MANAGEMENT'S DISCUSSION
and analysis of financial condition and results of operations

Operating Results

Operating  income  per share  rose 5 percent  in 1996 to $6.52 but  declined  12
percent  during  1997 to  $5.72 a  share.  Operating  income  excludes  realized
investment gains. These gains declined in 1996 to $3.0 million but rose to $14.5
million in 1997 due to portfolio  strategy decisions made by management in order
to maximize the investment portfolio's total return.  Including these gains, net
income  increased 1 percent in 1996 to $6.84 a share and rose 6 percent to $7.25
a share during 1997.  Pretax  operating  margins averaged 12.6 percent from 1995
through 1997 while return on equity averaged 9.70 percent annually.

The  Company  acquired  a block  of  traditional  and  interest  sensitive  life
insurance  during the third  quarter of 1997 for $51.4  million,  net of related
income tax benefits. This block adds $27 million in insurance revenues annually,
$3.8 billion of  insurance in force and $330 million of assets and  liabilities.
The block provided  $13.1 million of insurance  revenues for the portion of 1997
that  Kansas  City Life  owned the block.  Comparisons  offered  throughout  the
following  discussion  exclude  the  purchase  in order to  provide  more  valid
comparisons.

The following discusses Kansas City Life's performance over the past three years
in generating insurance revenues and how profitability from revenues emerged and
changed  year-to-year  by assessing each of the four sources of earnings for the
Company.

Insurance Revenues

Total insurance revenues rose 7 percent in 1996 and 5 percent in 1997.  Contract
charges arising from the interest sensitive and variable lines rose 6 percent in
both 1996 and 1997.  Life  insurance  premiums  rose  slightly  in 1996 and were
unchanged in 1997.  Accident and health  premiums rose 27 percent and 20 percent
in 1996 and 1997, respectively,  largely due to growth in group dental premiums.
Universal  life  accounted for 29 percent of total  statutory  premiums in 1997,
flexible annuities 13 percent,  variable products 10 percent, group coverages 16
percent and traditional lines 32 percent.

Sales,  in terms  of new  annualized  premiums,  rose  slightly  in 1996 and the
foundation was laid that year for significant sales growth the following year. A
variable  annuity  product was introduced in late 1995 and a variable  universal
life product was added during 1996.  These products  allowed the Company to more
effectively recruit seasoned, sizable agencies.  Agencies recruited during 1997,
combined with strong efforts from existing core agencies, resulted in 20 percent
sales growth for the year. New variable  premiums equaled $34.2 million in 1997,
providing nearly one-third of total sales. The variable  products  generated all
of the year's sales growth. The sales outlook for the coming year is encouraging
since recruiting results are expected to remain strong throughout 1998.

Sources of Earnings

A life  insurance  company's  profits  generally  evolve from the following four
sources.

  Investment Margin - Interest spreads on the interest  sensitive  products were
   maintained  in  1996  and  1997.  Traditional-type  products,  however,  were
   impacted  negatively  by declining  interest  rates and market  yields on new
   money which were below portfolio yields.  This lowered portfolio yields, thus
   dampening these lines' investment results.

   Overall  investment  income declined 1 percent in 1996 and 2 percent in 1997.
   Earnings comparisons in 1996 were impacted by a $4.0 million one-time receipt
   of mortgage income in 1995.  Excluding this item,  investment earnings rose 1
   percent in 1996.  Investment  income was impacted by market yields which were
   below portfolio yields and declining  investment assets in 1997. This decline
   was  principally due to the shift in product mix towards  variable  products.
   Funds provided by variable  products are invested in separate account assets,
   not in the Company's  general  investments.  The portfolio's total return was
   bolstered  each year by gains  realized  largely in the  securities  and real
   estate portfolios.

   The quality of the Company's  investment  portfolio  remains high.  Nearly 96
   percent of the securities  portfolio is investment  grade. Past concerns over
   Argentinean and Mexican  securities have waned.  Such  investments  currently
   total $35.3  million with an  unrealized  gain of  $158,000.  The Company has
   little  exposure  to the  Asian  woes.  There  were two  securities  defaults
   totaling $7.0 million.  Mortgage  loans in  delinquency  or in the process of
   foreclosure represent just 0.3 percent of the portfolio, half of the industry
   average.  Restructured  mortgage loans  represent 2.6 percent of the mortgage
   portfolio.  Three  mortgage  loans,  carried at $3.2  million,  were acquired
   during 1997 and  transferred to real estate.  The estimated fair value of the
   mortgage  portfolio  exceeds its carrying value by $7 million.  The estimated
   fair value of the real estate and joint venture investments  currently exceed
   their carrying value by $30 million.  Eleven foreclosed  properties were sold
   during the year at a $359,000 gain, net of tax. The Company  currently  holds
   14  properties,   valued  at  $13.4  million,  which  were  acquired  through
   foreclosure.

  Mortality Margin - Mortality  experience was favorable all three years for the
   parent company, Kansas City Life. However,  mortality experience deteriorated
   at the two  insurance  subsidiaries  in 1997.  Mortality  experience,  by its
   nature,  varies  year-to-year.   However,  after  a  careful  review  of  Old
   American's  mortality  experience,  steps  were  initiated  in early  1998 to
   strengthen its  underwriting  process.  Also, Old American's home health care
   line experienced adverse claims experience the past several years. Additional
   reserves  totaling $2.9 million were  established  in 1997 with the intent of
   preventing future earnings erosion in this block. Finally,  claims experience
   is also  crucial to the group  line of  business.  Group  claim  ratios  were
   historically low in 1995, but were considerably higher the past two years due
   to the group dental line.  In response,  premium  increases are being enacted
   where  possible and certain  dental  coverages will no longer be offered in a
   few specific states.

  Operating  Expenses  - Home  office  expenses  rose just 1 percent a year,  on
   average,  over the  eight-year  period from 1989  through  1996.  A concerted
   effort was made in 1997 to achieve significant sales growth and, partially as
   a  result,  these  expenses  rose 7  percent  in  1997.  Excluding  increased
   marketing costs,  these expenses rose 2 percent.  The revenue growth achieved
   as a result of this effort,  combined with the purchase of a sizable block of
   business, allowed the Company to make continued progress in lowering its unit
   costs and improving efficiency.

   Kansas City Life is making good progress on converting  its computer  systems
   to be year 2000  compliant.  It is anticipated  that this  conversion will be
   completed by the first quarter of 1999 at the latest.  These conversion costs
   are expensed as incurred.  Incremental  costs  related to this  endeavor have
   been, and are expected to remain, quite minor.

   The amortization of deferred  acquisition  costs  fluctuated  year-to-year as
   interest sensitive products' amortization schedules were reassessed quarterly
   based upon the profit margins realized quarterly.  However,  assumptions were
   not  unlocked  since the  assumed  total gross  margins  over the life of the
   business were unchanged.

  Surrender Margin - Policy  surrenders have a minor,  but beneficial,  earnings
   impact in the year they occur due to surrender  charges  levied  against most
   surrenders.  However policy  surrenders  truncate  future  earnings  streams.
   Surrenders of universal and  traditional  life  business,  as a percentage of
   values  available  to  be  surrendered,   were  largely  unchanged  over  the
   three-year period.  Surrenders of flexible annuities rose over the three-year
   period  principally due to shifting  consumer  preferences  towards  variable
   annuities, a product Kansas City Life introduced in late 1995.

The Company's effective Federal income tax rate declined from 30 percent in 1995
to 28 percent in 1997. This decline is largely due to investments in real estate
ventures  which  generate  affordable  housing  tax  credits.  Such  investments
currently total $40.3 million.

Changes in Reporting Regulations

A  new  accounting  guideline,   which  became  effective  for  1997,  Financial
Accounting  Standard No. 128, "Earnings Per Share", did not impact the Company's
computation of earnings per share.  Two new guidelines will become  effective in
1998  which  will  impact  certain  reporting  disclosures.  Standard  No.  130,
"Reporting Comprehensive Income",  requires that all components of comprehensive
income,  including  the change in  unrealized  investment  gains and losses,  be
displayed   prominently  as  well  as  report  an  amount   representing   total
comprehensive  income for the period.  Kansas City Life will adopt this standard
for the first quarter of 1998 and reclassify  comparative  financial statements.
Standard  No. 131,  "Disclosures  About  Segments of an  Enterprise  and Related
Information",  establishes  requirements  for annual and  interim  reporting  of
segment information including products and services,  geographic areas and major
customers.  Kansas City Life is studying these  requirements and will adopt this
standard by year end 1998.

Liquidity and Capital Resources

Kansas City Life plays a key role in the  economy as a provider of capital.  New
investments in  securities,  mortgage  loans and real estate  projects  averaged
$717.9  million  annually  the past three  years.  Liquidity  is normally  not a
concern.   Borrowing  has  been  minor  and  limited  to  supporting  investment
strategies. Future investment commitments are minimal. Kansas City Life performs
cash flow testing and asset liability  matching to ensure future cash flows will
be sufficient to meet future cash needs for benefits payments.

Cash  provided by  operating  activities,  combined  with  financing  activities
associated  with contract  deposits,  averaged  $77.1 million  annually the past
three years.  However,  this amount declined to $49.2 million in 1997 from $76.1
million a year earlier. This reflects increased surrenders of flexible annuities
as discussed  earlier and the increasing  importance of variable products to the
product  mix and to  revenue  growth.  Investable  cash  generated  by  variable
products is  segregated  in separate  accounts and is not  available for general
investing by the Company.

The Company's  statutory  equity is over five times the minimum capital required
to support its book of business,  as determined by  calculations  and guidelines
established by the National Association of Insurance Commissioners.

Kansas  City  Life  was  honored  for the  fourth  consecutive  year by the Ward
Financial Group as being among the fifty best life insurance  companies in terms
of financial safety and performance.


SELECTED FINANCIAL DATA
(Thousands, except per share data)

                          1997       1996       1995       1994       1993
Revenues:
 Insurance          $   244 695    219 593    205 458    203 827    196 829
 Investment
   income, net          193 696    186 743    188 087    173 388    163 237
 Other                    9 998      9 768      8 882      9 066      8 741
   Operating
     revenues           448 389    416 104    402 427    386 281    368 807
 Realized
   investment gains      14 505      3 013      4 950      6 060     24 648

                    $   462 894    419 117    407 377    392 341    393 455

Operating income    $    35 433     40 357     38 521     34 919     26 033
Realized investment
 gains, net               9 428      1 958      3 217      3 939     16 021
 Income before
 nonrecurring items      44 861     42 315     41 738     38 858     42 054
Nonrecurring
 expenses, net                -          -          -      1 481          -

 Net income         $    44 861     42 315     41 738     37 377     42 054

Per common share:
 Operating income   $      5.72       6.52       6.24       5.68       4.24
 Realized investment
  gains, net               1.53        .32        .52        .64       2.60
 Income before
 nonrecurring items $      7.25       6.84       6.76       6.32       6.84
 Nonrecurring
  expenses, net               -          -          -        .24          -

 Net income         $      7.25       6.84       6.76       6.08       6.84

 Cash dividends     $      1.76       1.68       1.63       1.40       1.36
 Stockholders'
  equity:
   As reported      $     85.68      74.79      73.99      55.78      61.68
   Excluding
    unrealized
    gains and losses      79.79      74.31      69.18      64.11      59.48

Assets              $ 3 439 452  2 954 710  2 903 768  2 663 753  2 651 430
Net return on
 invested assets           7.40%      7.68       8.03       7.71       7.65
Life insurance
 in force           $26 595 709 22 148 738 21 023 702 20 023 820 19 028 772

The above is not covered by the report of independent auditors. Per common share
earnings  information  represents  both basic and  diluted  earnings  per common
share.



CONSOLIDATED INCOME STATEMENT
                                                  1997     1996    1995
REVENUE
Insurance revenues:
  Premiums:
    Life insurance                             $106 051  103 263  101 341
    Accident and health                          44 931   37 575   29 475
  Contract charges                               93 713   78 755   74 642
Investment revenues:
  Investment income, net                        193 696  186 743  188 087
  Realized investment gains, net                 14 505    3 013    4 950
  Other                                           9 998    9 768   10 290

    TOTAL REVENUES                              462 894  419 117  408 785

BENEFITS AND EXPENSES
Policy benefits:
  Death benefits                                100 037   87 940   85 388
  Surrenders of life insurance                   14 999   15 488   16 345
  Other benefits                                 71 338   65 437   53 441
  Increase in benefit and contract reserves      86 804   85 614   89 139
Amortization of policy acquisition costs         35 712   30 086   27 992
Insurance operating expenses                     91 381   75 227   76 557

    TOTAL BENEFITS AND EXPENSES                 400 271  359 792  348 862

Income before Federal income taxes               62 623   59 325   59 923

Federal income taxes:
  Current                                        15 073   26 073   22 038
  Deferred                                        2 689   (9 063)  (3 853)

                                                 17 762   17 010   18 185

NET INCOME                                     $ 44 861   42 315   41 738

Basic and diluted earnings per share              $7.25     6.84     6.76

See accompanying Notes to Consolidated Financial Statements.


CONSOLIDATED BALANCE SHEET
                                                  1997        1996
ASSETS
Investments:
  Fixed maturities:
    Available for sale, at fair value
     (amortized cost $1,952,741,000;
        $1,762,091,000 - 1996)                $2 004 516      1 759 153
    Held to maturity, at amortized cost
     (fair value $151,495,000;
        $256,042,000 - 1996)                     145 661        248 433
  Equity securities available for sale,
     at fair value (cost $107,034,000;
        $71,522,000 - 1996)                      114 986         79 018
  Mortgage loans on real estate, net             270 054        246 493
  Real estate, net                                36 764         43 750
  Real estate joint ventures                      43 347         28 356
  Policy loans                                   123 186         94 412
  Short-term                                      74 341         19 642
  Other                                            7 500              -

        TOTAL INVESTMENTS                      2 820 355      2 519 257

Cash                                              50 927          4 577
Accrued investment income                         42 385         41 847
Receivables, net                                  10 204          6 854
Property and equipment, net                       23 628         24 791
Deferred acquisition costs                       209 826        207 020
Value of purchased insurance in force            108 458         38 031
Reinsurance assets                                99 593         93 328
Other                                             16 096          5 089
Separate account assets                           57 980         13 916
                                              $3 439 452      2 954 710

LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits:
  Life insurance                              $  766 583        671 204
  Accident and health                             37 155         30 356
Accumulated contract values                    1 755 133      1 544 714
Policy and contract claims                        37 569         35 223
Other policyholders' funds:
  Dividend and coupon accumulations               62 056         43 141
  Other                                           68 861         60 970
Income taxes:
  Current                                         16 113          3 537
  Deferred                                        39 917         19 748
Other                                             67 491         69 037
Separate account liabilities                      57 980         13 916

        TOTAL LIABILITIES                      2 908 858      2 491 846

Stockholders' equity:
  Common stock, par value $2.50 per share
    Authorized 18,000,000 shares,
      issued 9,248,340 shares                     23 121         23 121
  Paid-in capital                                 16 256         14 761
  Unrealized gains on securities
    available for sale, net                       36 448          2 963
  Retained earnings                              543 715        509 748
  Less treasury stock, at cost
    (3,055,275 shares; 3,058,871 shares -1996)    (88 946)       (87 729)

TOTAL STOCKHOLDERS' EQUITY                       530 594        462 864

                                              $3 439 452      2 954 710

See accompanying Notes to Consolidated Financial Statements.



CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                                1997     1996     1995

COMMON STOCK, beginning and end of year     $ 23 121    23 121    23 121

PAID IN CAPITAL:
  Beginning of year                           14 761    13 039    11 847
  Excess of proceeds over
    cost of treasury stock sold                1 495     1 722     1 192

      End of year                             16 256    14 761    13 039

UNREALIZED GAINS (LOSSES ON SECURITIES
  AVAILABLE FOR SALE:
    Beginning of year                          2 963    29 740   (51 345)
    Unrealized appreciation (depreciation)
      on securities available for sale, net   33 485   (26 777)   81 085

      End of year                             36 448     2 963    29 740

RETAINED EARNINGS:
  Beginning of year                          509 748   477 826   446 149
  Net income                                  44 861    42 315    41 738
  Stockholder dividends of $1.76 per share
    ($1.68 - 1996 and $1.63 - 1995)          (10 894)  (10 393)  (10 061)

      End of year                            543 715   509 748   477 826

TREASURY STOCK, at cost:
  Beginning of year                          (87 729)  (86 599)  (86 077)
  Cost of 20,090 shares acquired
    (27,876 shares - 1996 and
      17,240 shares - 1995)                   (1 440)   (1 501)     (829)
  Cost of 23,686 shares sold
    (39,440 shares - 1996 and
      32,709 shares - 1995)                      223       371       307

      End of year                            (88 946)  (87 729)  (86 599)

        TOTAL STOCKHOLDERS' EQUITY          $530 594   462 864   457 127


See accompanying Notes to Consolidated Financial Statements.


CONSOLIDATED STATEMENT OF CASH FLOWS
                                              1997       1996      1995
OPERATING ACTIVITIES
Net income                                $  44 861     42 315    41 738
Adjustments to reconcile net income to
  net cash from operating activities:
   Amortization of investment discount, net  (1 290)    (4 071)   (5 215)
   Depreciation                               5 379      4 995     5 265
   Policy acquisition costs capitalized     (42 170)   (38 639)  (40 388)
   Amortization of deferred
    policy acquisition costs                 35 712     30 086    27 992
   Realized investment gains                (14 505)    (3 013)   (4 950)
   Changes in assets and liabilities:
     Future policy benefits                  16 227     15 831    15 071
     Accumulated contract values             (9 933)     3 183     8 135
     Other policy liabilities                 7 137      5 294     3 852
     Income taxes payable and deferred        4 768     (8 322)   (1 595)
   Other, net                                (3 685)     5 886     4 318

   NET CASH PROVIDED                         42 501     53 545    54 223

INVESTING ACTIVITIES Investments called, matured or repaid:
  Fixed maturities available for sale       163 867    131 545   136 574
  Fixed maturities held to maturity         106 188     79 017    63 433
  Equity securities available for sale       31 473      8 899    13 727
  Mortgage loans on real estate              47 048     53 430    67 722
  Other                                         278       (100)    1 542
Investments sold:
  Fixed maturities available for sale       503 351    140 372   165 563
  Fixed maturities held to maturity               -          -     4 207
  Other                                      19 969     11 503    22 326
Investments purchased or originated:
  Fixed maturities available for sale      (855 980)  (431 916) (495 766)
  Equity securities available for sale      (69 434)   (18 071)  (12 896)
  Real estate joint ventures                (16 731)    (6 439)   (8 093)
  Mortgage loans on real estate             (68 599)   (54 161)  (31 053)
  Decrease (increase) in
    short-term investments, net             (54 699)    17 256   (17 558)
  Other                                      (9 144)    (2 150)   (1 068)
Acquisition of life block:
  Cash received net of purchase price paid  213 092          -         -
Net additions to property and equipment      (2 872)      (527)   (2 918)

        NET CASH PROVIDED (USED)              7 807    (71 342)  (94 258)

FINANCING ACTIVITIES
Proceeds from borrowings                    245 050      1 650    22 730
Repayment of borrowings                    (245 050)    (1 650)  (22 730)
Policyowner contract deposits               169 699    164 677   179 135
Withdrawals of policyowner
  contract deposits                        (163 041)  (142 114) (127 347)
Cash dividends to stockholders              (10 894)   (10 393)  (10 061)
Disposition of treasury stock, net              278        592       670

        NET CASH PROVIDED (USED)             (3 958)    12 762    42 397

Increase (decrease) in cash                  46 350     (5 035)    2 362
Cash at beginning of year                     4 577      9 612     7 250

        CASH AT END OF YEAR              $   50 927      4 577     9 612

See accompanying Notes to Consolidated Financial Statements.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables are generally stated in thousands,
  except per share data.)

SIGNIFICANT ACCOUNTING POLICIES

Organization
Kansas City Life Insurance Company is a Missouri  domiciled stock life insurance
company which, with its affiliates, is licensed to sell insurance products in 48
states and the District of Columbia.  The Company offers a diversified portfolio
of individual insurance, annuity and group products distributed through numerous
general  agencies.  In recent years, the Company's new business  activities have
been concentrated in interest sensitive and variable products.

Basis of Presentation
The  accompanying  consolidated  financial  statements have been prepared on the
basis of  generally  accepted  accounting  principles  (GAAP)  and  include  the
accounts of Kansas City Life Insurance Company and its subsidiaries. Significant
intercompany  transactions  have  been  eliminated  in  consolidation.   Certain
reclassifications  have been made to prior  year  results  to  conform  with the
current year's presentation.  GAAP requires management to make certain estimates
and assumptions  which affect amounts  reported in the financial  statements and
accompanying notes. Actual results could differ from these estimates.

Recognition of Revenues
Traditional  life insurance  products  include whole life  insurance,  term life
insurance and certain  annuities.  Premiums for these products are recognized as
revenues  when due.  Accident and health  insurance  premiums are  recognized as
revenues over the terms of the policies.  Universal  life-type  products include
universal life insurance and flexible annuities. Revenues for these products are
amounts  assessed  against  contract  values  for  cost  of  insurance,   policy
administration  and surrenders,  as well as  amortization of deferred  front-end
contract charges.

Future Policy Benefits
For traditional  life insurance  products,  reserves have been computed by a net
level premium  method based upon  estimates at the time of issue for  investment
yields,  mortality and  withdrawals.  These  estimates  include  provisions  for
experience less favorable than actually  expected.  Investment yield assumptions
for new issues are graded and range from 5.75 percent to 7.75 percent. Mortality
assumptions  are based on standard  mortality  tables.  The  1965-70  Select and
Ultimate Basic Table is used for business issued since 1977.

Reserves  and claim  liabilities  for  accident  and  health  insurance  include
estimated  unpaid claims and claims  incurred but not reported.  For traditional
life and  accident  and health  insurance,  benefits  and claims are  charged to
expense in the period incurred.

Liabilities for universal  life-type  products  represent  accumulated  contract
values,   without  reduction  for  potential  surrender  charges,  and  deferred
front-end  contract  charges which are amortized  over the term of the policies.
Benefits and claims are charged to expense in the period incurred net of related
accumulated contract values. Interest on accumulated contract values is credited
to  contracts  as earned.  Crediting  rates for  universal  life  insurance  and
flexible  annuity  products ranged from 4.75 percent to 6.50 percent during 1997
(4.75  percent to 6.75  percent  during  1996 and 4.79  percent to 7.00  percent
during 1995).

Withdrawal assumptions for all products are based on corporate experience.

Policy Acquisition Costs
The costs of acquiring new business,  principally  commissions,  certain  policy
issue and  underwriting  expenses  and certain  variable  agency  expenses,  are
deferred.  For  traditional  life  products,   deferred  acquisition  costs  are
amortized in proportion to premium  revenues over the  premium-paying  period of
related  policies,  using  assumptions  consistent  with those used in computing
benefit  reserves.  Acquisition  costs  for  universal  life-type  products  are
amortized over a period not exceeding 30 years in proportion to estimated  gross
profits  arising from  interest  spreads and  mortality,  expense and  surrender
charges expected to be realized over the term of the contracts.

Value of Purchased Insurance in Force
The value of purchased insurance in force arising from the acquisition of a life
insurance  subsidiary and, in 1997, the acquisition of a life insurance block of
business is being  amortized in  proportion to projected  future gross  profits.
This asset was increased  $76,533,000  for the acquisition of the life insurance
block of business and  $8,856,000  ($5,030,000  -1996 and $5,157,000 - 1995) for
accrual of interest and reduced $14,962,000  ($6,082,000 - 1996 and $6,088,000 -
1995) for  amortization.  The increase  for accrual of interest  was  calculated
using a 13.0 percent interest rate for the life insurance subsidiary and, on the
acquired block, a 7.0 percent  interest rate on the traditional life portion and
a 5.4 percent  rate on the  interest  sensitive  portion.  Through  1997,  total
accumulated   accrual  of  interest  and  amortization   equal  $35,496,000  and
$47,071,000, respectively. The percentage of the asset's current carrying amount
which will be  amortized  in each of the next five years is 6.9  percent - 1998,
6.8  percent - 1999,  6.7  percent - 2000,  6.5 percent - 2001 and 6.1 percent -
2002.

Participating Policies
Participating  business at year end  approximates 15 percent of the consolidated
life  insurance  in force.  The  amount of  dividends  to be paid is  determined
annually by the Board of Directors. Provision has been made in the liability for
future policy benefits to allocate amounts to participating policyholders on the
basis of dividend  scales  contemplated  at the time the  policies  were issued.
Additional provisions have been made for policyholder dividends in excess of the
original scale which have been declared by the Board of Directors.

Investments
Securities  held to  maturity  and  short-term  investments  are  stated at cost
adjusted  for  amortization  of  premium  and  accrual of  discount.  Securities
available  for sale are  stated at fair  value.  Unrealized  gains and losses on
securities  available for sale are reduced by deferred  income taxes and related
adjustments  in  deferred  acquisition  costs,  and are  included  in a separate
stockholders' equity account.

Mortgage  loans are stated at cost  adjusted  for  amortization  of premium  and
accrual of discount  less an allowance  for  possible  losses.  Foreclosed  real
estate  is  stated  at fair  value  at the  date of  foreclosure  (cost)  or net
realizable value,  whichever is lower. Other real estate investments are carried
at depreciated  cost. Real estate joint ventures are valued at cost adjusted for
the Company's equity in earnings since acquisition.  Policy loans are carried at
cost  less  payments  received.  Realized  gains  and  losses  on  disposals  of
investments,  determined by the specific  identification method, are included in
investment revenues.

Federal Income Taxes
Income taxes have been provided using the liability  method.  Under that method,
deferred tax assets and  liabilities  are  determined  based on the  differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.

Income Per Share
In 1997 the Company adopted Financial Accounting Standard No. 128, "Earnings per
Share".  Due to the Company's  capital  structure and lack of other  potentially
dilutive  securities,  there is no difference between basic and diluted earnings
per common share for any of the years or periods reported.  The weighted average
number of shares  outstanding  during the year was 6,190,793  shares  (6,188,489
shares - 1996 and 6,173,294 shares - 1995).

Statutory Information and
   Stockholder Dividends Restriction
The Company's earnings, unassigned surplus (retained earnings) and stockholders'
equity, on the statutory basis used to report to regulatory authorities, follow.

                                                  1997     1996     1995

Net gain (loss) from operations for the year   $(21 214)  27 345   29 307
Net income (loss) for the year                  (18 681)  25 574   29 484
Unassigned surplus at December 31               246 717  284 417  268 239
Stockholders' equity at December 31             197 147  234 570  217 801

The  statutory  loss reported in 1997 arose from the  acquisition  of a block of
business  as  discussed  in a  following  Note.  In  accordance  with  statutory
accounting  guidelines for coinsurance  transactions,  the  acquisition  reduced
statutory  earnings and  stockholders'  equity at the date of acquisition  $51.4
million, the purchase price paid less related tax benefits.

Stockholder dividends may not exceed statutory unassigned surplus. Additionally,
under  Missouri  law, the Company  must have the prior  approval of the Missouri
Director  of  Insurance  in order to pay a  dividend  exceeding  the  greater of
statutory  net gain from  operations  for the  preceding  year or 10  percent of
statutory  stockholders'  equity at the end of the preceding  year.  The maximum
payable in 1998 without  prior  approval is  $19,715,000.  The Company  believes
these  statutory  limitations  impose no practical  restrictions on its dividend
payment plans.

The  Company  is  required  to  deposit a defined  amount of assets  with  state
regulatory  authorities.   Such  assets  had  an  aggregate  carrying  value  of
approximately $36,000,000 ($36,000,000 - 1996 and $100,000,000 - 1995).

INVESTMENTS

Investment  Revenues Major  categories of investment  revenues are summarized as
follows.

                                                1997     1996     1995
Investment income:
  Fixed maturities                           $154 393   150 421   144 242
  Equity securities                             7 288     5 503     6 259
  Mortgage loans                               23 984    23 127    31 378
  Real estate                                  10 350    13 237    12 342
  Policy loans                                  7 296     6 372     6 174
  Short-term                                    3 612     2 353     2 753
  Other                                         3 132     2 222     2 533

                                              210 055   203 235   205 681
Less investment expenses                      (16 359)  (16 492)  (17 594)

                                             $193 696   186 743   188 087
Realized gains (losses:
  Fixed maturities                           $  4 778    (1 862)   (1 718)
  Equity securities                             3 702       961     4 634
  Mortgage loans                                    -     2 000      (108)
  Real estate                                   6 025     1 894     2 172
  Other                                             -        20       (30)

                                             $ 14 505     3 013     4 950

Unrealized Gains and Losses
Unrealized gains (losses) on the Company's securities follow.

                                                1997      1996      1995
Available for sale:
  End of year                                $ 59 727     4 558    51 744
  Deferred income taxes                       (19 627)   (1 595)  (16 013)
  Effect on deferred acquisition costs         (3 652)        -    (5 991)

                                             $ 36 448     2 963    29 740

  Increase (decrease) in net unrealized gains during the year:
    Fixed maturities                         $ 33 209   (26 216)   78 876
    Equity securities                             276      (561)    2 209

                                             $ 33 485   (26 777)   81 085
Held to maturity:
  End of year                                $  5 834     7 609    19 517

  Increase (decrease) in
    net unrealized gains during the year     $ (1 775)  (11 908)   16 667

The Company's  securities  categorized  as available for sale are stated at fair
value. The resulting adjustment to fair value results in significant  volatility
on  stockholders'  equity and the various  calculations  that are  dependent  on
stockholders' equity, such as return on equity.

Securities
The amortized  cost and fair value of  investments in securities at December 31,
1997, follow.

                                                Gross
                                 Amortized    Unrealized      Fair
                                   Cost      Gains  Losses    Value
Available for sale:
U.S. government bonds           $  135 182   3 166    297    138 051
Public utility bonds               281 781   6 956    662    288 075
Corporate bonds                  1 130 938  34 827  3 315  1 162 450
Mortgage-backed bonds              315 621   9 416    375    324 662
Other bonds                         81 469   2 260    425     83 304
Redeemable preferred stocks          7 750     261     38      7 974

Total fixed maturities           1 952 741  56 886  5 112  2 004 516

Equity securities                  107 034   8 709    757    114 986

                                 2 059 775  65 595  5 869  2 119 502

Held to maturity:
Public utility bonds                50 291   2 494     56     52 729
Corporate bonds                     92 350   3 727    641     95 436
Other bonds                          3 020     310      -      3 330

                                   145 661   6 531    697    151 495

                                $2 205 436  72 126  6 566  2 270 997

The amortized  cost and fair value of  investments in securities at December 31,
1996, follow.

                                                 Gross
                                 Amortized     Unrealized     Fair
                                   Cost      Gains  Losses    Value
Available for sale:
U.S. government bonds            $ 144 299   1 633    518    145 414
Public utility bonds               254 875   2 755  3 631    253 999
Corporate bonds                    981 157  10 122 17 161    974 118
Mortgage-backed bonds              253 810   6 473  1 532    258 751
Other bonds                        114 539     850  2 238    113 151
Redeemable preferred stocks         13 411     419    110     13 720

Total fixed maturities           1 762 091  22 252 25 190  1 759 153

Equity securities                   71 522   8 340    844     79 018

                                 1 833 613  30 592 26 034  1 838 171

Held to maturity:
Public utility bonds               138 592   5 619    306    143 905
Corporate bonds                    104 713   3 387  1 416    106 684
Other bonds                          5 128     325      -      5 453

                                   248 433   9 331  1 722    256 042

                                $2 082 046  39 923 27 756  2 094 213

All fixed maturity securities produced income in 1997.

The  distribution  of the  fixed  maturity  securities'  contractual  maturities
follows.   However,  expected  maturities  may  differ  from  these  contractual
maturities since borrowers may have the right to call or prepay obligations.

                                              Amortized         Fair
                                                Cost            Value
Available for sale:
Due in one year or less                      $   60 259         60 510
Due after one year through five years           290 534        295 928
Due after five years through ten years          706 504        717 050
Due after ten years                             579 823        606 366
Mortgage-backed bonds                           315 621        324 662

                                             $1 952 741      2 004 516

Held to maturity:
Due in one year or less                      $   27 043         27 342
Due after one year through five years            50 554         53 023
Due after five years through ten years           28 944         30 892
Due after ten years                              39 120         40 238

                                             $  145 661        151 495

Sales  of  investments  in  securities  available  for  sale,  excluding  normal
maturities and calls, follow.

                                             1997      1996      1995

Proceeds                                  $509 502   141 335   184 547
Gross realized gains                        11 597     1 400     6 416
Gross realized losses                        2 349     1 420     6 527

At December 31, 1997, the Company did not hold securities of any corporation and
its affiliates which exceeded 10 percent of stockholders' equity.

Kansas City Life employs no derivative financial instruments.

The Company  maintains a $60  million  bank line of credit  which may be used to
support  investment  strategies.  This line is unused at December 31, 1997,  and
will expire in April 1998.

Mortgage Loans
The  Company  holds  non-income   producing  mortgage  loans  equaling  $327,000
($2,077,000 - 1996).  Mortgage  loans are carried net of a valuation  reserve of
$8,500,000 ($8,500,000 - 1996).

At  December  31,  1997  and  1996,   the  mortgage   portfolio  is  diversified
geographically and by property type as follows.

                                     1997                   1996
                               Carrying    Fair       Carrying    Fair
                                Amount     Value       Amount     Value
Geographic region:
  East north central           $ 26 937   27 421        21 890   22 162
  Mountain                       64 602   66 321        75 058   76 163
  Pacific                        91 963   94 366        81 955   82 599
  West south central             32 997   33 961        36 155   36 940
  West north central             55 320   56 485        35 463   36 003
  Other                           6 735    7 017         4 472    4 662
  Valuation reserve              (8 500)  (8 500)       (8 500)  (8 500)

                               $270 054  277 071       246 493   250 029
Property type:
  Industrial                   $170 199  174 278       136 266   137 633
  Retail                         29 532   30 531        45 555    46 681
  Office                         58 658   60 267        54 332    55 280
  Other                          20 165   20 495        18 840    18 935
  Valuation reserve              (8 500)  (8 500)       (8 500)   (8 500)

                               $270 054  277 071       246 493   250 029

As of December 31,  1997,  the Company has  commitments  which expire in 1998 to
originate  mortgage  loans  of  $13,794,000  and to  advance  $10,454,000  on an
existing short-term line of credit.

Mortgage loans foreclosed upon and transferred to real estate investments during
the year equaled $3,189,000 ($2,977,000 - 1996 and $4,322,000 - 1995).

Mortgage  loans  acquired  in the sale of real  estate  assets  during  the year
totaled $4,299,000 ($6,579,000 - 1996 and $9,571,000 - 1995).

Real Estate
Detail concerning the Company's real estate investments follows.

                                                    1997       1996
Penntower office building, at cost:
  Land                                           $  1 106      1 106
  Building                                         18 068     17 644
  Less accumulated depreciation                    (9 809)    (9 303)
Foreclosed real estate, at lower of
  cost or net realizable value                     13 362     18 218
Other investment properties, at cost:
  Land                                              3 214      3 370
  Buildings                                        24 216     25 907
  Less accumulated depreciation                   (13 393)   (13 192)

                                                 $ 36 764     43 750

Investment real estate,  other than foreclosed  properties,  is depreciated on a
straight-line basis.  Penntower office building is depreciated over 60 years and
all other properties from 10 to 35 years.  Foreclosed real estate is carried net
of a  valuation  allowance  of  $3,686,000  ($5,227,000  - 1996) to reflect  net
realizable value.

The Company held non-income  producing real estate equaling $820,000 ($758,000 -
1996).


PROPERTY AND EQUIPMENT
                                                     1997      1996

Land                                             $  1 029     1 029
Home office buildings                              23 149    23 131
Furniture and equipment                            27 502    24 760

                                                   51 680    48 920
Less accumulated depreciation                     (28 052)  (24 129)

                                                  $23 628    24 791

Property  and   equipment  are  stated  at  cost  and   depreciated   using  the
straight-line  method. Home office buildings are depreciated over 25 to 50 years
and furniture and equipment over 3 to 10 years, their estimated useful lives.


POSTRETIREMENT BENEFIT PLANS

The Company has defined benefit  postretirement plans providing medical benefits
for substantially all its employees, full-time agents, and their dependents, and
life insurance  coverage for its  employees.  The Company and retirees share the
cost of the postretirement medical plan which incorporates cost-sharing features
such as  annually  adjusted  contributions,  deductibles  and  coinsurance.  The
medical  benefits  for  agents  are  contributory,   incorporating  cost-sharing
features  similar to the retired  employees'  medical plan.  The life  insurance
benefit is  non-contributory.  The Company  pays the cost of the  postretirement
health care benefits as they occur. The Company makes level annual contributions
to its life insurance plan over the plan participants' expected service periods.

The  plans'  funded  status,  reconciled  with  the  amounts  recognized  in the
Company's balance sheet, follows.

                                                      1997     1996
Accumulated postretirement benefit obligation:
  Retirees                                          $ 6 516    7 750
  Fully eligible active plan participants             2 914    1 904
  Other active plan participants                      8 242    5 803

                                                     17 672   15 457
  Unrecognized net loss                              (1 735)    (590)

                                                    $15 937   14 867

The net periodic postretirement benefit cost included the following components.

                                                  1997    1996   1995

Service cost                                    $  560     536    314
Interest cost                                      930     794    669
Net amortization of experience gains                (6)      -    (93)

                                                $1 484   1 330    890

The weighted  average  annual assumed rate of increase in the per capita cost of
covered benefits for the medical plans is 10 percent for 1998, and is assumed to
decrease gradually to 6 percent in 2004. Increasing the assumed health care cost
growth  rates by one  percentage  point  increases  the  accrued  postretirement
benefit  costs  $2,207,000  and  $2,040,000  as of  December  31, 1997 and 1996,
respectively.  The  aggregate  service and interest  cost  components of the net
periodic  postretirement  benefit  cost for 1997 would  increase  $312,000.  The
weighted   average   discount   rate  used  in   determining   the   accumulated
postretirement  benefit obligation was 7.25 percent and 7.75 percent at December
31, 1997 and 1996, respectively.


EMPLOYEE BENEFIT PLANS

The Company has a defined  benefit pension plan covering  substantially  all its
employees.  The  benefits  are  based  on years of  service  and the  employee's
compensation  during the last five years of  employment.  The  Company  annually
funds an amount greater than the minimum  required by ERISA but no more than the
maximum  deductible for Federal income tax purposes.  Contributions  provide not
only for benefits  attributed to service to date, but also for those expected to
be earned in the future.  The table below  outlines the plan's funded status and
those amounts recognized in the Company's financial statements.

                                                        1997       1996
Actuarial present value of accumulated benefit
  obligation, including vested benefits of
  $94,698,000 ($79,913,000 - 1996)                    $102 846     86 635
Projected benefit obligation for service
  rendered to date                                    $119 651    100 571
Plan assets at fair value, primarily
  listed corporate and U.S. bonds                       95 899     85 241
Plan assets less than projected benefit obligation     (23 752)   (15 330)
Items not yet recognized in earnings:
  Net loss from past experience                         25 452     15 571
  Prior service costs                                       12         14
  Net asset at January 1, 1987, being recognized
    over 16 years                                       (1 030)    (1 236)

    Net prepaid (unfunded) pension costs              $    682       (981)


                                                     1997    1996    1995
Net pension cost includes:
  Service costs - benefits earned
    during the period                             $ 3 150   3 369   2 403
  Interest cost on projected benefit obligation     7 823   6 647   6 156
  Actual return on plan assets                     (9 752) (2 951)(14 139)
  Net amortization and deferral                     2 354  (4 547)  7 412

        Net periodic pension cost                $  3 575   2 518   1 832

Assumptions were as follows:
  Weighted average discount rate                     7.25 %  7.75    7.00
  Weighted average compensation increase             4.50    4.50    5.50
  Weighted average expected
    long-term return on plan assets                  9.00    9.00    9.00

At December 31, 1996,  the Company  utilized  more recent  mortality  experience
which caused some increase in the benefit obligations.

The  1997  contribution  to the  pension  plan was  $4,967,000  (none - 1996 and
$992,000 - 1995).

Non-contributory  defined contribution  retirement plans are offered for general
agents and eligible sales agents which provide supplemental  payments based upon
earned agency first-year individual life and annuity commissions.  Contributions
to these plans were $133,000  ($174,000 -1996 and $287,000 - 1995).  The Company
also sponsors a non-contributory  deferred compensation plan for eligible agents
based  upon  earned  first-year  commissions.  Contributions  to this  plan were
$226,000 ($318,000 - 1996 and $405,000 - 1995).

Savings  plans for  eligible  employees  and agents are  sponsored  in which the
Company  matches  employee  contributions  up to 10  percent of salary and agent
contributions up to 2.5 percent of prior year paid commissions. Contributions to
the  plans  were  $2,102,000  ($2,082,000  -1996  and  $1,826,000  - 1995).  The
employees'  plan will  change for 1998 in that the Company  will match  employee
contributions  up to 6 percent of salary and the Company may contribute a profit
sharing  amount up to 4 percent of salary  depending  upon the Company's  profit
performance.

The Company also has a  non-contributory  trusteed employee stock ownership plan
covering substantially all salaried employees. The Company made no contributions
to this plan between 1995 and 1997.

Effective  January 1, 1998, the Company amended the defined benefit plan for all
employees  other  than  those  who are age 55 or over  with at least 15 years of
vested  service.  For  these  employees  the  defined  benefit  pension  plan is
converted to a cash balance plan whereby each  employee will have a cash balance
account.  Generally, the cash balance account consists of credits to the account
based on an employee's years of service and compensation,  and interest credits,
which for 1998 will be 7 percent.


FEDERAL INCOME TAXES

A  reconciliation  of the  Federal  income  tax  rate  and the  actual  tax rate
experienced is shown below.
                                                        1997   1996   1995

Federal income tax rate                                  35%    35     35
Special tax credits                                      (6)    (5)    (4)
Other permanent differences                              (1)    (1)    (1)

Actual income tax rate                                   28%    29     30

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below.

                                                       1997    1996
Deferred tax assets:
  Future policy benefits                            $ 53 923  46 518
  Employee retirement benefits                        13 104  13 055
  Other                                                2 882   5 176

Gross deferred tax assets                             69 909  64 749

Deferred tax liabilities:
  Capitalization of policy acquisition
    costs, net of amortization                        40 844  49 175
  Basis differences between tax and GAAP
    accounting for investments                        28 080  20 093
  Property and equipment, net                          1 704   1 770
  Value of insurance in force                         36 551  11 790
  Other                                                2 647   1 669

Gross deferred tax liabilities                       109 826  84 497

  Net deferred tax liability                        $ 39 917 (19 748)

Federal income taxes paid for the year were $14,335,000  ($25,332,000 - 1996 and
$19,981,000 - 1995).

Policyholders' surplus, which is frozen under the Deficit Reduction Act of 1984,
is  $40,500,000  for Kansas  City Life,  $2,800,000  for Sunset  Life  Insurance
Company of America  (Sunset  Life) and  $13,700,000  for Old American  Insurance
Company  (Old  American).   The  Companies  do  not  plan  to  distribute  their
policyholders' surplus.  Consequently,  the possibility of such surplus becoming
subject  to tax is  remote,  and no  provision  has been  made in the  financial
statements  for taxes  thereon.  Should the  balance in  policyholders'  surplus
become taxable, the tax computed at current rates would approximate $19,950,000.

Income taxed on a current basis is  accumulated in  "shareholders'  surplus" and
can be distributed to stockholders  without tax to the Company.  At December 31,
1997,  this  shareholders'  surplus  was  $348,057,000  for  Kansas  City  Life,
$73,170,000 for Sunset Life and $44,703,000 for Old American.


SEPARATE ACCOUNTS

These  accounts  arise from the  variable  line of  business.  Their  assets are
legally  segregated  and are not subject to the claims  which may arise from any
other business of the Company. These assets are reported at fair value since the
underlying  investment  risks are assumed by the  policyholders.  Therefore  the
related  liabilities  are recorded at amounts  equal to the  underlying  assets.
Investment  income and gains or losses  arising from  separate  accounts  accrue
directly to the  policyholders  and are,  therefore,  not included in investment
earnings in the  accompanying  consolidated  income  statement.  Revenues to the
Company from  separate  accounts  consist  principally  of contract  maintenance
charges, administrative fees and mortality and risk charges.


REINSURANCE
                                                 1997     1996     1995
Life insurance in force (in millions):
  Direct                                      $ 22 800   22 121   20 991
  Ceded                                         (3 375)  (2 742)  (2 442)
  Assumed                                        3 796       28       33

    Net                                       $ 23 221   19 407   18 582

Premiums:
Life insurance:
  Direct                                      $128 491  127 150  124 504
  Ceded                                        (26 262) (24 380) (23 292)
  Assumed                                        3 822      493      129

    Net                                       $106 051  103 263  101 341

Accident and health:
  Direct                                      $ 55 022   48 694   42 971
  Ceded                                        (10 091) (11 370) (13 496)
  Assumed                                            -      251        -

    Net                                       $ 44 931   37 575   29 475

Contract charges arise generally from directly issued business. However contract
charges  also arise from a block of business  assumed  during 1997 as  described
below.  Ceded  benefit  recoveries  were  $39,483,000  ($37,829,000  - 1996  and
$27,613,000 - 1995).

Old American has a coinsurance agreement with Employers Reassurance  Corporation
which  reinsures  certain  whole life policies  issued by Old American  prior to
December 1, 1986.  As of December 31, 1997,  these  policies had a face value of
$136,519,000.  The reserve for future policy benefits ceded under this agreement
was $51,003,000 ($52,556,000 - 1996).

As discussed in a following Note, the Company acquired a block of life insurance
business  through a reinsurance  treaty  during 1997. At December 31, 1997,  the
block  had $3.8  billion  of  insurance  in force,  future  policy  benefits  of
$88,476,000 and accumulated  contract values of $213,300,000.  During 1997, life
insurance  premiums  of  $3,096,000  and  contract  charges of  $9,997,000  were
recognized related to this block.

The maximum  retention on any one life is $350,000  for ordinary  life plans and
$100,000  for group  coverage.  A  contingent  liability  exists with respect to
reinsurance,  which may become a liability of the Company in the unlikely  event
that  the  reinsurers  should  be  unable  to  meet  obligations  assumed  under
reinsurance contracts.


FAIR VALUE OF FINANCIAL INSTRUMENTS

The  carrying  amounts  for cash,  short-term  investments  and policy  loans as
reported in the accompanying  balance sheet approximate  their fair values.  The
fair values for securities are based on quoted market prices,  where  available.
For those securities not actively traded, fair values are estimated using values
obtained  from  independent   pricing  services  or,  in  the  case  of  private
placements,  are  estimated by  discounting  expected  future cash flows using a
current market rate applicable to the yield,  credit quality and maturity of the
investments.  Fair values for mortgage loans are based upon discounted cash flow
analyses using an interest rate  assumption 2 percent above the comparable  U.S.
Treasury rate.

Fair  values  for the  Company's  liabilities  under  investment-type  insurance
contracts,  included with accumulated contract values for flexible annuities and
with  other  policyholder   funds  for  supplementary   contracts  without  life
contingencies, are estimated to be their cash surrender values.

Fair  values  for  the  Company's  insurance  contracts  other  than  investment
contracts  are not  required  to be  disclosed.  However,  the  fair  values  of
liabilities  under all insurance  contracts are taken into  consideration in the
Company's overall  management of interest rate risk, which minimizes exposure to
changing  interest  rates  through the matching of  investment  maturities  with
amounts due under insurance contracts.

The carrying amounts and fair values of the financial instruments follow.

                                          1997                 1996
                                  Carrying     Fair     Carrying    Fair
                                   Amount     Value      Amount     Value
Investments:
  Securities available
    for sale                    $2 119 502  2 119 502  1 838 171  1 838 171
  Securities held
    to maturity                    145 661    151 495    248 433    256 042
  Mortgage loans                   270 054    277 071    246 493    250 029

Liabilities:
  Individual and
    group annuities                830 495    802 461    862 605    829 261
  Supplementary contracts
    without life contingencies      21 526     21 526     21 835     21 835

The Investments Note provides further details regarding the investments above.


QUARTERLY CONSOLIDATED FINANCIAL DATA
(unaudited)
                                        First    Second   Third   Fourth
1997:
Total revenues                        $108 379  108 836  124 932  120 747

Operating income                      $ 10 299    8 548    7 639    8 946
Realized gains, net                      1 835      957    4 119    2 517

Net income                            $ 12 134    9 505   11 758   11 463

Per common share:
  Operating income                    $   1.66     1.39     1.23     1.44
  Realized gains, net                      .30      .15      .67      .41

  Net income                          $   1.96     1.54     1.90     1.85

1996:
Total revenues                        $106 434  101 263   104 924 106 497

Operating income                      $ 11 933   10 002     8 643   9 777
Realized gains (losses), net               614     (308)      671     982

Net income                            $ 12 547    9 694     9 314  10 759

Per common share:
  Operating income                    $   1.93     1.62      1.39    1.58
  Realized gains (losses), net             .10     (.05)      .11     .16

    Net income                        $   2.03     1.57      1.50    1.74



CONTINGENT LIABILITIES

The Company and certain of its subsidiaries are defendants in lawsuits involving
claims and disputes with  policyholders that may include claims seeking punitive
damages.  Some of these lawsuits  arise in  jurisdictions  that permit  punitive
damages  disproportionate to the actual damages alleged.  Although no assurances
can be given and no determinations can be made at this time as to the outcome of
any particular lawsuit or proceeding,  the Company and its subsidiaries  believe
that there are  meritorious  defenses  for these claims and are  defending  them
vigorously.  Management believes that the amounts that would ultimately be paid,
if any, would have no material effect on the Company's  consolidated  results of
operations and financial position.


ACQUISITION OF A BLOCK OF BUSINESS

In  September  1997,  the  Company  acquired  a block  of  traditional  life and
universal  life-type  products through a reinsurance  treaty. The ceding company
transferred $331,434,000 in liabilities and $254,901,000 in assets,  principally
cash. The difference was recorded as value of purchased insurance inforce and is
being  amortized in proportion to projected  future gross profits over 30 years,
the estimated life of the business.


MANAGEMENT'S REPORT

To Our Stockholders

Management  prepared the preceding  consolidated  financial  statements  and all
other  financial  information  included in this Annual Report and is responsible
for its integrity,  consistency and objectivity.  In preparing these statements,
management  necessarily  made  certain  estimates  and  judgments  and  selected
accounting   principles  in  conformity  with  generally   accepted   accounting
principles appropriate in the circumstances.

The Company maintains a system of internal accounting controls and procedures to
provide  reasonable  assurance,  at an  appropriate  cost,  that its  assets are
protected  and that its  financial  transactions  are  properly  authorized  and
recorded. Qualified personnel in the Company maintain and monitor these internal
controls on an ongoing basis.

The  Audit  Committee  of the Board of  Directors,  composed  solely of  outside
directors,  meets  annually  and, as required,  with the  independent  auditors,
management and the internal  auditors.  Each has free and separate access to the
committee.  The committee reviews audit procedures,  scope and findings, and the
adequacy of the Company's financial reporting.

The  independent  auditors,  Ernst & Young  LLP,  are  elected  by the  Board of
Directors to audit the financial statements and render an opinion thereon.


Richard L. Finn
Senior Vice President, Finance


REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
of Kansas City Life Insurance Company

We have audited the accompanying  consolidated balance sheet of Kansas City Life
Insurance  Company (the Company as of December 31, 1997 and 1996 and the related
consolidated statements of income,  stockholders' equity and cash flows for each
of the three years in the period ended  December 31,  1997.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Kansas
City Life Insurance  Company at December 31, 1997 and 1996 and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

Kansas City, Missouri
January 26, 1998


STOCKHOLDER INFORMATION

CORPORATE HEADQUARTERS
Kansas City Life Insurance Company
3520 Broadway
Post Office Box 419139
Kansas City, Missouri 64141-6139
Telephone:  (816) 753-7000
Fax: (816) 753-4902
Internet: http://www.kclife.com
E-Mail: Kclife @ Kclife.com

NOTICE OF ANNUAL MEETING
The annual meeting of stockholders will be held at
9 a.m. Thursday, April 23, 1998, at Kansas City Life's
corporate headquarters.

TRANSFER AGENT
Cheryl Keefer
Kansas City Life Insurance Company
Post Office Box 419139
Kansas City, Missouri 64141-6139

10-K REQUEST
Stockholders  may request a free copy of Kansas City Life's Form 10-K,  as filed
with the Securities  and Exchange  Commission,  by writing to Secretary,  Kansas
City Life Insurance Company.

SECURITY HOLDERS
As of  February  10,  1998,  Kansas  City Life had  approximately  795  security
holders, including individual participants in security position listings.

STOCK AND DIVIDEND INFORMATION
  Stock Quotation Symbol
    Over-the-Counter_KCLI

                                   Bid              Dividend
                            High         Low          Paid
                                     (per share)
1997:
First Quarter              $68.25       63.50         $ .44
Second Quarter              79.75       66.00           .44
Third Quarter               84.00       74.00           .44
Fourth Quarter              96.50       80.25           .44
                                                      $1.76

1996:
First Quarter              $58.25       51.00         $ .42
Second Quarter              57.50       52.50           .42
Third Quarter               56.50       52.00           .42
Fourth Quarter              63.50       53.50           .42
                                                      $1.68


A quarterly dividend of $.45 per share was paid February 23, 1998.

Over-the-counter market quotations are compiled according to Company records and
may reflect  inter-dealer prices,  without mark-up,  mark-down or commission and
may not necessarily  represent actual  transactions.


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