The discussions set forth in this Quarterly Report on Form 10-Q contain statements concerning potential future events. Such forward-looking statements are based upon assumptions by the Company's management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. In addition, management may make forward-looking statements orally or in other writings, including, but not limited to, in press releases, in the annual report to shareholders and in the Company's other filings with the Securities and Exchange Commission ("SEC"). Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of management's assumptions prove incorrect or should unanticipated circumstances arise, the Company's actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors referred to below in Part II, Item 1A, "Risk Factors." Readers are strongly encouraged to consider the factors referred to in such section and any amendments or modifications thereof when evaluating any forward-looking statements concerning the Company. The Company's reports filed with or furnished to the SEC on Form 8-K, Form 10-K, Form 10-Q and other forms and any amendments to those reports, may be obtained by contacting the SEC's Public Reference Branch at 1-800-SEC-0330 or by accessing the forms electronically, free of charge, through the SEC's Internet website at http://www.sec.gov or through the Company's Internet website, as soon as reasonably practicable after filing with the SEC, at http://www.dstsystems.com. The Company undertakes no obligation to update any forward-looking statements in this Quarterly Report to reflect future events or developments.

The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited Consolidated Financial Statements and Notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

INTRODUCTION

The business units of DST Systems, Inc. ("DST" or "the Company") offer sophisticated information processing and software services and products. These business units are reported as two operating Segments (Financial Services and Output Solutions). In addition, investments in the Company's real estate subsidiaries and affiliates, equity securities, private equity funds, and certain financial interests have been aggregated into the Investments and Other Segment.

Financial Services

The Company's Financial Services Segment provides sophisticated information processing and computer software services and products using proprietary software systems primarily to mutual funds, investment managers, insurance companies, real estate partnerships, banks, brokers, financial planners, healthcare payers, healthcare providers, third party administrators and medical practice groups. The Company's proprietary software systems include: a shareowner recordkeeping system for the U.S. that is able to process mutual fund shareowner accounts, subaccounts, defined contribution participants and Real Estate Investment Trust ("REIT") participants; a unit trust recordkeeping system for international mutual fund companies; investment management systems offered to U.S. and international investment managers and fund accountants; a business process management and customer contact system offered to mutual funds, insurance companies, brokerage firms, banks, healthcare payers, healthcare providers, cable television operators and mortgage servicing organizations; and healthcare claims administration processing systems and services, including consumer directed healthcare administration solutions, offered to providers of healthcare plans, third party administrators and medical practice groups.

Prior to March 31, 2009, DST owned a 50% interest in Argus Health Systems, Inc. ("Argus"). Using its proprietary claims processing system, Argus provides pharmacy claims processing and other related services to help clients manage pharmacy benefit programs. On March 31, 2009, DST purchased the remaining 50% interest of Argus for $57.0 million in cash. As a result, Argus is no longer an unconsolidated affiliate of DST, but rather

is a wholly owned subsidiary resulting in DST consolidating the results of Argus after March 31, 2009 rather than recording equity in earnings of Argus. Argus has been included in the Financial Services Segment.

The Financial Services Segment distributes its services and products on a direct basis and through subsidiaries and joint venture affiliates in the U.S., United Kingdom ("U.K."), Canada, Europe, Australia, India, South Africa and Asia-Pacific and, to a lesser degree, distributes such services and products through various strategic alliances.

Output Solutions

The Company's Output Solutions Segment provides single source, integrated print and electronic statement and billing output solutions. The Output Solutions Segment also provides customized statement and bill production, marketing and personalization services, postal optimization, and electronic presentment, payment and distribution solutions.

The Output Solutions Segment conducts its operations from five operating centers located throughout North America and the U.K. DST Output is among the largest First-class mailers in the U.S and is one of the largest users of continuous, high-speed, full-color inkjet printing systems.

DST Output's research and development initiatives have resulted in a Digital Press Technology ("DPT") high-speed color printing and inserting platform. The new platform enables the Output Solutions Segment to produce high-speed transactional printing combined with dynamic color printing. DST Output believes DPT is a technologically-differentiated service offering that enables it to provide better and more efficient products and services to clients.

The Output Solutions Segment distributes its product directly to customers and through relationships in which its services are combined with or offered concurrently through providers of data processing services. The Output Solutions Segment's products are also distributed or bundled with product offerings to customers of the Financial Services Segment.

Investments and Other

The Investments and Other Segment is comprised of the Company's real estate subsidiaries and affiliates, investments in equity securities, private equity funds and other financial interests. The assets held by the Investments and Other Segment are primarily passive in nature. The Company owns and operates real estate mostly in the U.S. and U.K., which is held primarily for lease to the Company's other business segments. The Company is a partner in certain real estate joint ventures that lease office space to the Company, certain of its unconsolidated affiliates and unrelated third parties. The Company is a 50% partner in a limited purpose real estate joint venture leasing approximately 1.1 million square feet of office space to the U.S. government. The Investments and Other Segment holds investments in equity securities with a market value of approximately $857.6 million at June 30, 2009, including approximately 10.6 million shares of State Street Corporation ("State Street"), 29.6 million shares of Computershare Ltd. ("Computershare") and 1.9 million shares of Euronet Worldwide, Inc., with a market value of $499.4 million, $215.3 million and $36.5 million, respectively, based on closing exchange values at June 30, 2009.

RESULTS OF OPERATIONS



The following table summarizes the Company's operating results (in millions,
except per share amounts):



                                     For the Three Months             For the Six Months
                                        Ended June 30,                  Ended June 30,
                                     2009             2008           2009           2008
Revenues
Operating revenues
Financial Services               $      287.7     $      294.5    $     555.4    $     581.3
Output Solutions                        117.5            131.1          244.5          273.8
Investments and Other                    14.7             15.1           29.9           30.1
Elimination Adjustments                 (15.4 )          (14.1 )        (29.7 )        (27.8 )
                                        404.5            426.6          800.1          857.4
% change from prior year
period                                   (5.2 )%                         (6.7 )%

Out-of-pocket reimbursements
Financial Services                       12.9             19.0           30.0           36.8
Output Solutions                        137.8            127.3          286.0          266.5
Investments and Other                     0.2              0.1            0.3            0.2
Elimination Adjustments                  (1.4 )           (0.1 )         (1.5 )         (0.2 )
                                        149.5            146.3          314.8          303.3
% change from prior year
period                                    2.2 %                           3.8 %

Total revenues                   $      554.0     $      572.9    $   1,114.9    $   1,160.7
% change from prior year
period                                   (3.3 )%                         (3.9 )%

Income from operations
Financial Services               $       61.9     $       74.5    $     127.9    $     143.9
Output Solutions                          5.9              7.4           13.1           21.2
Investments and Other                     2.7              3.1            5.8            6.0
Elimination Adjustments                  (2.0 )           (2.0 )         (3.9 )         (3.7 )
                                         68.5             83.0          142.9          167.4

Interest expense                         (9.5 )          (13.8 )        (20.1 )        (26.5 )
Other income (expense), net              11.2             (2.5 )         27.4           (6.9 )
Equity in earnings of
unconsolidated affiliates                10.5             11.6           16.2           20.3
Income before income taxes               80.7             78.3          166.4          154.3
Income taxes                             32.0             28.4           44.5           32.2
Net income                       $       48.7     $       49.9    $     121.9    $     122.1

Basic earnings per share         $       0.98     $       0.92    $      2.45    $      2.16
Diluted earnings per share       $       0.97     $       0.85    $      2.44    $      1.96

Consolidated revenues

Consolidated total revenues (including out-of-pocket ("OOP") reimbursements) for the three and six months ended June 30, 2009 were $554.0 million and $1,114.9 million, respectively, a decrease of $18.9 million or 3.3% and $45.8 million or 3.9% as compared to the three and six months ended June 30, 2008, respectively. Consolidated operating revenues for the three and six months ended June 30, 2009 decreased $22.1 million or 5.2% and $57.3 million or 6.7%, respectively, compared to the same periods in 2008. The decreases in consolidated operating revenues are attributable to declines of $13.6 million and $29.3 million in Output Solutions for the three and six months ended June 30, 2009, and declines of $6.8 million and $25.9 million in Financial Services for the three and six months ended June 30, 2009, both as compared to the same periods in 2008. The declines in Output Solutions were due to lower items mailed and images produced and the effects of changes in foreign currency exchange rates. The declines in Financial Services resulted from lower international revenues from decreased demand for professional services and changes in foreign currency exchange rates (principally changes between the U.S. Dollar and the British Pound), reductions in mutual fund shareowner processing service revenues, data processing support revenues and AWD software license revenues, partially offset by the inclusion of $22.3 million of incremental operating revenues resulting from the consolidation of Argus Health Systems, Inc. ("Argus") on March 31, 2009.

Consolidated OOP reimbursements during the three and six months ended June 30, 2009 increased $3.2 million or 2.2% and $11.5 million or 3.8%, respectively, compared to the same periods in 2008. OOP reimbursements for Output Solutions increased $10.5 million or 8.2% and $19.5 million or 7.3%, respectively, during the three and six months ended June 30, 2009, attributable to an increase in the number of clients where Output Solutions procures postage on behalf of the client, partially offset by lower volumes.

Income from operations

Consolidated income from operations for the three and six months ended June 30, 2009 decreased $14.5 million or 17.5% and $24.5 million or 14.6% as compared to the three and six months ended June 30, 2008, respectively. Financial Services income from operations decreased $12.6 million, attributable to an increase in deferred compensation costs of approximately $5.5 million (the effect of which is offset as unrealized appreciation on trading securities in other income, net), reduced earnings from international operations resulting from declines in professional service revenues and costs associated with reductions in staffing levels, reduced earnings from mutual fund shareowner processing, the consolidation of losses incurred by Argus since March 31, 2009, lower AWD software license revenue and from lower data processing support revenues. The $1.5 million decrease in Output Solutions during the three months ended June 30, 2009 resulted from lower operating revenues. Financial Services income from operations decreased $16.0 million during the six months ended June 30, 2009, principally for the same reasons mentioned above. The decrease in Output Solutions income from operations of $8.1 million during the six months ended June 30, 2009 is primarily attributable to lower operating revenues.

Interest expense

Interest expense for the three and six months ended June 30, 2009 was $9.5 million and $20.1 million, a decrease of $4.3 million or 31.2% and $6.4 million or 24.2%, respectively, compared to the same periods in 2008, primarily from lower average interest rates in 2009.

Other income (expense), net

The components of other income (expense) are as follows (in millions):

                                     For the Three Months             For the Six Months
                                        Ended June 30,                  Ended June 30,
                                     2009            2008            2009            2008

Gain on equity interest in
Argus Health Systems             $               $               $       41.7    $
Other than temporary
impairments / unrealized
losses on available-for-sale
securities                               (1.2 )         (10.0 )         (26.8 )         (20.2 )
Net gains (losses) on private
equity funds and other
investments                               1.3            (5.8 )          (3.1 )          (5.8 )
Net realized gains from sale
of available-for-sale
securities                                4.2             9.8             3.4             9.5
Gain on extinguishment of
senior convertible debentures             2.1                             5.8
Dividend income                           1.3             4.2             4.7            12.1
Interest income                           1.4             1.8             2.7             3.5
Miscellaneous items                       2.1            (2.5 )          (1.0 )          (6.0 )

Other income (expense), net was a gain of $11.2 million and $27.4 million during the three and six months ended June 30, 2009, respectively, but was a loss of $2.5 million and $6.9 million for the three and six months ended June 30, 2008, respectively. Several factors included in the table above and explained below contributed to the changes in other income during 2009 and 2008.

The Company recorded a gain of $41.7 million during the six months ended June 30, 2009 related to its purchase of the remaining 50% interest of Argus for $57.0 million. As required by generally accepted accounting principles, the Company adopted SFAS No. 141(R), "Business Combinations," ("SFAS 141R"), on January 1, 2009. In accordance with SFAS 141R, the acquisition of the remaining 50% of Argus on March 31, 2009 was treated as a step acquisition. Accordingly, DST remeasured its previously held equity interest in Argus to fair value, in the amount of $57.0 million, and recorded a gain of $41.7 million. DST has preliminarily recognized identifiable assets (proprietary software of $26.0 million, customer relationships of $14.0 million and other intangible assets of $1.0 million) and goodwill resulting from the acquisition of the remaining 50% Argus interest and the remeasurement of DST's previously held equity interest. Based on the preliminary purchase price allocation, DST estimates that annual amortization expense from acquired Argus intangible assets will be approximately $4.2 million. DST expects that the inclusion of Argus will be dilutive to 2009 diluted earnings per share.

The Company records investment impairment charges for available-for-sale securities with gross unrealized holding losses resulting from a decline in value that is other than temporary. The Company recognized $1.2 million and $26.8 million of investment impairments for the three and six months ended June 30, 2009, respectively, and $10.0 million and $20.2 million for the three and six months ended June 30, 2008, respectively, which were other than temporary. The decrease in impairments during the three months ended June 30, 2009, compared to the same period in 2008, is from improved financial market conditions. The increase in impairments during the six months ended June 30, 2009, compared to the same period in 2008, is from significant declines in securities share prices during the three months ended March 31, 2009 related to adverse economic conditions in the financial and other markets. The Company records lower of cost or market valuation adjustments on cost method private equity fund investments and other cost method investments when impairment conditions are present. During the three and six months ended June 30, 2009, the Company recorded $0.2 million and $4.2 million of impairments, respectively, compared to $5.8 million for both the three and six months ended June 30, 2008, on private equity fund and other investments related to adverse market conditions and from poor performance of the underlying investment. These private equity fund investment impairments during the three and six months ended June 30, 2009 were partially offset by gains from equity method private equity fund investments.

Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future, which could have a material effect on the Company's financial position.

Net realized gains from sale of available-for-sale securities were $4.2 million and $3.4 million during the three and six months ended June 30, 2009, respectively, compared to $9.8 million and $9.5 million during the three and six months ended June 30, 2008, respectively.

The Company recorded a $2.1 million and $5.8 million gain during the three and six months ended June 30, 2009 associated with the repurchase of a portion of the Company's senior convertible debentures at a discount to carrying value. The Company repurchased approximately $61.4 million and $112.9 million in principal amount of the original $540 million 4.125% Series A senior convertible debentures during the three and six months ended June 30 2009, respectively, and repurchased approximately $12.7 million and $14.7 million in principal amount of the original $300 million 3.625% Series B senior convertible debentures during the three and six months ended June 30, 2009, respectively.

The Company receives dividend income from certain investments held, including its investments in State Street Corporation ("State Street") and Computershare, Ltd. common stock. Dividend income decreased $2.9 million and $7.4 million during the three and six months ended June 30, 2009 compared to the same periods in 2008. As previously disclosed, State Street reduced its quarterly dividend in 2009 to $0.01 per share as compared to $0.24 per share in second quarter 2008 and $0.23 per share in first quarter 2008, which resulted in $2.6 million and $5.1 million of lower dividend income for DST during the three and six months ended June 30, 2009. In addition, approximately $0.3 million and $2.3 million of lower dividend income from other investments was recorded during the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008, attributable to a reduction of dividends in other available-for-sale securities held and, for the six months ended June 30, 2009, a decline in the Australian dollar.

Interest income was $1.4 million and $2.7 million during the three and six months ended June 30, 2009, respectively, a decrease of $0.4 million and $0.8 million compared to the same periods in 2008. The decrease in interest income in 2009 is attributable to lower amounts of short-term investments and lower interest rates.

Miscellaneous items include unrealized gains and losses on marketable securities designated as trading securities, program fees related to the Company's accounts receivable securitization program, realized foreign currency gains and losses, amortization of deferred non-operating gains and other non-operating items. Income from miscellaneous items was $2.1 million during the three months ended June 30, 2009 as compared to a loss of $2.5 million during the same period in 2008. The increase in other income during 2009 is primarily from unrealized appreciation on marketable securities designated as trading (the effect of which is offset in Financial Services Segment as an increase in costs and expenses), partially offset by higher accounts receivable securitization costs of $0.8 million associated with renewal fees incurred upon replacing the existing $200 million program with a new $175 million program with a new, third-party, multi-seller, asset-backed commercial paper conduit in May 2009. Loss from miscellaneous items was $1.0 million during the six months ended June 30, 2009 as compared to a loss of $6.0 million during the same period in 2008, a decrease of $5.0 million principally for the reasons mentioned above.

Equity in earnings (losses) of unconsolidated affiliates

The following table summarizes the Company's equity in earnings (losses) of unconsolidated affiliates (in millions):

                For the Three Months        For the Six Months*
                   Ended June 30,              Ended June 30,
                2009           2008          2009          2008

BFDS         $       3.1    $       4.7   $      6.8    $     10.6
IFDS, U.K.           2.3            2.9          3.8           5.9
IFDS, L.P.           1.7            1.9          2.6           2.4
Argus                               0.1         (1.5 )         0.4
Other                3.4            2.0          4.5           1.0
             $      10.5    $      11.6   $     16.2    $     20.3

For the three and six months ended June 30, 2009, DST's equity in earnings of unconsolidated affiliates decreased $1.1 million or 9.5% and $4.1 million or 20.2% compared to the same periods in 2008, attributable to lower equity in earnings of BFDS and IFDS U.K., partially offset by improved results in other unconsolidated affiliates.

DST's equity in BFDS earnings for the three and six months ended June 30, 2009 decreased $1.6 million and $3.8 million compared to the same periods in 2008, primarily from lower investment earnings resulting principally from lower interest rates on cash balances maintained by BFDS on behalf of customers, lower operating revenues resulting from lower shareowner accounts processed, and lease abandonment costs incurred in second quarter 2009 associated with consolidating operational facilities, partially offset by lower compensation and benefit related costs from lower staffing levels. Average daily balances invested by BFDS were $0.8 billion during both the three and six months ended June 30, 2009 as compared to $1.0 billion during the same periods in 2008. Average interest rates earned on the balances declined from 1.85% during the three months ended June 30, 2008 to 0.16% during the three months ended June 30, 2009. The aggregate effect of these volume and rate declines resulted in an approximate $4.2 million decline in interest earnings by BFDS during the three months ended June 30, 2009, which resulted in a decrease in DST's equity in earnings of unconsolidated affiliates of approximately $1.3 million. Average interest rates earned on the balances declined from 2.56% during the six months ended June 30, 2008 to 0.39% during the six months ended June 30, 2009. The aggregate effect of these volume and rate declines resulted in an approximate $12.2 million decline in interest earnings by BFDS during the six months ended June 30, 2009, which resulted in a decrease in DST's equity in earnings of unconsolidated affiliates of approximately $3.7 million.

DST's equity in earnings of IFDS U.K. decreased $0.6 million and $2.1 million during the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008. The decrease in equity in earnings during the three and six months ended June 30, 2009 is primarily attributable to the foreign currency exchange effects between the U.S. Dollar and British Pound. In addition, higher revenues from higher shareowner accounts serviced were partially offset by higher costs to support new clients during the three and six months ended June 30, 2009. Accounts serviced by IFDS U.K. were 6.1 million at June 30, 2009, an increase of 0.1 million accounts or 1.7% from March 31, 2009, an increase of 0.2 million accounts or 3.4% from December 31, 2008 and an increase of 0.3 million accounts or 5.2% from June 30, 2008.

DST's equity in earnings of IFDS L.P. (which includes IFDS Canada, Ireland and Luxembourg) decreased $0.2 million during the three months ended June 30, 2009 . . .