----

----

UNITED STATES            SECURITIES AND EXCHANGE COMMISSION            Washington, D.C. 20549

**FORM            10-Q**
|                                                  |                                                                                                                                                     |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| x                                                     | QUARTERLY REPORT                        PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE                        REQUIRED]     |
|                                                  | For the Quarterly                        Period ended September 30, 2007, or                                                                        |
| o                                                     | TRANSITION REPORT                        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO                        FEE REQUIRED] |
|                                                  | For the Transition                        Period from ________ to ________                                                                               |
| Commission File                        Number 2-40764 |
|                                                                          |
|-------------------------------------------------------------------------------|
| **KANSAS CITY LIFE                        INSURANCE COMPANY**                 |
|                                                                               |
| (Exact Name of                        Registrant as Specified in its Charter) |
|   |                                                            |   |                                          |   |
|--------|-----------------------------------------------------------------|--------|-----------------------------------------------|--------|
|   | Missouri                                                        |   | 44-0308260                                    |   |
|   |                                                                 |   |                                               |   |
|   | (State or Other                        Jurisdiction of          |   | (I.R.S.                        Employer       |   |
|   | Incorporation or                        Organization)           |   | Identification                        Number) |   |
|   |                                                            |   |                                          |   |
|   | 3520                        Broadway, Kansas City, Missouri     |   | 64111-2565                                    |   |
|   |                                                                 |   |                                               |   |
|   | (Address of Principal                        Executive Offices) |   | (Zip                        Code)             |   |

Registrants            Telephone Number, including Area Code: 816-753-7000
|                                                                                 |
|--------------------------------------------------------------------------------------|
| Not                        Applicable                                                |
|                                                                                      |
| (Former name or former                        address, if changed since last report) |

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

Yesx                      Noo

          Indicate            by check mark whether the Registrant is a large accelerated filer, an accelerated            filer, or a non-accelerated filer, See definition of accelerated filer and large            accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
|                                             |                                       |                                           |
|--------------------------------------------------|--------------------------------------------|------------------------------------------------|
| Large                        accelerated filer o | Accelerated filer                        x | Non-accelerated                        filer o |

          Indicate            by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of            the Exchange Act).

Yes            o                      No x

Indicate the number of shares            outstanding of each of the issuers classes of common stock, as of the latest            practicable date.
|                                                 |   |                                                         |
|------------------------------------------------------|--------|--------------------------------------------------------------|
| *Class*                                              |   | *Outstanding September                        30, 2007* |
|                                                      |   |                                                              |
| Common Stock, $1.25 par                        value |   | 11,831,804                        shares                     |

 

 

 

 

 

 

 

 

----

----

**KANSAS CITY            LIFE INSURANCE COMPANY            TABLE OF CONTENTS**

|       |                                                                                                                               |   |
|------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
| Part I.    | Financial                        Information                                                                                       | 3      |
|       |                                                                                                                               |   |
| Item 1.    | Financial Statements                        (Unaudited)                                                                            | 3      |
|       |                                                                                                                               |   |
|       | Consolidated Balance Sheets                                                                                                        | 3      |
|       |                                                                                                                               |   |
|       | Consolidated Statements of Income                                                                                                  | 4      |
|       |                                                                                                                               |   |
|       | Consolidated Statements of Cash Flows                                                                                              | 5      |
|       |                                                                                                                               |   |
|       | Notes to Consolidated                        Financial Statements                                                                  | 6      |
|       |                                                                                                                               |   |
| Item 2.    | Managements Discussion                        and Analysis of Financial Condition and Results of                        Operations | 13     |
|       |                                                                                                                               |   |
| Item 3.    | Quantitative and                        Qualitative Disclosures About Market Risk                                                  | 26     |
|       |                                                                                                                               |   |
| Item 4.    | Controls and Procedures                                                                                                            | 26     |
|       |                                                                                                                               |   |
| Part II.   | Other Information                                                                                                                  | 27     |
|       |                                                                                                                               |   |
| Item 1.    | Legal Proceedings                                                                                                                  | 27     |
|       |                                                                                                                               |   |
| Item 5.    | Other Information                                                                                                                  | 28     |
|       |                                                                                                                               |   |
| Item 6.    | Exhibits                                                                                                                           | 30     |
|       |                                                                                                                               |   |
| Signatures | 31                                                                                                                                 |

 

 

 

 

 

 

**-2-**

----

----

**Part I Financial            InformationItem 1. Financial Statements (Unaudited)**

**KANSAS CITY            LIFE INSURANCE COMPANYCONSOLIDATED BALANCE SHEETS**            (amounts in thousands, except share data)

|                                                                                                                                                                                   |   |                                          |      |                                    |   |      |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|-----------------------------------------|--------|-----------|--------|
|                                                                                                                                                                                   |   | September 30                        2007 |      | December 31                        2006 |   |
|                                                                                                                                                                                   |   | (Unaudited)                                   |      |                                    |   |
|                                                                                                                                                                                   |        |                                               |           |                                         |        |           |        |
| **ASSETS**                                                                                                                                                                             |   |                                          |      |                                    |   |      |   |
| Investments:                                                                                                                                                                           |   |                                          |      |                                    |   |      |   |
| Fixed maturity                        securities available for sale, at fair value                                                                                                     |   | $                                             | 2,623,597 |                                    | $      | 2,719,439 |   |
| Equity securities                        available for sale, at fair value                                                                                                             |   |                                          | 49,256    |                                    |   | 52,351    |   |
| Mortgage                        loans                                                                                                                                                  |   |                                          | 458,466   |                                    |   | 472,019   |   |
| Real estate                                                                                                                                                                            |   |                                          | 94,031    |                                    |   | 109,525   |   |
| Policy loans                                                                                                                                                                           |   |                                          | 93,180    |                                    |   | 96,218    |   |
| Short-term                        investments                                                                                                                                          |   |                                          | 63,031    |                                    |   | 44,219    |   |
|                                                                                                                                                                                   |        |                                               |           |                                         |        |           |        |
| Total                        investments                                                                                                                                               |   |                                          | 3,381,561 |                                    |   | 3,493,771 |   |
|                                                                                                                                                                                   |   |                                          |      |                                    |   |      |   |
| Cash                                                                                                                                                                                   |   |                                          | 11,048    |                                    |   | 3,908     |   |
| Accrued investment                        income                                                                                                                                       |   |                                          | 41,672    |                                    |   | 38,661    |   |
| Deferred acquisition                        costs                                                                                                                                      |   |                                          | 220,177   |                                    |   | 220,595   |   |
| Value of business                        acquired                                                                                                                                      |   |                                          | 76,146    |                                    |   | 82,769    |   |
| Reinsurance                        receivables                                                                                                                                         |   |                                          | 159,189   |                                    |   | 158,231   |   |
| Property and                        equipment                                                                                                                                          |   |                                          | 27,973    |                                    |   | 29,364    |   |
| Other assets                                                                                                                                                                           |   |                                          | 30,458    |                                    |   | 29,747    |   |
| Separate account                        assets                                                                                                                                         |   |                                          | 428,947   |                                    |   | 400,749   |   |
|                                                                                                                                                                                   |        |                                               |           |                                         |        |           |        |
| Total assets                                                                                                                                                                           |   | $                                             | 4,377,171 |                                    | $      | 4,457,795 |   |
|                                                                                                                                                                                   |   |                                               |           |                                    |        |           |   |
| **LIABILITIES**                                                                                                                                                                        |   |                                          |      |                                    |   |      |   |
| Future policy                        benefits                                                                                                                                          |   | $                                             | 849,905   |                                    | $      | 853,102   |   |
| Policyholder account                        balances                                                                                                                                   |   |                                          | 2,110,532 |                                    |   | 2,191,105 |   |
| Policy and contract                        claims                                                                                                                                      |   |                                          | 31,206    |                                    |   | 32,188    |   |
| Other policyholder                        funds                                                                                                                                        |   |                                          | 106,347   |                                    |   | 87,094    |   |
| Notes                        payable                                                                                                                                                   |   |                                          | 8,700     |                                    |   | 14,700    |   |
| Income taxes                                                                                                                                                                           |   |                                          | 27,764    |                                    |   | 35,319    |   |
| Other                        liabilities                                                                                                                                               |   |                                          | 145,277   |                                    |   | 159,234   |   |
| Separate account                        liabilities                                                                                                                                    |   |                                          | 428,947   |                                    |   | 400,749   |   |
|                                                                                                                                                                                   |        |                                               |           |                                         |        |           |        |
| Total                        liabilities                                                                                                                                               |   |                                          | 3,708,678 |                                    |   | 3,773,491 |   |
|                                                                                                                                                                                   |   |                                               |           |                                    |        |           |   |
| **STOCKHOLDERS'                        EQUITY**                                                                                                                                        |   |                                          |      |                                    |   |      |   |
| Common stock, par value                        $1.25 per share                        Authorized 36,000,000 shares,                            issued 18,496,680 shares |   |                                          | 23,121    |                                    |   | 23,121    |   |
| Additional paid in                        capital                                                                                                                                      |   |                                          | 29,013    |                                    |   | 25,852    |   |
| Retained                        earnings                                                                                                                                               |   |                                          | 776,909   |                                    |   | 780,892   |   |
| Accumulated other                        comprehensive loss                                                                                                                            |   |                                          | (35,712   | )                                       |   | (25,118   | )      |
| Treasury stock, at cost                        (2007 - 6,664,876 shares;                        2006 - 6,641,183 shares)                                                               |   |                                          | (124,838  | )                                       |   | (120,443  | )      |
|                                                                                                                                                                                   |        |                                               |           |                                         |        |           |        |
| Total stockholders'                        equity                                                                                                                                      |   |                                          | 668,493   |                                    |   | 684,304   |   |
|                                                                                                                                                                                   |        |                                               |           |                                         |        |           |        |
| Total liabilities and                        stockholders equity'                                                                                                                      |   | $                                             | 4,377,171 |                                    | $      | 4,457,795 |   |

*See            accompanying Notes to Consolidated Financial Statements (Unaudited).*

**-3-**

----

**KANSAS CITY            LIFE INSURANCE COMPANYCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**            (amounts in thousands, except share data)

|                                                                                             |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|------------------------------------------------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
|                                                                                             |   | Quarter ended                        September 30 |    | Nine                        Months ended                        September 30 |   |
|                                                                                             |   | 2007                                                   |    | 2006                                                                         |   | 2007    |   | 2006   |    |
|                                                                                             |   |                                                        |    |                                                                              |   |         |   |        |    |
| **REVENUES**                                                                                     |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Insurance                        revenues:                                                       |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Premiums                                                                                         |   | $                                                      | 43,041  |                                                                         | $      | 43,182  |   | $      | 131,033 |   | $      | 131,296 |   |
| Contract                        charges                                                          |   |                                                   | 28,058  |                                                                         |   | 28,364  |   |   | 83,238  |   |   | 86,217  |   |
| Reinsurance                        ceded                                                         |   |                                                   | (13,193 | )                                                                            |   | (13,404 | )      |   | (40,532 | )      |   | (40,739 | )      |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |
| Total insurance                        revenues                                                  |   |                                                   | 57,906  |                                                                         |   | 58,142  |   |   | 173,739 |   |   | 176,774 |   |
| Investment                        revenues:                                                      |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Net investment                        income                                                     |   |                                                   | 46,869  |                                                                         |   | 48,995  |   |   | 142,624 |   |   | 146,731 |   |
| Realized investment                        gains                                                 |   |                                                   | 1,339   |                                                                         |   | 757     |   |   | 6,501   |   |   | 2,397   |   |
| Other                        revenues                                                            |   |                                                   | 2,674   |                                                                         |   | 3,330   |   |   | 8,848   |   |   | 8,835   |   |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |
| Total                        revenues                                                            |   |                                                   | 108,788 |                                                                         |   | 111,224 |   |   | 331,712 |   |   | 334,737 |   |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |
|                                                                                             |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| **BENEFITS AND                        EXPENSES**                                                 |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Policyholder                        benefits                                                     |   |                                                   | 41,646  |                                                                         |   | 42,112  |   |   | 126,644 |   |   | 126,138 |   |
| Interest credited to                        policyholder account balances                        |   |                                                   | 22,614  |                                                                         |   | 23,805  |   |   | 68,119  |   |   | 71,019  |   |
| Amortization of                        deferred acquisition costs and value of business acquired |   |                                                   | 10,802  |                                                                         |   | 10,623  |   |   | 28,400  |   |   | 32,939  |   |
| Operating                        expenses                                                        |   |                                                   | 20,638  |                                                                         |   | 21,392  |   |   | 65,764  |   |   | 67,186  |   |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |
| Total benefits and                        expenses                                               |   |                                                   | 95,700  |                                                                         |   | 97,932  |   |   | 288,927 |   |   | 297,282 |   |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |
|                                                                                             |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Income before income                        tax expense                                          |   |                                                   | 13,088  |                                                                         |   | 13,292  |   |   | 42,785  |   |   | 37,455  |   |
|                                                                                             |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Income tax                        expense                                                        |   |                                                   | 3,957   |                                                                         |   | 3,766   |   |   | 13,536  |   |   | 10,631  |   |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |
|                                                                                             |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| **NET                        INCOME**                                                            |   | $                                                      | 9,131   |                                                                         | $      | 9,526   |   | $      | 29,249  |   | $      | 26,824  |   |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |
|                                                                                             |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Basic and diluted                        earnings per share:                                     |   |                                                   |    |                                                                         |   |    |   |   |    |   |   |    |   |
| Net income                                                                                       |   | $                                                      | 0.77    |                                                                         | $      | 0.80    |   | $      | 2.47    |   | $      | 2.25    |   |
|                                                                                             |   |                                                        |         |                                                                         |        |         |   |        |         |   |        |         |   |

*See            accompanying Notes to Consolidated Financial Statements (Unaudited).*

**-4-**

----

**KANSAS CITY            LIFE INSURANCE COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**            (amounts in thousands)

|                                                                     |   |                                                                                   |     |   |   |                                        |   |
|--------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|----------|--------|--------|---------------------------------------------|--------|
|                                                                     |   | Nine Months                        ended                        September 30 |     |
|                                                                     |   | 2007                                                                                   |     | 2006   |   |
|                                                                     |   |                                                                                        |     |        |   |
| **OPERATING                        ACTIVITIES**                          |   |                                                                                   |     |   |   |                                        |   |
| Net cash                        provided                                 |   | $                                                                                      | 3,716    |   | $      | 5,165                                       |   |
|                                                                     |   |                                                                                        |          |   |        |                                             |   |
| **INVESTING                        ACTIVITIES**                          |   |                                                                                   |     |   |   |                                        |   |
| Purchases of                        investments:                         |   |                                                                                   |     |   |   |                                        |   |
| Fixed maturity                        securities                         |   |                                                                                   | (191,568 | )      |   | (200,850                                    | )      |
| Equity                        securities                                 |   |                                                                                   | (2,871   | )      |   | (9,737                                      | )      |
| Mortgage                        loans                                    |   |                                                                                   | (50,399  | )      |   | (45,787                                     | )      |
| Real estate                                                              |   |                                                                                   | (2,465   | )      |   | (44,068                                     | )      |
| Other investment                        assets                           |   |                                                                                   | (21,995  | )      |   | -                            |   |
| Sales of                        investments:                             |   |                                                                                   |     |   |   |                                        |   |
| Fixed maturity                        securities                         |   |                                                                                   | 32,856   |   |   | 83,029                                      |   |
| Equity                        securities                                 |   |                                                                                   | 3,481    |   |   | 1,123                                       |   |
| Real estate                                                              |   |                                                                                   | 21,975   |   |   | 2,621                                       |   |
| Other investment                        assets                           |   |                                                                                   | 3,038    |   |   | 29,584                                      |   |
| Maturities and                        principal paydowns of investments: |   |                                                                                   |     |   |   |                                        |   |
| Fixed maturity                        securities                         |   |                                                                                   | 235,483  |   |   | 197,288                                     |   |
| Equity                        securities                                 |   |                                                                                   | 2,788    |   |   | 4,000                                       |   |
| Mortgage                        loans                                    |   |                                                                                   | 45,669   |   |   | 40,074                                      |   |
| Net additions to                        property and equipment           |   |                                                                                   | (630     | )      |   | (1,097                                      | )      |
| Proceeds from sale of                        non insurance affiliate     |   |                                                                                   | 10,104   |   |   | -                            |   |
|                                                                     |   |                                                                                        |          |   |        |                                             |   |
| Net cash                        provided                                 |   |                                                                                   | 85,466   |   |   | 56,180                                      |   |
|                                                                     |   |                                                                                        |          |   |        |                                             |   |
| **FINANCING                        ACTIVITIES**                          |   |                                                                                   |     |   |   |                                        |   |
| Proceeds from                        borrowings                          |   |                                                                                   | 30,637   |   |   | 55,796                                      |   |
| Repayment of                        borrowings                           |   |                                                                                   | (36,637  | )      |   | (65,045                                     | )      |
| Deposits on                        policyholder account balances         |   |                                                                                   | 154,914  |   |   | 153,437                                     |   |
| Withdrawals from                        policyholder account balances    |   |                                                                                   | (227,562 | )      |   | (202,000                                    | )      |
| Net transfers from                        separate accounts              |   |                                                                                   | 11,391   |   |   | 13,186                                      |   |
| Change in other                        deposits                          |   |                                                                                   | 19,725   |   |   | (12,258                                     | )      |
| Cash dividends to                        stockholders                    |   |                                                                                   | (33,275  | )      |   | (9,624                                      | )      |
| Net acquisition of                        treasury stock                 |   |                                                                                   | (1,235   | )      |   | (2,172                                      | )      |
|                                                                     |   |                                                                                        |          |   |        |                                             |   |
| Net cash                        used                                     |   |                                                                                   | (82,042  | )      |   | (68,680                                     | )      |
|                                                                     |   |                                                                                        |          |   |        |                                             |   |
|                                                                     |   |                                                                                   |     |   |   |                                        |   |
| Increase (decrease) in                        cash                       |   |                                                                                   | 7,140    |   |   | (7,335                                      | )      |
| Cash at beginning of                        year                         |   |                                                                                   | 3,908    |   |   | 12,099                                      |   |
|                                                                     |   |                                                                                        |          |   |        |                                             |   |
|                                                                     |   |                                                                                   |     |   |   |                                        |   |
| Cash at end of                        period                             |   | $                                                                                      | 11,048   |   | $      | 4,764                                       |   |
|                                                                     |   |                                                                                        |          |   |        |                                             |   |

*See            accompanying Notes to Consolidated Financial Statements (Unaudited).*

**-5-**

----

**Kansas City            Life Insurance Company            Notes to Consolidated Financial Statements (Unaudited)**(amounts in thousands, except share data)

***1. NATURE            OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES***

**Basis of            Presentation**

The unaudited            consolidated financial statements, the accompanying notes to these unaudited financial            statements and Management's Discussion and Analysis of Operations of Kansas City Life            Insurance Company include the accounts of the Company and its subsidiaries, principally            Sunset Life Insurance Company of America (Sunset Life), and Old American Insurance            Company (Old American).

The unaudited            consolidated financial statements have been prepared in accordance with U.S. generally            accepted accounting principles (GAAP) for interim financial reporting and with the            instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of            the disclosures required by GAAP for complete financial statements. As such, these            unaudited interim financial statements should be read in conjunction with the Company's            2006 Annual Report on Form 10-K. Management believes that the disclosures are adequate            to make the information presented not misleading, and all normal and recurring            adjustments necessary to present fairly the financial position at September 30,            2007 and the results of its operations for all periods presented have been made. The            results of operations for any interim period are not necessarily indicative of the            Company's operating results for a full year.

Significant            intercompany transactions have been eliminated in            consolidation.  Reclassifications have been made for reinsurance,            which reduced by $2.6 million both the total assets and the total liabilities of            the Consolidated Balance Sheet at December 31, 2006.

The preparation            of the unaudited consolidated financial statements requires management of the Company            to make estimates and assumptions relating to the reported amounts of assets and            liabilities, the disclosure of contingent assets and liabilities at the date of the            unaudited consolidated financial statements, and the reported amounts of revenue and            expenses during the period. These estimates are inherently subject to change and actual            results could differ from these estimates.

**Business            Changes**

On January 23,            2006, the Company entered into a definitive agreement to sell its bank subsidiary,            Generations Bank, for $10.1 million in cash to Brooke Corporation. On January 8, 2007,            the Company completed the sale of Generations Bank. The gain on the sale was $1.9            million. The bank subsidiary and the results of operations were not material to the            financial statements of the Company and are not disclosed separately.

**Significant            Accounting Policies**

A complete            summary of significant accounting policies is included in Note 1 to the audited            consolidated financial statements included in the Company's 2006 Annual Report on Form            10-K.

***2. NEW            ACCOUNTING PRONOUNCEMENTS***

In September            2005, the Accounting Standards Executive Committee of the American Institute of            Certified Public Accountants (AcSEC) issued Statement of Position 05-1 (SOP 05-1),            "*Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection            with Modifications or Exchanges of Insurance Contracts".* SOP 05-1 provides guidance            on accounting by insurance enterprises for deferred acquisition costs on internal            replacements of insurance contracts other than those specifically described in            Statement of Financial Accounting Standards (SFAS) No. 97, "*Accounting and Reporting            by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and            Losses from the Sale of Investments".* SOP 05-1 defines an internal replacement as a            modification in product benefits, features, rights, or coverages that occurs by            exchange of a contract for a new contract, or by amendment, endorsement, or rider to a            contract, or by the election of a feature or coverage within a contract. SOP 05-1 is            effective for internal replacements occurring in fiscal years beginning after December            31, 2006.

**-6-**

----

**Kansas City            Life Insurance Company            Notes to Consolidated Financial Statements (Unaudited) Continued**

Retrospective            application of SOP 05-1 to previously issued consolidated financial statements is not            permitted. SOP 05-1 was adopted on January 1, 2007, with no material impact to the            unaudited consolidated financial statements.

In June 2006,            the Financial Accounting Standards Board (FASB) issued Interpretation 48 "Accounting            for Uncertainty in Income Taxes" (FIN 48). FIN 48 applies to all uncertain tax            positions accounted for under SFAS No. 109 "Accounting for Income Taxes". FIN 48            addresses whether tax positions taken or to be taken on tax returns should be reflected            in the financial statements before they are resolved with the appropriate taxing            authority. Previous statements provided no specific guidance related to such positions.            FIN 48 was adopted on January 1, 2007, with no material impact to the unaudited            consolidated financial statements. Other disclosures regarding FIN 48 are provided in            Note 6 Income Taxes.

In September            2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157            provides a single definition of fair value, together with a framework for measuring it,            and requires additional disclosure about the use of fair value to measure assets and            liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement,            not an entity-specific measurement, and established a fair value hierarchy with the            highest priority being the quoted price in active markets. This statement is effective            for years beginning on or after November 15, 2007. The Company is currently evaluating            the impact of this statement but does not believe that it will have a material impact            on the unaudited consolidated financial statements.

In February            2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and            Financial Liabilities including an amendment of SFAS No. 115." SFAS 159 permits an            entity to measure certain financial assets and liabilities at fair value. Under SFAS            159, entities that elect the fair value option will report unrealized gains and losses            in earnings at each subsequent reporting date. The fair value option may be elected on            an instrument-by-instrument basis, with a few exceptions, as long as it is applied to            the instrument in its entirety. Once adopted, the fair value option election is            irrevocable, unless a new election date occurs. This statement is effective for years            beginning after November 15, 2007. The Company is currently evaluating the impact of            this statement but does not believe that it will have a material impact on the            unaudited consolidated financial statements.

All other            Standards and Interpretations of those Standards issued during the nine months            ended September 30, 2007, did not relate to accounting policies and procedures            pertinent to the Company at this time.

***3.            UNREALIZED LOSSES ON SECURITIES***

As of September            30, 2007, the Company had unrealized losses of $57.8 million on investment securities            with a fair value of $1.6 billion. As of December 31, 2006, the Company had unrealized            losses of $48.0 million on investment securities with a fair value of $1.6 billion. The            increase in unrealized losses was primarily attributable to the widening of spreads on            corporate bonds and mortgage-backed securities during the nine months            ended September 30, 2007.

**-7-**

----

**Kansas City            Life Insurance Company            Notes to Consolidated Financial Statements (Unaudited) Continued**

The following table provides            information regarding unrealized losses on investment securities available for sale, as            of September 30, 2007.

|                                                                               |   |                                                                |          |                                       |   |                              |          |                                     |   |                              |      |                                     |   |   |   |   |   |   |      |   |   |   |   |   |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|---------------|--------------------------------------------|--------|-----------------------------------|---------------|------------------------------------------|--------|-----------------------------------|-----------|------------------------------------------|--------|--------|--------|--------|--------|--------|-----------|--------|--------|--------|--------|--------|--------|
|                                                                               |   | Investment securities                        with unrealized losses |          |
|                                                                               |   | Less                        than 12 months                          |          | 12                        months or longer |   | Total                             |          |
|                                                                               |   |                                                                     |          |                                            |   |                                   |          |
|                                                                               |   | Fair                        Value                                   |          | Unrealized                        Losses   |   | Fair                        Value |          | Unrealized                        Losses |   | Fair                        Value |      | Unrealized                        Losses |   |
|                                                                               |   |                                                                     |          |                                            |   |                                   |          |                                          |   |                                   |      |                                          |   |
| Bonds:                                                                             |   |                                                                |          |                                       |   |                              |          |                                     |   |                              |      |                                     |   |
| U.S. Treasury                        securities and obligations of U.S. Government |   | $                                                                   | 5,819         |                                       |   | $                                 | 32            |                                     |   | $                                 | 27,026    |                                     |   | $      | 765    |   |   | $      | 32,845    |   |   | $      | 797    |   |   |
| Federal agencies                        1                                          |   |                                                                | -   |                                       |   |                              | -   |                                     |   |                              | 46,653    |                                     |   |   | 480    |   |   |   | 46,653    |   |   |   | 480    |   |   |
| Federal agency issued                        mortgage-backed securities 1          |   |                                                                | 30,741        |                                       |   |                              | 526           |                                     |   |                              | 177,413   |                                     |   |   | 5,455  |   |   |   | 208,154   |   |   |   | 5,981  |   |   |
| Corporate                        obligations                                       |   |                                                                | 319,871       |                                       |   |                              | 7,074         |                                     |   |                              | 606,731   |                                     |   |   | 30,757 |   |   |   | 926,602   |   |   |   | 37,831 |   |   |
| Corporate                        private-labeled mortgage-backed securities        |   |                                                                | 125,349       |                                       |   |                              | 2,412         |                                     |   |                              | 92,899    |                                     |   |   | 2,843  |   |   |   | 218,248   |   |   |   | 5,255  |   |   |
| Other                                                                              |   |                                                                | 60,528        |                                       |   |                              | 4,237         |                                     |   |                              | 85,193    |                                     |   |   | 2,576  |   |   |   | 145,721   |   |   |   | 6,813  |   |   |
|                                                                               |   |                                                                     |               |                                       |   |                                   |               |                                     |   |                                   |           |                                     |   |        |        |   |   |        |           |   |   |        |        |   |   |
| Fixed maturity                        securities                                   |   |                                                                | 542,308       |                                       |   |                              | 14,281        |                                     |   |                              | 1,035,915 |                                     |   |   | 42,876 |   |   |   | 1,578,223 |   |   |   | 57,157 |   |   |
| Equity                        securities                                           |   |                                                                | 4,575         |                                       |   |                              | 63            |                                     |   |                              | 6,383     |                                     |   |   | 593    |   |   |   | 10,958    |   |   |   | 656    |   |   |
|                                                                               |   |                                                                     |               |                                       |   |                                   |               |                                     |   |                                   |           |                                     |   |        |        |   |   |        |           |   |   |        |        |   |   |
| Total                                                                              |   | $                                                                   | 546,883       |                                       |   | $                                 | 14,344        |                                     |   | $                                 | 1,042,298 |                                     |   | $      | 43,469 |   |   | $      | 1,589,181 |   |   | $      | 57,813 |   |   |
|                                                                               |   |                                                                     |               |                                       |   |                                   |               |                                     |   |                                   |           |                                     |   |        |        |   |   |        |           |   |   |        |        |   |   |

----

The Company            holds three corporate debt securities with an unrealized loss of $4.1 million in            the category of investments with losses greater than 20% of book value for less than 6            months. These securities are expected to continue to perform to the original            contractual terms and the Company has the ability and intent to hold them until the            recovery of fair value, which may be at maturity.  No securities in this table            were considered to be other-than-temporarily impaired at September 30, 2007.

***4.            COMPREHENSIVE INCOME (LOSS)***

Comprehensive            income (loss) is comprised of net income and other comprehensive income (loss). Other            comprehensive income (loss) includes the unrealized investment gains or losses on            securities available for sale (net of reclassification adjustments for realized            investment gains or losses) net of adjustments to DAC, VOBA, and policyholder account            balances. In addition, other comprehensive income (loss) includes the change in the            pension liability. Other comprehensive income (loss) also includes deferred income            taxes on these items.

Comprehensive income            was $19.7 million for the third quarter of 2007, which consisted of net income of $9.1            million and other comprehensive income of $10.6 million. Comprehensive income was $46.5            million for the third quarter of 2006, which consisted of net income of $9.5 million            and other comprehensive income of $37.0 million. The other comprehensive income for            both periods was due primarily to a decrease in unrealized investment losses as a            result of a decrease in interest rates during the respective quarters, with the 2007            decrease in interest rates being partially offset by the widening of spreads on            corporate bonds and mortgage-backed securities.

 

Comprehensive income            was $18.6 million for the nine months ended September 30, 2007, which consisted of net            income of $29.2 million and other comprehensive loss of $10.6 million. Comprehensive            income was $13.5 million for the nine months ended September 30, 2006, which consisted            of net income of $26.8 million and other comprehensive loss of $13.3 million. The other            comprehensive loss for both periods was due primarily to an increase in unrealized            investment losses. The increase in unrealized investment losses for the nine months of            2007 was primarily due to the widening of spreads on corporate bonds and            mortgage-backed securities. The increase in unrealized investment losses for the nine            months of 2006 was primarily due to the increase in interest rates.

**-8-**

----

**Kansas City            Life Insurance Company            Notes to Consolidated Financial Statements (Unaudited) Continued**

***5. INCOME            PER SHARE***

Due to the            Company's capital structure and the absence of other potentially dilutive securities,            there is no difference between basic and diluted earnings per common share for any of            the periods reported. The weighted average number of shares outstanding was 11,842,494            and 11,875,104 for the quarters ended September 30, 2007 and 2006, respectively.            The weighted average number of shares outstanding was 11,851,906 and 11,888,046 for            the nine months ended September 30, 2007 and 2006, respectively.

***6. INCOME            TAXES***

The            third quarter income tax expense was $4.0 million or 30% of income before tax for 2007,            versus $3.8 million or 28% of income before tax for the prior year period. The income            tax expense for the nine months ended September 30, 2007, was $13.5 million or 32% of            income before tax for 2007, versus $10.6 million or 28% of income before tax for the            prior year period.

 

The            effective income tax rate in both years was lower than the prevailing corporate federal            income tax rate of 35%, primarily due to income tax credits generated from the            Company’s investments in affordable housing. The effect of the affordable housing            tax credits on the effective tax rate in both the third quarter and nine-month periods            was a benefit of approximately 3% of income before tax in 2007 and 6% in 2006.             The decrease in the tax benefit from affordable housing tax credits was due to a            decrease in tax credits realized.

***7.******SEGMENT INFORMATION***

The Company has            three reportable business segments, which are defined based on the nature of the            products and services offered: Individual Insurance, Group Insurance and Old American.            The Individual Insurance segment consists of individual insurance products for both            Kansas City Life and Sunset Life. The Individual Insurance segment is marketed through            a nationwide sales force of independent general agents and third-party arrangements.            The Group Insurance segment consists of sales of group life, group disability, and            group dental products. This segment is marketed through a nationwide sales force of            independent general agents, group brokers and third-party marketing arrangements. Old            American consists of individual insurance products designed primarily as final expense            products. These products are marketed through a nationwide general agency sales force            with exclusive territories, using direct response marketing to supply agents with            leads.

Separate            investment portfolios are maintained for each of the three life insurance companies of            the Company. However, investments are allocated to the Group Insurance segment based            upon its cash flows. Its investment income is modeled using the year of investment            method. Home office functions are fully integrated for the three companies in order to            maximize economies of scale. Operating expenses are allocated to the segments            based upon internal cost studies.

Inter-segment            revenues are not material. The Company operates in the United States and no individual            customer accounts for 10% or more of the Company's revenue.

**-9-**

----

**Kansas City            Life Insurance Company            Notes to Consolidated Financial Statements (Unaudited) Continued**

The following            schedule provides, in thousands, the financial performance of each of the three            reportable operating segments of the Company.

|                                          |   |   |   |   |                                        |   |                                   |    |                                |   |                                              |   |     |   |   |   |   |   |   |   |   |   |   |   |   |    |   |
|-----------------------------------------------|--------|--------|--------|--------|---------------------------------------------|--------|----------------------------------------|---------|-------------------------------------|--------|---------------------------------------------------|--------|----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|
|                                          |   |   |   |   | Individual                        Insurance |   | Group                        Insurance |    | Old                        American |   | Intercompany                        Eliminations1 |   | Total    |   |
|                                          |   |   |   |   |                                             |   |                                        |    |                                     |   |                                                   |   |          |   |
| Insurance                        revenues:    |   |   |   |   |                                        |   |                                   |    |                                |   |                                              |   |     |   |
| Third                        quarter:         |   |   | 2007   |   |                                        | $      | 31,215                                 |    |                                |   | $                                                 | 11,348 |     |   |   | $      | 15,492 |   |   |   | $      | (149   | )      |   | $      | 57,906  |   |
|                                          |   |   | 2006   |   |                                        |   | 31,327                                 |    |                                |   |                                              | 11,058 |     |   |   |   | 15,900 |   |   |   |   | (143   | )      |   |   | 58,142  |   |
| Nine months:                             |   |   | 2007   |   |                                        | $      | 93,168                                 |  2 |                                |   | $                                                 | 34,142 |     |   |   | $      | 46,879 |   |   |   | $      | (450   | )      |   | $      | 173,739 |   |
|                                          |   |   | 2006   |   |                                        |   | 95,639                                 |    |                                |   |                                              | 33,456 |  3  |   |   |   | 48,109 |   |   |   |   | (430   | )      |   |   | 176,774 |   |
|                                          |   |   |   |   |                                        |   |                                   |    |                                |   |                                              |   |     |   |   |   |   |   |   |   |   |   |   |   |   |    |   |
| Net investment                        income: |   |   |   |   |                                        |   |                                   |    |                                |   |                                              |   |     |   |   |   |   |   |   |   |   |   |   |   |   |    |   |
| Third                        quarter:         |   |   | 2007   |   |                                        | $      | 43,416                                 |    |                                |   | $                                                 | 132    |     |   |   | $      | 3,321  |   |   |   | $      |        |   |   | $      | 46,869  |   |
|                                          |   |   | 2006   |   |                                        |   | 45,724                                 |    |                                |   |                                              | 52     |     |   |   |   | 3,219  |   |   |   |   |        |   |   |   | 48,995  |   |
| Nine months:                             |   |   | 2007   |   |                                        | $      | 132,336                                |    |                                |   | $                                                 | 319    |     |   |   | $      | 9,969  |   |   |   | $      |        |   |   | $      | 142,624 |   |
|                                          |   |   | 2006   |   |                                        |   | 136,543                                |    |                                |   |                                              | 203    |     |   |   |   | 9,985  |   |   |   |   |        |   |   |   | 146,731 |   |
|                                          |   |   |   |   |                                        |   |                                   |    |                                |   |                                              |   |     |   |   |   |   |   |   |   |   |   |   |   |   |    |   |
| Net income                        (loss):     |   |   |   |   |                                        |   |                                   |    |                                |   |                                              |   |     |   |   |   |   |   |   |   |   |   |   |   |   |    |   |
| Third                        quarter:         |   |   | 2007   |   |                                        | $      | 8,602                                  |    |                                |   | $                                                 | (553   | )        |   |   | $      | 1,082  |   |   |   | $      |        |   |   | $      | 9,131   |   |
|                                          |   |   | 2006   |   |                                        |   | 8,677                                  |    |                                |   |                                              | (506   | )        |   |   |   | 1,355  |   |   |   |   |        |   |   |   | 9,526   |   |
| Nine months:                                  |   |   | 2007   |   |                                        | $      | 27,035                                 |  2 |                                |   | $                                                 | (1,114 | )        |   |   | $      | 3,328  |   |   |   | $      |        |   |   | $      | 29,249  |   |
|                                          |   |   | 2006   |   |                                        |   | 24,262                                 |    |                                |   |                                              | (1,169 | ) 3 |   |   |   | 3,731  |   |   |   |   |        |   |   |   | 26,824  |   |

1            Elimination entries to remove intercompany transactions for life and accident and            health insurance were as follows: insurance revenues from the Group Insurance segment            and operating expenses from the Individual Insurance segment were eliminated to arrive            at Consolidated Statements of Income.

2            Contract charges include expense loads which were reduced for the portion that            represents unearned revenue.   During the second quarter of 2007, contract            charges were reduced by $1.7 million, from a correction of the unearned revenue portion            of a universal life product. The amount of the correction attributable to prior periods            was $1.4 million, with $0.2 million in 2005, $0.9 million in 2006 and $0.3 million in            the first quarter of 2007.  No adjustment was necessary in the third quarter of            2007.  The prior period financial statements were not revised as the amounts were            determined to be immaterial.

3            Insurance revenues for the nine months of 2006 included unrecorded renewal premiums            from earlier periods of $0.6 million.  An adjustment was reflected in            the second quarter of 2006 that related to renewal premiums attributable to years            2003 through 2006. The unrecorded premiums in 2003, 2004 and 2005 were $0.1 million,            $0.2 million and $0.3 million, respectively. No adjustment was necessary in the third            quarter of 2006.   Excluding the unrecorded premiums, the net loss for the            segment was $1.6 million for the nine months ended September 30, 2006.             Management has assessed the materiality of such premiums against prior periods and            deemed the unrecorded premiums were not material.

**-10-**

----

**Kansas City            Life Insurance Company            Notes to Consolidated Financial Statements (Unaudited) Continued**

***8.            PENSIONS AND OTHER POSTRETIREMENT BENEFITS***

Components of            net periodic benefit cost:

|                                                      |   |                                                   |                        |                                                   |   |   |   |   |   |   |   |   |   |
|-----------------------------------------------------------|--------|--------------------------------------------------------|-----------------------------|--------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                      |   | Pension                        Benefits                |                        | Other                        Benefits                  |   |
|                                                      |   | Quarter ended                        September 30 |                        | Quarter ended                        September 30 |   |
|                                                      |   | 2007                                                   |                        | 2006                                                   |   | 2007   |   | 2006   |   |
|                                                      |        |                                                        |                             |                                                        |        |        |        |        |        |        |        |        |        |
| Service cost                                              |   | $                                                      |     605 |                                                   | $      | 589    |   | $      | 184    |   | $      | 188    |   |
| Interest                        cost                      |   |                                                   |  1,874                 |                                                   |   | 1,927  |   |   | 413    |   |   | 299    |   |
| Expected return on plan                        assets     |   |                                                   | (2,826                      | )                                                      |   | (2,117 | )      |   | (13    | )      |   | (13    | )      |
| Amortization                        of:                   |   |                                                   |                        |                                                   |   |   |   |   |   |   |   |   |   |
| Unrecognized actuarial                        loss (gain) |   |                                                   |     228 |                                                   |   | 717    |   |   | 75     |   |   | (2     | )      |
| Unrecognized prior                        service cost    |   |                                                   |    (162      | )                                                      |   | (170   | )      |   | (94    | )      |   | (94    | )      |
|                                                      |   |                                                        |                        |                                                        |   |        |   |        |   |
| Net periodic benefits                        cost         |   | $                                                      |    (281      | )                                                      | $      | 946    |   | $      | 565    |   | $      | 378    |   |
|                                                      |   |                                                        |                             |                                                   |        |        |   |        |        |   |        |        |   |

|                                                      |   | Pension                        Benefits                                                |   | Other                        Benefits                                                  |   |
|-----------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|
|                                                      |   | Nine Months                        ended                        September 30 |   | Nine Months                        ended                        September 30 |   |
|                                                      |   | 2007                                                                                   |   | 2006                                                                                   |   | 2007 |   | 2006 |   |
|                                                      |        |                                                                                        |        |                                                                                        |        |  |  |  |  |  |  |  |  |
| Service                        cost                       |   | $                                                                                      | 1,732  |                                                                                   | $      | 1,768 |   | $ | 592 |   | $ | 628 |   |
| Interest                        cost                      |   |                                                                                   | 5,586  |                                                                                   |   | 5,781 |   |   | 1,067 |   |   | 1,009 |   |
| Expected return on                        plan assets     |   |                                                                                   | (7,091 | )                                                                                      |   | (6,350 | ) |   | (40 | ) |   | (41 | ) |
| Amortization                        of:                   |   |                                                                                   |   |                                                                                   |   |   |   |   |   |   |   |   |   |
| Unrecognized actuarial                        loss (gain) |   |                                                                                   | 1,727  |                                                                                   |   | 2,151 |   |   | 132 |   |   | 116 |   |
| Unrecognized prior                        service cost    |   |                                                                                   | (485   | )                                                                                      |   | (510 | ) |   | (283 | ) |   | (284 | ) |
|                                                      |   |                                                                                        |        |                                                                                   |        |  |   |  |  |   |  |  |   |
| Net periodic                        benefits cost         |   | $                                                                                      | 1,469  |                                                                                   | $      | 2,840 |   | $ | 1,468 |   | $ | 1,428 |   |
|                                                      |   |                                                                                        |        |                                                                                   |        |  |   |  |  |   |  |  |   |

***9.            SHARE-BASED PAYMENT***

The Company has            a long-term incentive plan for senior management that awards participants for the            increase in the share price of the Company's common stock through units (phantom            shares) assigned by the Board of Directors. The awards are calculated over three-year            intervals on a calendar year basis. At the conclusion of each three-year interval,            participants will receive awards based on the increase in the share price during a            defined measurement period, times the number of units. The increase in the share price            will be determined based on the change in the share price from the beginning to the end            of the three-year interval. Dividends are accrued and paid at the end of each            three-year interval to the extent that they exceed negative stock price appreciation.            Plan payments are contingent on the continued employment of the participant unless            termination is due to a qualifying event such as death, disability or            retirement.

In the first            quarter of 2007, the plan made a payment of $1.0 million to plan participants for the            three-year interval ended December 31, 2006. A payment of $1.5 million was made in the            first quarter of 2006 for the three-year interval ended December 31, 2005. No payments            were made in the second or third quarters of 2007 or 2006. At

**-11-**

----

**Kansas City Life Insurance Company            Notes to Consolidated Financial Statements (Unaudited) Continued**

each reporting            period an estimate of the share-based compensation expenses is accrued, utilizing            the share price (fair value) at the period end.  The cost of compensation that            reduced operating expenses was$159 and $193, for the third            quarters of 2007 and 2006, respectively. The associated tax expense for these            periods was $56 and $68, respectively.  The cost of compensation that reduced            operating expense for the nine month periods ending September 30, 2007 and 2006, was            $324 and $482, respectively.  The associated tax expense for these periods was            $114 and $169, respectively.

***10.            COMMITMENTS***

In the normal            course of business, the Company has open purchase and sale commitments. At September            30, 2007, the Company had purchase commitments to fund mortgage loans and other            investments of $5.9 million and $1.1 million of sale commitments. Subsequent to            September 30, 2007, the Company entered into purchase commitments of $1.6            million.

***11. CONTINGENT            LIABILITIES***

The life            insurance industry, including the Company, has been subject to an increase in            litigation in recent years. Such litigation has been pursued on behalf of purported            classes of policyholders and other claims and legal actions in jurisdictions where            juries often award punitive damages, which are grossly disproportionate to actual            damages.

Although no            assurances can be given and no determinations can be made at this time, management            believes that the ultimate liability, if any, with respect to these claims and actions,            would have no material effect on the Company's business, results of operations or            financial position.

***12. GUARANTEES AND            INDEMNIFICATIONS***

The Company is            subject to various indemnification obligations issued in conjunction with certain            transactions, primarily assumption reinsurance agreements, stock purchase agreements,            mortgage servicing agreements, construction and lease guarantees and borrowing            agreements whose terms range in duration and often are not explicitly defined.            Generally, a maximum obligation is not explicitly stated; therefore, the overall            maximum amount of the obligation under the indemnifications cannot be reasonably            estimated. While we are unable to estimate with certainty the ultimate legal and            financial liability with respect to these indemnifications, we believe the likelihood            is remote that material payments would be required under such indemnifications, and            therefore such indemnifications would not result in a material adverse effect on the            Company's business, financial position or results of operations.

**-12-**

----

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

**Cautionary Statement on            Forward-Looking Information**

This report            reviews the Company's financial condition and results of operations, and historical            information is presented and discussed. Where appropriate, factors that may affect            future financial performance are also identified and discussed. Certain statements made            in this report include "forward-looking statements" that fall within the meaning of the            Private Securities Litigation Reform Act of 1995. Forward-looking statements include            any statement that may predict, forecast, indicate or imply future results, performance            or achievements rather than historical facts and may contain words like "believe,"            "expect," "estimate," "project," "forecast," "anticipate," "plan," "will," "shall," and            other words, phrases or expressions with similar meaning.

Forward-looking            statements are subject to known and unknown risks, uncertainties and other factors that            may cause actual results to differ materially from those contemplated by the            forward-looking statements. Factors that could cause the Company's future results to            differ materially from expected results include, but are not limited to:

|   |   |                                                                                                                                                                                                                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |        | Changes in general                        economic conditions, including the performance of financial markets and                        interest rates;                                                                                    |
|   |   |                                                                                                                                                                                                                                        |
|   |        | Increasing competition                        and changes in customer behavior, which may affect the Company's ability to                        sell its products and retain business;                                                     |
|   |   |                                                                                                                                                                                                                                        |
|   |        | Customer and agent                        response to new products, distribution channels and marketing                        initiatives;                                                                                                 |
|   |   |                                                                                                                                                                                                                                        |
|   |        | Fluctuations in                        experience regarding current mortality, morbidity, persistency and interest                        rates relative to expected amounts used in pricing the Company's                        products; |
|   |   |                                                                                                                                                                                                                                        |
|   |        | Changes in assumptions                        related to deferred acquisition costs and the value of business                        acquired;                                                                                              |
|   |   |                                                                                                                                                                                                                                        |
|   |        | Regulatory, accounting                        or tax changes that may affect the cost of, or the demand for, the                        Company's products or services;                                                                     |
|   |   |                                                                                                                                                                                                                                        |
|   |        | Unanticipated changes                        in industry trends and ratings assigned by nationally recognized rating                        organizations.                                                                                  |

The Company            cannot give assurances that such statements will prove to be correct. Given these risks            and uncertainties, investors should not place undue reliance on forward-looking            statements as a prediction of actual results.

**Consolidated Results of            Operations**

***Summary of            Results***

Net income for            the third quarter of 2007 decreased $0.4 million to $9.1 million or 4%, versus the same            quarter in the prior year. Net income per share for the third quarter decreased $0.03            to $0.77 per share versus $0.80 per share in the third quarter of the prior year. Net            income for the nine months increased $2.4 million to $29.2 million or 9% over the prior            year. Net income per share for the nine months increased $0.22 to $2.47 per share            compared with $2.25 per share in the prior year period.

***Sales***

The Company measures            sales in terms of new premiums and deposits. Premiums are included in insurance            revenues in the Consolidated Statements of Income (Unaudited), while deposits are shown            as a Financing Activity in the Consolidated Statements of Cash Flows (Unaudited). The            first set of tables below reconciles premiums included in insurance revenues and            provides detail by new and renewal business. New premiums are also detailed by product.            The second set of tables reconciles deposits with the Consolidated Statements of Cash            Flows (Unaudited) and provides detail by new and renewal deposits. New deposits are            also detailed by product.

 

The Company’s            marketing plan has been to focus its primary growth strategies on its individual life            insurance business, which includes new premiums for individual life products and new            deposits for universal life and variable universal life products. The marketing plan            also includes strategies to grow the business through its existing sales force and the            addition of new agents and general agents.

 

**-13-**

 

----

 

 

Consolidated            total premiums were flat in the third quarter of 2007, compared with the prior year.            New premiums in the third quarter increased $0.2 million or 3% versus a 10% increase in            the prior year. New immediate annuity premiums increased $0.4 million or 34% and new            individual life premiums increased $0.2 million or 5%. New group life premiums            increased $0.2 million or 80% in the third quarter, while new group accident and health            sales decreased $0.6 million or 20%, compared with a year ago. New group accident and            health premiums have been affected by the termination of the stop loss product line at            year end 2006, which resulted in a $0.4 million decline in premiums in the third            quarter versus last year. Excluding this terminated block from new sales in the third            quarter versus a year ago would result in a 10% increase in total new premiums and a 6%            decrease in the group accident and health product premiums.

 

Total            premiums for the nine months ended 2007 were flat, compared with a decline in the prior            year period. New premiums for the nine months increased 3%, compared with a decline a            year ago. The increase in the nine months was primarily due to a $1.4 million or 33%            increase in immediate annuity premiums and a $0.4 million or 52% increase in group life            premiums. These increases were partially offset by a $0.2 million or 2% decline in            individual life premiums and a $0.8 million or 9% decline in group accident and health            premiums. The termination of the stop loss product line resulted in a $1.0 million            decline in premiums through the nine months of 2007. Excluding this terminated block            from new sales for the nine months would result in an 8% increase in new premiums and a            3% increase in the group accident and health product premiums.

 

Consolidated renewal            premiums declined 1% in both the third quarter and nine months versus the same periods            a year ago. Individual life renewal premiums declined 2% for the third quarter and 1%            for the nine months, compared with the prior year. Group life and accident and health            renewal premiums increased 3% for the third quarter and less than 1% for the nine            months versus the same periods a year ago.

 

|                                                       |   |                                              |   |   |   |          |   |   |   |   |   |          |   |
|------------------------------------------------------------|--------|---------------------------------------------------|--------|--------|--------|---------------|--------|--------|--------|--------|--------|---------------|--------|
|                                                       |   | Quarter ended September                        30 |   |
|                                                       |   | 2007                                              |   | %      |   | 2006          |   | %      |   |
| New                        premiums:                       |   |                                              |   |   |   |          |   |   |   |   |   |          |   |
| Individual life                        insurance           |   | $                                                 | 3,094  |   |   | 5             |   | $      | 2,936  |   |   | (26           | )      |
| Immediate                        annuities                 |   |                                              | 1,723  |   |   | 34            |   |   | 1,286  |   |   | -   |   |
| Group life                        insurance                |   |                                              | 437    |   |   | 80            |   |   | 243    |   |   | (26           | )      |
| Group accident and                        health insurance |   |                                              | 2,255  |   |   | (20           | )      |   | 2,816  |   |   | 17            |   |
|                                                       |   |                                                   |        |   |   |          |   |        |        |   |   |          |   |
| Total new                        premiums                  |   |                                              | 7,509  |   |   | 3             |   |   | 7,281  |   |   | 10            |   |
| Renewal                        premiums                    |   |                                              | 35,532 |   |   | (1            | )      |   | 35,901 |   |   | 1             |   |
|                                                       |   |                                                   |        |   |   |          |   |        |        |   |   |          |   |
| Total                        premiums                      |   | $                                                 | 43,041 |   |   | -   |   | $      | 43,182 |   |   | 2             |   |
|                                                       |   |                                                   |        |   |   |          |   |        |        |   |   |          |   |

|                                                       |   |                                                            |    |   |   |    |   |   |    |   |   |   |   |
|------------------------------------------------------------|--------|-----------------------------------------------------------------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|
|                                                       |   | Nine Months                        ended September 30 |    |
|                                                       |   | 2007                                                            |    | %      |   | 2006    |   | %      |    |
| New                        premiums:                       |   |                                                            |    |   |   |    |   |   |    |   |   |   |   |
| Individual life                        insurance           |   | $                                                               | 9,089   |   |   | (2      | )      | $      | 9,305   |   |   | (7     | )      |
| Immediate                        annuities                 |   |                                                            | 5,505   |   |   | 33      |   |   | 4,133   |   |   | (51    | )      |
| Group life                        insurance                |   |                                                            | 1,101   |   |   | 52      |   |   | 726     |   |   | (28    | )      |
| Group accident and                        health insurance |   |                                                            | 7,661   |   |   | (9      | )      |   | 8,456   |   |   | 19     |   |
|                                                       |   |                                                                 |         |   |   |    |   |        |         |   |   |   |   |
| Total new                        premiums                  |   |                                                            | 23,356  |   |   | 3       |   |   | 22,620  |   |   | (15    | )      |
| Renewal                        premiums                    |   |                                                            | 107,677 |   |   | (1      | )      |   | 108,676 |   |   | 1      |   |
|                                                       |   |                                                                 |         |   |   |    |   |        |         |   |   |   |   |
| Total                        premiums                      |   | $                                                               | 131,033 |   |   | -  |   | $      | 131,296 |   |   | (2     | )      |
|                                                       |   |                                                                 |         |   |   |    |   |        |         |   |   |   |   |

 

Total new deposits            increased 7% for the third quarter and 5% for the nine months, compared with the prior            year. New universal life sales decreased 9% for the third quarter but increased 5% for            the nine months versus 2006. New variable universal life products declined 4% in the            third quarter but were up 1% for the nine months. Fixed deferred annuity deposits            increased $0.6 million or 7% in the third quarter, but declined $2.5 million or 11% for            the first nine months, compared with the prior year. However, new variable annuity            sales increased $1.0 million or 17% in the third quarter and $4.3 million or 29% for            the nine months versus a year ago. The increased sales of variable annuity products            continue to reflect customer interest in the equity markets.

 

Total renewal            deposits increased 1% for the third quarter but declined 1% for the nine months,            compared with the prior year. Renewal deposits were flat for universal life and            increased 48% for variable annuities; while variable universal life declined 3% and            fixed deferred annuity deposits declined 11% in the third quarter. Together, universal            life and variable universal life renewal deposits declined 1% and fixed deferred            annuity products declined $4.2 million or 25% for the nine months. However, renewal            variable annuity deposits increased $4.6 million or 59% for the first nine months,            compared with a year ago.

 

**-14-**

----

 

 

|                                                     |   |                                                            |    |   |   |    |   |   |    |   |   |   |   |
|----------------------------------------------------------|--------|-----------------------------------------------------------------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|
|                                                     |   | Quarter                        ended September 30          |    |
|                                                     |   | 2007                                                            |    | %      |   | 2006    |   | %      |    |
| New                        deposits:                     |   |                                                            |    |   |   |    |   |   |    |
| Universal life                        insurance          |   | $                                                               | 2,641   |   |   | (9      | )      | $      | 2,897   |   |   | 16     |   |
| Variable universal life                        insurance |   |                                                            | 481     |   |   | (4      | )      |   | 499     |   |   | 14     |   |
| Fixed deferred                        annuities          |   |                                                            | 8,727   |   |   | 7       |   |   | 8,169   |   |   | (48    | )      |
| Variable                        annuities                |   |                                                            | 6,798   |   |   | 17      |   |   | 5,829   |   |   | (6     | )      |
|                                                     |   |                                                                 |    |   |   |         |   |   |    |
| Total new                        deposits                |   |                                                            | 18,647  |   |   | 7       |   |   | 17,394  |   |   | (30    | )      |
| Renewal                        deposits                  |   |                                                            | 33,037  |   |   | 1       |   |   | 32,735  |   |   | (12    | )      |
|                                                     |   |                                                                 |    |   |   |         |   |   |    |
| Total                        deposits                    |   | $                                                               | 51,684  |   |   | 3       |   | $      | 50,129  |   |   | (19    | )      |
|                                                     |   |                                                                 |    |   |   |         |   |   |    |
|                                                     |   |                                                            |    |   |   |    |   |   |    |   |   |   |   |
|                                                     |   | Nine Months                        ended September 30 |    |
|                                                     |   |                                                            | 2007    |   |   | %       |   |   | 2006    |   |   | %      |   |
| New                        deposits:                     |   |                                                            |    |   |   |    |   |   |    |   |   |   |   |
| Universal life                        insurance          |   | $                                                               | 8,076   |   |   | 5       |   | $      | 7,718   |   |   | 7      |   |
| Variable universal life                        insurance |   |                                                            | 1,878   |   |   | 1       |   |   | 1,865   |   |   | 11     |   |
| Fixed deferred                        annuities          |   |                                                            | 20,727  |   |   | (11     | )      |   | 23,269  |   |   | (43    | )      |
| Variable                        annuities                |   |                                                            | 19,604  |   |   | 29      |   |   | 15,255  |   |   | (24    | )      |
|                                                     |   |                                                                 |    |   |   |         |   |   |    |
| Total new                        deposits                |   |                                                            | 50,285  |   |   | 5       |   |   | 48,107  |   |   | (31    | )      |
| Renewal                        deposits                  |   |                                                            | 104,629 |   |   | (1      | )      |   | 105,330 |   |   | (11    | )      |
|                                                     |   |                                                                 |    |   |   |         |   |   |    |
| Total                        deposits                    |   | $                                                               | 154,914 |   |   | -  |   | $      | 153,437 |   |   | (18    | )      |
|                                                     |   |                                                                 |    |   |   |         |   |   |    |

***Insurance            Revenues***

Insurance revenues            consist of premiums and contract charges less reinsurance ceded. Total insurance            revenues decreased $0.2 million or less than 1% in the third quarter and $3.0 million            or 2% for the nine months, compared with the prior year.

 

Total            individual life premiums declined 1% for both the third quarter and nine months,            compared with the prior year. Premiums received from the sale of new immediate            annuities increased 34% in the third quarter and 33% for the nine months. Premiums from            new group life increased 80% in the third quarter and 52% for the nine months. Total            premiums received from accident and health business declined 2% for both the third            quarter and nine months. However, these premiums included the stop loss product line            that the Company exited at year end 2006. Excluding the premiums on the stop loss            business, the total group accident and health sales increased 3% for the nine months.            Total premiums on the Old American segment declined 3% for both the third quarter and            the nine months, while new premiums increased 8% in the third quarter and 2% for the            nine months.

             

Contract            charges declined 1% for the third quarter and 3% for the nine months. Contract charges            consist of cost of insurance, surrender charges, expense loads and deferred revenue.            Contract charges were reduced $1.7 million in the second quarter and six months of            2007, resulting from a correction of the unearned revenue portion of a universal life            product. The amount of the correction attributable to prior periods was $1.4 million,            including $0.2 million in 2005, $0.9 million in 2006 and $0.3 million in the first            quarter of 2007.

***Investment            Revenues***

Net investment            income declined 4% in the third quarter due to reduced investment assets and lower            investment expenses in 2006.  Net investment income declined 3% for the nine            months due to reduced investment assets. 

 

The Company had a            $1.3 million realized investment gain in the third quarter versus a $0.8 million gain            in 2006, whereas gains for the nine months were $6.5 million compared with $2.4 million            a year ago. The realized investment gains in the third quarter were largely due to            sales of real estate properties, which generated gains of $1.2 million. The realized            investment gains for the nine months were also largely due to the sale of real estate            properties, which generated gains of $4.7 million, and the $1.9 million gain from the            sale of Generations Bank. The following table provides detail concerning realized            investment gains and losses for the third quarter and nine month periods of 2007 and            2006.

 

**-15-**

 

----

 

 

|                                                            |   |                                 |          |                                          |   |                |   |   |          |   |   |          |   |
|-----------------------------------------------------------------|--------|--------------------------------------|---------------|-----------------------------------------------|--------|---------------------|--------|--------|---------------|--------|--------|---------------|--------|
|                                                            |   | Quarter                        ended |               | Nine Months                        ended |        |
|                                                                 |        | September 30                    |               | September 30                             |        |
| **Realized                        Investment Gains and Losses** |   | 2007                                 |          | 2006                                          |   | 2007                |   | 2006   |          |
|                                                            |   |                                      |          |                                               |   |                     |   |        |          |
| Gross gains                        resulting from:              |   |                                 |          |                                          |   |                |   |   |          |   |   |          |   |
| Sales of investment                        securities           |   | $                                    | 546           |                                          | $      | 761                 |   | $      | 570           |   | $      | 2,816         |   |
| Investment securities                        called             |   |                                 | 52            |                                          |   | 193                 |   |   | 775           |   |   | 755           |   |
| Sales of real                        estate                     |   |                                 | 1,213         |                                          |   | -         |   |   | 4,703         |   |   | 710           |   |
| Sale of Generations                        Bank                 |   |                                 | -   |                                          |   | -         |   |   | 1,904         |   |   | -   |   |
| Other investment                        gains                   |   |                                 | -   |                                          |   | -    |   |   | -   |   |   | 1             |   |
|                                                            |   |                                      |          |                                               |   |                     |   |        |          |
| Total gross                        gains                        |   |                                 | 1,811         |                                          |   | 954                 |   |   | 7,952         |   |   | 4,282         |   |
|                                                            |   |                                      |          |                                               |   |                     |   |        |          |
| Gross losses                        resulting from:             |   |                                 |          |                                          |   |                |   |   |          |   |   |          |   |
| Sales of investment                        securities           |   |                                 | (249          | )                                             |   | -         |   |   | (1,136        | )      |   | (1,154        | )      |
| Investment securities                        called             |   |                                 | (281          | )                                             |   | (95                 | )      |   | (330          | )      |   | (413          | )      |
| Other investment                        losses                  |   |                                 | -   |                                          |   | (26                 | )      |   | -   |   |   | (127          | )      |
|                                                            |   |                                      |          |                                               |   |                     |   |        |          |
| Total gross                        losses                       |   |                                 | (530          | )                                             |   | (121                | )      |   | (1,466        | )      |   | (1,694        | )      |
| Amortization of DAC                        and VOBA             |   |                                 | 58            |                                          |   | (76                 | )      |   | 15            |   |   | (191          | )      |
|                                                            |   |                                      |          |                                               |   |                     |   |        |          |
| Realized investment                        gains                |   | $                                    | 1,339         |                                          | $      | 757                 |   | $      | 6,501         |   | $      | 2,397         |   |
|                                                            |   |                                      |          |                                               |   |                     |   |        |          |

 

The Company            regularly evaluates the quality of its investment portfolio. Occasionally, in a            diversified portfolio, certain investments may suffer market price deterioration due to            a wide variety of factors. Distressed securities are placed onto watch lists that are            then further analyzed to identify any specific securities that the Company believes may            have experienced other than temporary declines in fair value. To the extent that the            Company believes these fluctuations represent an other than temporary decline in value,            the value of the investment is adjusted by a charge to income as a realized investment            loss. The Company's review process identified no securities with other than temporary            impairment in the third quarter or nine months ended September 30, 2007 and            2006.

 

As of September 30,            2007, the Company had unrealized losses of $57.8 million on investment            securities with a fair value of $1.6 billion. As of December 31, 2006, the Company            had unrealized losses of $48.0 million on investment securities with a fair            value of $1.6 billion. The increase in unrealized losses was primarily attributable to            the widening of spreads on corporate bonds and mortgage-backed securities during the            nine months ended September, 30, 2007.

***Policyholder            Benefits***

Policyholder            benefits consist of death benefits (mortality), annuity benefits, accident and health            benefits, surrenders and the associated increase or decrease in reserves for future            policy benefits. Policyholder benefits decreased 1% for the third quarter but were flat            for the nine months compared with the prior year. Death benefits and surrenders of life            insurance policies declined in both the third quarter and the nine months.

***Interest            Credited to Policyholder Account Balances***

Interest was            credited to policyholder account balances for universal life, fixed deferred annuities            and other investment-type products. Interest credited to policyholder account balances            decreased $1.2 million or 5% in the third quarter and $2.9 million or 4% for the nine            months, due primarily to lower policyholder account balances.

***Amortization of Deferred            Acquisition Costs (DAC) and Value of Business Acquired (VOBA)***

Certain life            insurance and annuity products require that DAC is amortized in proportion to the            expected future gross profits. Profit expectations are based upon assumptions of future            interest spreads, mortality margins, expense margins and policy and premium persistency            experience. At least annually, a review is performed of the assumptions related to            profit expectations. If it is determined the assumptions should be revised, the impact            of the changes is recorded as a change in DAC amortization in the current period due to            an unlocking adjustment. A similar analysis is performed on VOBA annually and if            necessary, adjustments are made in the current period VOBA            amortization.

 

**-16-**

 

----

            The amortization of DAC was $9.2 million in the third quarter and $22.3 million for the            nine months, compared with $9.0 million and $27.9 million for the same periods in the            prior year, respectively. There was no unlocking adjustment in the third quarter of            2007. However, the amortization of DAC for the nine months ending September 30, 2007,            contained an unlocking adjustment of $5.4 million in the second quarter for            interest spreads and mortality margins, thereby reducing DAC amortization for the nine            month period.

 

            The amortization of VOBA was $1.6 million for both the third quarters of 2007 and 2006.            The amortization of VOBA was $6.1 million for the nine months, compared with $5.0            million in the prior year period. The increase in the amortization of VOBA for the nine            months was a result of a VOBA unlocking adjustment in the second quarter of 2007 in the            amount of $1.1 million for mortality margins. There were no VOBA unlocking adjustments            made in the third quarter of 2007 or in any periods of            2006.

***Operating            Expenses***

Operating            expenses consist of commissions and production allowances, net of the capitalization of            commission and production allowances, and expenses from the Company’s operations.            Operating expenses decreased $0.8 million or 4% in the third quarter and decreased $1.4            million or 2% for the nine months, compared to the prior year. The decrease in            operating expenses for both the third quarter and nine months was primarily the result            of reduced employee benefit costs. Partially offsetting the third quarter decrease was            an increase in legal fees and premium taxes, while an increase in legal and consulting            fees partially offset the decline in operating expenses for the nine months.

***Income            Taxes***

The            third quarter income tax expense was $4.0 million or 30% of income before tax for 2007,            versus $3.8 million or 28% of income before tax for the prior year period. The income            tax expense for the nine months ended September 30, 2007, was $13.5 million or 32% of            income before tax for 2007, versus $10.6 million or 28% of income before tax for the            prior year period.

 

The            effective income tax rate in both years was lower than the prevailing corporate federal            income tax rate of 35%, primarily due to income tax credits generated from the            Company’s investments in affordable housing. The effect of the affordable housing            tax credits on the effective tax rate in both the third quarter and nine-month periods            was a benefit of approximately 3% of income before tax in 2007 and 6% in 2006.             The decrease in the tax benefit from affordable housing tax credits was due to a            decrease in tax credits realized.

**Operating            Results by Segment**

The Company has            three reportable business segments, which are defined based on the nature of the            products and services offered: Individual Insurance, Group Insurance and Old American.            The Individual Insurance segment consists of individual insurance products for both            Kansas City Life and Sunset Life. The Individual Insurance segment is marketed through            a nationwide sales force of independent general agents and third-party marketing            arrangements. The Group Insurance segment consists of sales of group life, group            disability, and group dental products. This segment is marketed through a nationwide            sales force of independent general agents, group brokers and third-party marketing            arrangements. Old American consists of individual insurance products designed primarily            as final expense products. These products are marketed through a nationwide general            agency sales force with exclusive territories, using direct response marketing to            supply agents with leads. Refer to Note 7 - Segment Information in the Notes to the            Consolidated Financial Statements (Unaudited).

**-17-**

----

***Individual Insurance***The following table presents financial data of the Individual Insurance            business segment for the third quarters and nine months ended September            30, 2007 and 2006 (in thousands):

|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |    |   |   |    |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|----------------------------------------------------------------------------------------|--------|--------|--------|--------|---------|--------|--------|---------|--------|
|                                                                                             |   | Quarter ended                        September 30 |    | Nine Months                        ended                        September 30 |   |
|                                                                                             |   | 2007                                                   |    | 2006                                                                                   |   | 2007   |   | 2006   |    |
| Insurance                        revenues:                                                       |   |                                                   |    |                                                                                   |   |   |   |   |    |   |   |    |   |
| Premiums                                                                                         |   | $                                                      | 13,411  |                                                                                   | $      | 12,925 |   | $      | 40,939  |   | $      | 39,363  |   |
| Contract                        charges                                                          |   |                                                   | 28,058  |                                                                                   |   | 28,364 |   |   | 83,238  |   |   | 86,217  |   |
| Reinsurance                        ceded                                                         |   |                                                   | (10,254 | )                                                                                      |   | (9,962 | )      |   | (31,009 | )      |   | (29,941 | )      |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |         |   |        |         |   |
| Total insurance                        revenues                                                  |   |                                                   | 31,215  |                                                                                   |   | 31,327 |   |   | 93,168  |   |   | 95,639  |   |
| Investment                        revenues:                                                      |   |                                                   |    |                                                                                   |   |   |   |   |    |   |   |    |   |
| Net investment                        income                                                     |   |                                                   | 43,416  |                                                                                   |   | 45,724 |   |   | 132,336 |   |   | 136,543 |   |
| Realized investment                        gains                                                 |   |                                                   | 1,364   |                                                                                   |   | 727    |   |   | 6,554   |   |   | 2,106   |   |
| Other                        revenues                                                            |   |                                                   | 2,612   |                                                                                   |   | 3,128  |   |   | 8,640   |   |   | 8,306   |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |         |   |        |         |   |
| Total                        revenues                                                            |   |                                                   | 78,607  |                                                                                   |   | 80,906 |   |   | 240,698 |   |   | 242,594 |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |         |   |        |         |   |
|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |    |   |   |    |   |
| Policyholder                        benefits                                                     |   |                                                   | 22,946  |                                                                                   |   | 24,089 |   |   | 71,627  |   |   | 71,720  |   |
| Interest credited to                        policyholder account balances                        |   |                                                   | 22,614  |                                                                                   |   | 23,805 |   |   | 68,119  |   |   | 71,019  |   |
| Amortization of                        deferred acquisition costs and value of business acquired |   |                                                   | 7,636   |                                                                                   |   | 7,602  |   |   | 18,967  |   |   | 23,278  |   |
| Operating                        expenses                                                        |   |                                                   | 13,079  |                                                                                   |   | 13,324 |   |   | 42,365  |   |   | 42,781  |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |         |   |        |         |   |
| Total benefits and                        expenses                                               |   |                                                   | 66,275  |                                                                                   |   | 68,820 |   |   | 201,078 |   |   | 208,798 |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |         |   |        |         |   |
|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |    |   |   |    |   |
| Income before income                        tax expense                                          |   |                                                   | 12,332  |                                                                                   |   | 12,086 |   |   | 39,620  |   |   | 33,796  |   |
|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |    |   |   |    |   |
| Income tax                        expense                                                        |   |                                                   | 3,730   |                                                                                   |   | 3,409  |   |   | 12,585  |   |   | 9,534   |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |         |   |        |         |   |
|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |    |   |   |    |   |
| Net                        income                                                                |   | $                                                      | 8,602   |                                                                                   | $      | 8,677  |   | $      | 27,035  |   | $      | 24,262  |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |         |   |        |         |   |

Premium information is provided            in the table below.

|                                             |   |                                                   |   |   |   |          |   |   |   |   |   |          |   |
|--------------------------------------------------|--------|--------------------------------------------------------|--------|--------|--------|---------------|--------|--------|--------|--------|--------|---------------|--------|
|                                             |   | Quarter                        ended September 30 |   |
|                                             |   | 2007                                                   |   | %      |   | 2006          |   | %      |   |
| New                        premiums:             |   |                                                   |   |   |   |          |   |   |   |   |   |          |   |
| Individual life                        insurance |   | $                                                      | 1,414  |   |   | 2             |   | $      | 1,384  |   |   | (23           | )      |
| Immediate                        annuities       |   |                                                   | 1,723  |   |   | 34            |   |   | 1,286  |   |   | -   |   |
|                                             |   |                                                        |        |   |   |          |   |        |        |   |   |          |   |
| Total new                        premiums        |   |                                                   | 3,137  |   |   | 17            |   |   | 2,670  |   |   | 54            |   |
| Renewal                        premiums          |   |                                                   | 10,274 |   |   | -   |   |   | 10,255 |   |   | 2             |   |
|                                             |   |                                                        |        |   |   |          |   |        |        |   |   |          |   |
| Total                        premiums            |   | $                                                      | 13,411 |   |   | 4             |   | $      | 12,925 |   |   | 10            |   |
|                                             |   |                                                        |        |   |   |          |   |        |        |   |   |          |   |

|                                             |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------|--------|-----------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                             |   | Nine Months                        ended September 30 |   |
|                                             |   | 2007                                                            |   | %      |   | 2006   |   | %      |   |
| New                        premiums:             |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Individual life                        insurance |   | $                                                               | 4,243  |   |   | (7     | )      | $      | 4,568  |   |   | 1      |   |
| Immediate                        annuities       |   |                                                            | 5,505  |   |   | 33     |   |   | 4,133  |   |   | (51    | )      |
|                                             |   |                                                                 |        |   |   |   |   |        |        |   |   |   |   |
| Total new                        premiums        |   |                                                            | 9,748  |   |   | 12     |   |   | 8,701  |   |   | (33    | )      |
| Renewal                        premiums          |   |                                                            | 31,191 |   |   | 2      |   |   | 30,662 |   |   | 2      |   |
|                                             |   |                                                                 |        |   |   |   |   |        |        |   |   |   |   |
| Total                        premiums            |   | $                                                               | 40,939 |   |   | 4      |   | $      | 39,363 |   |   | (9     | )      |
|                                             |   |                                                                 |        |   |   |   |   |        |        |   |   |   |   |

**-18-**

----

Deposit information is provided            in the table below.

|                                                     |   |                                                            |    |   |   |   |   |   |    |   |   |   |   |
|----------------------------------------------------------|--------|-----------------------------------------------------------------|---------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|
|                                                     |   | Quarter                        ended September 30          |    |
|                                                     |   | 2007                                                            |    | %      |   | 2006   |   | %      |    |
| New                        deposits:                     |   |                                                            |    |   |   |   |   |   |    |   |   |   |   |
| Universal life                        insurance          |   | $                                                               | 2,641   |   |   | (9     | )      | $      | 2,897   |   |   | 16     |   |
| Variable universal life                        insurance |   |                                                            | 481     |   |   | (4     | )      |   | 499     |   |   | 14     |   |
| Fixed deferred                        annuities          |   |                                                            | 8,727   |   |   | 7      |   |   | 8,169   |   |   | (48    | )      |
| Variable                        annuities                |   |                                                            | 6,798   |   |   | 17     |   |   | 5,829   |   |   | (6     | )      |
|                                                     |   |                                                                 |         |   |   |   |   |        |         |   |   |   |   |
| Total new                        deposits                |   |                                                            | 18,647  |   |   | 7      |   |   | 17,394  |   |   | (30    | )      |
| Renewal                        deposits                  |   |                                                            | 33,037  |   |   | 1      |   |   | 32,735  |   |   | (12    | )      |
|                                                     |   |                                                                 |         |   |   |   |   |        |         |   |   |   |   |
| Total                        deposits                    |   | $                                                               | 51,684  |   |   | 3      |   | $      | 50,129  |   |   | (19    | )      |
|                                                     |   |                                                                 |         |   |   |   |   |        |         |   |   |   |   |
|                                                     |   |                                                            |    |   |   |   |   |   |    |   |   |   |   |
|                                                     |   | Nine Months                        ended September 30 |    |
|                                                     |   | 2007                                                            |    | %      |   | 2006   |   | %      |    |
| New                        deposits:                     |   |                                                            |    |   |   |   |   |   |    |   |   |   |   |
| Universal life                        insurance          |   | $                                                               | 8,076   |   |   | 5      |   | $      | 7,718   |   |   | 7      |   |
| Variable universal life                        insurance |   |                                                            | 1,878   |   |   | 1      |   |   | 1,865   |   |   | 11     |   |
| Fixed deferred                        annuities          |   |                                                            | 20,727  |   |   | (11    | )      |   | 23,269  |   |   | (43    | )      |
| Variable                        annuities                |   |                                                            | 19,604  |   |   | 29     |   |   | 15,255  |   |   | (24    | )      |
|                                                     |   |                                                                 |         |   |   |   |   |        |         |   |   |   |   |
| Total new                        deposits                |   |                                                            | 50,285  |   |   | 5      |   |   | 48,107  |   |   | (31    | )      |
| Renewal                        deposits                  |   |                                                            | 104,629 |   |   | (1     | )      |   | 105,330 |   |   | (11    | )      |
|                                                     |   |                                                                 |         |   |   |   |   |        |         |   |   |   |   |
| Total                        deposits                    |   | $                                                               | 154,914 |   |   | -      |   | $      | 153,437 |   |   | (18    | )      |
|                                                     |   |                                                                 |         |   |   |   |   |        |         |   |   |   |   |

 

Net            income for this segment in the third quarter was $8.6 million, a decrease of $0.1            million from 2006. Net income for the nine months was $27.0 million, an increase of            $2.8 million compared with 2006. The decrease in the third quarter was largely the            result of the decrease in net investment income, partially offset by decreases in            interest credited to policyholder account balances and policyholder benefits. The            improved results for the nine months were due to decreases in the amortization of DAC            and interest credited to policyholder account balances, accompanied by increases in            premiums and realized investment gains. Partially offsetting these improvements were            decreases in contract charges and net investment income.

 

Insurance            revenues for this segment were essentially flat in the third quarter and 3% lower for            the nine months versus a year ago. Total premiums increased 4% in both the third            quarter and nine months, reflecting improved sales of immediate annuities. However, in            both periods the premium increase was offset by a decline in contract charges. The            decline in the nine months resulted from an adjustment to deferred revenues, lower            surrender charges and a decline in cost of insurance charges. Total reinsurance ceded            increased 3% in the third quarter and 4% for the nine months, reflecting increased            sales of premiums and deposits on individual business.

 

Total            premiums increased 4% in the third quarter, compared with 2006. New individual life            premiums increased 2% and new immediate annuity premiums increased $0.4 million or 34%            in the third quarter, compared to the same periods in the prior year. Renewal premiums            were flat in the third quarter compared with a year ago.

 

Total            premiums for the nine months increased 4% versus 2006. The increase in premiums was the            result of a $1.4 million or 33% increase in new immediate annuity premiums, which more            than offset a 7% decline in new individual life premiums. Renewal premiums increased 2%            for the nine months.

 

New            deposits increased $1.3 million or 7% in the third quarter and $2.2 million or 5% for            the nine months, as compared with the same periods in the prior year. New variable            annuity deposits increased $1.0 million or 17% in the third quarter and $4.3 million or            29% for the nine months, compared with the same periods in the prior year. Increased            sales of variable annuity products reflect customer interest in the equity markets. New            fixed deferred annuity deposits increased $0.6 million or 7% in the third quarter, but            declined $2.5 million or 11% for the nine months, compared with            2006.

 

Contract charges            were reduced by $1.7 million in the second quarter and six months of            2007, resulting from a correction of the unearned revenue portion of a universal life            product. The amount of the correction attributable to prior periods was $1.4 million,            including $0.2 million in 2005, $0.9 million in 2006 and $0.3 million in the first            quarter of 2007. In addition, surrender charges declined in the nine months reflecting            improved persistency with these products.

 

Net            investment income declined 5% in the third quarter due to reduced investment assets and            lower investment expenses in 2006.  Net investment income declined 3% for the nine            months due to reduced investment assets. 

 

**-19-**

 

----

 

The            Individual Insurance segment had realized investment gains of $1.4 million in the third            quarter, compared with realized investment gains of $0.7 million in 2006. Realized            investment gains for the nine months were $6.6 million, compared with $2.1 million a            year ago. The realized investment gains in the third quarter of 2007 were largely due            to sales of real estate properties, which generated gains of $1.2 million. The realized            investment gains for the nine months of 2007 were primarily due to the sale of real            estate properties, which generated gains of $4.7 million, and the $1.9 million gain            from the sale of Generations Bank.

 

Policyholder            benefits decreased $1.1 million or 5% in the third quarter and $0.1 million or less            than 1% for the nine months. The reduction in policyholder benefits was primarily due            to a decline in surrenders of individual life insurance for the third quarter and nine            months, as well as improved mortality for both periods.

 

Interest            credited to policyholder account balances decreased $1.2 million or 5% in the third            quarter and $2.9 million or 4% for the nine months, compared to the same periods a year            ago. The changes were primarily due to lower policyholder account            balances.

 

The            amortization of DAC was $6.6 million in the third quarter and $14.8 million for the            nine months of 2007, compared with $6.7 million and $20.3 million for the same periods            in the prior year. The decrease in the amortization of DAC for the nine months was due            primarily to the change in DAC unlocking year-to-year. In the second quarter of 2007,            the amortization of DAC decreased $5.4 million due to unlocking adjustments that            related to assumptions for interest spreads and mortality            margins.

 

The            amortization of VOBA was $1.0 million in the third quarter and $4.2 million for the            nine months of 2007, compared with $0.9 million and $3.0 million for the same periods            in the prior year. The increase in the amortization of VOBA for the nine months was due            primarily to a $1.1 million VOBA unlocking adjustment in the second quarter of 2007.            This unlocking was related to the assumptions for mortality margins. There was no VOBA            unlocking adjustment in 2006.

 

Operating            expenses consist of commissions and production allowances, net of the capitalization of            commissions and production allowances, and expenses from the Company’s            operations. Operating expenses decreased $0.2 million in the third quarter and $0.4            million for the nine months, compared with the prior year. The decreases in the third            quarter and nine months were primarily due to reduced employee benefits. Partially            offsetting the third quarter decrease was an increase in legal fees and premium taxes,            while an increase in legal and consulting fees partially offset the decline in            operating expenses for the nine months.

 

**-20-**

----

***Group            Insurance***

The following            table presents financial data of the Group Insurance business segment for            the third quarters and nine months ended September 30, 2007 and 2006 (in            thousands):

|                                                  |   |                                                   |   |                                                                                   |   |   |   |   |   |   |   |   |   |
|-------------------------------------------------------|--------|--------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                  |   | Quarter ended                        September 30 |   | Nine Months                        ended                        September 30 |   |
|                                                  |   | 2007                                                   |   | 2006                                                                                   |   | 2007   |   | 2006   |   |
| Insurance                        revenues:            |   |                                                   |   |                                                                                   |   |   |   |   |   |   |   |   |   |
| Premiums                                              |   | $                                                      | 13,279 |                                                                                   | $      | 13,357 |   | $      | 40,513 |   | $      | 40,664 |   |
| Reinsurance                        ceded              |   |                                                   | (1,931 | )                                                                                      |   | (2,299 | )      |   | (6,371 | )      |   | (7,208 | )      |
|                                                  |   |                                                        |        |                                                                                   |        |        |   |        |        |   |        |        |   |
| Total insurance                        revenues       |   |                                                   | 11,348 |                                                                                   |   | 11,058 |   |   | 34,142 |   |   | 33,456 |   |
| Investment                        revenues:           |   |                                                   |   |                                                                                   |   |   |   |   |   |   |   |   |   |
| Net investment                        income          |   |                                                   | 132    |                                                                                   |   | 52     |   |   | 319    |   |   | 203    |   |
| Other                        revenues                 |   |                                                   | 60     |                                                                                   |   | 184    |   |   | 201    |   |   | 506    |   |
|                                                  |   |                                                        |        |                                                                                   |        |        |   |        |        |   |        |        |   |
| Total                        revenues                 |   |                                                   | 11,540 |                                                                                   |   | 11,294 |   |   | 34,662 |   |   | 34,165 |   |
|                                                  |   |                                                        |        |                                                                                   |        |        |   |        |        |   |        |        |   |
|                                                  |   |                                                   |   |                                                                                   |   |   |   |   |   |   |   |   |   |
| Policyholder                        benefits          |   |                                                   | 7,772  |                                                                                   |   | 7,597  |   |   | 22,571 |   |   | 21,992 |   |
| Operating                        expenses             |   |                                                   | 4,558  |                                                                                   |   | 4,420  |   |   | 13,683 |   |   | 13,843 |   |
|                                                  |   |                                                        |        |                                                                                   |        |        |   |        |        |   |        |        |   |
| Total benefits and                        expenses    |   |                                                   | 12,330 |                                                                                   |   | 12,017 |   |   | 36,254 |   |   | 35,835 |   |
|                                                  |   |                                                        |        |                                                                                   |        |        |   |        |        |   |        |        |   |
|                                                  |   |                                                   |   |                                                                                   |   |   |   |   |   |   |   |   |   |
| Loss before income tax                        benefit |   |                                                   | (790   | )                                                                                      |   | (723   | )      |   | (1,592 | )      |   | (1,670 | )      |
|                                                  |   |                                                   |   |                                                                                   |   |   |   |   |   |   |   |   |   |
| Income tax                        benefit             |   |                                                   | (237   | )                                                                                      |   | (217   | )      |   | (478   | )      |   | (501   | )      |
|                                                  |   |                                                        |        |                                                                                   |        |        |   |        |        |   |        |        |   |
|                                                  |        |                                                        |        |                                                                                        |        |        |        |        |        |        |        |        |        |
| Net loss                                              |   | $                                                      | (553   | )                                                                                      | $      | (506   | )      | $      | (1,114 | )      | $      | (1,169 | )      |
|                                                  |   |                                                        |        |                                                                                   |        |        |   |        |        |   |        |        |   |

Premium information is provided            in the table below.

|                                              |   |                                                            |   |   |   |          |   |   |   |   |   |   |   |
|---------------------------------------------------|--------|-----------------------------------------------------------------|--------|--------|--------|---------------|--------|--------|--------|--------|--------|--------|--------|
|                                              |   | Quarter                        ended September 30          |   |
|                                              |   | 2007                                                            |   | %      |   | 2006          |   | %      |   |
| New                        premiums:              |   |                                                            |   |   |   |          |   |   |   |   |   |   |   |
| Group life                        insurance       |   | $                                                               | 438    |   |   | 80            |   | $      | 243    |   |   | (26    | )      |
| Group dental                        insurance     |   |                                                            | 1,574  |   |   | (9            | )      |   | 1,737  |   |   | 59     |   |
| Group disability                        insurance |   |                                                            | 404    |   |   | 14            |   |   | 354    |   |   | (29    | )      |
| Other group                        insurance      |   |                                                            | 276    |   |   | (62           | )      |   | 725    |   |   | (11    | )      |
|                                              |   |                                                                 |        |   |   |          |   |        |        |   |   |   |   |
| Total new                        premiums         |   |                                                            | 2,692  |   |   | (12           | )      |   | 3,059  |   |   | 12     |   |
| Renewal                        premiums           |   |                                                            | 10,587 |   |   | 3             |   |   | 10,298 |   |   | 3      |   |
|                                              |   |                                                                 |        |   |   |          |   |        |        |   |   |   |   |
| Total                        premiums             |   | $                                                               | 13,279 |   |   | (1            | )      | $      | 13,357 |   |   | 5      |   |
|                                              |   |                                                                 |        |   |   |          |   |        |        |   |   |   |   |
|                                              |   |                                                            |   |   |   |          |   |   |   |   |   |   |   |
|                                              |   | Nine Months                        ended September 30 |   |
|                                              |   | 2007                                                            |   | %      |   | 2006          |   | %      |   |
| New                        premiums:              |   |                                                            |   |   |   |          |   |   |   |   |   |   |   |
| Group life                        insurance       |   | $                                                               | 1,101  |   |   | 52            |   | $      | 726    |   |   | (28    | )      |
| Group dental                        insurance     |   |                                                            | 4,983  |   |   | 4             |   |   | 4,779  |   |   | 63     |   |
| Group disability                        insurance |   |                                                            | 1,126  |   |   | 1             |   |   | 1,117  |   |   | (31    | )      |
| Other group                        insurance      |   |                                                            | 1,552  |   |   | (39           | )      |   | 2,560  |   |   | (1     | )      |
|                                              |   |                                                                 |        |   |   |          |   |        |        |   |   |   |   |
| Total new                        premiums         |   |                                                            | 8,762  |   |   | (5            | )      |   | 9,182  |   |   | 13     |   |
| Renewal                        premiums           |   |                                                            | 31,751 |   |   | 1             |   |   | 31,482 |   |   | 6      |   |
|                                              |   |                                                                 |        |   |   |          |   |        |        |   |   |   |   |
| Total                        premiums             |   | $                                                               | 40,513 |   |   | -   |   | $      | 40,664 |   |   | 7      |   |
|                                              |   |                                                                 |        |   |   |          |   |        |        |   |   |   |   |

Insurance            revenues for the Group Insurance segment increased $0.3 million or 3% for the third            quarter and $0.7 million or 2% for the nine months. There are two factors from the            prior year which affect the comparison of insurance revenues for both the third quarter            and nine months. First, the Company exited the stop loss market at year end 2006.            Direct premiums for the stop loss block declined $0.4 million or 67% in the third            quarter of 2007 and $1.0 million or 41% for the nine months of 2007. Second, in the            second quarter of 2006 the Company identified unrecorded renewal premiums of $0.8            million attributable to years 2003 through 2006. The unrecorded premiums in 2003, 2004            and 2005 were $0.1 million, $0.2 million and $0.3 million, respectively. The unrecorded            premiums attributable to the first quarter of 2006 were $0.2 million. Excluding these            two factors, insurance revenues would have increased 4% and 5% for the third quarter            and nine months, respectively.

**-21-**

----

Total            new group premiums decreased 12% in the third quarter and 5% for the nine months. New            group life premiums increased 80% in the third quarter and 52% for the nine months,            compared with the same periods in the prior year. New group accident and health            premiums declined 20% in the third quarter and 9% in the nine months. As previously            discussed however, the segment exited the stop loss business in 2006 as the managing            third-party administrator was acquired and the contract was subsequently terminated.            Excluding this exited block, new group accident and health premiums would have            decreased $0.1 million or 6% in the third quarter and increased $0.2 million or 3% for            the nine months, compared with a year ago. The decrease in the third quarter was            primarily due to a $0.2 million or 9% decline in new dental premiums. The increase in            the nine months was largely due to an increase in new dental premiums of $0.2 million            or 4%. Renewal premiums increased 3% for the third quarter and 1% for the nine months.            However, excluding the adjustment for unrecorded premiums in 2006, renewal premiums            would have increased 3% for the nine months of 2007.

 

Reinsurance premiums            decreased 16% for the quarter and 12% for the nine months, compared with the same            periods last year. This decrease was primarily due to the termination of the stop loss            business and a change in reinsurance structure on accidental death and            dismemberment reinsurance.

 

Policyholder            benefits increased 2% for the third quarter and 3% for the nine months of 2007. Death            benefits in the group life product line increased 8% both in the third quarter and nine            month periods. Benefits paid on disability and all other group products declined 1% for            the third quarter but increased 1% for the nine months. Disability benefits paid on            long-term and short-term disability product lines increased 22% in the third quarter            and 23% for the nine months but were largely offset by benefits paid on the dental            product line. Dental benefits decreased 2% for the third quarter and 1% for the nine            months.

 

Operating            expenses consist of commissions and production allowances and expenses from the            Company’s operations. Operating expenses increased 3% in the third quarter but            decreased 1% for the nine months, compared with the same periods in 2006. Increases in            commissions and production allowances from the group life and long-term disability            product lines largely accounted for the third quarter increase in operating expenses,            while a reduction in direct expenses, largely in salaries and benefits, resulted in a            decrease in operating expenses for the nine months.

 

The            net loss for this segment totaled $0.6 million for the third quarter of 2007, compared            with the $0.5 million loss in the third quarter of 2006. The net loss for the nine            months was $1.1 million, compared with the $1.2 million loss for the same period a year            earlier. Excluding the unrecorded premiums previously discussed, the net loss for this            segment was $1.6 million for the nine months ended September 30,            2006.

 

**-22-**

----

***Old American Insurance            Company***

The following            table presents financial data of the Old American Insurance Company business segment            for the third quarters and nine months ended September 30, 2007 and 2006            (in thousands):

|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|---------|----------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                             |   | Quarter ended                        September 30 |    | Nine Months                        ended                        September 30 |   |
|                                                                                             |   | 2007                                                   |    | 2006                                                                                   |   | 2007   |   | 2006   |   |
|                                                                                             |   |                                                        |    |                                                                                        |   |        |   |        |   |
| Insurance                        revenues:                                                       |   |                                                   |    |                                                                                   |   |   |   |   |   |   |   |   |   |
| Premiums                                                                                         |   | $                                                      | 16,5000 |                                                                                   | $      | 17,043 |   | $      | 50,031 |   | $      | 51,699 |   |
| Reinsurance                        ceded                                                         |   |                                                   | (1,008  | )                                                                                      |   | (1,143 | )      |   | (3,152 | )      |   | (3,590 | )      |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |        |   |        |        |   |
| Total insurance                        revenues                                                  |   |                                                   | 15,492  |                                                                                   |   | 15,900 |   |   | 46,879 |   |   | 48,109 |   |
| Investment                        revenues:                                                      |   |                                                   |    |                                                                                   |   |   |   |   |   |   |   |   |   |
| Net investment                        income                                                     |   |                                                   | 3,321   |                                                                                   |   | 3,219  |   |   | 9,969  |   |   | 9,985  |   |
| Realized investment                        gains (losses)                                        |   |                                                   | (25     | )                                                                                      |   | 30     |   |   | (53    | )      |   | 291    |   |
| Other                        revenues                                                            |   |                                                   | 2       |                                                                                   |   | 18     |   |   | 7      |   |   | 23     |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |        |   |        |        |   |
| Total                        revenues                                                            |   |                                                   | 18,790  |                                                                                   |   | 19,167 |   |   | 56,802 |   |   | 58,408 |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |        |   |        |        |   |
|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |   |   |   |   |   |
| Policyholder                        benefits                                                     |   |                                                   | 10,928  |                                                                                   |   | 10,426 |   |   | 32,446 |   |   | 32,426 |   |
| Amortization of                        deferred acquisition costs and value of business acquired |   |                                                   | 3,166   |                                                                                   |   | 3,021  |   |   | 9,433  |   |   | 9,661  |   |
| Operating                        expenses                                                        |   |                                                   | 3,150   |                                                                                   |   | 3,791  |   |   | 10,166 |   |   | 10,992 |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |        |   |        |        |   |
| Total benefits and                        expenses                                               |   |                                                   | 17,244  |                                                                                   |   | 17,238 |   |   | 52,045 |   |   | 53,079 |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |        |   |        |        |   |
|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |   |   |   |   |   |
| Income before income                        tax expense                                          |   |                                                   | 1,546   |                                                                                   |   | 1,929  |   |   | 4,757  |   |   | 5,329  |   |
|                                                                                             |   |                                                   |    |                                                                                   |   |   |   |   |   |   |   |   |   |
| Income tax                        expense                                                        |   |                                                   | 464     |                                                                                   |   | 574    |   |   | 1,429  |   |   | 1,598  |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |        |   |        |        |   |
|                                                                                             |
| Net income                                                                                       |   | $                                                      | 1,082   |                                                                                   | $      | 1,355  |   | $      | 3,328  |   | $      | 3,731  |   |
|                                                                                             |   |                                                        |         |                                                                                   |        |        |   |        |        |   |        |        |   |

Premium information is provided            in the table below.

|                                    |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |
|-----------------------------------------|--------|-----------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                    |   | Quarter                        ended September 30          |   |
|                                    |   | 2007                                                            |   | %      |   | 2006   |   | %      |   |
|                                    |   |                                                                 |   |        |   |        |   |        |   |
| New premiums                            |   | $                                                               | 1,680  |   |   | 8      |   | $      | 1,552  |   |   | (28    | )      |
| Renewal                        premiums |   |                                                            | 14,820 |   |   | (4     | )      |   | 15,491 |   |   | (1     | )      |
|                                    |   |                                                                 |        |   |   |   |   |        |        |   |   |   |   |
| Total                        premiums   |   | $                                                               | 16,500 |   |   | (3     | )      | $      | 17,043 |   |   | (4     | )      |
|                                    |   |                                                                 |        |   |   |   |   |        |        |   |   |   |   |
|                                    |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Nine Months                        ended September 30 |   |
|                                    |   | 2007                                                            |   | %      |   | 2006   |   | %      |   |
|                                    |   |                                                            |   |   |   |   |   |   |   |   |   |   |   |
| New premiums                            |   | $                                                               | 4,846  |   |   | 2      |   | $      | 4,737  |   |   | (14    | )      |
| Renewal                        premiums |   |                                                            | 45,185 |   |   | (4     | )      |   | 46,962 |   |   | (3     | )      |
|                                    |   |                                                                 |        |   |   |   |   |        |        |   |   |   |   |
| Total                        premiums   |   | $                                                               | 50,031 |   |   | (3     | )      | $      | 51,699 |   |   | (4     | )      |
|                                    |   |                                                                 |        |   |   |   |   |        |        |   |   |   |   |

 

Net            income for this segment was $1.1 million for the third quarter, compared with net            income of $1.4 million for the same period in the prior year. This decline largely            resulted from the combination of a decline in insurance revenues, increased            policyholder benefits and reduced operating expenses. Net income for the nine months            was $3.3 million versus $3.7 million for the nine months of 2006. The slight decline in            net income for the nine month period reflected decreases in insurance revenues and            realized investment gains and losses, which were partially offset by decreases in            operating expenses.

 

Insurance            revenues decreased 3% in both the third quarter and nine months, compared with the same            periods in the prior year. These changes include reduced total premiums of $0.5 million            or 3% in the third quarter and $1.7 million or 3% for the nine months. However, new            premiums increased 8% versus a 28% decline for the third

 

**-23-**

----

Net            investment income increased $0.1 million or 3% in the third quarter and was essentially            flat for the nine months compared with 2006. The increase in the third quarter was the            result of an increase in both the level of invested assets and an improvement in            investment rates compared with a year ago.

 

Total            policyholder benefits increased 5% in the third quarter and remained flat for the nine            months, compared with the same periods a year ago. The increase in the third quarter            was primarily the result of an increase in death benefits.

 

The            amortization of DAC and VOBA increased $0.1 million or 5% in the third quarter but            decreased $0.2 million or 2% in the nine months compared with last            year.

 

Operating            expenses consist of commissions and production allowances, net of the capitalization of            commission and production allowances, and expenses from the Company’s operations.            Operating expenses decreased $0.6 million or 17% in the third quarter and $0.8 million            or 8% in the nine months versus a year ago. These declines were primarily due to            reduced salaries and benefits and a reduction in agent costs for both the third quarter            and nine month periods.

**Liquidity and Capital            Resources**

***Liquidity***

Statements made in            the Company's 2006 Form 10-K and the 2006 Annual Report to Stockholders remain            pertinent, as the Company’s liquidity position is materially unchanged from            year-end 2006.

             

The Company meets            liquidity requirements primarily through positive cash flows from operations. The            Company has sufficient sources of liquidity to satisfy operational requirements.            Primary sources of cash flow are premiums, other insurance considerations and deposits,            receipts for policyholder accounts, investment sales and maturities, investment income            and access to credit from other financial institutions. The principal uses of cash are            for the insurance operations, including the purchase of investments, payment of            insurance benefits, operating expenses, dividends, income taxes, withdrawals from            policyholder accounts and costs related to acquiring new business.

 

Cash from operations            for the nine months ended September 30, 2007, decreased $1.4 million versus the same            period a year ago. Contributing to this decrease was a reduction in investment income            and premiums of $2.4 million, an increase in commissions paid of $1.0 million and an            increase in federal income taxes paid of $5.0 million.  Partially offsetting these            items was a decrease in claims paid of $2.9 million, a decrease in operating            expenses paid of $1.6 million and an increase in accounts payable of $2.1            million.

 

Net cash provided            from investing activities was $85.5 million, up from $56.2 million for the same period            in 2006. Purchases of fixed maturities and equity securities were $194.4 million for            the nine months, down from $210.6 million in the prior year. Mortgage loan originations            increased $4.6 million for the nine months but purchases of real estate declined $41.6            million, reflecting the large purchases made in the first quarter of 2006. Sales and            maturities of fixed maturity and equity securities totaled $274.6 million for the first            nine months, a decrease of $10.8 million or 4% versus a year ago. Sales of real            estate investments were $22.0 million versus $2.6 million a year ago. Mortgage loan            maturities and principal paydowns were $45.7 million, an increase of 14% compared with            2006. In addition, the sale of Generations Bank resulted in proceeds of $10.1 million            for the nine months.

 

Net cash used for            financing activities was $82.0 million for the nine months, compared with $68.7 million            a year ago. This change was primarily the result of four items. First, withdrawals on            policyholder account balances net of related deposits were $72.6 million, an increase            of $24.1 million over the prior year. Second, dividends            paid to stockholders were $33.3 million, reflecting both the one-time special dividend            paid in the first quarter of 2007 and the regular quarterly dividends, compared with            the regular quarterly dividends of $9.6 million in 2006. Third,

 

**-24-**

----

partially offsetting these decreases to cash was an increase of $32.0            million in other deposits, largely from the Company’s retained asset            program. Finally, the Company had a $3.2 million net reduction in borrowed money            compared with the prior year.

 

The above information excludes net proceeds from variable insurance            products. These proceeds are segregated into separate accounts and are not held in the            Company’s general investments because the policyholders, rather than the Company,            assume the underlying investment risks.

***Debt and            Short-term Borrowing***

The Company and            certain subsidiaries have access to borrowing capacity through their membership            affiliation with the Federal Home Loan Bank of Des Moines (FHLB). At September 30,            2007, outstanding balances totaled $8.7 million in maturities of less than one            year.

Borrowings            totaled $8.7 million at September 30, 2007, down $6.0 million from year end 2006.            The decrease in borrowings is due to reductions in borrowing from the FHLB. The Company            has unsecured revolving lines of credit of $60.0 million with two major commercial            banks with no balances outstanding.

***Capital            Resources***

The Company            considers existing capital resources to be more than adequate to support the current            level of business activities.

 

The following table            shows the capital adequacy for the Company.

 

|                                                                                  |   |                                          |      |                                    |   |      |   |
|---------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|-----------------------------------------|--------|-----------|--------|
|                                                                                  |   | September 30                        2007 |      | December 31                        2006 |   |
|                                                                                  |   |                                               |      |                                         |   |
| Total assets less                        separate accounts                            |   | $                                             | 3,948,224 |                                    | $      | 4,057,046 |   |
| Total stockholders'                        equity                                     |   |                                          | 668,493   |                                    |   | 684,304   |   |
| Ratio of stockholders'                        equity to assets less separate accounts |   |                                          | 17        | %                                       |   | 17        | %      |

 

The ratio of equity            to assets less separate accounts has remained relatively constant. Unrealized            investment losses on available for sale securities, which are included as a part of            stockholders’ equity, totaled $9.3 million at September 30, 2007 (net of related            taxes, policyholder account balances and deferred acquisition costs). This represents            an increase of $10.6 million in unrealized losses versus the unrealized gains of $1.3            million at year-end 2006.

 

Stockholders’            equity at September 30, 2007, decreased $15.8 million from year-end 2006. The decrease            was largely due to the payment of stockholder dividends of $33.3 million and an            increase in the unrealized investment losses, net of applicable taxes, of $10.6            million. These were partially offset by net income of $29.2 million for the nine months            ended September 30, 2007. In January 2007, the Company declared a special one-time            dividend of $2.00 per share in addition to the regular quarterly dividend of $0.27 per            share. The two dividends totaled $26.9 millionand            were paid in February 2007, reducing stockholders’ equity. The Company’s            regular quarterly dividend of $0.27 per share was also paid in the second and third            quarters of 2007, reducing stockholders’ equity.

 

The            Company purchased 23,319 of its shares under the stock repurchase program for $1.0            million during the third quarter of 2007 and 34,589 shares for $1.6 million for the            nine months of 2007. No purchases were made during the same nine months of 2006. Under            this program, the Company may purchase up to one million shares on the open market            during the twelve months ended January 30, 2008.

 

On October 29, 2007,            the Board of Directors declared a quarterly dividend of $0.27 per share, unchanged from            the prior year, that will be paid November 13, 2007, to stockholders of record as of            November 8, 2007.

 

Current legislative            activities are not expected to have a significant impact on the ongoing operations of            the Company.

**-25-**

----

**Item            3.Quantitative and Qualitative Disclosures About Market Risk**

Market risks have not changed            materially from those disclosed in the Company's 2006 Annual Report on Form            10-K.

**Item            4.Controls and            Procedures**

As required by            Exchange Act Rule 13a-15(b), Kansas City Life Insurance Company management, including            the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of            the end of the period covered by this report, of the effectiveness of the Company's            disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on            that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that            the Company's disclosure controls and procedures were effective as of the end of the            period covered by this report. As required by Exchange Act 13a-15(d), Kansas City Life            Insurance Company management, including the Chief Executive Officer and Chief Financial            Officer, also conducted an evaluation of the Company's internal control over financial            reporting to determine whether any changes occurred during the period covered by this            report that have materially affected, or are reasonably likely to materially affect the            Company's internal control over financial reporting. Based on that evaluation, there            has been no such change during the period covered by this report.

**-26**-

----

**Part II:            Other Information**

**Item            1.Legal            Proceedings**

The life            insurance industry, including the Company and its subsidiaries, has been subject to an            increase in litigation in recent years. Such litigation has been pursued on behalf of            purported classes of insurance purchasers, often questioning the conduct of insurers in            the marketing of their products.

In addition to            the above, the Company and its subsidiaries are defendants in, or subject to other            claims or legal actions. Some of these claims and legal actions are in jurisdictions            where juries are given substantial latitude in assessing damages, including punitive            damages. Although no assurances can be given and no determinations can be made at this            time, management believes that the ultimate liability, if any, with respect to these            other claims and legal actions would have no material effect on the Company's business,            results of operations or financial position.

**-27-**

----

**Item            5.Other Information**

|                                                            |                                                                         |
|-----------------------------------------------------------------|------------------------------------------------------------------------------|
| **3520 Broadway,                        Kansas City, MO 64111** | **Contact:**                        Tracy W. Knapp, Chief Financial Officer, |
|                                                            | (816) 753-7299,                        Extension 8216                        |

**For Immediate Release:**            November 2, 2007, press release reporting financial results for the third quarter            of 2007.

**Kansas City            Life Announces Third Quarter 2007 Results**

Kansas            City Life Insurance Company reported net income of $9.1 million or $0.77 per share for            the quarter and $29.2 million or $2.47 per share for the nine months ended September            30, 2007. Net income declined $0.4 million or 4% for the third quarter and increased            $2.4 million or 9% for the nine months, relative to the same periods in            2006.

 

Net            income for the third quarter was favorably impacted by increases in immediate annuity            premiums and investment gains from the sale of real estate, along with reduced            policyholder benefits and operating expenses. Offsetting these favorable results was            the impact of reduced net investment income, which resulted from both a lower level of            invested assets during the current year and lower investment expenses in the third            quarter of 2006.

 

The            increase in net income in the nine months was primarily due to a $4.1 million increase            in realized investment gains, accompanied by a decline in the amortization of deferred            acquisition costs and value of business acquired, and reduced operating            expenses.

 

New            premiums increased 3% for the third quarter and nine month period relative to the prior            year. This included increases in individual life, immediate annuity, and group life            insurance premiums in the third quarter. New deposits on policyholder account balances            increased 7% for the third quarter, primarily due to increases in variable and fixed            deferred annuities. New deposits in the nine months increased 5%, primarily due to            increased sales of variable annuities and universal life            insurance.

 

Policyholder            benefits and interest credited declined $1.7 million or 3% in the third quarter            relative to the same period in the prior year, primarily as a result of lower death            benefits and reduced policyholder account balances. These same changes resulted in a            decline of $2.4 million or 1% in policyholder benefits and interest credited for the            nine month period.

 

In            addition to strong financial results, the Company strengthened its product mix with the            addition of a new guaranteed minimum withdrawal benefit rider during the third quarter.            This new product works in tandem with the Company’s variable annuity product to            provide policyholders with certain guaranteed levels of income in retirement. The            introduction of this new product is noteworthy because these types of guaranteed income            and benefit products are becoming very popular with consumers as they prepare for the            uncertainties of providing for a secure future. The Company remains focused on            increasing its life insurance business and an important aspect of successfully doing so            is to maintain a competitive array of financial protection products that help            Kansas City Life agents meet the financial security needs of their            clients.

 

We            were saddened by the recent passing of Warren J. Hunzicker, M.D., a member of the            Kansas City Life Board of Directors since 1989. Having served as Vice President and            Medical Director for Kansas City Life for many years prior to his service on the Board            of Directors, Dr. Hunzicker contributed greatly to the success of Kansas City Life and            will truly be missed.

 

The            Kansas City Life Board of Directors approved a quarterly dividend of $0.27 per share to            be paid November 13, 2007, to shareholders of record as of November 8,            2007.

 

*(Continued on            next page)*

 

**-28**-

 

----

 

 

Kansas City Life                        Announces

Third Quarter 2007                        Results

November 2, 2007;                        Page Two

            Kansas City Life Insurance Company (NASDAQ: KCLI) was established in 1895 and is based            in Kansas City, Missouri. The Company’s primary business is providing financial            protection through the sale of life insurance and annuities. The Company’s            revenues were $448.4 million in 2006, and assets and life insurance in force were $4.5            billion and $31.3 billion, respectively, as of December 31, 2006. The Company and its            affiliates operate in 49 states and the District of Columbia. Please refer to the            Company’s Form 10-Q at            *www.kclife.com*.

 

 

**KANSAS CITY            LIFE INSURANCE COMPANY            CONDENSED CONSOLIDATED INCOME STATEMENT****(Unaudited)**            (amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended                        September 30

 

Nine Months                        ended                        September 30

 

 

 

2007

 

2006

 

2007

 

2006

 

 

Revenues

 

$

108,788

 

$

111,224

 

$

331,712

 

$

334,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,131

 

$

9,526

 

$

29,249

 

$

26,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share,                        basic and diluted

 

$

0.77

 

$

0.80

 

$

2.47

 

$

2.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends                        paid

 

$

0.27

 

$

0.27

 

$

2.81

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of                        shares outstanding

 

 

11,842,494

 

 

11,875,104

 

 

11,851,906

 

 

11,888,046

 

**-29-**

**Item            6.****Exhibits.**

 

 

 

 

 

(a)                        Exhibits:

 

 

 

 

31(a)

Section 302                        Certification.

 

 

 

31(b)

Section 302                        Certification.

 

 

 

32(a)

Section 1350                        Certification. 

**-30-**

**SIGNATURES**

Pursuant to the            requirements of the Securities Exchange Act of 1934, the registrant has duly caused            this report to be signed on its behalf by the undersigned thereunto duly            authorized.

 

 

 

**KANSAS CITY LIFE                        INSURANCE COMPANY**

 

 

(Registrant)

 

/s/R. Philip                        Bixby

R. Philip                        Bixby

President, Chief                        Executive Officer                        and Chairman of the Board

 

 

/s/Tracy W.                        Knapp

Tracy W.                        Knapp

Senior Vice                        President, Finance

Date: November 2,            2007

-**31**-