking,  among other things, a declaratory  judgment  interpreting whether
Grupo TFM was obligated to honor its obligation under the Put Agreement,  as the
Mexican  government  had not made any  effort  to sell its 20%  interest  in TFM
through a public  offering  prior to October 31, 2003. We, along with Grupo TMM,
have been named as additional necessary parties in the suit, but we have not yet
been served with Grupo TFM's  complaint.  The Mexican  government  has  provided
Grupo TFM with notice of its  intention to sell its  interest in TFM.  Grupo TFM
responded to the Mexican government's notice, reaffirming its right and interest
in  purchasing  the Mexican  government's  remaining  interest in TFM,  but also
advising  the  Mexican  government  that it would not take any action  until its
lawsuit seeking a declaratory judgment was resolved. In the event that Grupo TFM
does not purchase the Put Shares and the Acquisition  has not been  consummated,
then Grupo TMM and KCS,  are jointly and  severally  obligated  to purchase  the
Mexican  government's  remaining  interest in TFM. Should the Mexican government
cause  Grupo TMM to purchase  any of the Put Shares  after  consummation  of the
Acquisition Agreement, KCS would be obligated to purchase such shares from Grupo
TMM.

THE STOCK PURCHASE AGREEMENT

     Pursuant to the terms and conditions of the Stock Purchase Agreement, dated
as of April 20, 2003, by and among KCS,  Grupo TMM and TFM, on May 9, 2003,  KCS
purchased  from TFM 51% of the  outstanding  shares of Mexrail,  a  wholly-owned
subsidiary of TFM, for  $32,680,000.  TFM had the right to repurchase all of the
shares of Mexrail  capital  stock  acquired by KCS at any time for the  purchase
price paid by KCS, subject to any STB orders or directions. TFM made a demand in
August  2003 to  repurchase  from KCS the shares of  Mexrail  sold to KCS in May
2003. On September 23, 2003,  the STB issued a decision  finding no need to rule
on the transfer  back to TFM of the 51% interest in Mexrail that KCS acquired on
May 9, 2003.  The effect of the STB decision  was to allow TFM to reacquire  the
shares in accordance with the Stock Purchase  Agreement.  On September 30, 2003,
TFM  repurchased  the  Mexrail  shares from KCS at the price KCS paid TFM in May
2003,  and TFM now owns 100% of Mexrail.  Under the terms of the Stock  Purchase
Agreement,  upon this  repurchase,  the Stock Purchase  Agreement  automatically
terminated.

     KCS, Grupo TMM and TFM entered into a new Stock Purchase Agreement dated as
of August 16, 2004 ("New Mexrail  Stock  Purchase  Agreement").  Pursuant to the
terms of that Agreement, KCS purchased from TFM 51% of the outstanding shares of
Mexrail,  a wholly-owned  subsidiary of TFM, for  $32,680,000,  and placed those
shares into trust  pending STB  approval to exercise  common  control over KCSR,
Gateway  Eastern  and  Tex-Mex.  The  terms of the new  Mexrail  Stock  Purchase
Agreement are  substantially  similar to the Stock Purchase  Agreement,  but TFM
does not have any right to repurchase  the Mexrail shares sold to KCS and KCS is
obligated to purchase the remaining  shares of Mexrail owned by TFM on or before
October  31,  2005.  KCS filed a Status  Report  with the STB on August 16, 2004
notifying  the STB of the purchase of 51% of the shares of Mexrail and asking it
to reinstate the Procedural Schedule that the STB had previously established and
suspended.  The  STB on  August  30,  2004  issued  a  scheduling  order  giving
interested parties until September 30, 2004 an opportunity to file comments.  In
accordance  with the  procedural  schedule,  KCS  submitted  its  replies to the
comments on October  15,  2004.  The STB must  decide the matter  within 45 days
following  the  date on which  the last  pleading  is filed in the  matter.  KCS
expects a decision on its  application  from the STB on or before  November  29,
2004.


REGULATORY MATTERS



     As  discussed  in  "--Summary  of the  Acquisition  Agreement  and  Related
Agreements--The   Acquisition  Agreement"  and  "--Summary  of  the  Acquisition
Agreement and Related  Agreements--The  Stock Purchase Agreement" above, certain
regulatory  approvals and filings are required in connection with the closing of
the Acquisition. The following actions have occurred to date:

     o    KCS's  solicitation  for  permission as a foreign  investor to control
          TFM,  through Grupo TFM, was filed with the Mexican  National  Foreign
          Investments  Commission  ("MNFIC")  on April 25,  2003.  On August 27,
          2003,  KCS  announced  that it received  notice from the MNFIC of that
          Commission's  decision to close the  proceeding  with respect to KCS's
          application to acquire control of Grupo TFM and, through Grupo TFM, of
          TFM, without  prejudice to refile in the event the dispute is resolved
          between  KCS and  Grupo TMM over  whether  the  Acquisition  Agreement
          remains  in   effect.   KCS  filed  a  renewed   application   seeking
          authorization  from the MNFIC on June 23,  2004.  In a decision  dated
          September 13, 2004, the MNFIC denied KCS' application, but invited KCS
          to  reapply  for  authorization  at  anytime.  KCS  filed  an  amended
          application  seeking  authorization  from the MNFIC on  September  17,
          2004. On October 6, 2004,  KCS announced  that it had received  notice
          from the  MNFIC  approving  its  application.  KCS must  complete  the
          transactions  described in the  Acquisition  Agreement and the Related
          Agreements  on or before  October 5, 2005,  or seek renewed  authority
          from the MNFIC. See "--Recent Developments";

     o    KCS's  Notification  with respect to the  acquisition of the Grupo TFM
          shares  from  Multimodal  was  filed  with  the  Mexican   Competition
          Commission  ("MCC") on April 21,  2003.  KCS received  formal  written
          notice that the MCC has approved the proposed  consolidation,  without
          conditions.  On September 26, 2003,  KCS  announced  this approval was
          extended for an additional 180 days. On April 5, KCS announced that on
          April 2, 2004,  the MCC granted an extension of 180 calendar days from
          the April 2, 2004 date of notice for its ruling issued on May 19, 2003
          granting  authority for the sale of Grupo TMM's  interest in Grupo TFM
          to KCS. On October 7, 2004,  KCS was  notified by the MCC that the MCC
          had  extended  KCS'  authority  to  purchase  TMM's  interest in Grupo
          Transportacion  Ferroviaria  Mexicana,  S.A. de C.V. for an additional
          180 days. MCC originally authorized the purchase in a ruling dated May
          19, 2003,  and the new ruling extends that  authorization  to April 5,
          2005.

     o    TFM  formerly   notified   the   Secretary   of   Communications   and
          Transportation of the proposed transactions on May 2, 2003;

     o    On August 6, 2004 Grupo TMM announced the successful completion of its
          exchange  offer and consent  solicitation  for its 9 1/2 percent Notes
          due 2003 and its 10 1/4  percent  Senior  Notes  due  2006.  Grupo TMM
          announced  that holders of at least 95.3% of the  aggregate  principal
          amount  of 2003  notes and 97.3  percent  of the  aggregate  principal
          amount of the 2006 notes had accepted the exchange  offer and tendered
          their  notes.  Grupo TMM  announced  at that time that it  expected to
          complete  the  exchange  of the  2003 and 2006  notes  for new  Senior
          Secured Notes due in 2007 on or about August 10, 2004.

     o    KCS filed with the STB on May 13, 2003 a Railroad Control Application,
          seeking  permission  to exercise  common  control  over KCSR,  Gateway
          Eastern and  Tex-Mex.  On June 9, 2003,  the STB issued its  decision,
          effective  June 13,  2003,  finding that the  transaction  proposed in
          KCS's  application  is a "minor  transaction"  under 49 CFR 1180.2(c),
          although KCS was required to supplement  its  application as discussed
          in  the  decision,  to  address  some  of  the  implication  of  KCS's
          acquisition  of control of TFM. KCS filed the  supplement  on June 23,
          2003, as required by the decision.  The STB also outlined a procedural
          schedule for  consideration  of KCS's  application to exercise  common
          control over KCSR, Gateway Eastern and Tex-Mex. On September 23, 2003,
          the STB  entered  an  order  asking  all  interested  parties  to file
          comments by September 30, 2003 addressing  whether "in light of recent
          developments"  the STB should



          continue with the procedural  schedule,  which calls for a decision on
          the merits to be issued by October 17, 2003.  On  September  30, 2003,
          KCS  filed  comments  with  the  STB  suggesting  that  STB  precedent
          establishes  that  the  STB  has  sufficient  jurisdiction  to rule on
          control applications even where closing on the underlying  transaction
          has been put in doubt. In the alternative,  KCS argued that the matter
          should  be  held  in  abeyance,  rather  than  dismissed,   until  the
          arbitration is completed.  On October 8, 2003, the STB issued an order
          suspending  the  procedural  schedule  pending  a  resolution  of  the
          uncertainties  that now surround  KCS's efforts to acquire  control of
          Tex-Mex,   and  requiring  KCS  to  file  status   reports   regarding
          developments in its efforts to acquire control of TFM and Tex-Mex.  In
          accordance with the STB's order,  KCS filed its first status report on
          November 3, 2003 and follow-up status reports were filed thereafter in
          accordance  with the STB's order.  KCS filed a status  report with the
          STB on August 16, 2004 notifying the STB of the purchase of 51% of the
          shares of Mexrail and asking it to reinstate the  Procedural  Schedule
          that the STB had  previously  established  and  suspended.  The STB on
          August 30, 2004 issued a scheduling  order giving  interested  parties
          until  September  30,  2004  an  opportunity  to  file  comments.   In
          accordance with the procedural schedule,  KCS submitted its replies to
          the  comments  on October  15,  2004.  The STB must  decide the matter
          within 45 days  following the date on which the last pleading is filed
          in the matter.  KCS expects a decision on its application from the STB
          on or before November 29, 2004;

     o    KCS filed its  Hart-Scott-Rodino  notification on May 19, 2003.  Grupo
          TMM filed its HSR notification on July 1, 2003. Under the HSR process,
          the United  States  Department  of Justice  ("DOJ")  has 30 days after
          notice is filed to issue a second request asking for various documents
          and information from the HSR parties. The waiting period under the HSR
          officially  expired on July 31, 2003,  with no request for  additional
          information  from the DOJ. As more than one year has passed  since the
          expiration  of the  waiting  period,  Grupo  TMM and KCS will  need to
          refile with the DOJ and restart the HSR process prior to  consummating
          the transactions contemplated by the Acquisition Agreement.

RECENT DEVELOPMENTS

     DISPUTE OVER ACQUISITION AGREEMENT

     On August  18,  2003,  Grupo TMM  announced  that at its  General  Ordinary
Shareholders  meeting  that day,  the  shareholders  did not approve the sale of
Grupo TMM's interest in Grupo TFM to KCS. Grupo TMM further  announced that as a
result of the stockholder vote, Grupo TMM's Board of Directors  intended to meet
to review Grupo TMM's  options and that Grupo TMM was  proceeding  to inform the
authorities at the Ministry of Communications and  Transportacion,  the Ministry
of  Finance,  other  relevant  authorities  and  stakeholders  at Grupo  TMM and
subsidiaries of the Grupo TMM shareholders'  decision. On August 23, 2003, Grupo
TMM sent a notice  to KCS  claiming  to  terminate  the  Acquisition  Agreement,
because  the Grupo  TMM  shareholders  had  failed to  approve  the  Acquisition
Agreement.

     On August  29,  2003,  KCS  delivered  to Grupo TMM the  Notice of  Dispute
pursuant to the  Acquisition  Agreement.  This  initiated  a 60-day  negotiation
period  between  the  parties.  The  parties  were unable to resolve the dispute
within  that  period of time.  In  addition,  on August  29,  2003,  KCS filed a
complaint in the Delaware  Chancery  Court  alleging that Grupo TMM had breached
the  Acquisition  Agreement and seeking a final order requiring Grupo TMM not to
sell Grupo TFM or take other actions outside of the ordinary course of business,
so as to preserve  the assets and  business of TFM while the parties  follow the
dispute resolution  procedures  provided for in the Acquisition  Agreement.  The
Notice of Dispute and complaint  point out that the  Acquisition  Agreement does
not provide  that a negative  shareholder  vote by Grupo TMM  shareholders  is a
basis for termination, and KCS maintains that the Acquisition Agreement is still
valid and remains in effect until December 31, 2004.



     On September 2, 2003,  KCS filed in the Delaware Court of Chancery a motion
for a preliminary  injunction to preserve the parties' positions while KCS seeks
to resolve its dispute  over Grupo TMM's  attempt to terminate  the  Acquisition
Agreement.  On September 2, 2003,  KCS filed in the Delaware Court of Chancery a
motion for a preliminary injunction to preserve the parties' positions while KCS
seeks to  resolve  its  dispute  over  Grupo  TMM's  attempt  to  terminate  the
Acquisition Agreement.

     On October 28,  2003,  Chancellor  William B.  Chandler III of the Delaware
Court of  Chancery  entered a  written  order  granting  KCS'  motion  seeking a
preliminary  injunction to preserve the parties' positions pending resolution of
the dispute between KCS and Grupo TMM over the Acquisition Agreement.

     On October 31, 2003, KCS initiated  binding  arbitration in accordance with
the terms of the Acquisition Agreement by serving an Arbitration Demand on Grupo
TMM and the American  Arbitration  Association.  In its Arbitration  Demand, KCS
seeks a  determination  that the  Acquisition  Agreement  is in full  force  and
effect, specific performance of the Acquisition Agreement, and damages for Grupo
TMM's breach of the terms of the Acquisition  Agreement and failure to negotiate
in good faith  during the 60-day  negotiation  period.  By the  agreement of the
parties, the arbitration has been bifurcated. The first stage of the arbitration
only  addressed  the  question  of  whether  Grupo  TMM's   purported   negative
shareholder  vote  gave  Grupo  TMM  the  right  to  terminate  the  Acquisition
Agreement.  On March 22,  2004,  KCS  announced  that the panel of the  American
Arbitration Association  International Center for Dispute Resolution hearing the
dispute  between  KCS and Grupo TMM issued its  interim  award on March 19, 2004
finding that the  Acquisition  Agreement  remains in force and is binding on KCS
and Grupo TMM in accordance with its terms. The arbitration panel concluded that
the rejection of the Acquisition  Agreement by Grupo TMM's  shareholders did not
authorize Grupo TMM's purported  termination of the Acquisition  Agreement.  The
second phase of the  arbitration  will decide the  remaining  issues,  including
remedies and damages.  On April 7, 2004,  KCS and Grupo TMM announced  that they
have agreed not to move immediately into the next phase of arbitration. Both KCS
and  Grupo  TMM have  reserved  the  right  to  proceed  with the next  phase of
arbitration at any time.

     On January 6, 2004, KCS announced that in a ruling by the Delaware Court of
Chancery regarding a motion to enforce injunction and hold Grupo TMM in contempt
in the dispute  between KCS and Grupo TMM over the  Acquisition  Agreement,  the
court held Grupo TMM in contempt of court for taking  action  inconsistent  with
the court's October 29, 2003 order discussed above. The court held that by Grupo
TMM causing its subsidiary Grupo TFM to revoke powers of attorney  requiring the
signature of a KCS representative for transactions in excess of $2.5 million and
in  granting  new powers of attorney to Grupo TMM  directors,  Jose  Serrano and
Mario Mohar to act on behalf of the company,  Grupo TMM violated  provisions  of
the Acquisition Agreement. The previous order of the court required Grupo TMM to
cause Grupo TFM to conduct its business in  accordance  with past  practices and
not to directly or  indirectly  amend its  organizational  documents.  The court
ordered  Grupo TMM to take the  actions  necessary  to revoke  the new powers of
attorney, to re-enact the original powers of attorney,  and to pay KCS its costs
and attorneys fees for bringing the motion for contempt.

     On  April  4,  2004,  KCS and  Grupo  TMM  agreed  to and  signed,  and the
arbitration panel approved,  a stipulation  agreement in which KCS and Grupo TMM
have agreed to discharge in good faith all of the obligations of the Acquisition
Agreement.  On September  16, 2004,  KCS and Grupo TMM  announced  that they had
agreed to extend the deadline under the Acquisition  Agreement to June 15, 2005,
to provide additional time to complete the transaction.


     REPURCHASE OF MEXRAIL SHARES BY KCS



     KCS, Grupo TMM and TFM entered into a new Stock Purchase Agreement dated as
of August 16, 2004 ("New Mexrail  Stock  Purchase  Agreement").  Pursuant to the
terms of that Agreement, KCS purchased from TFM 51% of the outstanding shares of
Mexrail,  a wholly-owned  subsidiary of TFM, for  $32,680,000,  and placed those
shares into trust  pending STB  approval to exercise  common  control over KCSR,
Gateway  Eastern  and  Tex-Mex.  The  terms of the new  Mexrail  Stock  Purchase
Agreement are  substantially  similar to the Stock Purchase  Agreement,  but TFM
does not have any right to repurchase  the Mexrail shares sold to KCS and KCS is
obligated to purchase the remaining  shares of Mexrail owned by TFM on or before
October  31,  2005.  KCS filed a Status  Report  with the STB on August 16, 2004
notifying  the STB of the purchase of 51% of the shares of Mexrail and asking it
to reinstate the Procedural Schedule that the STB had previously established and
suspended.  The  STB on  August  30,  2004  issued  a  scheduling  order  giving
interested parties until September 30, 2004 an opportunity to file comments.  In
accordance  with the  procedural  schedule,  KCS  submitted  its  replies to the
comments on October  15,  2004.  The STB must  decide the matter  within 45 days
following  the  date on which  the last  pleading  is filed in the  matter.  KCS
expects a decision on its  application  from the STB on or before  November  29,
2004.

     NOTICE OF TERMINATION OF JOINT VENTURE AGREEMENT

     In  addition,  KCS  acknowledged  receipt  from  Grupo  TMM of a notice  to
terminate a joint venture  agreement  between the parties  entered into in 1995.
Pursuant to such notice,  the joint venture agreement  terminated on December 1,
2003.



                  DESCRIPTION OF THE SERIES C PREFERRED STOCK

     The  following is a summary of certain  provisions  of the  certificate  of
designations for our 4.25% Redeemable Cumulative Convertible Perpetual Preferred
Stock,  Series C, which we refer to as the "Series C Preferred Stock." A copy of
the certificate of  designations  and the form of Series C Preferred Stock share
certificate  are  available  upon request from us at the address set forth under
"Where You Can Find More Information." The following summary of the terms of the
Series C Preferred  Stock does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the  certificate of
designations,  including the  definitions  of terms used in the  certificate  of
designations. Wherever particular provisions or defined terms of the certificate
of  designations  or form of Series C Preferred  Stock are  referred  to,  these
provisions or defined terms are  incorporated by reference in this prospectus by
reference.  We urge you to read the certificate of designations  because it, and
not this  description,  defines  your  rights  as a holder of shares of Series C
Preferred  Stock.  As used in this  section,  the terms the "KCS," "us," "we" or
"our" refer to Kansas City Southern and not any of its subsidiaries.

GENERAL

     Under our restated certificate of incorporation,  our board of directors is
authorized,  without further stockholder action, to issue up to 2,000,000 shares
of New Series Preferred Stock, par value $1.00 per share, in one or more series,
with such voting powers or without  voting powers,  and with such  designations,
preferences and relative,  participating,  optional or other special rights, and
qualifications,  limitations  or  restrictions,  as  shall  be set  forth in the
resolutions  providing therefor. We have 450,000 shares of authorized New Series
Preferred Stock which are  undesignated.  Of the 2,000,000  shares of New Series
Preferred Stock, (1) 150,000 shares are designated as New Series Preferred Stock
Series A, of which no shares are currently outstanding, (2) 1,000,000 shares are
designated  as Series B  Convertible  Preferred  Stock,  of which no shares  are
currently  outstanding and (3) 400,000 shares are designated as 4.25% Redeemable
Cumulative  Convertible  Perpetual  Preferred Stock,  Series C, of which 400,000
shares are currently  outstanding.  We also have  outstanding  242,170 shares of
Preferred Stock out of 840,000 authorized shares.

     The  holders  of the  shares  of  Series C  Preferred  Stock  will  have no
preemptive  rights or  preferential  rights to purchase or subscribe  for stock,
obligations, warrants or any other of our securities.

RANKING

     The Series C Preferred  Stock,  with  respect to  dividend  rights and upon
liquidation, winding up and dissolution, ranks:

     o    junior to all our existing and future debt obligations;

     o    junior to "senior stock," which is our Preferred Stock, and each class
          or series of our capital stock other than (a) our common stock and any
          other class or series of our capital  stock the terms of which provide
          that such class or series  will rank  junior to the Series C Preferred
          Stock and (b) any other class or series of our capital stock the terms
          of which  provide that such class or series will rank on a parity with
          the Series C Preferred Stock;

     o    on a parity with "parity stock," which is (a) our New Series Preferred
          Stock, Series A, (b) our Series B Convertible  Preferred Stock and (c)
          any other  class or series of our  capital  stock that has terms which
          provide  that  such  class or series  will  rank on a parity  with the
          Series C Preferred Stock;



     o    senior to "junior  stock," which is our common stock and each class or
          series of our  capital  stock that has terms which  provide  that such
          class or series will rank junior to the Series C Preferred Stock; and

     o    effectively junior to all of our subsidiaries' (i) existing and future
          liabilities and (ii) capital stock held by others.


The term "senior stock" includes warrants,  rights, calls or options exercisable
for or convertible into that type of stock.

DIVIDENDS

     Holders of the shares of Series C Preferred  Stock are entitled to receive,
when,  as and if  declared  by our  board of  directors,  out of  funds  legally
available for payment,  cumulative cash dividends on each  outstanding  share of
Series  C  Preferred  Stock  at the  annual  rate of  4.25%  of the  liquidation
preference  per share.  The dividend rate is initially  equivalent to $21.25 per
share  annually.  The right of holders of the shares of Series C Preferred Stock
to receive  dividend  payments is subject to the rights of any holders of shares
of senior stock and parity stock.

     Dividends  are payable  quarterly in arrears on February 15, May 15, August
15 and November 15 of each year,  beginning on August 15, 2003.  If any of those
dates  is not a  business  day,  then  dividends  will be  payable  on the  next
succeeding  business day. Dividends will accumulate from the most recent date as
to which  dividends will have been paid or, if no dividends have been paid, from
the date of original  issuance of the Series C Preferred  Stock.  Dividends  are
payable to holders of record as they appear in our stock records at the close of
business  on  February  1, May 1,  August 1 and  November 1 of each year or on a
record  date  that may be fixed by our board of  directors  and that will be not
more  than 60 days  nor  fewer  than 10 days  before  the  applicable  quarterly
dividend payment date. Dividends will be cumulative from each quarterly dividend
payment date,  whether or not we have funds legally available for the payment of
those dividends.

     Dividends  payable on the shares of Series C Preferred Stock for any period
shorter than a full quarterly  period will be computed on the basis of a 360-day
year  consisting  of twelve 30-day  months.  Dividends on the shares of Series C
Preferred Stock,  including special dividends,  if any, will be payable in cash.
Accumulated  unpaid dividends cumulate dividends at the annual rate of 4.25% and
are payable in the manner provided above.

     For so long as the Series C Preferred Stock is outstanding, (1) we will not
declare,  pay or set  apart  funds  for the  payment  of any  dividend  or other
distribution  with  respect to any junior  stock or parity stock and (2) neither
we, nor any of our subsidiaries,  will redeem, purchase or otherwise acquire for
consideration  junior stock or parity stock through a sinking fund or otherwise,
unless we have paid or set apart  funds for the payment of all  accumulated  and
unpaid  dividends,  including  special  dividends,  if any,  with respect to the
shares of the Series C Preferred  Stock and any parity  stock for all  preceding
dividend  periods.  As an  exception  to clause  (2), we will be able to redeem,
purchase or  otherwise  acquire for  consideration  parity  stock  pursuant to a
purchase  or  exchange  offer made on the same terms to all  holders of Series C
Preferred Stock and such parity stock.

     Holders of the Series C Preferred  Stock will not have any right to receive
dividends  that we may  declare  on our  common  stock.  The  right  to  receive
dividends declared on our common stock will be realized only after conversion of
such  holder's  shares of Series C  Preferred  Stock  into  shares of our common
stock.



CONVERSION RIGHTS

GENERAL

     Each share of Series C Preferred  Stock will be convertible at any time and
from  time to time,  on or after the  occurrence  of the  conversion  triggering
events  described  below  at the  option  of the  holder,  into  fully  paid and
nonassessable shares of our common stock at a conversion rate of 33.4728 shares,
subject to  adjustments  as described  under  "--Adjustments  to the  Conversion
Rate."

     A holder of shares of the Series C  Preferred  Stock may convert any or all
of those shares by surrendering  to us at our principal  office or at the office
of the transfer  agent,  as may be  designated  by our board of  directors,  the
certificate  or  certificates  for those shares of the Series C Preferred  Stock
accompanied by a written notice stating that the holder elects to convert all or
a specified  whole  number of those  shares in  accordance  with the  provisions
described  in this  prospectus  and  specifying  the name or names in which  the
holder wishes the certificate or  certificates  for shares of common stock to be
issued.  In case the  notice  specifies  a name or names  other than that of the
holder,  the notice will be accompanied by payment of all transfer taxes payable
upon the  issuance of shares of common  stock in that name or names.  Other than
those taxes,  we will pay any  documentary,  stamp or similar  issue or transfer
taxes that may be payable in respect of any  issuance  or  delivery of shares of
common  stock upon  conversion  of shares of the Series C  Preferred  Stock.  As
promptly as practicable  after the surrender of that certificate or certificates
and the  receipt of the notice  relating  to the  conversion  and payment of all
required  transfer taxes, if any, or the  demonstration to our satisfaction that
those  taxes  have been  paid,  we will  deliver  or cause to be  delivered  (a)
certificates   representing  the  number  of  validly  issued,  fully  paid  and
nonassessable  full  shares  of our  common  stock to which the  holder,  or the
holder's  transferee,  of shares of the Series C Preferred Stock being converted
will be  entitled  and (b) if less  than the full  number  of shares of Series C
Preferred  Stock  evidenced by the  surrendered  certificate or  certificates is
being  converted,  a new  certificate or  certificates,  of like tenor,  for the
number of shares evidenced by the surrendered  certificate or certificates  less
the number of shares being  converted.  This  conversion  will be deemed to have
been  made at the close of  business  on the date of giving  the  notice  and of
surrendering the certificate or certificates representing the shares of Series C
Preferred  Stock to be converted so that the rights of the holder  thereof as to
the shares being  converted will cease except for the right to receive shares of
common stock, and the person entitled to receive the shares of common stock will
be treated for all purposes as having  become the record  holder of those shares
of common stock at that time.

     In lieu of the  foregoing  procedures,  if the Series C Preferred  Stock is
held in global form, you must comply with The Depository  Trust Company  ("DTC")
procedures to convert your beneficial  interest in respect of Series C Preferred
Stock evidenced by a global share of Series C Preferred Stock.

     If a holder  of shares of Series C  Preferred  Stock  exercises  conversion
rights,  upon delivery of the shares for conversion,  those shares will cease to
cumulate  dividends as of the end of the day  immediately  preceding the date of
conversion.  Holders of shares of Series C  Preferred  Stock who  convert  their
shares into our common  stock will not be entitled  to, nor will the  conversion
rate be adjusted for, any accumulated and unpaid dividends.  Accordingly, shares
of  Series C  Preferred  Stock  surrendered  for  conversion  after the close of
business on any record date for the payment of dividends declared and before the
opening of business on the dividend  payment  date  relating to that record date
must be  accompanied  by a payment  in cash of an amount  equal to the  dividend
payable in respect of those shares for the  dividend  period in which the shares
are  converted.  A holder of shares of Series C  Preferred  Stock on a  dividend
payment  record date who converts such shares into shares of our common stock on
the corresponding dividend payment date will be entitled to receive the dividend
payable on such  shares of Series C  Preferred  Stock on such  dividend  payment
date, and the converting  holder need not include  payment of the amount of such
dividend upon surrender of shares of Series C Preferred Stock for conversion.



     Notwithstanding  the foregoing,  if shares of Series C Preferred  Stock are
converted  during the  period  between  the close of  business  on any  dividend
payment  record date and the opening of business on the  corresponding  dividend
payment  date,  and we have called  such shares of Series C Preferred  Stock for
redemption during such period or we have specified a fundamental change purchase
date during such period,  the holder who tenders such shares for conversion will
receive the dividend  payable on such dividend payment date and need not include
payment  of the amount of such  dividend  upon  surrender  of shares of Series C
Preferred Stock for conversion.

     In case any  shares of Series C  Preferred  Stock are to be  redeemed,  the
right to convert those shares of the Series C Preferred  Stock will terminate at
5:00 p.m.,  New York City time,  on the business day  immediately  preceding the
date fixed for  redemption  unless we default in the  payment of the  redemption
price of those shares.

     In  connection  with the  conversion  of any  shares of Series C  Preferred
Stock,  no fractional  shares of common stock will be issued,  but we will pay a
cash adjustment in respect of any fractional  interest in an amount equal to the
fractional interest multiplied by the closing sale price of our common stock (as
defined  below  under   "--Conversion   Rights--Events   Triggering   Conversion
Rights--Conversion  Rights Based on Trading  Price of Our Common  Stock") on the
date the shares of Series C Preferred Stock are  surrendered for conversion.  If
more  than one  share of  Series  C  Preferred  Stock  will be  surrendered  for
conversion  by the same  holder at the same time,  the number of full  shares of
common  stock  issuable on  conversion  of those  shares will be computed on the
basis of the total number of shares of Series C Preferred Stock so surrendered.

     We will at all times  reserve  and keep  available,  free  from  preemptive
rights, for issuance upon the conversion of shares of Series C Preferred Stock a
number of our authorized but unissued shares of common stock that will from time
to time be sufficient  to permit the  conversion  of all  outstanding  shares of
Series C Preferred Stock.

     Before the delivery of any securities  that we will be obligated to deliver
upon  conversion  of the  Series C  Preferred  Stock,  we will  comply  with all
applicable  federal and state laws and  regulations  that  require  action to be
taken by us. All shares of common stock  delivered upon conversion of the Series
C Preferred Stock will upon delivery be duly and validly issued,  fully paid and
nonassessable,  free of all liens and charges and not subject to any  preemptive
rights.

EVENTS TRIGGERING CONVERSION RIGHTS

     A holder's  right to convert  its shares of Series C  Preferred  Stock will
arise only upon the occurrence of the events specified in this section.

     CONVERSION  RIGHTS BASED ON TRADING PRICE OF OUR COMMON  STOCK.  Commencing
after June 30, 2003, a holder may surrender  shares of Series C Preferred  Stock
for  conversion  into shares of our common stock in any fiscal quarter (and only
during  such fiscal  quarter),  if, as of the last day of the  preceding  fiscal
quarter, the closing sale price of our common stock for at least 20 trading days
in a period of 30  consecutive  trading  days ending on the last  trading day of
such preceding fiscal quarter is more than 110% of the "conversion  price" as of
the last day of such preceding fiscal quarter.  The "conversion price" as of any
day will equal the  liquidation  preference  divided by the  conversion  rate in
effect on such date.

     "Trading  day" means a day during  which  trading in  securities  generally
occurs on the New York Stock  Exchange  or, if our common stock is not listed on
the New York  Stock  Exchange,  on the  principal  other  national  or  regional
securities  exchange on which our common  stock is then listed or, if our



common stock is not listed on a national or regional securities exchange, on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
or, if our common stock is not quoted on Nasdaq,  on the principal  other market
on which our common stock is then traded.

     The "closing  sale price" of our common stock on any date means the closing
sale price per share (or if no closing  sale price is  reported,  the average of
the closing bid and ask prices or, if more than one in either case,  the average
of the average  closing bid and the average  closing ask prices) on such date as
reported on the principal United States securities  exchange on which our common
stock is  traded  or,  if our  common  stock is not  listed  on a United  States
national  or  regional  securities  exchange,  as  reported  by Nasdaq or by the
National Quotation Bureau Incorporated.  In the absence of such a quotation,  we
will determine the closing sale price on the basis we consider appropriate.

     CONVERSION  RIGHTS UPON CREDIT RATING  DOWNGRADE.  After the earlier of (a)
the date the Series C Preferred  Stock is  assigned a credit  rating by both S&P
and Moody's and (b) May 31, 2003, during a period in which (1) the credit rating
assigned  to the Series C  Preferred  Stock by S&P is below CCC,  (2) the credit
rating  assigned  to the Series C  Preferred  Stock by Moody's is below Caa3 (3)
either S&P or Moody's does not assign a credit  rating to the Series C Preferred
Stock,  or (4) any rating is  suspended  or  withdrawn by either S&P or Moody's,
holders may also surrender  Series C Preferred  Stock for conversion into shares
of our common stock.

     CONVERSION  UPON  SATISFACTION  OF TRADING  PRICE  CONDITION.  Holders  may
surrender their shares of Series C Preferred Stock for conversion into shares of
our common stock during the five business day period after any five  consecutive
trading-day  period in which the trading  price of the Series C Preferred  Stock
for each day of that five trading-day period was less than 98% of the product of
the closing sale price of our common stock and the conversion  rate in effect on
each such day.

     The  "trading  price"  of the  Series  C  Preferred  Stock  on any  date of
determination  means the average of the secondary market bid quotations obtained
by us or a calculation  agent for 50,000  shares of Series C Preferred  Stock at
approximately  3:30 p.m.,  New York City time, on such  determination  date from
three  independent  nationally  recognized  securities  dealers  that  we  or  a
calculation agent selects; provided that if three such bids cannot reasonably be
obtained by us or a calculation agent, but two such bids are obtained,  then the
average of the two bids shall be used,  and if only one such bid can  reasonably
be obtained by us or the calculation agent, that one bid shall be used. If we or
a calculation  agent cannot reasonably obtain at least one bid for 50,000 shares
of Series C Preferred Stock from a nationally  recognized  securities dealer, or
in our  reasonable  judgment,  the  bid  quotations  are not  indicative  of the
secondary market value of the Series C Preferred  Stock,  then the trading price
per share of Series C Preferred  Stock will be deemed to be less than 98% of the
product of the closing sale price of our common stock and the conversion rate.

     CONVERSION  RIGHTS UPON NOTICE OF  REDEMPTION.  A holder may  surrender for
conversion  any or all shares of Series C Preferred  Stock that have been called
for  redemption  at any time  prior to 5:00  p.m.,  New York City  time,  on the
business day immediately preceding the date of redemption,  even if the Series C
Preferred Stock is not otherwise convertible at that time.

     CONVERSION RIGHTS UPON OCCURRENCE OF CERTAIN CORPORATE TRANSACTIONS.  If we
are party to a consolidation, merger or binding share exchange pursuant to which
shares of our common stock would be  converted  into cash,  securities  or other
property,  a holder  may  surrender  shares  of  Series C  Preferred  Stock  for
conversion  into shares of our common  stock at any time from and after the date
that is 15 days prior to the anticipated effective date of the transaction until
15 days after the actual date of such  transaction  and, at the effective  time,
the right to  convert  shares of Series C  Preferred  Stock  into  shares of our
common  stock will be changed  into a right to convert  such  Series C Preferred
Stock into the kind and amount of cash,  securities  or other  property of us or
another  person that the holder would have  received if



the holder had converted the holder's Series C Preferred Stock immediately prior
to the transaction.  If such transaction also constitutes a fundamental  change,
the  holder  will be able to  require  us to  purchase  all or a portion of such
holder's  Series C Preferred  Stock as  described  under  "--Fundamental  Change
Requires Us to Purchase  Shares of Series C Preferred Stock at the Option of the
Holder."

     If we elect to:

     o    distribute  to all  holders of our  common  stock  rights or  warrants
          entitling them to purchase,  for a period  expiring  within 45 days of
          the record date for such  distribution,  our common stock at less than
          the average  closing sale price for the 10 trading days  preceding the
          declaration date for such distribution; or

     o    distribute  to all holders of our common  stock,  cash,  assets,  debt
          securities or rights to purchase our  securities,  which  distribution
          has a per share value  exceeding  5% of the closing  sale price of our
          common stock on the day immediately preceding the declaration date for
          such distribution;

we must  notify  you at least 20 days  prior  to the  ex-dividend  date for such
distribution.  Once we have given such notice,  you may surrender your shares of
Series C  Preferred  Stock for  conversion  at any time until the earlier of the
close of business on the business day immediately preceding the ex-dividend date
or any  announcement  by us that  such  distribution  will  not take  place.  No
adjustment to the conversion rate or your ability to convert will be made if you
will otherwise participate in the distribution without conversion.

     Upon  determination  that Series C Preferred  Stock  holders are or will be
entitled to convert  their  Series C  Preferred  Stock into shares of our common
stock in accordance with any of the foregoing provisions,  we will issue a press
release and publish such information on our website on the World Wide Web.

ADJUSTMENTS TO THE CONVERSION RATE

     The  conversion  rate is subject to adjustment  from time to time if any of
the following events occur:

     o    dividends or  distributions  on shares of our common stock  payable in
          shares of our common stock;

     o    subdivisions,  combinations or certain  reclassifications of shares of
          our common stock;

     o    distributions  to all holders of shares of our common  stock of rights
          or warrants  entitling them to purchase,  for a period expiring within
          45 days of the record date for such distribution,  our common stock at
          less than the  average  closing  sale  price for the 10  trading  days
          preceding the declaration date for such distribution;

     o    distributions  to all holders of shares of our common  stock of shares
          of our capital stock,  evidences of indebtedness or assets,  including
          securities but excluding:

          o    rights or warrants specified above;

          o    dividends or distributions specified above; and

          o    cash distributions.

          In the event that we make a distribution  to all holders of our common
          stock consisting of capital stock of, or similar equity interest in, a
          subsidiary or other business unit of ours, the



          conversion  rate will be  adjusted  based on the  market  value of the
          securities so  distributed  relative to the market value of our common
          stock,  in each case based on the average closing sale prices of those
          securities  for the 10 trading days  commencing  on and  including the
          fifth  trading  day  after  the  date on which  "ex-dividend  trading"
          commences  for such  dividend  or  distribution  on the New York Stock
          Exchange  or such other  national  or  regional  exchange or market on
          which the securities are then listed or quoted.

     o    distributions  to all  holders of shares of our common  stock of cash,
          excluding  any  dividend  or   distribution  in  connection  with  our
          liquidation,  dissolution  or  winding  up,  to the  extent  that  the
          aggregate cash dividends per share of common stock in any twelve month
          period exceeds the greater of:

          o    the  annualized  amount  per  share of  common  stock of the next
               preceding  quarterly  cash  dividend  on the common  stock to the
               extent that the preceding  quarterly  dividend did not require an
               adjustment of the  conversion  rate  pursuant to this clause,  as
               adjusted to reflect  subdivisions  or  combinations of the common
               stock; and

          o    5% of the average of the closing  sale price of the common  stock
               during the ten trading days immediately  prior to the declaration
               date of the dividend.

          If an  adjustment is required to be made under this clause as a result
          of a distribution that is a quarterly  dividend,  the adjustment would
          be based upon the amount by which the distribution  exceeds the amount
          of the quarterly  cash dividend  permitted to be excluded  pursuant to
          this clause. If an adjustment is required to be made under this clause
          as a result of a distribution  that is not a quarterly  dividend,  the
          adjustment would be based upon the full amount of the distribution;

     o    we or one of our  subsidiaries  makes a payment in respect of a tender
          offer or  exchange  offer for our common  stock to the extent that the
          cash and value of any other consideration  included in the payment per
          share of common  stock  exceeds  the  closing  sale price per share of
          common stock on the trading day next succeeding the last date on which
          tenders or exchanges  may be made  pursuant to such tender or exchange
          offer; and

     o    someone  other than us or one of our  subsidiaries  makes a payment in
          respect  of a tender  offer or  exchange  offer  in  which,  as of the
          closing date of the offer,  our board of directors is not recommending
          rejection of the offer. The adjustment referred to in this clause will
          only be made if:

          o    the  tender  offer  or  exchange  offer  is  for an  amount  that
               increases  the  offeror's  ownership of common stock to more than
               25% of the total shares of common stock outstanding; and

          o    the cash and value of any  other  consideration  included  in the
               payment per share of common stock  exceeds the closing sale price
               per share of common stock on the business day next succeeding the
               last date on which  tenders or exchanges  may be made pursuant to
               the tender or exchange offer.

          However,  the adjustment referred to in this clause will generally not
          be made if as of the  closing of the  offer,  the  offering  documents
          disclose  a  plan  or  an  intention  to  cause  us  to  engage  in  a
          consolidation or merger or a sale of all or  substantially  all of our
          assets.

     We have adopted a Rights  Agreement dated  September 19, 1995,  pursuant to
which certain rights were issued with respect to our shares of common stock. You
will receive,  upon conversion of your Series C Preferred  Stock, in addition to
the common stock, the rights under the rights agreement or any other rights plan
then in effect unless, prior to conversion, the rights have expired,  terminated
or been



redeemed or unless the rights have  separated  from the common stock at the time
of conversion, in which case the conversion rate will be adjusted at the time of
separation as if we had  distributed to all holders of our common stock,  shares
of our capital stock, evidences of indebtedness or assets as described under the
fourth  bullet  point  above,  subject  to  readjustment  in  the  event  of the
expiration, termination or redemption of such rights.

     In the event of:

     o    any reclassification of our common stock;

     o    a consolidation, merger or combination involving us; or

     o    a  sale  or  conveyance  to  another   person  or  entity  of  all  or
          substantially all of our property and assets;

in which holders of our common stock would be entitled to receive  stock,  other
securities,  other  property,  assets  or cash  for  their  common  stock,  upon
conversion of your Series C Preferred  Stock you will be entitled to receive the
same type of  consideration  that you would have been entitled to receive if you
had  converted  the Series C Preferred  Stock into our common stock  immediately
prior to any of these events.

     The proposed  Acquisition and transactions  described under "Description of
the  Acquisitions"  including the Merger,  and the renaming of KCS to NAFTA Rail
are not, as  proposed,  expected to trigger any  adjustments  to the  conversion
rate.

     You may in certain  situations  be deemed to have  received a  distribution
subject to United  States  federal  income tax as a dividend in the event of any
taxable  distribution to holders of common stock or in certain other  situations
requiring a conversion rate  adjustment.  See "Certain United States Federal Tax
Considerations."

     We may,  from time to time,  increase the  conversion  rate if our board of
directors  has made a  determination  that  this  increase  would be in our best
interests. Any such determination by our board will be conclusive.  In addition,
we may increase the conversion rate if our board of directors deems it advisable
to avoid or diminish  any income tax to holders of common stock  resulting  from
any stock or  rights  distribution.  See  "Certain  United  States  Federal  Tax
Considerations."

     We will not be required to make an adjustment in the conversion rate unless
the  adjustment  would require a change of at least 1% in the  conversion  rate.
However,  we will carry  forward  any  adjustments  that are less than 1% of the
conversion rate.  Except as described above in this section,  we will not adjust
the  conversion  rate for any  issuance of our common  stock or  convertible  or
exchangeable securities or rights to purchase our common stock or convertible or
exchangeable securities.

OPTIONAL REDEMPTION

     We may not  redeem any shares of Series C  Preferred  Stock  before May 20,
2008.  On or after May 20,  2008,  we will have the option to redeem some or all
the  shares of Series C  Preferred  Stock at a  redemption  price of 100% of the
liquidation preference, plus accumulated and unpaid dividends, including special
dividends, if any, to the redemption date, but only if the closing sale price of
our common stock for 20 trading days within a period of 30  consecutive  trading
days  ending on the trading  day before the date we give the  redemption  notice
exceeds  135% of the  conversion  price in  effect  on each  such  day.  If full
cumulative  dividends  on the Series C Preferred  Stock have not been paid,  the
Series C Preferred  Stock may not be redeemed and we may not purchase or acquire
any shares of Series C Preferred  Stock otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Series C Preferred Stock
and any parity stock.



     We may  elect  to pay the  redemption  price in cash,  common  stock,  or a
combination  of cash and common  stock.  The number of shares of common  stock a
holder will  receive  will equal the  relevant  amount of the  redemption  price
divided by 97.5% of the average of the closing  sale prices of our common  stock
for the  five  trading  days  ending  on the  third  trading  day  prior  to the
redemption date. However, we may not pay the purchase price in common stock or a
combination of common stock and cash unless we satisfy certain  conditions prior
to  the  redemption  date  as  provided  in  the  certificate  of  designations,
including:

     o    registration  of the  shares of our  common  stock to be  issued  upon
          redemption under the Securities Act and the Exchange Act, if required;

     o    qualification  of the  shares of our  common  stock to be issued  upon
          redemption under  applicable  state securities laws, if necessary,  or
          the availability of an exemption therefrom; and

     o    listing of our common  stock on a United  States  national  securities
          exchange or quotation  thereof in an inter-dealer  quotation system of
          any registered United States national securities association.

     In the event of an optional  redemption,  we will send a written  notice by
first  class mail to each  holder of record of the Series C  Preferred  Stock at
such holder's registered address,  not fewer than 30 nor more than 90 days prior
to the  redemption  date,  stating,  among other things,  whether the redemption
price  will be  paid  in  cash or  common  stock,  or a  combination  and,  if a
combination,  specifying  the  portions  payable  in cash and common  stock.  In
addition, we will (i) publish such information once in a daily newspaper printed
in the English language and of general  circulation in the Borough of Manhattan,
City of New York, (ii) issue a press release  containing such  information,  and
(iii) publish such information on our website on the World Wide Web.

     Because  the  average  closing  sale  price  of our  common  stock  will be
determined  prior to the redemption  date,  holders of Series C Preferred  Stock
bear the market  risk that our common  stock will  decline in value  between the
date the average  closing sale price is calculated and the  redemption  date. In
addition, because the number of shares of our common stock that you will receive
upon any redemption for shares is based on the average  closing sale price for a
5 trading day period,  the market  value of those  shares on the date of receipt
may be less than the value of those  shares  based on the average  closing  sale
price.

     If we give notice of  redemption,  then, by 12:00 p.m., New York City time,
on the  redemption  date, to the extent funds are legally  available,  we shall,
with respect to:

     o    shares  of  Series  C  Preferred  Stock  held by DTC or its  nominees,
          deposit or cause to be deposited,  irrevocably with DTC cash or common
          stock  sufficient  to pay the  redemption  price  and  will  give  DTC
          irrevocable  instructions and authority to pay the redemption price to
          holders of such shares of Series C Preferred Stock; and

     o    shares of Series C Preferred Stock held in certificated  form, deposit
          or cause to be deposited,  irrevocably with the transfer agent cash or
          common stock  sufficient to pay the redemption price and will give the
          transfer  agent  irrevocable  instructions  and  authority  to pay the
          redemption price to holders of such shares of Series C Preferred Stock
          upon surrender of their certificates evidencing their shares of Series
          C Preferred Stock.

     If on the  redemption  date DTC and the transfer  agent hold cash or common
stock  sufficient  to pay the  redemption  price  for the  shares  of  Series  C
Preferred  Stock  delivered for  redemption in accordance  with the terms of the
certificate of designations,  dividends will cease to accumulate on those shares
of Series C Preferred  Stock called for  redemption and all rights of holders of
such shares will terminate except for the right to receive the redemption price.



     Payment of the redemption  price for the shares of Series C Preferred Stock
is conditioned upon book-entry  transfer of or physical delivery of certificates
representing the Series C Preferred Stock, together with necessary endorsements,
to the transfer  agent,  or to the transfer  agent's account at DTC, at any time
after delivery of the redemption notice. Payment of the redemption price for the
Series C Preferred Stock will be made (i) if book-entry  transfer of or physical
delivery of the Series C Preferred  Stock has been made by or on the  redemption
date, on the  redemption  date,  or (ii) if  book-entry  transfer of or physical
delivery of the Series C  Preferred  Stock has not been made by or on such date,
at the time of  book-entry  transfer  of or  physical  delivery  of the Series C
Preferred Stock.

     If the  redemption  date falls  after a dividend  payment  record  date and
before the  related  dividend  payment  date,  holders of the shares of Series C
Preferred  Stock at the close of business on that dividend  payment  record date
will be  entitled  to  receive  the  dividend  payable  on those  shares  on the
corresponding  dividend  payment  date.  The  redemption  price  payable on such
redemption  date will  include  only the  liquidation  preference,  but will not
include  any  amount in  respect  of  dividends  declared  and  payable  on such
corresponding dividend payment date.

     In the case of any partial redemption,  we will select the shares of Series
C Preferred Stock to be redeemed on a pro rata basis, by lot or any other method
that we, in our discretion, deem fair and appropriate.

     Our restated  certificate of incorporation  provides that we may not redeem
the  Series C  Preferred  Stock  if,  (i) as of the date of the  mailing  of the
redemption  notice,  such redemption would, if such date were the date fixed for
redemption,  reduce our net assets  remaining after such redemption  below twice
the  aggregate  amount  payable  upon  voluntary  or  involuntary   liquidation,
dissolution  or winding up or (ii) we have not paid or set apart for payment all
accumulated  dividends for the current and prior dividend  periods in respect of
shares which have a right to cumulative dividends.

FUNDAMENTAL CHANGE REQUIRES US TO PURCHASE SHARES OF SERIES C PREFERRED STOCK AT
THE OPTION OF THE HOLDER

     In the event of a  fundamental  change,  you will have the  right,  at your
option,  subject to the terms and conditions of the certificate of designations,
to require us to purchase any or all of your shares of Series C Preferred Stock.
We will  purchase  the Series C Preferred  Stock at a price equal to 100% of the
liquidation  preference of the Series C Preferred Stock to be purchased plus any
accumulated and unpaid dividends,  including special dividends,  if any, to, but
excluding,  the fundamental change purchase date, unless such fundamental change
purchase  date falls  after a record  date and on or prior to the  corresponding
dividend  payment  date,  in  which  case (i) we will  pay the  full  amount  of
accumulated and unpaid  dividends  payable on such dividend payment date only to
the holder of record at the close of business on the  corresponding  record date
and (ii) the purchase price payable on the fundamental change purchase date will
include  only the  liquidation  preference,  but will not  include any amount in
respect of dividends declared and payable on such corresponding payment date. We
will be required to purchase the Series C Preferred Stock as of the date that is
not less than 20 nor more than 35  business  days after the  occurrence  of such
fundamental change, which we refer to as a fundamental change purchase date.

     We will pay the  purchase  price of the Series C  Preferred  Stock,  at our
option, in cash, in shares of our common stock or any combination  thereof.  The
number of shares of common  stock a holder will  receive will equal the purchase
price  divided by 97.5% of the average  closing sale prices for the five trading
days ending on the third trading day prior to the  fundamental  change  purchase
date.  However,  we may not pay the purchase  price in common  stock,  unless we
satisfy  certain  conditions  prior to the  fundamental  change purchase date as
provided in the certificate of designations including:



     o    registration  of  the  shares  of  the  applicable   common  stock  or
          securities to be issued upon  repurchase  under the Securities Act and
          the Exchange Act, if required;

     o    qualification  of  the  shares  of  common  stock  to be  issued  upon
          repurchase under  applicable  state securities laws, if necessary,  or
          the availability of an exemption therefrom; and

     o    listing  of the  shares of common  stock on a United  States  national
          securities exchange or quotation thereof in an inter-dealer  quotation
          system  of  any   registered   United   States   national   securities
          association.

     If we pay the purchase price in shares of common stock,  we will notify you
of such payment in our notice  regarding  the  fundamental  change.  Because the
average  closing sale price of our common stock will be determined  prior to the
fundamental  change purchase date,  holders of Series C Preferred Stock bear the
market  risk that our common  stock will  decline in value  between the date the
average  closing sale price is  calculated  and the purchase  date. In addition,
because the number of shares of our common  stock that you will receive is based
on the average  closing  sale price for a five  trading  day period,  the market
value of those shares on the date of receipt may be less than the value of those
shares based on the average closing sale price.

     A "fundamental  change" is any transaction or event (whether by means of an
exchange offer, liquidation,  tender offer, consolidation,  merger, combination,
reclassification, recapitalization or otherwise) in connection with which all or
substantially all of our common stock is exchanged for, converted into, acquired
for or constitutes solely the right to receive consideration which is not all or
substantially all common stock that:

     o    is listed on, or  immediately  after the  transaction or event will be
          listed on, a United States national securities exchange, or

     o    is approved,  or  immediately  after the  transaction or event will be
          approved,  for quotation on the Nasdaq  National Market or any similar
          United  States  system of automated  dissemination  of  quotations  of
          securities prices.

     Within 15 business days after the  occurrence of a fundamental  change,  we
are  obligated  to mail to all  holders  of  Series C  Preferred  Stock at their
addresses  shown in the register of the registrar  and to  beneficial  owners as
required by applicable law (and issue a press release and publish on our website
on the World Wide Web) a notice regarding the fundamental change, stating, among
other things:

     o    the events causing a fundamental change;

     o    the date of such fundamental change;

     o    the last date on which the purchase right may be exercised;

     o    the  fundamental  change purchase price and whether that price will be
          paid  in  cash  or  shares  of  our  common  stock  or  any  specified
          combination thereof;

     o    the fundamental change purchase date;

     o    the name and address of the paying agent and the conversion agent;

     o    the conversion rate and any adjustments to the conversion rate;

     o    that the Series C Preferred  Stock with respect to which a fundamental
          change purchase notice is given by the holder may be converted only if
          the   fundamental   change  purchase  notice  has  been  withdrawn  in
          accordance with the terms of the Series C Preferred Stock; and

     o    the procedures that holders must follow to exercise these rights.



     To exercise this right,  you must deliver a written  notice to the transfer
agent prior to the close of business on the business day immediately  before the
fundamental   change  purchase  date.  The  required   purchase  notice  upon  a
fundamental change must state:

     o    if  certificated  shares of Series C Preferred Stock have been issued,
          the Series C Preferred  Stock  certificate  numbers,  or if not,  such
          information as may be required under applicable DTC procedures;

     o    the number of preferred shares to be purchased; and

     o    that we are to purchase such Series C Preferred  Stock pursuant to the
          applicable  provisions of the Series C Preferred Stock and certificate
          of designations.

     You may withdraw any fundamental change purchase notice by a written notice
of withdrawal  delivered to the transfer agent prior to the close of business on
the business day before the  fundamental  change  purchase  date.  The notice of
withdrawal must state:

     o    the number of the withdrawn shares of Series C Preferred Stock;

     o    if  certificated  shares of Series C Preferred Stock have been issued,
          the Series C Preferred  Stock  certificate  numbers,  or if not,  such
          information as may be required under applicable DTC procedures; and

     o    the number,  if any, of shares of Series C Preferred Stock that remain
          subject to your fundamental change purchase notice.

     A holder must  either  effect  book-entry  transfer or deliver the Series C
Preferred Stock to be purchased,  together with necessary  endorsements,  to the
office of the transfer agent after delivery of the  fundamental  change purchase
notice to receive  payment of the fundamental  change  purchase price.  You will
receive payment in cash or shares of common stock,  as applicable,  on the later
of the fundamental  change  purchase date or the time of book-entry  transfer or
the delivery of the Series C Preferred  Stock. If the transfer agent holds money
or securities  sufficient to pay the  fundamental  change  purchase price of the
Series C Preferred  Stock on the business day following the  fundamental  change
purchase date, then, immediately after the fundamental change purchase date:

     o    the shares of Series C Preferred Stock will cease to be outstanding;

     o    dividends will cease to accrue; and

     o    all other rights of the holder will terminate.

     This will be the case  whether or not  book-entry  transfer of the Series C
Preferred  Stock  is made or  whether  or not the  Series C  Preferred  Stock is
delivered to the transfer agent.

     The fundamental change purchase feature of the Series C Preferred Stock may
in certain  circumstances  make more  difficult or discourage a takeover of KCS.
The  fundamental  change  purchase  feature,  however,  is not the result of our
knowledge of any specific effort:

     o    to accumulate shares of common stock;

     o    to  obtain  control  of  KCS  by  means  of a  merger,  tender  offer,
          solicitation or otherwise; or

     o    by management to adopt a series of anti-takeover provisions.



     Instead, the terms of the fundamental change purchase feature resulted from
negotiations between the Initial Purchasers and us.

     We could, in the future, enter into certain transactions, including certain
recapitalizations,  that would not constitute a fundamental  change with respect
to the fundamental  change purchase  feature of the Series C Preferred Stock but
that  would  increase  the  amount  of our  (or our  subsidiaries')  outstanding
indebtedness.

     Our  ability  to  purchase  shares of  Series C  Preferred  Stock  upon the
occurrence of a fundamental change is subject to important limitations.  Because
we are a holding  company,  our ability to purchase the Series C Preferred Stock
for cash may be limited by  restrictions on our ability to obtain funds for such
repurchase  through  dividends from our  subsidiaries  and the terms of our then
existing borrowing agreements. If a fundamental change were to occur, we may not
have  sufficient  legally  available funds to pay the purchase price in cash for
all tendered shares of Series C Preferred Stock. Any future credit agreements or
other agreements relating to our indebtedness may contain provisions prohibiting
the purchase of the Series C Preferred  Stock under  certain  circumstances,  or
expressly  prohibit  our  purchase  of  the  Series  C  Preferred  Stock  upon a
fundamental change or may provide that a fundamental change constitutes an event
of default under that agreement.  If a fundamental  change occurs at a time when
we are prohibited from  purchasing  shares of Series C Preferred Stock for cash,
we could seek the  consent of our  lenders to  purchase  the Series C  Preferred
Stock or attempt to refinance this debt. If we do not obtain  consent,  we would
not be permitted to purchase the Series C Preferred  Stock,  except as described
below.

     If,  following a  fundamental  change,  we are  prohibited  from paying the
purchase  price of the Series C  Preferred  Stock in cash under the terms of our
credit agreements or other agreements relating to our indebtedness,  we will, if
permitted  under those  agreements  and under  applicable  law, elect to pay the
purchase price of the Series C Preferred Stock in shares of our common stock or,
in the case of a merger in which we are not the  surviving  corporation,  common
stock of the surviving corporation or its direct or indirect parent corporation.


VOTING RIGHTS

     Unless otherwise determined by our board of directors, holders of shares of
Series C Preferred  Stock will not have any voting  rights  except as  described
below, as provided in our restated certificate of incorporation, or as otherwise
required  from time to time by law.  Whenever  (1)  dividends  on any  shares of
Series C  Preferred  Stock or any other  class or series of stock  ranking  on a
parity  with the  Series C  Preferred  Stock  with  respect  to the  payment  of
dividends shall be in arrears for dividend periods,  whether or not consecutive,
containing in the aggregate a number of days equivalent to six calendar quarters
or (2) we fail to pay the  redemption  price  on the  date  shares  of  Series C
Preferred  Stock are called for redemption or the purchase price on the purchase
date for shares of Series C  Preferred  Stock  following a  fundamental  change,
then,  in each case,  the holders of shares of Series C Preferred  Stock (voting
separately as a class with all other series of other  preferred  stock on parity
with the  Series C  Preferred  Stock upon which  like  voting  rights  have been
conferred and are exercisable)  will be entitled to vote for the election of two
of the  authorized  number  of our  directors  at the  next  annual  meeting  of
stockholders and each subsequent meeting until all dividends  accumulated on the
Series C Preferred Stock have been fully paid or set aside for payment. The term
of office of all  directors  elected by the holders of Series C Preferred  Stock
will terminate  immediately  upon the termination of the right of the holders of
Series C  Preferred  Stock to vote for  directors.  Each holder of shares of the
Series C Preferred Stock will have one vote for each share of Series C Preferred
Stock held.

     So long as any shares of the Series C Preferred  Stock remain  outstanding,
we will not,  without the consent of the holders of at least  two-thirds  of the
shares of Series C Preferred Stock outstanding at the time, voting separately as
a class with all other series of Series C Preferred Stock upon which like voting
rights  have  been  conferred  and are  exercisable  (1) issue or  increase  the
authorized  amount  of any  class or



series of stock ranking senior to the outstanding Series C Preferred Stock as to
dividends or upon  liquidation or (2) amend,  alter or repeal  provisions of our
restated  certificate of  incorporation  or of the resolutions  contained in the
certificate of designations,  whether by merger,  consolidation or otherwise, so
as to amend,  alter or affect any  power,  preference  or  special  right of the
outstanding  Series  C  Preferred  Stock  or the  holders  thereof  without  the
affirmative  vote of not less than  two-thirds  of the  issued  and  outstanding
Series C Preferred Stock; provided,  however, that any increase in the amount of
the  authorized  common  stock or  authorized  Series C  Preferred  Stock or the
creation  and  issuance  of other  series of common  stock or Series C Preferred
Stock  ranking on a parity with or junior to the Series C Preferred  Stock as to
dividends and upon  liquidation  will not be deemed to materially  and adversely
affect such powers, preference or special rights.

LIQUIDATION PREFERENCE

     Upon any voluntary or involuntary liquidation, dissolution or winding up of
our company resulting in a distribution of assets to the holders of any class or
series of our capital stock,  each holder of shares of Series C Preferred  Stock
will be entitled to payment out of our assets  available for  distribution of an
amount equal to the liquidation preference per share of Series C Preferred Stock
held by that holder, plus all accumulated and unpaid dividends,  on those shares
to  the  date  of  that  liquidation,   dissolution,   winding  up,  before  any
distribution is made on any junior stock,  including our common stock, but after
any  distributions on any of our indebtedness or senior stock.  After payment in
full of the liquidation  preference and all accumulated and unpaid  dividends to
which holders of shares of Series C Preferred  Stock are entitled,  holders will
not be entitled to any further  participation in any distribution of our assets.
If, upon any voluntary or involuntary liquidation,  dissolution or winding up of
our  company,  the amounts  payable with respect to shares of Series C Preferred
Stock and all other  parity  stock  are not paid in full,  holders  of shares of
Series C Preferred  Stock and holders of the parity stock will share equally and
ratably in any  distribution  of our  assets in  proportion  to the  liquidation
preference and all accumulated and unpaid dividends to which each such holder is
entitled.

     Neither the voluntary  sale,  conveyance,  exchange or transfer,  for cash,
shares of stock, securities or other consideration,  of all or substantially all
of our property or assets nor the  consolidation,  merger or amalgamation of our
company  with  or  into  any  corporation  or  the   consolidation,   merger  or
amalgamation of any corporation  with or into our company will be deemed to be a
voluntary or involuntary liquidation, dissolution or winding up of our company.

     We are not  required  to set  aside any funds to  protect  the  liquidation
preference of the shares of Series C Preferred  Stock,  although the liquidation
preference will be substantially in excess of the par value of the shares of the
Series C Preferred Stock.

TRANSFER AGENT

     The transfer agent, registrar, dividend disbursing agent, calculation agent
and redemption agent for the Series C Preferred Stock is UMB Bank, N.A.

BOOK-ENTRY SYSTEM

     The  Series  C  Preferred  Stock  has been  issued  in the form of a global
security  held  in  book-entry  form.  DTC's  nominee,  Cede & Co.  is the  sole
registered  holder  of the  Series  C  Preferred  Stock.  Owners  of  beneficial
interests in the Series C Preferred  Stock  represented  by the global  security
will hold their interests  pursuant to the procedures and practices of DTC. As a
result,  beneficial  interests  in any such  securities  will be shown  on,  and
transfers  will be effected  only  through,  records  maintained  by DTC and its
direct and indirect  participants and any such interest may not be exchanged for
certificated securities,  except in limited circumstances.  Owners of beneficial
interests must exercise any rights in respect of their interests,  including any
right to  convert  or  require  repurchase  of their  interests  in the Series C
Preferred  Stock,  in  accordance  with the  procedures  and  practices  of DTC.
Beneficial  owners  will not be holders  and will not be  entitled to any rights
provided  to the  holders  of the  Series C  Preferred  Stock  under the  global



security or the certificate of  designations.  Our company and any of our agents
may treat DTC as the sole holder and registered owner of the global securities.

     DTC has  advised us as  follows:  DTC is a  limited-purpose  trust  company
organized  under the New York Banking Law, a "banking  organization"  within the
meaning  of the New  York  Uniform  Commercial  Code,  and a  "clearing  agency"
registered  pursuant to the  provisions  of Section 17A of the Exchange Act. DTC
facilitates  the  settlement  of  transactions  among its  participants  through
electronic   computerized   book-entry   changes  in   participants'   accounts,
eliminating  the need for physical  movement of securities  certificates.  DTC's
participants  include  securities  brokers and dealers,  banks, trust companies,
clearing corporations and certain other organizations.  DTC is owned by a number
of its participants and by the New York Stock Exchange, Inc., the American Stock
Exchange LLC, and the National Association of Securities Dealers, Inc. Access to
DTC's  book-entry  system is also available to others,  such as banks,  brokers,
dealers  and  trust  companies  that  clear  through  or  maintain  a  custodial
relationship with a participant, either directly or indirectly.

EXCHANGE OF GLOBAL SECURITIES

     The Series C Preferred Stock,  represented by the global security,  will be
exchangeable for certificated securities with the same terms only if:

     o    DTC is unwilling or unable to continue as  depositary or if DTC ceases
          to be a  clearing  agency  registered  under  the  Exchange  Act and a
          successor depositary is not appointed by us within 90 days; or

     o    we decide to  discontinue  use of the  system of  book-entry  transfer
          through DTC (or any successor depositary).

REGISTRATION RIGHTS

     This summary of certain  provisions of the  registration  rights  agreement
does not  purport to be  complete  and is subject  to, and is  qualified  in its
entirety  by  reference  to,  all  the  provisions  of the  registration  rights
agreement,  a copy of which we will  make  available  upon  written  request  as
described under "Where You Can Find More Information."

     We have agreed under the registration rights agreement, at our expense, for
the benefit of the holders, to file with the SEC a shelf registration  statement
covering  resale of the  Series C  Preferred  Stock and the shares of our common
stock  issuable  upon  conversion  of the Series C Preferred  Stock by August 3,
2003.  We have  agreed to use our best  efforts to cause the shelf  registration
statement  to  become  effective  by  November  1,  2003,  and to keep the shelf
registration  statement  effective until the earlier of (i) the sale pursuant to
Rule 144 under the Securities Act or the shelf registration statement of all the
securities registered thereunder,  and (ii) the expiration of the holding period
applicable to such  securities  held by persons that are not  affiliates of ours
under Rule 144(k) under the Securities Act or any successor  provision,  subject
to permitted exceptions.

     We may  suspend  the  use of the  prospectus  under  certain  circumstances
relating to pending  corporate  developments,  public  filings  with the SEC and
similar events. Any suspension period shall not:

     o    exceed 30 days in any three-month period; or

     o    exceed an aggregate of 90 days for all periods in any 12-month period.

     We will pay  predetermined  liquidated  damages as described  herein in the
form of "special dividends" to holders of transfer restricted Series C Preferred
Stock and in the form of  "liquidated  damages  payments" to holders of transfer
restricted common stock issued upon conversion of such Series C Preferred Stock,
if a shelf  registration  statement is not timely  declared  effective or if the
prospectus is unavailable  for the periods in excess of those  permitted  above.
Such special  dividends or liquidated



damages payments shall accumulate until such failure to file or become effective
or unavailability is cured:

     o    on the Series C  Preferred  Stock at an annual rate equal 0.50% of the
          aggregate liquidation preference of Series C Preferred Stock; and

     o    on the common stock that has been issued on conversion of the Series C
          Preferred  Stock,  at an annual rate equal to 0.50% of an amount equal
          to the conversion price.

     So long as the failure to become effective or unavailability  continues, we
will pay special dividends or make liquidated  damages payments,  as applicable,
in cash on each  dividend  payment date for the Series C Preferred  Stock to the
holder of record of such transfer  restricted Series C Preferred Stock or common
stock on the record date immediately  preceding the applicable  dividend payment
date. When such  registration  default is cured,  accumulated and unpaid special
dividends  or  liquidated  damages  payments  will be paid in cash to the record
holder as of the date of such cure.

     A holder who sells  Series C Preferred  Stock or shares of our common stock
issued upon  conversion  of the Series C Preferred  Stock  pursuant to the shelf
registration statement generally will be required to:

     o    be named as a selling securityholder in the related prospectus;

     o    deliver a prospectus to purchasers; and

     o    be bound by certain  provisions of the  registration  rights agreement
          that are applicable to such holder,  including certain indemnification
          provisions,  and will be subject to certain civil liability provisions
          under the Securities Act.

     Under the registration rights agreement we will:

     o    pay all of our expenses of the shelf registration statement;

     o    provide copies of such  prospectus to each holder that has notified us
          of its acquisition of Series C Preferred Stock or shares of our common
          stock issued upon conversion of the Series C Preferred Stock;

     o    notify  each such  holder when the shelf  registration  statement  has
          become effective; and

     o    take certain other  actions as are required to permit,  subject to the
          foregoing,  unrestricted  resales of the Series C Preferred  Stock and
          the shares of our common stock issued upon  conversion of the Series C
          Preferred Stock.

     We have agreed in the  registration  rights agreement to give notice to all
holders of the filing and effectiveness of the shelf  registration  statement by
release made to Reuters Economic  Services and Bloomberg  Business News or other
reasonable   means  of   distribution.   A   notice   and   questionnaire   (the
"questionnaire")  must be  completed  and  delivered  by a holder to us at least
three  business  days prior to any intended  distribution  of Series C Preferred
Stock or shares of our common stock  issuable  upon  conversion  of the Series C
Preferred  Stock  pursuant  to the shelf  registration  statement.  Holders  are
required to complete and deliver the  questionnaire  at least ten business  days
prior to the  effectiveness of the shelf  registration  statement in order to be
named as a selling  security  holder in the  related  prospectus  at the time of
effectiveness.  Upon  receipt  of a  completed  questionnaire  after  that time,
together with such other information as we may reasonably request from a holder,
we  will,  within  five  business  days,  file  such  amendments  to  the  shelf
registration  statement or supplements to a related  prospectus as are necessary
to permit such  holder to deliver  such  prospectus  to  purchasers  of Series C
Preferred  Stock or shares of our common stock  issuable upon  conversion of the
Series  C  Preferred  Stock,  subject  to our  right



to suspend the use of the prospectus as described above. We will pay the special
dividends or liquidated  damages  payments  described  above to the holder if we
fail  to  make  the  filing  in the  time  required  or,  if  such  filing  is a
post-effective  amendment  to the shelf  registration  statement  required to be
declared  effective  under the Securities Act, if such amendment is not declared
effective  within 45 days of the filing.  Any holder that does not  complete and
deliver a questionnaire or provide such other information will not be named as a
selling security holder in the prospectus and therefore will not be permitted to
sell the Series C Preferred  Stock or shares of our common stock  issuable  upon
conversion of the Series C Preferred  Stock  pursuant to the shelf  registration
statement.



                        DESCRIPTION OF KCS CAPITAL STOCK

     The description of our capital stock set forth below is not complete and is
qualified by reference to our restated  certificate of incorporation  (including
the  certificate of designations  for the Series C Preferred  Stock) and bylaws.
Copies of our restated  certificate of incorporation  (including the certificate
of designations  for the Series C Preferred Stock) and bylaws are available from
us upon request.  These documents have also been filed with the SEC. Please read
"Where You Can Find More Information."

AUTHORIZED CAPITAL STOCK

     Under our restated certificate of incorporation, KCS is authorized to issue
(i) 400,000,000  shares of common stock, par value $0.01 per share, (ii) 840,000
shares of Preferred Stock, par value $25.00 per share, and (ii) 2,000,000 shares
of New Series  Preferred  Stock,  par value  $1.00 per share,  of which  150,000
shares  are  designated  as New  Series  Preferred  Stock,  Series A  ("Series A
Preferred  Stock"),  1,000,000  shares are  designated  as Series B  Convertible
Preferred  Stock ("Series B Preferred  Stock") and 400,000 shares are designated
as 4.25% Redeemable Cumulative  Convertible Perpetual Preferred Stock, Series C.
As of June  30,  2004,  62,674,103  shares  of  common  stock  were  issued  and
outstanding (excluding 10,695,013 treasury shares),  242,170 shares of Preferred
Stock were issued and  outstanding,  400,000 shares of Series C Preferred  Stock
were issued and  outstanding  and no other shares of New Series  Preferred Stock
were outstanding. In connection with the Acquisition, upon obtaining stockholder
approval,  KCS intends to amend its restated  certificate of  incorporation  to,
among other things,  authorize  the issuance of the Class A  Convertible  Common
Stock.  See  "Description  of the Class A  Convertible  Common  Stock." No other
classes of capital stock are  authorized  under KCS's  restated  certificate  of
incorporation.  The issued and  outstanding  shares of common  stock,  Preferred
Stock and Series C Preferred Stock are duly  authorized,  validly issued,  fully
paid and non-assessable.  Our common stock and Preferred Stock are listed on the
New York Stock Exchange.

COMMON STOCK

     Holders of common stock are entitled to receive  dividends  when, as and if
declared by the board of  directors  out of funds  legally  available  therefor,
provided that, if any shares of New Series  Preferred  Stock or Preferred  Stock
are outstanding, no dividends or other distributions may be made with respect to
the common  stock  unless full  required  dividends  on the shares of New Series
Preferred  Stock and  Preferred  Stock  have been  paid,  including  accumulated
dividends in the case of any series of New Series  Preferred Stock designated to
receive cumulative dividends.

     Holders of common  stock are entitled to one vote per share  multiplied  by
the number of directors to be elected in an election of directors,  which may be
cast  cumulatively,  and to one vote per share on any other matter,  voting as a
single class.  In certain  instances,  holders of New Series  Preferred Stock or
Preferred Stock may have special class voting rights. Holders of Preferred Stock
are entitled to one vote per share  multiplied  by the number of directors to be
elected in an election of directors, which may be cast cumulatively,  and to one
vote per share on other  matters.  Holders of  Preferred  Stock vote as a single
class with the  holders of common  stock and any series of New Series  Preferred
Stock having voting rights;  however,  whenever  dividends are in arrears on the
Preferred Stock for six quarters,  the holders of Preferred Stock have the right
to vote as a class to elect  two  directors  at the  next  annual  stockholders'
meeting at which  directors are elected and have such right until dividends have
been paid on the Preferred Stock for four consecutive quarters.  The vote of the
holders of two-thirds of Preferred  Stock voting together as a class is required
for any amendment to KCS's  restated  certificate of  incorporation  which would
materially  and  adversely  alter or change the powers,  preferences  or special
rights of such stock. See  "Description of the Series C Preferred  Stock--Voting
Rights"  for a  discussion  of the  voting  rights of  holders  of the  Series C
Preferred Stock.



     In the event of the voluntary or  involuntary  dissolution,  liquidation or
winding up of KCS,  holders of common  stock are  entitled  to receive pro rata,
after  satisfaction in full of the prior rights of creditors  (including holders
of KCS's  indebtedness)  and holders of New Series Preferred Stock and Preferred
Stock, all the remaining assets of KCS available for distribution.  The issuance
of additional shares of New Series Preferred Stock or Preferred Stock may result
in a dilution of the voting power and relative  equity  interests of the holders
of common  stock and would  subject the common  stock to the prior  dividend and
liquidation rights of the New Series Preferred Stock and Preferred Stock issued.
The common stock is not redeemable and has no preemptive rights.

PREFERRED STOCK

     We have 840,000  shares of  authorized  Preferred  Stock,  of which 242,170
shares are issued and  outstanding.  Holders of Preferred  Stock are entitled to
receive,  in the discretion of our board of directors,  noncumulative  dividends
declared by our board of directors of up to $1 per share per year,  and no more,
before dividends may be declared or paid with respect to our common stock or any
series of New Series Preferred Stock.

     Holders of Preferred Stock are entitled to one vote per share multiplied by
the number of directors to be elected in an election of directors,  which may be
cast  cumulatively,  and to one vote per  share on  other  matters.  Holders  of
Preferred  Stock vote as a single class with the holders of our common stock and
any series of New Series Preferred Stock having voting rights. However, whenever
dividends are in arrears on the Preferred Stock for six quarters, the holders of
Preferred  Stock have the right to vote as a class to elect two directors at the
next annual  stockholders'  meeting at which directors are elected and have such
right until dividends have been paid on the Preferred Stock for four consecutive
quarters.  The vote of the  holders of  two-thirds  of  Preferred  Stock  voting
together as a class is required for any amendment to our restated certificate of
incorporation  which would  materially and adversely alter or change the powers,
preferences or special rights of the Preferred Stock.

     In the event of our voluntary or  involuntary  dissolution,  liquidation or
winding up,  holders of Preferred  Stock are entitled to receive  payment in the
amount of the par value of their  Preferred  Stock and any  declared  and unpaid
dividends  before any payment is made upon the New Series Preferred Stock or our
common stock.  The Preferred Stock is not redeemable by us and has no preemptive
rights.

NEW SERIES PREFERRED STOCK

     Under our restated certificate of incorporation,  our board of directors is
authorized without further  stockholder  action, to issue up to 2,000,000 shares
of New Series  Preferred  Stock in one or more series,  with such  designations,
powers, preferences,  rights,  qualifications,  limitations or restrictions,  as
shall be set  forth in a  certificate  of  designations  filed  pursuant  to the
Delaware  Corporation Law, subject to the powers,  preferences and rights of the
Preferred Stock.

     If any series of New Series Preferred Stock entitles the holders thereof to
dividends, such dividends may be paid following the payment or setting apart for
payment of dividends on the Preferred  Stock and prior to the payment or setting
apart for payment of dividends on our common stock. If specified,  dividends may
be cumulative. In the event of a liquidation,  dissolution or winding up of KCS,
holders of each  series of New Series  Preferred  Stock are  subordinate  to the
holders of Preferred Stock, but have preference and priority over the holders of
our common  stock,  for  payments  of amounts as set forth in a  certificate  of
designations.  The New Series Preferred Stock has no preemptive  rights. We have
450,000 shares of authorized New Series Preferred Stock which are undesignated.



     SERIES A PREFERRED STOCK

     Our board of directors established the Series A Preferred Stock, consisting
of 150,000 shares,  for issuance  pursuant to our Stockholder  Rights  Agreement
(the  "Rights  Agreement").  No  shares of Series A  Preferred  Stock  have been
issued. See "--Anti-Takeover Provisions--Rights Agreement" below.

     The shares of Series A Preferred  Stock  purchasable  upon  exercise of the
Rights  will  have a  cumulative  quarterly  dividend  rate set by our  board of
directors or equal to 1,000 times the dividend  declared on our 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 Series A
Preferred  Stock  held  by  such  stockholder.  In  the  event  of  any  merger,
consolidation  or other  transaction  in which our common shares are  exchanged,
each share of Series A  Preferred  Stock 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  Stock 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 our common stock. The
shares will not be redeemable. The vote of holders of a majority of the Series A
Preferred Stock,  voting together as a class, will be required for any amendment
to the our restated  certificate  of  incorporation  that would  materially  and
adversely  alter or change the  powers,  preferences  or special  rights of such
shares.

     SERIES B PREFERRED STOCK

     In 1993, our board of directors  authorized the establishment of the Series
B Preferred Stock,  consisting of 1,000,000 shares,  for issuance to the trustee
of a grantor  trust formed by us entitled  "Employee  Plan  Funding  Trust" (the
"Trust") for the purpose of holding  shares of Series B Preferred  Stock for the
benefit of various KCS employee  benefit  plans,  including  the Employee  Stock
Ownership Plan,  stock option plans and Employee Stock Purchase Plan. On October
1, 1993, we sold 1,000,000  shares of Series B Preferred  Stock to the Trust for
$200 million with funds borrowed from us, secured by a pledge of the securities.
The  Trust  was  administered  by an  independent  bank  trustee.  The  Series B
Preferred  Stock  could only be held by the trustee of the Trust or on behalf of
any employee  benefit plan  designated as a beneficiary of the Trust.  Effective
September 30, 1998, we terminated the Trust. In accordance with the Agreement to
terminate the Trust,  we received  872,362 shares of Series B Preferred Stock in
full repayment of the  indebtedness  from the Trust. In addition,  the remaining
127,638  shares of Series B Preferred  Stock were  converted by the Trustee into
our common stock,  at the rate of 6 to 1, resulting in the issuance to the Trust
of 765,828 shares of our common stock.  The Trustee then transferred this common
stock to us and we have set these  shares aside for use in  connection  with the
KCS 1991  Amended and  Restated  Stock  Option and  Performance  Award Plan,  as
amended  and  restated  effective  May 5, 2004.  No shares of Series B Preferred
Stock remain outstanding.

     SERIES C PREFERRED STOCK

     For a detailed discussion of the Series C Preferred Stock, see "Description
of the Series C Preferred Stock."

ANTI-TAKEOVER PROVISIONS

     CLASSIFIED BOARD OF DIRECTORS

     Our  restated  certificate  of  incorporation  provides  that our  board of
directors  will be  divided  into  three  classes  as nearly  equal in number as
possible.  Each class of  directors  serves  for a term of three  years and such
terms  commence in three  consecutive  years so that one class of  directors  is
elected at the annual stockholders'  meeting each year. Our restated certificate
of  incorporation  also provides that the vote of 70% of the shares  entitled to
vote in the election of directors is required to amend the restated



certificate  of  incorporation  to increase the number of directors to more than
eighteen, abolish cumulative voting for directors and abolish the classification
of the board. The same vote  requirement is imposed by our restated  certificate
of  incorporation on certain  transactions  involving  mergers,  consolidations,
sales or leases of assets having a fair market value of $2 million or more, with
or to  certain  owners  of more  than 5% of our  stock  entitled  to vote in the
election of  directors,  unless our board of directors has approved a memorandum
of  understanding  with any such owner prior to its  becoming  such a 5% holder.
These  provisions  could have the effect of delaying,  deferring or preventing a
change in control of KCS.

     RIGHTS AGREEMENT

     To implement the Rights Agreement,  in 1995 our board of directors declared
and made a dividend  distribution of one Series A Preferred Stock purchase right
("Right") for each  outstanding  share of our common stock.  Each Right entitles
the  registered  holder  to  purchase  from us  1/1,000  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.

     The Rights,  which are automatically  attached to our common stock, are not
exercisable or transferable apart from our common stock until the tenth calendar
day following the earlier to occur of (unless extended by our board of directors
and subject to the earlier redemption or expiration of the Rights):

     o    the date of a public  announcement  that an acquiring person acquired,
          or obtained the right to acquire,  beneficial ownership of 20% or more
          of the outstanding shares of our common stock (or 15% in the case that
          such person is considered an "adverse person"); or

     o    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% or more of such  outstanding  shares  of our
          common  stock (or 15% in the case that such  person is  considered  an
          "adverse person").

Until  exercised,  the  Rights  will  have no rights  as a  stockholder  of KCS,
including,  without  limitation,  the  right to vote or  receive  dividends.  In
connection with certain  business  combinations  resulting in the acquisition of
KCS or dispositions or more than 50% of our assets or earnings power, each Right
shall  thereafter  have the right to receive,  upon the exercise of the Right 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 us.

     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% (or 15% in some  instances)  or  more of the  outstanding  shares  of our
common stock, we may redeem the Rights in whole,  but not in part, at a price of
$0.005  per  Right.  In  addition,  our right of  redemption  may be  reinstated
following an  inadvertent  trigger of the Rights (as  determined by our board of
directors) if an acquiring  person  reduces its  beneficial  ownership to 10% or
less of the outstanding shares of our common stock in a transaction or series of
transactions not involving us.

     Under  certain  circumstances,  the Rights  Agreement  could  significantly
impair the  ability of third  parties  to  acquire  control of us without  prior
approval of our board of directors.



               DESCRIPTION OF THE CLASS A CONVERTIBLE COMMON STOCK

     Shares of Class A Convertible Common Stock are to be issued pursuant to the
Acquisition  Agreement and the  transactions  contemplated  thereby.  Additional
shares  of Class A  Convertible  Common  Stock  may be  issued  pursuant  to the
Consulting  Agreement.  The Class A  Convertible  Common Stock and the shares of
common stock  issuable upon  conversion of the Class A Convertible  Common Stock
will be subject  to the rights and  obligations  contained  in the  amended  and
restated  certificate  of  incorporation,  to be filed  upon  occurrence  of the
Merger, and the Stockholders' Agreement.

     All capitalized  terms used in this "Description of the Class A Convertible
Common  Stock"  section and not  otherwise  defined  shall have the meanings set
forth in the  Stockholders'  Agreement  and  form of the  amended  and  restated
certificate of incorporation attached as Exhibit A to the Acquisition Agreement.

DIVIDEND RIGHTS

     When and as dividends or other distributions are declared,  whether payable
in cash,  in  property  or in shares of our  stock,  the  holders of the Class A
Convertible  Common Stock and common  stock shall be entitled to share  equally,
share for share, in such dividends or other  distributions as if all such shares
were of a single class.

TERMS OF CONVERSION

     The Class A  Convertible  Common  Stock will be  convertible  into an equal
number of shares of common  stock at any time,  upon the option of holders,  and
mandatorily,  upon the  occurrence  of  certain  conditions.  Shares  of Class A
Convertible Common Stock shall be converted automatically, without any action on
the part of any Person,  into an equal number of shares of common stock upon the
occurrence  of the  following  events:  (i) a Transfer  by any TMM Holder of any
shares of Class A Convertible Common Stock to a Person other than Grupo TMM, TMM
Holdings,  Multimodal,  or the  stockholders of Grupo TMM who will have executed
the Stockholders' Agreement ("Grupo TMM Principal Stockholders")  (collectively,
the  "TMM  Holders"),  or an  entity  which  is an  Affiliate  of any of the TMM
Holders; (ii) on the first day on which the TMM Holders, in the aggregate, cease
to  beneficially  own, in the aggregate,  at least 40% of the Voting  Securities
initially  acquired by  Multimodal  pursuant to the Merger  contemplated  by the
Acquisition  Agreement;  (iii) a Change of Control  of KCS;  or (iv) a Change of
Control of such TMM  Holder,  if after such Change of Control a  Competitor  has
Beneficial  Ownership  of more than a majority of the Total Voting Power of such
TMM Holder.

     In  order to  facilitate  optional  conversions  and  transfers  of Class A
Convertible  Common Stock (and, except for Transfers to Affiliates in accordance
with the  Stockholders'  Agreement,  the  conversion  of such shares into common
stock),  any TMM Holder  shall,  at its option,  deliver  written  notice of the
proposed  conversion or transfer,  together with the certificate or certificates
representing  such shares to be  converted  and/or  transferred,  to  Conversion
Agent.  Following  any  automatic  conversion,  the  share or  shares of Class A
Convertible   Common   Stock  so  converted   shall  cease  to  be   outstanding
(notwithstanding  the fact that the holder or holders  may not have  surrendered
the certificate or  certificates  representing  such Class A Convertible  Common
Stock for  conversion),  and such  certificate or certificates  shall thereafter
represent  solely the right to receive a certificate or certificates  for common
stock  issuable  upon  conversion  of the Class A  Convertible  Common  Stock so
converted,  upon surrender of such certificate or certificates to the Conversion
Agent.

VOTING RIGHTS

     Each holder of Class A  Convertible  Common  Stock shall be entitled to one
vote for each share of such stock held by such holder. Each outstanding share of
Class A  Convertible  Common  Stock  shall be



entitled to vote on each matter on which our  stockholders  shall be entitled to
vote. However,  with respect to the election of directors other than the Class A
Directors (described below), the Class A Convertible Common Stock shall be voted
in favor of nominees recommended by our board of directors who were nominated in
compliance with Article V of the Stockholders' Agreement.

     Voting separately as a class, the holders of the Class A Convertible Common
Stock shall have the right to elect Class A Director(s) as follows: (i) from and
after the effectiveness of the amended and restated certificate of incorporation
until such time as the TMM Holders cease to beneficially own in the aggregate at
least 75% of the Voting  Securities  initially  acquired  by MM  pursuant to the
Merger contemplated by the Acquisition  Agreement (80% if a Change of Control of
TMM or any TMM  Holder  shall  have  occurred),  two  members  of our  board  of
directors will be elected by the holders of the Class A Convertible Common Stock
voting  as a  separate  class;  (ii) at such  time as the TMM  Holders  cease to
beneficially  own in the  aggregate  at  least  75%  of  the  Voting  Securities
initially acquired by MM pursuant to the Merger  contemplated by the Acquisition
Agreement  (80% if a Change  of  Control  of TMM or any TMM  Holder  shall  have
occurred) and provided that such TMM Holders continue to beneficially own in the
aggregate  at  least  40% of the  Voting  Securities  initially  acquired  by MM
pursuant to the Merger contemplated by the Acquisition Agreement,  the number of
directors  which the holders of Class A Convertible  Common Stock have the right
to elect voting as a separate class will be decreased from two to one; and (iii)
at such time as the TMM Holders  cease to  beneficially  own in the aggregate at
least 40% of the Voting  Securities  initially  acquired  by MM  pursuant to the
Merger  contemplated by the Acquisition  Agreement,  the right of the holders of
Class A Convertible  Common Stock voting as a separate class to elect any member
of our board of directors shall terminate.  Notwithstanding  any of the above to
the  contrary,  if a Change of Control of Grupo TMM or any TMM Holder shall have
occurred and the acquirer is a  Competitor,  the right of the holders of Class A
Convertible  Common Stock voting as a separate  class to elect any  member(s) of
our board of directors shall immediately terminate.

LIQUIDATION RIGHTS

     In the event of any voluntary or  involuntary  liquidation,  dissolution or
winding up of the  affairs of KCS,  holders  of the Class A  Convertible  Common
Stock and common  stock  shall be  entitled to share  ratably  according  to the
number of shares held by them, in all of our assets  available for  distribution
to our stockholders.

PREEMPTION RIGHTS

     The  holders of Class A  Convertible  Common  Stock  shall have  preemptive
rights to acquire  additional shares of Class A Convertible  Common Stock in the
event we  authorize  the  issuance or sale of any shares of common  stock or any
securities  containing  options or rights to acquire any shares of common  stock
(other than as a dividend on the outstanding common stock).  Notwithstanding the
foregoing,  the  holders  of  Class  A  Convertible  Common  Stock  do not  have
preemptive  rights with respect to issuances of common stock (including for this
purpose,  options,  warrants and other securities into or exercisable for common
stock) issued: (i) to our employees, directors, consultants, agents, independent
contractors or other service providers in connection with a Plan existing on the
date hereof or a Plan approved by our board of directors and adopted by us after
the date hereof;  (ii) upon the conversion of Class A Convertible  Common Stock;
(iii) upon the exercise of any options,  warrants,  or  exchangeable  securities
which are  outstanding  as of the  effective  date of the amended  and  restated
certificate of  incorporation;  or (iv) in connection  with the  acquisition (by
merger,  consolidation,  acquisition of assets or equity interests or otherwise)
of the equity interests or assets of another Person.

     We shall first  notify  then-existing  TMM  Holders of Class A  Convertible
Common Stock of any proposed  transaction  triggering  preemptive  rights of the
Class A Convertible  Common Stock and offer to sell to each such Person a number
of shares of Class A  Convertible  Common  Stock (or,  as  applicable,



options,   warrants  or  other  securities  into  or  exercisable  for  Class  A
Convertible  Common Stock) determined  according to the formula specified in the
amended and restated  certificate of  incorporation.  To the extent that any TMM
Holder elects not to participate in such  preemptive  rights,  each of the other
TMM Holders shall have a pro rata right to purchase at the same price and on the
same terms and conditions the Voting Securities which such non-participating TMM
Holder had the right but elected not to purchase.

     The  preemptive  rights of the TMM  Holders of Class A  Convertible  Common
Stock  shall  immediately  and  irrevocably  terminate  on the date that the TMM
Holders  do not  beneficially  own in the  aggregate  at least 40% of the Voting
Securities   initially  acquired  by  Multimodal  pursuant  to  the  Acquisition
Agreement.

TRANSFER RESTRICTIONS

     For a period of five years from and after the  effectiveness of the amended
and restated  certificate of incorporation,  the TMM Holders shall not, directly
or indirectly,  alone or in concert with others, sell, assign, transfer, pledge,
hypothecate,  otherwise subject to any lien, grant any option with respect to or
otherwise   dispose  of  any   interest  in  (or  enter  into  an  agreement  or
understanding   with  respect  to  the  foregoing)  any  Voting   Securities  (a
"Disposition") to a Competitor.  Disposition  pursuant to a Public Offering or a
Rule 144  Transaction  will not be deemed to  violate  this  prohibition  if the
selling TMM Holder(s) follow appropriate and reasonable  procedures  designed to
prevent the sale of such Voting Securities to any Competitor. After the earliest
of (i) five years following the date of the amended and restated  certificate of
incorporation,  or (ii) the first date on which the TMM Holders beneficially own
in the aggregate,  directly or indirectly and alone or as part of a Group,  less
than 15% of the outstanding  Voting  Securities of KCS, a TMM Holder may propose
to sell Voting Securities to a Competitor; provided we shall have the right (but
not the  obligation)  to  purchase,  in  whole  but  not in  part,  such  Voting
Securities at a per share cash purchase price equal to the purchase price in the
agreement  between the selling TMM Holder and a Competitor.  This purchase right
shall be assignable, in whole or in part, by us to any other Person, but no such
assignment  shall relieve us of our obligation to assure payment of the purchase
price for any Voting Securities as to which a notice of election to exercise the
Right of First Refusal is made by us or any such assignee.

     For a period of five years from and after the  effectiveness of the amended
and restated  certificate  of  incorporation,  each of the TMM Holders shall not
effect a Disposition of Voting  Securities to any Affiliate of either Grupo TMM,
TMM  Holdings  or  Multimodal  or any  Affiliate  of  any  Grupo  TMM  Principal
Stockholders unless such Affiliate agrees in writing to be bound by the terms of
the Stockholders' Agreement.  The TMM Holders shall remain responsible,  jointly
and severally, for any breaches of the Stockholders' Agreement by such Affiliate
(provided that any TMM Holder which is a Grupo TMM Principal  Stockholder  shall
be  severally  responsible  only for  breaches by an  Affiliate of the Grupo TMM
Principal  Stockholder to which such Grupo TMM Principal  Stockholder  effects a
Distribution).

     Subject to the foregoing transfer restrictions, TMM Holders may sell any or
all Voting  Securities  beneficially  owned by such Person provided that: (i) no
Disposition  that in the  aggregate  represents  5% or  more of the  outstanding
Voting  Securities  shall  be made to any  Person  other  than a  Person  who is
eligible to file  reports  pursuant to Rule 13d-1 under the Exchange Act (a "13G
Filer"),  unless such Person would not be so eligible with respect to the Voting
Securities  acquired from the  Disposition;  and (ii) no  Disposition  of Voting
Securities that in the aggregate represents 5% or more of the outstanding Voting
Securities  shall be made to any 13G  Filer  unless  (a) such  13G  Filer  would
continue  to be  eligible  to file  reports  pursuant  to Section  13G under the
Exchange Act with respect to the Voting  Securities  after giving  effect to the
proposed  acquisition of such Voting Securities;  and (b) the selling TMM Holder
shall have  delivered a written notice to us advising us of the number of Voting
Securities the seller  desires to sell



and the terms,  including  price,  of the proposed  transaction and we have been
provided the right (but not the  obligation)  to purchase,  in whole or in part,
such Voting  Securities at a per share cash purchase price equal to the purchase
price in the proposed transaction.

     Notwithstanding  any provision of the amended and restated  certificate  of
incorporation  to the contrary,  no  Disposition  shall be made to any Person or
Group that would,  together with such Person's  Affiliates  and  Associates  and
after giving effect to the acquisition of such Voting  Securities,  beneficially
own or have the right to acquire more than 15% of the Total Voting Power of KCS.

     TMM Holders shall be permitted to make a Disposition,  notwithstanding  any
contrary provision in the amended and restated certificate of incorporation,  in
connection with any tender or exchange offer made by an unaffiliated third party
to acquire KCS common stock so long as certain conditions are satisfied.

     The transfer  restrictions  imposed by the amended and restated certificate
of incorporation  (with the exception of our right of first refusal in the event
a TMM Holder  intends to sell shares of Class A  Convertible  Common  Stock to a
Competitor,  which shall survive indefinitely) shall immediately and irrevocably
terminate upon the earlier of the first date the TMM Holders beneficially own in
the aggregate less than 15% of the outstanding  Voting  Securities of KCS for at
least 30 consecutive days, or the occurrence of a Change of Control of KCS.

PLEDGES

     Subject to the transfer restrictions  contained in the amended and restated
certificate of incorporation, a TMM Holder may pledge or hypothecate as security
for  any  indebtedness  or  other  obligations  any  or  all  Voting  Securities
beneficially owned by such Person; provided that such TMM Holder obtains written
consent  from the pledgee that upon the  occurrence  of an event which gives the
pledgee the right to foreclose on the pledged  Voting  Securities  ("Foreclosure
Event")  such  pledgee  shall  provide  to us  prompt  written  notice  of  such
Foreclosure  Event and  provide us the right to  purchase,  in whole or in part,
such Voting  Securities at a price  determined in accordance with such provision
of the amended and restated  certificate of  incorporation.  This purchase right
shall be assignable, in whole or in part, by us to any other Person, but no such
assignment  shall relieve us of our obligation to assure payment of the purchase
price for any Voting  Securities  as to which we have  delivered  such a written
notice.




                CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS

     The  following is a  discussion  of the material  U.S.  federal  income tax
consequences  of  purchasing,  owning and  disposing  of our Series C  Preferred
Stock,  but it does not purport to be a comprehensive  description of all of the
tax  considerations  that may be  relevant to a decision to acquire our Series C
Preferred Stock.  The discussion  applies to you only if you are a United States
holder (as defined below) and only if you hold our Series C Preferred Stock as a
capital  asset for federal  income tax  purposes.  It does not  address  special
classes of holders, such as:

     o    certain financial institutions;

     o    insurance companies;

     o    dealers and traders in securities or foreign currencies;

     o    persons holding Series C Preferred Stock as part of a short sale, wash
          sale, straddle or conversion transaction;

     o    persons whose functional currency for U.S. federal income tax purposes
          is not the U.S. dollar;

     o    partnerships  or other entities  classified as  partnerships  for U.S.
          federal income tax purposes; or

     o    tax-exempt organizations.

     This  discussion is based on the Internal  Revenue Code of 1986, as amended
(the "Code"), final, temporary and proposed Treasury regulations, administrative
pronouncements  and  judicial  decisions  all  as  currently  in  effect.  These
authorities  are subject to change,  possibly  on a  retroactive  basis.  Please
consult your own tax advisers  concerning  the U.S.  federal,  state,  local and
foreign tax  consequences  of purchasing,  owning and disposing of shares of our
Series C Preferred Stock in your particular circumstances.

     As used herein, the term "United States Holder" means a beneficial owner of
a share of Series C Preferred  Stock that is, for United States  federal  income
tax purposes:

     o    a citizen or resident of the United States;

     o    a  corporation,  or other  entity  taxable as a  corporation  for U.S.
          federal income tax purposes, created or organized in or under the laws
          of the United States or of any political subdivision thereof; or

     o    an estate or trust the  income of which is  subject  to United  States
          federal income taxation regardless of its source.

     The term "United States holder" also includes  certain former  citizens and
residents of the United States.

     TAXATION OF DISTRIBUTIONS

     Distributions  paid on our  Series C  Preferred  Stock  will be  treated as
dividends  taxable to you as  ordinary  income to the  extent of our  current or
accumulated  earnings and profits (as determined  under



U.S. federal income tax  principles).  Distributions in excess of our current or
accumulated  earnings and profits will be treated  first as a tax free return of
capital to the extent of your basis in our Series C Preferred  Stock and then as
capital gain. Distributions on our Series C Preferred Stock will be taxable when
received by you.

     Distributions  taxable as  dividends  received by corporate  United  States
Holders will be eligible for the 70% dividends  received  deduction,  subject to
various  limitations.  The  benefits of the  dividends  received  deduction to a
corporate United States Holder may, in effect,  be reduced or eliminated by many
exceptions and restrictions,  including  restrictions  relating to the corporate
United States Holder's taxable income,  holding period of our Series C Preferred
Stock, debt financing and the so-called  "extraordinary  dividend"  provision of
Section 1059 of the Code.  The dividends  received  deduction is not a deduction
for purposes of the computation of the adjusted current earnings for alternative
minimum tax purposes.

     CONSTRUCTIVE DIVIDENDS

     Any increase to the  conversion  rate of our Series C Preferred  Stock may,
depending  on the  circumstances,  be deemed to be a  distribution  to you.  Any
deemed distribution will be taxed in the same manner as an actual  distribution.
See "Taxation of Distributions" above.

     CONVERSION INTO COMMON STOCK

     Your  conversion of our Series C Preferred Stock into our common stock will
not be a taxable event,  except that the receipt of cash in lieu of a fractional
share of our common stock will result in capital  gain or loss  (measured by the
difference  between the cash received in lieu of the  fractional  share and your
tax basis in the fractional share).

     Your tax basis in common stock  received upon a conversion of your Series C
Preferred  Stock will be the same as your basis in your Series C Preferred Stock
at the time of conversion, reduced by any basis allocated to a fractional share.
Your  holding  period for the common  stock  received  will include your holding
period for your converted Series C Preferred Stock.

     REDEMPTION FOR CASH

     You will generally recognize capital gain or loss on the redemption of your
Series C Preferred Stock for cash,  provided that the redemption  meets at least
one of the  following  requirements  as  determined  under  federal  income  tax
principles:

     o    the redemption is not essentially equivalent to a dividend;

     o    the redemption  results in a complete  termination of your interest in
          our stock (preferred and common); or

     o    the redemption is substantially disproportionate with respect to you.

     In  determining  whether  any of the  above  requirements  applies,  shares
considered  to be owned by you by reason of  certain  attribution  rules must be
taken into account. A redemption is not essentially  equivalent to a dividend if
the  redemption  results  in  a  "meaningful  reduction"  in  the  shareholder's
proportionate interest in the corporation. It may be more difficult for a person
who owns,  actually or constructively by operation of the attribution rules, any
of our common  stock to satisfy  any of the above  requirements,  including  the
requirement that there be a meaningful  reduction in the holder's  proportionate
interest in us.



     If the  redemption  satisfies any of the above  requirements,  such capital
gain or loss will be equal to the difference between the amount of cash received
by you and your tax basis in your redeemed Series C Preferred Stock. The capital
gain or loss will be long-term if the holding  period for our Series C Preferred
Stock is more than one year.

     If the redemption does not satisfy any of the above requirements,  then the
entire  amount  received  (without  offset  for your tax basis in your  Series C
Preferred Stock redeemed) will be treated as a distribution taxable as described
in  "Taxation  of  Distributions"  above.  In such case,  your tax basis in your
redeemed Series C Preferred Stock will be allocated to your remaining  stock, if
any. Prospective  investors should consult their own tax advisors as to the U.S.
federal income tax consequences of a redemption of our Series C Preferred Stock.

     REDEMPTION SOLELY FOR COMMON STOCK

     You will not  recognize  gain or loss on our  redemption  of your  Series C
Preferred  Stock  solely for our common  stock  (except  that you may  recognize
ordinary  income to the extent that a portion of our common stock is  determined
to  constitute  a payment in respect of  dividends  in arrears on your  Series C
Preferred Stock).  The tax basis of the common stock received will equal the tax
basis of the Series C Preferred Stock  redeemed,  and the holding period for the
common stock  received will include the holding period of the Series C Preferred
Stock redeemed  (except that the portion,  if any, of common stock received that
constitutes  a payment in respect of  dividends in arrears will have a tax basis
equal to its fair market value at the time of the  redemption  and a new holding
period commencing on the day following the redemption).

     REDEMPTION FOR A COMBINATION OF CASH AND COMMON STOCK

     Upon a redemption of our Series C Preferred Stock for a combination of cash
and our common stock, you will recognize gain, but not loss, equal to the lesser
of (i) the excess of the fair  market  value of our  common  stock plus the cash
received in  redemption  of our Series C Preferred  Stock over your adjusted tax
basis in your  Series C  Preferred  Stock  redeemed  and (ii) the amount of cash
received in the redemption. Notwithstanding the previous sentence, any shares of
common stock that are determined to constitute a payment in respect of dividends
in arrears on our Series C Preferred  Stock will be taxable as ordinary  income.
Except as described  below,  the gain  recognized upon such a redemption will be
capital  gain and will be  long-term  if the  holding  period for your  Series C
Preferred  Stock redeemed is more than one year. Your basis for our common stock
received  will equal your basis in your Series C Preferred  Stock  redeemed plus
any gain  recognized  and minus the cash  received.  Your holding period for the
common stock will include  your holding  period in the Series C Preferred  Stock
redeemed.

     If the redemption has the effect of the  distribution  of a dividend,  then
the gain recognized upon the redemption, as determined above, will be treated as
a dividend taxable as ordinary income to the extent of your ratable share of our
earnings and profits. The remainder of the gain will be capital gain and will be
long-term if the holding  period for your Series C Preferred  Stock  redeemed is
more  than one year.  For  purposes  of  determining  whether  your gain will be
treated as a dividend,  stock (including our common stock) owned by you actually
and constructively through attribution rules, will be taken into account.

     OTHER SALES AND DISPOSITIONS

     Except as set forth  above,  gain or loss you  realize on the sale or other
disposition  of shares of our Series C Preferred  Stock will be capital  gain or
loss, and will be long-term capital gain or loss if you held the shares for more
than one year.  The amount of your gain or loss will be equal to the  difference
between your tax basis in the shares of our Series C Preferred Stock disposed of
and the amount realized on the disposition.



     INFORMATION REPORTING AND BACKUP WITHHOLDING

     Payment of dividends and sales or redemption  proceeds that are made within
the  United  States or through  certain  U.S.-related  financial  intermediaries
generally are subject to information  reporting and to backup withholding unless
(i) you are a  corporation  or other exempt  recipient  or (ii),  in the case of
backup  withholding,  you provide a correct taxpayer  identification  number and
certify that no loss of exemption from backup withholding has occurred.

     The amount of any backup  withholding from a payment to you will be allowed
as a credit  against your U.S.  federal income tax liability and may entitle you
to a refund, provided that the required information is furnished to the Internal
Revenue Service.

                             SELLING SECURITYHOLDERS

     The Series C Preferred  Stock,  and any shares of our common  stock  issued
upon conversion of the Series C Preferred Stock, is being offered by the selling
securityholders  listed in the table  below.  We  issued  and sold the  Series C
Preferred Stock in a private placement to the initial purchasers, Morgan Stanley
& Co. Incorporated and Deutsche Bank Securities Inc. The selling securityholders
purchased  their Series C Preferred  Stock from the initial  purchasers  or from
subsequent holders in transactions exempt from registration under the Securities
Act.

     This  prospectus  covers sales,  by the named selling  securityholders,  of
Series C Preferred  Stock and shares of common stock issued upon any  conversion
of the Series C Preferred Stock by the selling  securityholder.  This prospectus
will not cover  subsequent sales of our common stock received upon conversion of
Series C Preferred Stock purchased from a selling  securityholder  named in this
prospectus.

     No offer or sale  under  this  prospectus  may be made by a  securityholder
unless  that  holder  is  listed in the table  below,  in a  supplement  to this
prospectus  or in an amendment to the related  registration  statement  that has
become  effective.  We will  supplement  or amend  this  prospectus  to  include
additional  selling  securityholders  upon  request  and upon  provision  of all
required  information  to us,  subject to the terms of the  Registration  Rights
Agreement, dated as of May 5, 2003 between KCS and the initial purchasers.

     The following table sets forth certain information,  as of October 21, 2004
about the amount of Series C Preferred Stock  beneficially owned by each selling
security  holder  and the  number  of  shares  of  common  stock  issuable  upon
conversion of the Series C Preferred Stock that may be offered from time to time
pursuant to this prospectus.

     The percentage of Series C Preferred Stock outstanding  beneficially  owned
by each selling security holder is based on 400,000 shares of Series C Preferred
Stock  outstanding.  The  number of shares of common  stock  owned  prior to the
offering does not include shares of common stock issuable upon conversion of the
Series C  Preferred  Stock.  The number of shares of common  stock  shown in the
table below assumes conversion of all shares of Series C Preferred Stock held by
such holder at the initial conversion rate of 33.4728 shares of common stock per
share of Series C Preferred Stock. This conversion rate is subject to adjustment
as described under "Description of the Series C Preferred  Stock--Adjustments to
the Conversion Rate." Accordingly, the number of shares of common stock issuable
upon  conversion  of the Series C Preferred  Stock may increase or decrease from
time to time.  Under the certificate of designations  for the Series C Preferred
Stock,  fractional  shares  will not be issued upon  conversion  of the Series C
Preferred Stock. Cash will be paid instead of fractional shares, if any.

     The following table has been prepared based upon the information  furnished
to us by the selling security holders.  The selling security holders  identified
below may have sold,  transferred or otherwise



disposed  of some or all of their  Series C  Preferred  Stock  since the date on
which the information in the following table is presented in transactions exempt
from or not subject to the  registration  requirements  of the Securities Act of
1933.  Information  concerning the selling security holders may change from time
to time and, if necessary,  we will supplement this prospectus  accordingly.  We
cannot give an  estimate as to the amount of Series C Preferred  Stock or common
stock issuable upon conversion thereof that will be held by the selling security
holders  upon the  termination  of this  offering  because the selling  security
holders may offer some or all of their Series C Preferred  Stock or common stock
pursuant  to  the  offering  contemplated  by  this  prospectus.  See  "Plan  of
Distribution."

     Except as otherwise  disclosed  in  footnotes  to the table  below,  to our
knowledge, other than their ownership of the securities described below, none of
the selling  security  holders has, or has had within the past three years,  any
position,  office  or  other  material  relationship  with  us  or  any  of  our
predecessors or affiliates.





                                                                                      

                                         NUMBER OF
                                         SHARES OF
                                          SERIES C
                                         PREFERRED                       NUMBER OF      NUMBER OF
                                           STOCK       PERCENTAGE OF     SHARES OF      SHARES OF
                                        BENEFICIALLY     SERIES C       COMMON STOCK     COMMON
                                           OWNED         PREFERRED      OWNED PRIOR    STOCK THAT    PERCENTAGE OF
                                          THAT MAY         STOCK           TO THE        MAY BE       COMMON STOCK
                 NAME                     BE SOLD       OUTSTANDING     OFFERING(1)      SOLD(2)     OUTSTANDING(3)
                 ----                   ------------   --------------   -------------  -----------   --------------
Alexandra Global Master Fund LTD               1,500                *               0       50,209                 *
Allstate Insurance Company                     2,000                *          16,300       66,945                 *
Bank Austria Cayman Islands, LTD               2,000                *               0       66,945                 *
BNP Paribas Equity Strategies, SNC             2,065                *          19,211       69,121                 *
BP Amoco PLC Master Trust                      2,026                *               0       67,815                 *
Clinton Multistrategy Master Fund,
Ltd.                                             375                *               0       12,552                 *
CNH CA Master Account, L.P.                      250                *               0        8,368                 *
Context Convertible Arbitrage Fund,
L.P.                                           8,350            2.09%               0      279,497                 *
CooperNeff Convertible Strategies
(Cayman) Master Fund, L.P.                     2,160                *               0       72,301                 *
DBAG London                                    5,000            1.25%               0      167,364                 *
Equitec Group LLC                              2,500                *               0       83,682                 *
Goldman Sachs & Co.                           12,500            3.13%          35,853      418,410                 *
Guggenheim Portfolio Co. XV, LLC               1,500                *               0       50,209                 *
Hotel Union & Hotel Industry of
Hawaii Pension Plan                              732                *               0       24,502                 *
KD Convertible Arbitrage Fund L.P.             5,735            1.43%               0      191,966                 *
Lyxor/Convertible Arbitrage Fund, Ltd.           140                *               0        4,686                 *
Lyxor Master Fund Ref.: Silverado              1,750                *               0       58,577                 *
McMahan Securities Co. L.P.                      350                *               0       11,715                 *
Morgan Stanley & Co. Incorporated(4)          39,489            9.87%          70,922    1,321,807             2.17%
Newport Alternative Income Fund                  411                *               0       13,757                 *
OIP Limited                                      360                *               0       12,050                 *
Pacific Life Insurance Company                   250                *               0        8,368                 *
Putnam Convertible Income - Growth
Trust                                         13,000            3.25%               0      435,146                 *
RCG Latitude Master Fund, LTD                  4,250            1.06%               0      142,259                 *
RCG Multi Strategy Master Fund, LTD            3,000                *               0      100,418                 *
Ramius Master Fund, LTD                        5,750            1.44%               0      192,468                 *
Silverado Arbitrage Trading, LTD               1,300                *               0       43,514                 *
Silverback Master, LTD                        30,000            7.50%               0    1,004,184             1.58%
Silvercreek II Limited                         1,569                *               0       52,518                 *
Silvercreek Limited Partnership                3,160                *               0      105,774                 *
Singlehedge U.S. Convertible
Arbitrage Fund                                   340                *               0       11,380                 *
Sphinx Convertible Arb Fund SPC                  711                *               0       23,799                 *
SSI Blended Market Neutral L.P.                1,025                *               0       34,309                 *
SSI Hedged Convertible Market Neutral
L.P.                                           1,117                *               0       37,389                 *
Sturgeon Limited                                 295                *               0        9,874                 *
TQA Master Plus Fund, Ltd.                     5,000            1.25%               0      167,364                 *
UBS AG London Branch                          12,500            3.13%               0      418,410                 *
UBS O'Connor LLC F/B/O O'Connor
Global Convertible Portfolio                     500                *               0       16,736                 *
Viacom Inc. Pension Plan Master Trust             66                *               0        2,209                 *
Xavex Convertible Arbitrage #5                 1,000                *               0       33,472                 *
Windmill Master Fund, LP                      10,000            2.50%               0      334,728                 *
Institutional Benchmarks Master Fund
Ltd. (formerly Zurich Institutional
Benchmarks Master Fund Ltd.)                   2,844                *               0       95,196                 *
All other beneficial owners(5)(6)             10,250            2.56%               0      343,096                 *
TOTAL(7)                                     199,120           49.78%         142,286    6,665,104             9.79%





*    Less than one percent.

(1)  Does not include  shares of common stock  issuable  upon  conversion of the
     Series C Preferred Stock.
(2)  Consists of shares of common stock issuable upon conversion of the Series C
     Preferred  Stock,  assuming a conversion  rate of 33.4728  shares of common
     stock for each share of Series C Preferred Stock and a cash payment in lieu
     of any  fractional  share  interest.  The  conversion  rate is  subject  to
     adjustment  as  described  under  "Description  of the  Series C  Preferred
     Stock--Adjustments  to the  Conversion  Rate."  Accordingly,  the number of
     shares of common stock  issuable upon  conversion of the Series C Preferred
     Stock may increase or decrease from time to time. Numbers have been rounded
     down to whole numbers due to fact that fractional shares will not be issued
     upon conversion of the Series C Preferred  Stock. The "total" for number of
     shares of common  stock  that may be sold is based on the  conversion  rate
     applied to the total shares of Series C Preferred  Stock  remaining  unsold
     under the registration statement.
(3)  Calculated based on Rule 13d-3(d) (1) under the Securities  Exchange Act of
     1934, as amended,  using 62,702,450  shares of common stock  outstanding on
     September 30, 2004. In calculating  this amount,  we treated as outstanding
     the number of shares of common stock issuable upon conversion of the Series
     C Preferred Stock by the applicable holder.  However, we did not assume the
     conversion of any other holder's Series C Preferred Stock.
(4)  Morgan  Stanley  Senior  Funding,  Inc.  was a lender  under  KCS's  credit
     facility.  In addition,  during the past three years,  Morgan Stanley & Co.
     Incorporated  and/or its affiliates have performed  financial  advisory and
     investment banking services for KCS. Morgan Stanley & Co., Incorporated was
     an initial  purchaser of 80% of the Series C Preferred Stock in the private
     placement of these securities.
(5)  We  will  identify   additional  selling  security  holders,   if  any,  by
     post-effective amendment before they offer or sell their securities.
(6)  Assumes that the unnamed  holders of Series C Preferred Stock or any future
     transferees,  pledgees or donees of or from any such unnamed  holder do not
     beneficially own any common stock other than the common stock issuable upon
     conversion of the Series C Preferred Stock at the initial conversion rate.
(7)  Does not include 200,880 shares of Series C Preferred Stock sold by selling
     securityholders  which shares are convertible  into 6,723,997 shares of KCS
     common stock,  assuming a conversion rate of 33.4728 shares of common stock
     for each share of Series C  Preferred  Stock and a cash  payment in lieu of
     any fractional share interest.



PLAN OF DISTRIBUTION

     The Series C Preferred  Stock and the common stock are being  registered to
permit public secondary  trading of these securities by the holders thereof from
time to time after the date of this  prospectus.  We have  agreed,  among  other
things,  to bear all expenses  (other than  underwriting  discounts  and selling
commissions)  in connection  with the  registration  and sale of the  securities
covered by this prospectus.

     We will not receive any of the  proceeds  from the  offering by the selling
securityholders  of Series C Preferred  Stock or the common stock into which the
Series C Preferred  Stock is  convertible.  We have been  advised by the selling
securityholders  that the selling  securityholders  may sell all or a portion of
the Series C Preferred  Stock and common  stock  beneficially  owned by them and
offered  hereby from time to time on any  exchange on which the  securities  are
listed  on terms  to be  determined  at the  times of such  sales.  The  selling
securityholders  may also make  private  sales  directly  or through a broker or
brokers. Alternatively, any of the selling securityholders may from time to time
offer the Series C Preferred  Stock or the common  stock  beneficially  owned by
them through  underwriters,  dealers or agents, who may receive  compensation in
the form of underwriting discounts,  commissions or concessions from the selling
securityholders  and the  purchasers  of the  Series C  Preferred  Stock and the
common  stock for whom  they may act as agent.  The  aggregate  proceeds  to the
selling  securityholders from the sale of the Series C Preferred Stock or common
stock  offering  by them  hereby  will be the  purchase  price of such  Series C
Preferred Stock or common stock less discounts and commissions, if any.

     The Series C Preferred Stock and common stock may be sold from time to time
in one or more transactions at fixed offering prices,  which may be changed,  or
at varying prices determined at the time of sale or at negotiated prices.  These
prices will be  determined  by the holders of such  securities  or by  agreement
between  these  holders and  underwriters  or dealers  who may  receive  fees or
commissions in connection therewith.

     These transactions may include block  transactions or crosses.  Crosses are
transactions  in which  the same  broker  acts as an agent on both  sides of the
trade.  These  transactions  may be  effected  (i) on  any  national  securities
exchange or  quotation  service on which the Series C Preferred  Stock or common
stock may be listed or quoted at the time of sale, (ii) in the  over-the-counter
market, (iii) in transactions otherwise than on such exchanges or services or in
the over-the-counter  market, (iv) through the writing of options (including the
issuance by the selling  securityholder of derivative  securities),  whether the
options or such other  derivative  securities  are listed on an options or other
exchange or otherwise,  (v) through the  settlement of short sales,  or (vi) any
combination of the foregoing.

     In connection  with the sales of the Series C Preferred Stock or our common
stock  or  otherwise,   the  selling   securityholder  may  enter  into  hedging
transactions with  broker-dealers  or others,  which may in turn engage in short
sales of the  Series C  Preferred  Stock or our  common  stock in the  course of
hedging the  positions  they assume.  The selling  securityholder  may also sell
Series  C  Preferred  Stock or our  common  stock  short  and  deliver  Series C
Preferred  Stock or our common  stock to close out short  positions,  or loan or
pledge Series C Preferred Stock or our common stock to  broker-dealers or others
that in turn may sell such securities. The selling securityholder may enter into
option or other transactions with broker-dealers or other financial institutions
that require the delivery to the  broker-dealer or other financial  institutions
of the Series C Preferred Stock or the common stock,  which the broker-dealer or
other financial institution may resell pursuant to the prospectus, or enter into
transactions in which a broker-dealer  makes purchases as a principal for resale
for its  own  account  or  though  other  types  of  transactions.  The  selling
securityholder  may  pledge or grant a security  interest  in some or all of the
Series C  Preferred  Stock or our common  stock  issued upon  conversion  of the
Series C Preferred  Stock owned by it and if it defaults in the  performance  of
its secured obligations,  the pledgees or secured parties may offer and sell the
Series C Preferred  Stock or our common stock from time to time pursuant to this
prospectus.



The selling securityholder also may transfer and donate Series C Preferred Stock
or shares of our common stock issuable upon conversion of the Series C Preferred
Stock in other circumstances in which case the transferees,  donees, pledgees or
other successors in interest will be the selling  securityholder for purposes of
the prospectus.  The selling  securityholder may sell short our common stock and
may deliver  this  prospectus  in  connection  with such short sales and use the
shares of our common stock covered by the  prospectus to cover such short sales.
In addition,  any Series C Preferred Stock or shares of our common stock covered
by this  prospectus that qualify for sale pursuant to Rule 144, Rule 144A or any
other available exemption from registration under the Securities Act may be sold
under Rule 144, Rule 144A or such other available exemption.

     At the time a particular  offering of Series C Preferred Stock or shares of
our common stock  issuable upon  conversion  of the Series C Preferred  Stock is
made, a prospectus supplement,  if required,  will be distributed which will set
forth the  aggregate  amount of Series C Preferred  Stock or number of shares of
our common stock being offered and the terms of the offering, including the name
or names of any  underwriters,  dealers,  brokers  or  agents,  if any,  and any
discounts, commissions or concessions allowed or reallowed to be paid to brokers
or dealers.

     Our  outstanding  common  stock is listed for trading on the New York Stock
Exchange.

     The  Series  C  Preferred  Stock  was  issued  and  sold on May 5,  2003 in
transactions exempt from the registration  requirements of the Securities Act to
persons  reasonably   believed  by  the  Initial  Purchasers  to  be  "qualified
institutional  buyers" (as defined in Rule 144A under the  Securities  Act).  We
have agreed to indemnify each selling  securityholder  and each person,  if any,
who controls any selling securityholder (within the meaning of either Section 15
of the  Securities  Act or Section 20 of the  Exchange  Act),  and each  selling
securityholder has agreed to indemnify us, our directors,  our officers who sign
the  registration  statement  of  which  this  prospectus  forms a part and each
person,  if any, who controls us (within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange  Act),  each  underwriter  and each
person who controls any underwriter within the meaning of the Securities Act (in
the case of an  underwritten  offering)  and each other  selling  securityholder
against certain liabilities arising under the Securities Act.

     Selling  securityholders and any underwriters,  dealers,  brokers or agents
who  participate  in the  distribution  of the Series C  Preferred  Stock or our
common  stock may be deemed  to be  "underwriters"  within  the  meaning  of the
Securities  Act and any profits on the sale of the Series C Preferred  Stock and
our common stock by them and any discounts,  commissions or concessions received
by any such  underwriters,  dealers,  brokers  or  agents  may be  deemed  to be
underwriting discounts and commissions under the Securities Act.

     The selling  securityholders  and any other  person  participating  in such
distribution  will be subject to  applicable  provisions of the Exchange Act and
the rules and regulations thereunder,  including, without limitation, Regulation
M which may limit the timing of  purchases  and sales of the Series C  Preferred
Stock and our common  stock by the  selling  securityholders  and any other such
person.  Furthermore,  Regulation  M under the  Exchange  Act may  restrict  the
ability of any person engaged in a distribution  of the Series C Preferred Stock
and our common stock being  distributed for a period of up to five business days
prior to the commencement of such distribution.  All of the foregoing may affect
the  marketability  of the Series C Preferred Stock and our common stock and the
ability  of any  person or entity to  engage in  market-making  activities  with
respect to the Series C Preferred Stock and our common stock.

     We will use our best  efforts to keep the  registration  statement of which
this  prospectus is a part  effective  until the earliest of (i) the sale to the
public  pursuant to Rule 144 (or any similar  provision  then in force,  but not
Rule 144A) under the Securities Act or the registration  statement of which this
prospectus forms a part of all the securities  registered  thereunder,  and (ii)
the  expiration  of the holding



period applicable to such securities held by persons that are not our affiliates
under Rule 144(k) under the Securities Act or any successor  provision,  subject
to permitted exceptions.



                        FINANCIAL STATEMENTS OF GRUPO TFM

     The combined and consolidated financial statements for Grupo TFM (including
the notes  thereto  and the Report of  Independent  Accountants  thereon)  as of
December  31, 2003 and 2002 and for each of the three years in the period  ended
December  31, 2003 are  incorporated  herein by reference to Exhibit 99.1 to our
annual report on Form 10-K for the year ended December 31, 2003.




                         PRO FORMA FINANCIAL INFORMATION


In  April  2003,  KCS  completed  the sale of  400,000  shares  of its  Series C
Preferred  Stock,  resulting in net proceeds of  approximately  $193.0  million.
Annual preferred stock dividends related to these shares are approximately  $8.5
million,  which will be reflected as a reduction of net earnings in  determining
earnings  available  to common  stockholders  and  earnings per share in periods
following the sale of the Series C Preferred Stock. Additionally,  to the extent
that the assumed  conversion  of these shares into  13,389,121  shares of common
stock would have a dilutive  impact on earnings  per share,  such shares will be
included in the computation of diluted earnings per share in future periods.

In April 2003,  KCS and Grupo TMM announced a series of  transactions  that were
approved  by both  respective  boards of  directors  that would,  following  KCS
shareholder  approval and satisfaction of other conditions,  place KCSR, Tex-Mex
and TFM under the common  control of a single  transportation  holding  company,
NAFTA Rail.  Grupo TFM holds an 80% interest in TFM, which holds a 100% interest
in Mexrail. Mexrail wholly-owns Tex-Mex.

Under the terms of the agreement,  Multimodal,  a subsidiary of Grupo TMM, would
receive 18  million  shares of NAFTA Rail  representing  approximately  22% (20%
voting,  2% subject to voting  restrictions) of NAFTA Rail  outstanding  shares,
$200 million in cash and a potential  incentive  payment of between $100 million
and $180 million based upon the resolution of certain future contingencies.  See
Note 17 of the Notes to Pro Forma Condensed  Consolidated  Financial  Statements
for further information.

There are a number of conditions to closing on the Acquisition.  Accordingly, no
assurance  can be given  that KCS will be able to  consummate  the  Acquisition.
Notwithstanding this uncertainty, the following pro forma condensed consolidated
financial  statements are presented to illustrate the impact of the  Acquisition
on KCS's historical  financial  statements and reflect the effect of the various
transactions  necessary to consummate the agreements as if the  transaction  had
occurred  on January 1, 2003 and January 1, 2004 for income  statement  purposes
for the year ended  December  31, 2003 and the six months  ended June 30,  2004,
respectively, and as of June 30, 2004 for balance sheet purposes. The historical
financial  statements  of  Grupo  TFM  are  prepared  under  the  principles  of
International   Financial   Reporting   Standards   ("IFRS")   and   include   a
reconciliation between U.S. Generally Accepted Accounting Principles ("US GAAP")
and IFRS. The Grupo TFM historical  financial  information included in these pro
forma  financial  statements  is  reflected  under  US  GAAP  and  therefore  no
reconciliation of financial information between US GAAP and IFRS is required for
these purposes.



The  following  summarizes  selected  pro  forma  financial  information  of KCS
assuming the transaction  acquiring a controlling interest in Grupo TFM has been
completed as of June 30, 2004.


                              KANSAS CITY SOUTHERN
                 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                               AS OF JUNE 30, 2004
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)



                                                                                                    
                                                                                          PRO FORMA
                                                       KCS          GRUPO TFM            ADJUSTMENTS                  PRO
                                                   HISTORICAL       HISTORICAL     DEBIT ----------- CREDIT           FORMA
                                                   ----------       ----------     -----             ------           -----
ASSETS:
Current Assets:
  Cash and cash equivalents                           $  156.5       $   5.3        $  38.2 (4)        $200.0  (4)      $    -
  Accounts receivable, net                               114.4         188.1                             10.7  (11)      291.8
  Inventories                                             44.7          17.8                                              62.5
  Other current assets                                    25.9          17.9                                              43.8
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL CURRENT ASSETS                                     341.5         229.1           38.2             210.7            398.1
                                                   ------------   -----------    -----------        ----------      -----------
Investments                                              446.8           8.5                            396.3  (1)        59.0
Concession rights and related assets                        -        1,153.2           24.1 (2,8,10)      6.0  (3)     1,171.3
Properties, net                                        1,401.6         659.6                                           2,061.2
Goodwill                                                  10.6            -                                               10.6
Deferred income taxes and employees statutory
profit sharing                                              -          266.1                                             266.1
Other assets                                              31.4          29.1                                              60.5
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL ASSETS                                          $2,231.9      $2,345.6        $  62.3            $613.0         $4,026.8
                                                   ============   ===========    ===========        ==========      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
  Debt due within one year                              $  8.8      $  131.8                                          $  140.6
  Accounts and wages payable and accrued
  liabilities                                            174.8         177.9           10.7 (11)                         342.0
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL CURRENT LIABILITIES                                183.6         309.7           10.7                -             482.6
                                                   ------------   -----------    -----------        ----------      -----------

OTHER LIABILITIES:
  Long-term debt                                         563.9         827.9                             38.2 (4)      1,430.0
  Deferred income taxes                                  397.2            -                               6.9 (10)       404.1
  Other noncurrent liabilities and deferred
  credits                                                109.1          28.2            6.0 (3)                          131.3
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL OTHER LIABILITIES                                1.070.2         856.1            6.0              45.1          1,965.4
                                                   ------------   -----------    -----------        ----------      -----------

MINORITY INTEREST                                           -          357.3             -               40.7 (16)       398.0
                                                   ------------   -----------    -----------        ----------      -----------

STOCKHOLDERS' EQUITY
  Preferred stock                                          6.1            -              -                 -               6.1
  Redeemable cumulative convertible perpetual
  preferred stock                                          0.4            -              -                 -               0.4
  Common / capital stock                                   0.6         807.0          807.0 (6)            -               0.6
  New issue, non-voting common, $. 01 par                   -             -              -                0.2 (7)          0.2
  Treasury shares and effect on purchase of
  subsidiary shares                                         -         (222.0)            -              222.0 (6)           -
  Retained earnings                                      854.4         237.5          237.5 (6)            -  (7)        854.4
  Capital surplus                                        115.9            -              -              202.5 (7)        318.4
  Accumulated other comprehensive income                   0.7            -                                                0.7
                                                   ------------   -----------    -----------        ----------      -----------
Total stockholders' equity                               978.1         822.5        1,044.5             424.7          1,180.8
                                                   ------------   -----------    -----------        ----------      -----------

                                                   ------------   -----------    -----------        ----------      -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $ 2,231.9      $2,345.6       $1,061.2            $510.5         $4,026.8
                                                   ============   ===========    ===========        ==========      ===========




       See notes to proforma condensed consolidated financial statements.




The  following  summarizes  selected  pro  forma  financial  information  of KCS
assuming the transaction  acquiring a controlling interest in Grupo TFM had been
completed as of January 1, 2004.

                              KANSAS CITY SOUTHERN
                PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)



                                                                                                       

                                                                                               PRO FORMA
                                                                 KCS        GRUPO TFM         ADJUSTMENTS              PRO
                                                              HISTORICAL   HISTORICAL    DEBIT          CREDIT        FORMA

REVENUES                                                         $301.7      $352.4                                    $654.1

Costs and expenses                                                238.9       248.5          2.2  (14)                  489.6
Depreciation and amortization                                      25.9        44.5          0.3  (15)                   70.7
                                                              ----------  ----------     --------                   ----------

OPERATING INCOME                                                   36.9        59.4          2.5                         40.5

Equity in net earnings of unconsolidated affiliates:
    Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.         4.2          -           4.2  (9)                      -
    Other                                                           0.4          -                                        0.4
Interest expense                                                  (21.7)      (59.9)         1.4  (5)                   (83.0)
Debt retirement costs                                              (4.2)         -            -                          (4.2)
Other income (expense)                                              3.2         0.1          0.5  (5)                     2.8
                                                              ----------  ----------     --------      ----------   ----------
Income before income taxes                                         18.8        (0.4)         8.6           -              9.8
Income tax provision (benefit)                                      6.2       (12.0)        (1.7) (10)     -             (7.5)
                                                              ----------  ----------     --------      ----------   ----------

INCOME BEFORE MINORITY INTEREST                                    12.6        11.6          6.9           -             17.3
MINORITY INTEREST                                                    -         (2.4 )        0.5  (16)     -             (2.9)
                                                              ----------  ----------     --------      ----------   ----------

NET INCOME                                                         12.6         9.2          7.4           -             14.4
PREFERRED STOCK DIVIDENDS                                           4.4           -           -   (12)                    4.4
                                                              ----------  ----------     --------      ----------   ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                       $ 8.2       $ 9.2        $ 7.4       $   -          $  10.0
                                                              ----------  ----------     --------      ----------   ----------

BASIC EARNINGS PER COMMON SHARE:
    NET INCOME                                                   $ 0.13                                               $  0.12 (12)
                                                              ==========                                            ==========

Basic Weighted Average Common shares outstanding (IN THOUS)      62,570                                                80,570 (13)
                                                              ----------                                            ----------

DILUTED EARNINGS PER COMMON SHARE:
    NET INCOME                                                   $ 0.13                                               $  0.12 (12)
                                                              ==========                                            ==========

Diluted Weighted Average Common shares outstanding (IN THOUS)    63,812                                                81,812
                                                                                                                              (13)
                                                              ----------                                            ----------




       See notes to proforma condensed consolidated financial statements.



The  following  summarizes  selected  pro  forma  financial  information  of KCS
assuming the transaction  acquiring a controlling interest in Grupo TFM had been
completed as of January 1, 2003.

                              KANSAS CITY SOUTHERN
                PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
                      FOR THE YEAR ENDED DECEMBER 31, 2003
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)



                                                                                                      

                                                                                               PRO FORMA
                                                                 KCS        GRUPO TFM         ADJUSTMENTS              PRO
                                                              HISTORICAL   HISTORICAL    DEBIT -------- CREDIT        FORMA
                                                              ----------   ----------    -----          ------        -----

REVENUES                                                         $581.3      $698.5                                  $1,279.8

Costs and expenses                                                487.9       503.7          4.2  (14)                  995.8
Depreciation and amortization                                      64.3        87.2          0.8  (15)                  152.3
                                                              ----------  ----------     --------                   ----------

OPERATING INCOME                                                   29.1       107.6          5.0            -           131.7

Equity in net earnings of unconsolidated affiliates:
    Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.        12.3          -          12.3  (9)                      -
    Other                                                         (1.3)          -                                       (1.3)
Interest expense                                                 (46.4)     (111.1)          0.1  (5)                  (157.6)
Other income (expense)                                              6.8      (13.8)          1.2  (5)                    (8.2)
                                                              ----------  ----------     --------      ----------   ----------
Income before income taxes                                          0.5      (17.3)         18.6            -           (35.4)
Income tax provision (benefit)                                    (2.8)      (51.5)        (2.4) (10)       -           (56.7)
                                                              ----------  ----------     --------      ----------   ----------
INCOME BEFORE MINORITY INTEREST                                     3.3        34.2         16.2                         21.3
MINORITY INTEREST                                                    -        (6.9)          1.4 (16)       -            (8.3)
                                                              ----------  ----------     --------      ----------   ----------

INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                3.3        27.3         17.6           -             13.0
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF INCOME TAXES         8.9          -             -           -              8.9
                                                              ----------  ----------     --------      ----------   ----------
NET INCOME                                                         12.2        27.3         17.6           -             21.9
PREFERRED STOCK DIVIDENDS                                           5.9          -           2.8  (12)                    8.7
                                                              ----------  ----------     --------      ----------   ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                       $ 6.3       $27.3       $ 20.4          $ -         $  13.2
                                                              ----------  ----------     --------      ----------   ----------
BASIC EARNINGS PER COMMON SHARE:
    INCOME BEFORE ACCOUNTING CHANGE                            $ (0.04)                                               $  0.05 (12)
                                                              ==========                                            ==========
    NET INCOME                                                 $  0.10                                                $  0.17 (12)
                                                              ==========                                            ==========

Basic Weighted Average Common shares outstanding (IN THOUS)      61,725                                                79,725 (13)
                                                              ----------                                            ----------

DILUTED EARNINGS PER COMMON SHARE:
    INCOME BEFORE ACCOUNTING CHANGE                            $ (0.04                                                $  0.05 (12)
                                                              ==========                                            ==========
    NET INCOME                                                 $  0.10                                                $  0.16 (12)
                                                              ==========                                            ==========

Diluted Weighted Average Common shares outstanding (IN THOUS)    61,725                                                81,082 (13)
                                                              ----------                                            ----------



       See notes to proforma condensed consolidated financial statements.




                              KANSAS CITY SOUTHERN
         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: REMOVAL OF THE EQUITY INVESTMENT IN GRUPO TFM & MEXRAIL

Pursuant to the  Acquisition  Agreement,  Kansas City Southern (the "Company" or
"KCS") would acquire a controlling interest in Grupo Transportacion  Ferroviaria
Mexicana,  S.A. de C.V.  ("Grupo TFM"),  resulting in the full  consolidation of
Grupo TFM's balance sheet into NAFTA Rail,  successor to KCS.  Accordingly,  the
equity  investment  as of June 30, 2004  reflected  on the  Company's  condensed
consolidated balance sheet would be eliminated. KCS and Grupo TMM are in dispute
over Grupo TMM's attempt to terminate  the  agreement  entered into on April 20,
2003 by KCS and Grupo  TMM and  other  parties  under  which  KCS would  acquire
control of TFM.

On September 16, 2004, the Company closed on its 51% investment in Mexrail, Inc.
("Mexrail") for a total of approximately $32.7 million.  The Mexrail shares were
placed  in  a  voting   trust  while   awaiting  the  approval  of  the  Surface
Transportation  Board  ("STB").

NOTE 2: CREATION OF IDENTIFIABLE INTANGIBLE ASSETS

Additional  identifiable  intangibles  or goodwill may result from the Grupo TFM
acquisition.  The current  value of the  consideration  to obtain a  controlling
interest  in Grupo TFM  exceeds the  current  book value of the  underlying  net
assets by  approximately  $3.9  million,  which is  reflected  on the  condensed
consolidated  pro forma balance sheet as an addition to concession  assets.  The
Company has not completed a fair value appraisal or any associated allocation of
excess  purchase price to the fair value of tangible  assets as of this date. At
the time those  processes are  completed,  the  allocation of the purchase price
could change and may include certain  identifiable  intangibles  assets, such as
customer  contracts,  customer  relationships  or similar items. For purposes of
these pro forma financial statements,  the Company has assumed the difference in
value will be assigned to concession assets.

NOTE 3: RECOGNITION OF THE DEFERRED GAIN ON THE SALE OF MEXRAIL

On April 1, 2002,  the Company sold its 49% interest in Mexrail to TFM for $31.4
million  resulting in a pre-tax gain of $4.4 million,  which was reported in the
Company's  Consolidated  Statements  of Income for the year ended  December  31,
2002. In addition,  the  transaction  resulted in the  recognition of a deferred
gain, of which $6.0 million remained  unamortized as of June 30, 2004.  Assuming
the  transaction  contemplated  had  occurred on June 30,  2004,  the  remaining
unamortized gain on the April 2002 Mexrail  transaction would be eliminated from
the Company's long-term  liabilities and reflected with an offsetting adjustment
to concession assets as part of the transaction. Also see Note 2.




NOTE 4: TRANSACTION FINANCING

As described above, part of the transaction  consideration includes a payment of
$200  million.  This  payment may be made by the  Company,  at its option,  in a
combination  of  additional  common  stock  issuance to Grupo TMM and cash.  For
purposes of these pro forma financial  statements,  the Company has assumed that
the entire  payment of $200 million will be made in cash with a  combination  of
the  net  proceeds  of the  sale  of  4.25%  Redeemable  Cumulative  Convertible
Perpetual  Preferred  Stock,   Series  C  ("Convertible   Preferred  Stock")  of
approximately $193.0 million, completed in April 2003, with the remainder funded
from proceeds from borrowings under the Company's credit facility. The pro forma
financial  statements presented herein reflect the effect of these transactions.
Also see Note 7.

The Convertible  Preferred Stock is redeemable at the option of a holder only in
the event of a  "fundamental  change",  which is defined as "any  transaction or
event  (whether  by means  of an  exchange  offer,  liquidation,  tender  offer,
consolidation,  merger,  combination,   reclassification,   recapitalization  or
otherwise) in connection  with which all or  substantially  all of the Company's
Common stock is  exchanged  for,  converted  into,  acquired for or  constitutes
solely the right to receive  common stock that is not listed on a United  States
national  securities  exchange or approved for quotation on the Nasdaq  National
Market or similar system. The practical effect of this provision is to limit the
Company's  ability to  eliminate a holder's  ability to convert the  Convertible
Preferred Stock into common shares of publicly traded security  through a merger
or  consolidation  transaction.   In  no  other  circumstances  is  the  Company
potentially  obligated  to  redeem  the  Convertible  Preferred  Stock for cash.
Accordingly,  since the  Company  is in a  position  to  control a  "fundamental
change" the  Convertible  Preferred  Stock is  classified  as  permanent  equity
capital.

NOTE 5: ADJUSTMENTS TO INTEREST INCOME AND INTEREST EXPENSE

The  proforma  condensed  consolidated  income  statements  for the  year  ended
December  31, 2003 and the six months ended June 30, 2004 reflect a $1.2 million
and $0.5 million reduction to interest income,  respectively.  These adjustments
reflect the fact that,  assuming the Acquisition had been  consummated as of the
beginning of each  proforma  income  statement  presented,  the  Company's  cash
balance that had arisen from the  issuance of the  Convertible  Preferred  Stock
would have been used to fund the $200 million payment described above, and thus,
interest  income  relating to that cash  balance  would not have been  realized.
Similarly,  had the  Acquisition  been  consummated  as of the beginning of each
proforma income statement period  presented,  cash would not have been available
to pay down $49.3 million of debt during  December 2003 and $38.5 million during
March 2004.  Therefore,  an adjustment has been made to the pro forma  condensed
consolidated  income statements to increase interest expense by $0.1 million for
the year ended  December 31, 2003 and $1.4 million for the six months ended June
30, 2004.

NOTE 6:  ELIMINATION OF GRUPO TFM STOCKHOLDERS' EQUITY

As a result of NAFTA Rail  obtaining a  controlling  interest in Grupo TFM,  its
assets and liabilities would be consolidated with NAFTA Rail. Accordingly, Grupo
TFM's  stockholders'  equity  amounts would be  eliminated in the  consolidation
process.




NOTE 7: ISSUANCE OF NEW SECURITIES

As noted above,  Grupo TMM will receive as consideration  for the transaction 18
million shares of NAFTA Rail. This pro forma adjustment reflects the addition to
stockholders'  equity  of a total of $202.7  million  of  equity  based  upon 18
million  common  shares as part of the initial  agreement  and  assuming a stock
price of $11.26 per share.  The assumed stock price was derived by averaging the
closing price of the Company's common stock five days before and five days after
the  announcement of the transaction on April 21, 2003. The total  allocation of
the new capital is $0.2 million,  which is comprised of 18 million shares of new
non-voting  common stock with a par value of $.01 per share and $202.5  million,
which is reflected as capital surplus representing the value of the stock issued
in  excess  of par.  Note the  cost of the  purchase  would  have  increased  by
approximately $70 million if a current stock price of $15.16 per share was used.
This stock price of $15.16 was  determined by averaging the closing price of the
Company's  common  stock five days before and five days  subsequent  to June 30,
2004.  In the event the terms of the  Acquisition  Agreement  are  substantively
modified,  the actual purchase price and resulting purchase  accounting would be
adjusted to reflect current prices.

In April  2003,  the  Company  issued  400,000  shares of $1.00 par value  4.25%
Convertible  Preferred Stock resulting in net proceeds of  approximately  $193.0
million  (net  of fees of  approximately  $7.0  million).  This  transaction  is
reflected in the  accompanying KCS historical  consolidated  balance sheet as of
June 30, 2004 as new capital of $0.4 million,  capital surplus of $110.9 million
and retained earnings of $81.7 million.

Holders of the Convertible Preferred Stock are entitled to receive any dividends
declared by the  Company's  board of  directors  at the rate of 4.25% per annum,
payable  quarterly in arrears on February 15, May 15,  August 15 and November 15
of each year,  commencing August 15, 2003. The dividends are cumulative from the
date of initial issuance and accumulated but unpaid dividends cumulate dividends
at the annual rate of 4.25%.  In  addition,  the Company  will also pay "special
dividends" if it fails to comply with certain  obligations  under a registration
rights  agreement.  A holder may convert its  Convertible  Preferred  Stock into
shares of the Company's Common Stock only under certain circumstances,  relating
to: (i) the trading  price of the Company's  Common Stock;  (ii) a credit rating
downgrade; (iii) the trading price per share of the Convertible Preferred Stock;
(iv) redemption of the Convertible  Preferred  Stock;  and (v) the occurrence of
certain corporate transactions.

The  conversion  rate may be adjusted  upon the  occurrence  of certain  events.
Subject to certain  conditions,  on or after May 20, 2008, the Company will have
the option to redeem some or all of the shares of Convertible Preferred Stock at
a redemption price of 100% of the liquidation  preference,  plus accumulated and
unpaid dividends, if any, to the redemption date. In the event of a "fundamental
change,"  the Company may be  required  to  purchase  shares of the  Convertible
Preferred  Stock at the  option of the  holder  at a price  equal to 100% of the
liquidation  preference  plus any accumulated  and unpaid  dividends,  including
special dividends, if any, to, but excluding, the purchase date.

The Company may elect to pay the  purchase  price in cash,  Common  Stock,  or a
combination  of cash and Common  Stock.  If the  Company  elects to pay all or a
portion of the purchase  price in shares of Common Stock,  the Common Stock will
be  valued  at a  specified  discount.  The  Company  agreed  to file  with  the
Securities and Exchange  Commission a shelf registration  statement with respect
to the resale of the  Convertible  Preferred Stock and the Common Stock issuable
upon  conversion  of the  Convertible  Preferred  Stock  and to keep  the  shelf
registration  statement  effective for a specified  period of time. In addition,
the  Company  will be required  to pay to holders of the  Convertible  Preferred
Stock liquidated  damages in the form of special dividends or liquidated damages
payments,  as  applicable,  if the  Company  fails to register  the  Convertible
Preferred Stock and the Common Stock issuable upon conversion of the Convertible
Preferred  Stock  within,  and to keep  such  registration  statement  effective
during, the specified time periods.



NOTE 8: ELIMINATION OF EQUITY BASIS DIFFERENCE IN GRUPO TFM

The calculation of the Company's net equity in Grupo TFM's underlying net assets
utilizing the Company's current ownership  percentage of approximately  46.6% as
compared  to the  amount  recorded  as an  investment  as of  June  30,  2004 of
approximately  $396.2  million  results in a basis  difference of  approximately
$13.3 million.  This  difference in basis results from a number of factors,  the
most significant of which is the changing ownership interest in Grupo TFM, which
produced a difference  in  investment  basis that occurred when TFM acquired the
Mexican  Government's  24.6%  interest  in Grupo TFM  during  2002.  This  basis
difference would have been amortized over time; however, due to the contemplated
transaction wherein the Company will obtain a controlling interest in Grupo TFM,
the  remaining  basis   difference  will  be  recognized  at  the  date  of  the
transaction.  The pro forma financial  statements as stated herein recognize the
elimination of this basis difference as an addition to concession  assets on the
condensed consolidated balance sheet. See Note 2.

NOTE 9: ELIMINATION OF EQUITY EARNINGS FROM GRUPO TFM

Assuming the contemplated  transaction would have been consummated on January 1,
2003 or January 1, 2004,  as  applicable,  the Company  would have  consolidated
earnings of Grupo TFM and accordingly, the equity in earnings of Grupo TFM would
be eliminated.

NOTE 10: PROVISION FOR INCOME TAXES / DEFERRED INCOME TAXES

The pro forma condensed  consolidated  income statement  reflects the income tax
impacts of the pro forma adjustments utilizing an income tax rate of 38.25%, but
excluding  any  consideration  of the equity  earnings  of Grupo TFM,  since the
Company has not previously provided a tax provision on these amounts.

In addition, the recognition of additional identifiable intangible assets in the
form  of  concession  assets  creates  an  additional   deferred  tax  liability
associated with those assets. The pro forma condensed consolidated balance sheet
as of June 30, 2004 recognizes the deferred tax liability of approximately  $6.9
million using the tax rate noted above.

NOTE 11: CONSOLIDATION ELIMINATIONS

These pro forma  adjustments  reflect the  elimination of  intercompany  amounts
between the Company,  Grupo TFM and Mexrail,  assuming the three  entities  were
consolidated for financial reporting purposes.



NOTE 12: COMPUTATION OF EARNINGS PER SHARE

Basic earnings per share for the purposes of the pro forma  consolidated  income
statement  reflect pro forma  consolidated  net income,  less  dividends  on the
Company's $25 par  preferred  stock of  approximately  $242,000  annually,  less
dividends on the Company's $.01 par Convertible Preferred Stock of approximately
$8.5 million  annually,  divided by the weighted average  outstanding  shares as
described in Note 13 below.  Note the  proforma  adjustment  includes  only $2.8
million for preferred  dividends as the historical  financial  statements of the
Company reflect $5.7 million of dividends  related to the Convertible  Preferred
Stock for the year ended  December 31, 2003 and $0.2 million  related to the $25
par preferred stock.

Diluted  earnings  per share  for the  purposes  of the pro  forma  consolidated
condensed income  statements  reflect pro forma  consolidated  net income,  less
dividends on the  Company's $25 par preferred  stock of  approximately  $242,000
annually,  divided  by  the  weighted  average  diluted  outstanding  shares  as
described in Note 13 below.

The assumed  conversion of the Company's $1.00 par  Convertible  Preferred Stock
(convertible into 13,389,121 common shares) would have been anti-dilutive to the
pro  forma  diluted  earnings  per  share  computations  in each of the  periods
presented.  Accordingly,  conversion of preferred  shares into common shares was
not assumed and these shares were not included in the pro forma diluted earnings
per share computations. Total preferred dividends, however, were subtracted from
net income in the computation of the pro forma diluted earnings per share.

NOTE 13: WEIGHTED AVERAGE SHARES OUTSTANDING

The weighted  average basic shares  outstanding  are  calculated  beginning with
Company  historical average basic shares (61,725,000 for the year ended December
31, 2003 and 62,570,000 for the six months ended June 30, 2004) plus  18,000,000
assumed shares to be issued as described in Note 7 above.

For the six months ended June 30,  2004,  the weighted  average  diluted  shares
outstanding  are calculated  beginning with Company  historical  average diluted
shares of 63,812,000 plus 18,000,000 assumed shares to be issued as described in
the Note 7 above,  but excluding the 13,389,121  shares assuming full conversion
of the Convertible  Preferred  Stock into common  utilizing a conversion rate of
33.4728 for each share of preferred to common.  As stated in Note 12 above,  the
inclusion of the 13,389,121 shares would have had an anti-dilutive effect on the
computations of pro forma dilutive earnings per share.

For the year ended  December  31,  2003,  the weighted  average  diluted  shares
outstanding  are calculated  beginning with Company  historical  average diluted
shares of 61,725,000  plus 1,375,000  shares assumed for the conversion of stock
options that were treated as anti-dilutive for the calculation of the historical
diluted earnings per share computation but would be dilutive under the pro forma
dilutive  earnings per share  computation  plus 18,000,000  assumed shares to be
issued as described in the Note 7 above,  but  excluding the  13,389,121  shares
assuming  full  conversion  of  the  Convertible  Preferred  Stock  into  common
utilizing a conversion rate of 33.4728 for each share of preferred to common.

NOTE 14: CONSULTING AGREEMENT

In  connection  with the  transaction,  the  Company  intends  to  enter  into a
consulting  agreement with a consulting firm  ("Consultant")  controlled by Jose
Serrano  Segovia  with an  initial  term of three  years.  In  consideration  of
services  provided,  Consultant  will  receive an annual fee of $0.6  million in
cash,  plus up to 2.1 million shares of restricted  common stock of the Company.
The  restricted  stock vests  based upon the  achievement  of certain  events as
defined  in the  consulting  agreement  and/or  ratably  over  the  term  of the



agreement  in  certain  circumstances.  The  pro  forma  condensed  consolidated
financial statements herein reflect the effect of these transactions as follows.
The restricted  stock will be accounted for as  compensation  expense based upon
the assumed  fair market value at date of vesting and expensed in the period the
stock vests.

The annual fee is reflected as additional  operating  costs and expenses of $0.6
million for the year ended December 31, 2003 and $0.3 million for the six months
ended June 30, 2004. An initial 750,000 shares of restricted  stock vest ratably
over the term of the  agreement.  For  purposes of the pro forma  statements  of
income, the Company has assumed a calculated value of stock based upon the stock
price of $14.49  for the year  ended  December  31,  2003 and $15.16 for the six
months ended June 30, 2004,  which are the stock prices  derived by averaging of
the closing price of the  Company's  common stock five days before and five days
after December 31, 2003 and June 30, 2004,  respectively.  The resulting amounts
are  reflected as  compensation  expense and  amortized on a straight line basis
over three years.  The additional  compensation  expense is  approximately  $3.6
million for the year ended December 31, 2003 and $1.9 million for the six months
ended June 30, 2004. The Company recognizes that the prospective  accounting for
these  shares will result in variable  accounting  treatment  and the  resulting
expense will be dependent upon the Company's  stock price at the actual time the
stock vests.  Since the Company cannot predict the future price of the Company's
stock, the pro forma adjustments assume the stock prices as noted above.

The consulting  agreement  provides for additional  vesting of restricted  stock
totaling 1,350,000 shares, in increments of 525,000,  125,000 and 700,000 shares
depending on the  achievement of certain  events  ("contingent  shares").  These
events  include the  completion of an agreement with TFM labor unions and events
related to the VAT tax issue.  While the Company  cannot  predict  the  ultimate
timing of  achievement  of these  events and thus their pro forma  effect on the
adjusted financial  statements,  the Company would intend to record compensation
expense at the time and in the quarter or annual  period in which  these  shares
vest,  at then  fair  value as  determined  by the  Company's  stock  price.  No
adjustments for these contingent shares have been made in the attached pro forma
financial statements due to the uncertainty of their realization and vesting.

The calculated value of these contingent  shares is approximately  $20.5 million
based upon the stock price of $15.16 as noted  above.  The actual  impact to the
Company's financial statements related to the restricted stock is dependent upon
the price of the  Company's  stock at the time the  restricted  stock  vests and
which the Company  cannot  predict.  A $1.00 per share change,  either higher or
lower, in the Company's stock price at the time the restricted stock vests could
result in higher or lower  compensation  expense of approximately  $1.4 million,
assuming all 1.35 million contingent shares vested at the same time.

NOTE 15: AMORTIZATION OF IDENTIFIABLE INTANGIBLES - CONCESSION ASSETS

The  transactions  as described  above  result in a net  addition to  concession
assets of approximately $18.1 million, including $6.9 million of deferred income
tax impact  described  in Note 10 above.  For  purposes of the pro forma  income
statements  presented  herein,  this  balance is  amortized  over the  remaining
amortizable  life  of  the  concession  assets  of 33  years.  This  results  in
additional amortization expense of approximately $0.8 million for the year ended
December 31, 2003 and $0.3 million for the six months ended June 30, 2004.



NOTE 16: MINORITY INTEREST

As previously reported,  TFM repurchased the Mexican Government's 24.6% interest
in Grupo TFM in June 2002.  Since the purchase of the Mexican  Government  24.6%
interest  was  completed by Grupo TFM's  subsidiary,  TFM, and the fact that the
Mexican  Government  also continues to maintain a 20% minority  interest in TFM,
the Mexican  Government  retained an indirect 4.9448% minority interest in Grupo
TFM through its  ownership of TFM. The pro forma  adjusting  entries to minority
interest reflect the continuing  indirect minority ownership in Grupo TFM by the
Mexican  Government  for the  periods  indicated.  For the pro  forma  condensed
consolidated  balance sheet as of June 30, 2004, an additional  $40.7 million of
minority  interest was added to the pro forma balances  representing  4.9448% of
Grupo  TFM's  net  assets.  For  the pro  forma  condensed  consolidated  income
statements,  the amount of  minority  interest in Grupo TFM's US GAAP net income
was computed for the periods presented  resulting in approximately  $1.4 million
for the year ended  December  31, 2003 and $0.5 million for the six months ended
June 30, 2004.

NOTE 17: VAT RELATED MATTERS

The impact of any  settlement  of the VAT  dispute  between  TFM and the Mexican
Government on the Company's  consolidated financial statements will be dependent
upon the timing and amount of any such settlement.

It is expected  that the value of any  consideration  received  from the Mexican
Government  from the settlement of the VAT dispute will be recorded as income by
TFM and Grupo TFM,  net of  related  income  taxes.  If a binding  agreement  is
reached before the consummation of the Acquisition, the Company would record its
proportionate  share of any such gain  through  its equity in  earnings of Grupo
TFM,  based  upon  its  existing  ownership  of  46.6%.  If the  Acquisition  is
subsequently consummated, the proceeds from any settlement received and retained
by TFM,  including  the impacts of any  additional  consideration  as may become
payable as  discussed  below,  would  impact  the  Company's  allocation  of the
purchase price to assets  acquired and  liabilities  assumed,  likely  impacting
amounts otherwise  allocable to long-lived  assets,  including  intangibles,  as
presented herein.

If the VAT dispute were settled  following the  consummation of the Acquisition,
the  Company  would  record in income its  proportionate  share of any such gain
through its  consolidation of the operating results of Grupo TFM, based upon its
pre-acquisition   ownership   interest  of  46.6%.   The  portion  of  any  gain
attributable  to the acquired  interest of Grupo TMM would  likely  constitute a
pre-acquisition  contingency and not impact the Company's operating results, but
rather would be  considered in the  allocation  of the purchase  price to assets
acquired and liabilities assumed, likely reducing amounts otherwise allocable to
long-lived assets, including intangibles, as presented herein.

Pursuant  to the terms of the  Acquisition,  if the  value of the  consideration
received by TFM in connection with the settlement of the VAT dispute exceeds the
amount  payable  pursuant  to the Put  Agreement  in place  between  the Mexican
Government, Grupo TFM, Grupo TMM and the Company, whereby the Mexican Government
may put its ownership in TFM to the other  parties,  additional  amounts will be
payable  by the  Company or TFM to Grupo  TMM,  depending  on the amount of such
excess.  Such payment  would range from $100 million to $180  million.  Any such
payment  would  constitute  additional  consideration  for the purchase of Grupo
TMM's interest in Grupo TFM and as such would likely increase amounts  allocable
to long-lived assets, including intangibles, as presented herein.




NOTE 18:  CONSIDERATION OF THE MEXICAN GOVERNMENT'S PUT RIGHTS REGARDING ITS 20%
MINORITY INTEREST IN TFM

The provisions of the "Put Agreement"  obligate Grupo TFM or KCS to purchase the
Mexican  Government's 20% minority interest in TFM under certain conditions.  As
disclosed in the Company's Form 10-Q for the six months ended June 30, 2004, the
total estimated purchase price of the Mexican Government's minority interest was
approximately  $464 million.  The calculation of the purchase price is dependent
upon  inflationary  factors of the Mexican  economy and  foreign  exchange  rate
factors,  which the Company can not predict.  While the Company along with Grupo
TFM are currently exploring financing alternatives, the source and cost any such
financing for this  obligation is not reasonably  determinable  at this time. In
addition,  the acquisition of the Mexican  Government's  interest and funding of
this  obligation  could be affected by the outcome and  settlement  of TFM's VAT
dispute with the Mexican Government.

Due to the  uncertainties  noted above,  the  accompanying  pro forma  financial
statements do not reflect the impact of the acquisition of additional  shares of
TFM which could arise under the Put Agreement. If, following the consummation of
the  acquisition  of Grupo TFM shares from Grupo TMM,  the Company  acquires the
remaining  shares  of TFM held by the  Mexican  Government  pursuant  to the Put
Agreement,  the accompanying  pro forma financial  statements would be generally
impacted as follows. The excess of the purchase price over the carrying value of
minority interest would be allocated to the assets and liabilities of Grupo TFM,
based upon their  fair  values,  with the likely  impact  being an  increase  to
recorded  amounts for long-lived  assets,  including  intangibles,  as presented
herein.  Additionally,  the minority  interest in earnings of Grupo TFM would be
eliminated from the pro forma income statement,  offset by the costs of any debt
financing  incurred to finance the purchase and any increases in depreciation or
amortization expense relating to the application of purchase accounting.




                                  LEGAL MATTERS

     The  validity  of the  issuance  of the  Series C  Preferred  Stock and the
validity of the common stock issuable upon  conversion of the Series C Preferred
Stock  and tax  matters  have been  passed  upon for us by  Sonnenschein  Nath &
Rosenthal LLP, Kansas City, Missouri.

                                     EXPERTS

     Our  consolidated  financial  statements  as of and  for  the  years  ended
December 31, 2003,  2002 and 2001,  incorporated in this prospectus by reference
to our annual  report on Form 10-K for the year ended  December 31,  2003,  have
been  so  incorporated  in  reliance  on the  report  of KPMG  LLP,  independent
accountants,  given and on the authority of said firm as experts in auditing and
accounting.  The  audit  report  of KPMG  indicates  that KPMG did not audit the
financial  statements  of Grupo  TFM,  a 46.6%  owned  investee  company,  as of
December  31, 2003 or for the years ended  December  31, 2003 and  December  31,
2001.  The  financial  statements  of  Grupo  TFM as of and for the  year  ended
December 31, 2003 and for the year ended December 31, 2001 were audited by other
auditors whose reports have been furnished to KPMG, and KPMG's opinion,  insofar
as it relates to the amounts included for Grupo TFM as of and for the year ended
December 31, 2003 and for the year ended  December 31, 2001, was based solely on
the reports of the other auditors.

     The  combined and  consolidated  financial  statements  of Grupo TFM, as of
December  31, 2003 and 2002 and for each of the three years in the period  ended
December 31, 2003, which are incorporated in this prospectus by reference to our
annual  report on Form 10-K for the year ended  December 31, 2003,  have been so
incorporated  in  reliance  on  the  report  of  PricewaterhouseCoopers,   S.C.,
independent  accountants,  given on the  authority  of said firm as  experts  in
auditing and accounting.

                       WHERE YOU CAN FIND MORE INFORMATION

     We file annual,  quarterly and current reports and other  information  with
the SEC.  You may  inspect  and  copy  such  material  at the  public  reference
facilities  maintained by the SEC at 450 Fifth Street,  N.W.,  Washington,  D.C.
20549.  Please call the SEC at 1-800-SEC-0330 for more information on the public
reference  room.  You can also  find our SEC  filings  at the SEC's  website  at
www.sec.gov  and on our website at  www.kcsi.com.  Information  contained on our
website is not part of this prospectus.

     In  addition,  our  reports  and  other  information  concerning  us can be
inspected at the New York Stock  Exchange,  20 Broad Street,  New York, New York
10005, where our common stock is listed.

     The following  documents we filed with the SEC pursuant to the Exchange Act
are incorporated herein by reference:

     o    Our annual report on Form 10-K for the fiscal year ended  December 31,
          2003;

     o    Our definitive proxy statement filed April 5, 2004 (1)

     o    Our  quarterly  reports on Form 10-Q for the quarters  ended March 31,
          2004 and June 30, 2004;

     o    Our  current  reports  on Form 8-K filed on July 28,  2004,  August 3,
          2004, August 18, 2004, September 17, 2004, September 24, 2004, October
          1, 2004,  October 7, 2004 (dated  October 6, 2004),  and Item 8.01 and
          Exhibit  99.2 of our  current  report on Form 8-K filed on  October 8,
          2004.

----------
(1)  The  information  referred  to in  item  402(a)(8)  of  Regulation  S-K and
paragraph  (d)(3) of Item 7 of Schedule 14A  promulgated by the SEC shall not be
deemed to be specifically incorporated by reference into this prosepectus.



     All documents  subsequently filed by us pursuant to Sections 13(a),  13(c),
14 or 15(d) of the Exchange Act (excluding any information furnished pursuant to
Item 9 or Item 12 on any current report on Form 8-K),  prior to the  termination
of the  offering,  shall be deemed to be  incorporated  by  reference  into this
prospectus and to be a part hereof from the date of the filing of such document.
In addition,  all documents filed by us pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act (excluding any information  furnished pursuant to Item
9 or Item 12 on any  current  report on Form 8-K) after the date of the  initial
registration  statement and prior to effectiveness of the registration statement
shall be deemed to be incorporated by reference into this prospectus and to be a
part  hereof  from  the  date of the  filing  of such  document.  Any  statement
contained in a document  incorporated by reference  herein shall be deemed to be
modified or superseded for all purposes to the extent that a statement contained
in this  prospectus or in any other  subsequently  filed  document which is also
incorporated or deemed to be  incorporated by reference,  modifies or supersedes
such  statement.  Any statement so modified or  superseded  shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.

     We will provide  without  charge to each person to whom this  prospectus is
delivered,  upon written or oral  request of such  person,  a copy of any or all
documents incorporated by reference in this prospectus. Requests for such copies
should be directed to Kansas  City  Southern,  P.O.  Box  219335,  Kansas  City,
Missouri  64121-9335  (or if by United  Parcel  Service  or some  other  form of
express  delivery  to 427  West  12th  Street,  Kansas  City,  Missouri  64105),
Attention: Corporate Secretary's Office, or if by telephone at (816) 983-1538.

                           FORWARD-LOOKING STATEMENTS

     This  prospectus  and  the  document  incorporated  in this  prospectus  by
reference may contain  forward-looking  statements within the meaning of Section
27A of the  Securities  Act and Section 21E of the  Exchange  Act. In  addition,
management  may make  forward-looking  statements  orally or in other  writings,
including,  but not  limited  to, in press  releases,  in the  annual  report to
shareholders  and  in  our  other  filings  with  the  Securities  and  Exchange
Commission.  Readers can identify these forward-looking statements by the use of
such verbs as expects, anticipates, believes or similar verbs or conjugations of
such  verbs.  These  forward-looking  statements  include,  without  limitation,
statements regarding: expectations as to operational improvements;  expectations
as to cost  savings,  revenue  growth and  earnings;  the time by which  certain
objectives  will be  achieved;  estimates  of costs  relating  to  environmental
remediation and  restoration;  proposed new products and services;  expectations
that claims, lawsuits, environmental costs, commitments, contingent liabilities,
labor  negotiations  or  agreements,  or other  matters will not have a material
adverse effect on our consolidated financial condition, results of operations or
liquidity;  and statements concerning  projections,  predictions,  expectations,
estimates or forecasts as to our business,  financial and  operational  results,
and future economic performance, statements of management's goals and objectives
and other similar expressions  concerning matters that are not historical facts.
If any of  management's  assumptions  prove  incorrect  or should  unanticipated
circumstances  arise,  our actual  results  could  materially  differ from those
anticipated by such forward-looking  statements. The differences could be caused
by a number of factors or combination of factors including,  but not limited to,
the factors  identified below and the factors  discussed above under the heading
"Risk Factors."  Readers are strongly  encouraged to consider these factors when
evaluating any forward-looking statements concerning us.

     o    whether we are fully  successful in executing  our business  strategy,
          including capitalizing on NAFTA trade to generate traffic and increase
          revenues, exploiting our domestic opportunities,  establishing new and
          expanding  existing strategic  alliances and marketing  agreements and
          providing superior customer service;

     o    whether  we are  successful  in  retaining  and  attracting  qualified
          management personnel;



     o    whether we are able to generate  cash that will be sufficient to allow
          us to pay principal and interest on our debt and meet our  obligations
          and to fund our other liquidity needs;

     o    whether we are able to complete the Acquisition;

     o    our ability to satisfy our contingent obligation to purchase shares of
          TFM, owned by the government of Mexico;

     o    Material  adverse  changes in economic and industry  conditions,  both
          within the United States and globally;

     o    the effects of adverse general economic conditions  affecting customer
          demand  and the  industries  and  geographic  areas that  produce  and
          consume commodities carried;

     o    the effect of NAFTA on the level of U.S.-Mexico trade;

     o    industry competition, conditions, performance and consolidation;

     o    general  legislative and regulatory  developments,  including possible
          enactment of initiatives to re-regulate the rail industry;

     o    legislative,  regulatory,  or legal developments  involving  taxation,
          including  enactment  of  new  federal  or  state  income  tax  rates,
          revisions of controlling authority,  and the outcome of tax claims and
          litigation;

     o    changes in securities and capital markets;

     o    natural events such as severe weather,  fire,  floods,  earthquakes or
          other disruptions of our operating systems, structures and equipment;

     o    any  adverse  economic or  operational  repercussions  from  terrorist
          activities and any governmental response thereto;

     o    war or risk of war;

     o    changes in fuel prices;

     o    changes in labor  costs and labor  difficulties,  including  stoppages
          affecting either our operations or our customers' abilities to deliver
          goods to us for shipment; and

     o    the  outcome  of claims and  litigation,  including  those  related to
          environmental  contamination,  personal  o injuries  and  occupational
          illnesses arising from hearing loss, repetitive motion and exposure to
          asbestos and diesel fumes.

     We will not update any forward-looking  statements to reflect future events
or  developments.  If we do update one or more  forward-looking  statements,  no
inference  should be drawn that we will make  additional  updates  with  respect
thereto or with respect to other forward-looking statements.