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 is 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 $966.1 million at September 30, 2009, including approximately 10.6 million shares of State Street Corporation ("State Street"), 25.0 million shares of Computershare Ltd. ("Computershare") and 1.9 million shares of Euronet Worldwide, Inc., with a market value of $556.5 million, $246.2 million and $45.3 million, respectively, based on closing exchange values at September 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 Nine Months
                                    Ended September 30,             Ended September 30,
                                   2009             2008            2009           2008
Revenues
Operating revenues
Financial Services             $      276.3     $      284.4    $      831.7    $     865.7
Output Solutions                      120.3            128.8           364.8          402.6
Investments and Other                  15.1             16.1            45.0           46.2
Elimination Adjustments               (16.1 )          (15.1 )         (45.8 )        (42.9 )
                                      395.6            414.2         1,195.7        1,271.6
% change from prior year
period                                 (4.5 )%                          (6.0 )%

Out-of-pocket
reimbursements
Financial Services                     11.6             17.5            41.6           54.3
Output Solutions                      145.5            128.6           431.5          395.1
Investments and Other                   0.1              0.2             0.4            0.4
Elimination Adjustments                (1.1 )           (0.1 )          (2.6 )         (0.3 )
                                      156.1            146.2           470.9          449.5
% change from prior year
period                                  6.8 %                            4.8 %

Total revenues                 $      551.7     $      560.4    $    1,666.6    $   1,721.1
% change from prior year
period                                 (1.6 )%                          (3.2 )%

Income from operations
Financial Services             $       55.6     $       70.0    $      183.5    $     213.9
Output Solutions                        7.0              7.4            20.1           28.6
Investments and Other                   1.9              3.4             7.7            9.4
Elimination Adjustments                (1.9 )           (1.9 )          (5.8 )         (5.6 )
                                       62.6             78.9           205.5          246.3

Interest expense                       (8.8 )          (13.8 )         (28.9 )        (40.3 )
Other income (expense), net            33.2              2.8            60.6           (4.1 )
Equity in earnings of
unconsolidated affiliates               7.8              9.0            24.0           29.3
Income before income taxes             94.8             76.9           261.2          231.2
Income taxes                           33.9             26.7            78.4           58.9
Net income                     $       60.9     $       50.2    $      182.8    $     172.3

Basic earnings per share       $       1.22     $       0.97    $       3.68    $      3.14
Diluted earnings per share     $       1.21     $       0.90    $       3.65    $      2.86

Consolidated revenues

Consolidated total revenues (including out-of-pocket ("OOP") reimbursements) for the three and nine months ended September 30, 2009 were $551.7 million and $1,666.6 million, respectively, a decrease of $8.7 million or 1.6% and $54.5 million or 3.2% as compared to the three and nine months ended September 30, 2008, respectively. Consolidated operating revenues for the three and nine months ended September 30, 2009 decreased $18.6 million or 4.5% and $75.9 million or 6.0%, respectively, compared to the same periods in 2008. The decreases in consolidated operating revenues are attributable to declines of $8.1 million and $34.0 million in Financial Services for the three and nine months ended September 30, 2009, and declines of $8.5 million and $37.8 million in Output Solutions for the three and nine months ended September 30, 2009, both as compared to the same periods in 2008. The declines in Financial Services for the three and nine months ended September 30, 2009 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), lower DST Health Solutions professional services revenues, reductions in mutual fund shareowner processing service revenues and AWD software license revenues, partially offset by the inclusion of $22.2 million (three months ended September 30, 2009) and $44.5 million (nine months ended September 30, 2009) of net incremental operating revenues resulting from the consolidation of Argus Health Systems, Inc. ("Argus") on March 31, 2009. In addition, the nine months ended September 30, 2008 reflects higher data processing support revenues related to a contract that expired in June 2008. The declines in Output Solutions reflect lower revenue per item mailed and image produced and the effects of changes in foreign currency exchange rates for the three and nine months ended September 30, 2009. In addition, the nine months ended September 30, 2009 reflects lower revenues for Output Solutions from lower images produced.

Consolidated OOP reimbursements during the three and nine months ended September 30, 2009 increased $9.9 million or 6.8% and $21.4 million or 4.8%, respectively, compared to the same periods in 2008. OOP reimbursements for Output Solutions increased $16.9 million or 13.1% and $36.4 million or 9.2%, respectively, during the three and nine months ended September 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 for the nine months ended September 30, 2009.

Income from operations

Consolidated income from operations for the three and nine months ended September 30, 2009 decreased $16.3 million or 20.7% and $40.8 million or 16.6% as compared to the three and nine months ended September 30, 2008, respectively. Financial Services income from operations decreased $14.4 million for the three months ended September 30, 2009, attributable to an increase in deferred compensation costs of approximately $6.5 million (the effect of which is offset as unrealized appreciation on trading securities in other income, net), consolidation of losses incurred by Argus, lower revenues from mutual fund shareowner processing, international operations, DST Health Solutions and AWD. The $0.4 million decrease in Output Solutions during the three months ended September 30, 2009 resulted from lower operating revenues. Financial Services income from operations decreased $30.4 million during the nine months ended September 30, 2009, principally for the same reasons mentioned above except the amount of increased deferred compensation costs was approximately $12.2 million for the nine months ended September 2009. The decrease in Output Solutions income from operations of $8.5 million during the nine months ended September 30, 2009 is primarily attributable to lower operating revenues.

Interest expense

Interest expense for the three and nine months ended September 30, 2009 was $8.8 million and $28.9 million, a decrease of $5.0 million or 36.2% and $11.4 million or 28.3%, respectively, compared to the same periods in 2008. Interest expense decreased for the three months ended September 30, 2009 primarily from lower average debt and lower average interest rates. Interest expense decreased for the nine months ended September 30, 2009 primarily from lower average interest rates in 2009. Costs associated with the convertible senior debentures exchange transaction completed in October 2009, as described in the Liquidity and Capital Resources section below, were approximately $3.5 million and will be expensed in fourth quarter 2009.

Other income (expense), net

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

                                         For the Three Months            For the Nine Months
                                         Ended September 30,             Ended September 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                                (5.6 )         (26.8 )         (25.8 )
Net gains (losses) on private
equity funds and other
investments                                  (0.2 )          (1.5 )          (3.3 )          (7.3 )
Net realized gains from sale of
available-for-sale securities                22.5             2.2            25.9            11.7
Gain on extinguishment of senior
convertible debentures                        0.1                             5.9
Dividend income                               4.1             7.5             8.8            19.6
Interest income                               1.5             2.6             4.2             6.1
Miscellaneous items                           5.2            (2.4 )           4.2            (8.4 )
Other income (expense), net          $       33.2    $        2.8    $       60.6    $       (4.1 )

Other income (expense), net was a gain of $33.2 million and $60.6 million during the three and nine months ended September 30, 2009, respectively. Other income (expense), net was a gain of $2.8 million and a loss of $4.1 million during the three and nine months ended September 30, 2008, respectively.

The Company recorded a gain of $41.7 million during the nine months ended September 30, 2009 related to its purchase of the remaining 50% interest of Argus for $57.0 million. In accordance with new accounting guidance on business combinations, 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 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 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 $26.8 million of investment impairments for the nine months ended September 30, 2009, and $5.6 million and $25.8 million for the three and nine months ended September 30, 2008, respectively, which were other than temporary. The decrease in impairments during the three months ended September 30, 2009, compared to the same period in 2008, is from improved financial market conditions. 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 nine months ended September 30, 2009, the Company recorded $0.2 million and $3.3 million of net impairments, respectively, compared to $1.5 million and $7.3 million for the three and nine months ended September 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 nine months ended September 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 $22.5 million and $25.9 million during the three and nine months ended September 30, 2009, respectively, compared to $2.2 million and $11.7 million during the three and nine months ended September 30, 2008, respectively. Included in the $25.9 million of gains from the sale of available-for-sale securities for the nine months ended September 30, 2009, is a $17.6 million gain from the sale of approximately 4.6 million shares of Computershare Ltd.

The Company recorded a $0.1 million and $5.9 million gain during the three and nine months ended September 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 $9.7 million and $122.6 million in principal amount of the original $540 million 4.125% Series A senior convertible debentures during the three and nine months ended September 30 2009, respectively, and repurchased approximately $14.7 million in principal amount of the original $300 million 3.625% Series B senior convertible debentures during the nine months ended September 30, 2009.

The Company receives dividend income from certain investments held. Dividend income decreased $3.4 million and $10.8 million during the three and nine months ended September 30, 2009 compared to the same periods in 2008. State Street Corporation ("State Street") reduced its quarterly dividend in first quarter 2009 to $0.01 per share as compared to $0.24 per share in third quarter 2008, $0.24 per share in second quarter 2008 and $0.23 per share in first quarter 2008, which resulted in $2.6 million and $7.7 million of lower dividend income for DST during the three and nine months ended September 30, 2009, respectively. In addition, approximately $0.8 million and $3.1 million of lower dividend income from other investments was recorded during the three and nine months ended September 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 nine months ended September 30, 2009, a decline in the Australian dollar. The sale of approximately 4.6 million shares of Computershare Ltd. during third quarter 2009 is expected to have a negative impact on the Company's future dividend income.

Interest income was $1.5 million and $4.2 million during the three and nine months ended September 30, 2009, respectively, a decrease of $1.1 million and $1.9 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 $5.2 million during the three months ended September 30, 2009 as compared to a loss of $2.4 million during the same period in 2008. The $7.6 million increase in other income during third quarter 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). Income from miscellaneous items was $4.2 million during the nine months ended September 30, 2009 as compared to a loss of $8.4 million during the same period in 2008, an increase of $12.6 million principally for the reason mentioned above, partially offset by $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.

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 Nine Months*
                            Ended September 30,          Ended September 30,
                           2009            2008          2009           2008

           BFDS         $       2.2     $       4.6   $       9.0    $      15.2
           IFDS, U.K.           2.0             2.6           5.8            8.5
           IFDS, L.P.           2.1             2.4           4.7            4.8
           Argus                                             (1.5 )          0.4
           Other                1.5            (0.6 )         6.0            0.4
                        $       7.8     $       9.0   $      24.0    $      29.3

For the three and nine months ended September 30, 2009, DST's equity in earnings of unconsolidated affiliates decreased $1.2 million or 13.3% and $5.3 million or 18.1% 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 nine months ended September 30, 2009 decreased $2.4 million and $6.2 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, lease abandonment costs incurred in second and third quarters of 2009 associated with consolidating operational facilities and higher bank fees. Average daily balances invested by BFDS were $878 million and $823 million during the three and nine months ended September 30, 2009 as compared to $904 million and $1.0 billion during the same periods in 2008. Average interest rates earned on the balances declined from 1.67% during the three months ended September 30, 2008 to 0.15% during the three months ended September 30, 2009. The aggregate effect of these volume and rate declines resulted in an approximate $3.4 million decline in interest earnings by BFDS during the three months ended September 30, 2009, which resulted in a decrease in DST's equity in earnings of unconsolidated affiliates of approximately $1.0 million. Average interest rates earned on the balances declined from 2.23% during the nine months ended September 30, 2008 to 0.18% during the nine months ended September 30, 2009. The aggregate effect of these volume and rate declines resulted in an approximate $15.6 million decline in interest earnings by BFDS during the nine months ended September 30, 2009, which resulted in a decrease in DST's equity in earnings of unconsolidated affiliates of approximately $4.8 million.

. . .