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 will not 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, 2007.

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 equity securities, private equity funds, and certain financial interests, and the Company's real estate subsidiaries and affiliates have been aggregated into an 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, healthcare providers, banks, brokers, financial planners, real estate partnerships, providers of healthcare plans, third party administrators, medical practice groups and healthcare providers. The Company's proprietary software systems include mutual fund shareowner, subaccount and unit trust recordkeeping systems for U.S. and international mutual fund companies; a defined-contribution participant recordkeeping system for the U.S. retirement plan market; 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.

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 offers a variety of related professional services, including marketing and personalization services, and postal optimization solutions. The Output Solutions Segment also provides electronic presentment, payment and distribution solutions.

The Output Solutions Segment conducts its operations from five production facilities 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 Canada offers customer communications and document automation solutions to the Canadian market. DST International Output provides personalized print and electronic communications principally in the U.K.

The Output Solutions Segment distributes its products 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.

In first quarter 2008, the Company changed the measurement of certain occupancy cost components of its Output Solutions Segment. The Output Solutions Segment leases its California, Connecticut and Missouri production facilities from the Investments and Other Segment. Beginning in 2008, the Company began reporting financial results for the Output Solutions Segment on the basis that the Output Solutions Segment owned (instead of leased) these three production facilities. Management believes this action will improve its ability to analyze the Output Solutions Segment operating results taking into consideration the special purpose nature of the production plants. Reported results for the Output Solutions Segment and the Elimination Adjustments for periods prior to 2008 have been restated to reflect this change. The Company's restated segment results for the three and nine months ended September 30, 2007 are included in the information that follows. The Investments and Other Segment continues to present rental revenues from the Output Solutions Segment along with the related depreciation expense associated with the properties, while the elimination of the inter-segment activity is included in the Elimination Adjustments.

Investments and Other

The Investments and Other Segment holds investments in equity securities, private equity funds, and certain financial interests, and the Company's real estate subsidiaries and affiliates. The assets held by the Investments and Other Segment are primarily passive in nature. The Investments and Other Segment holds investments in equity securities with a market value of approximately $1.1 billion at September 30, 2008, including approximately 11.3 million shares of State Street Corporation ("State Street"), 29.6 million shares of Computershare and 1.9 million shares of Euronet Worldwide, Inc., with a market value of $643.3 million, $218.2 million and $31.5 million, respectively, based on closing exchange values at September 30, 2008. Additionally, 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.

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,
                                              2008           2007          2008         2007
Revenues
Operating revenues
Financial Services                         $     284.4     $   281.1    $    865.7    $   836.8
Output Solutions                                 128.8         136.4         402.6        421.4
Investments and Other                             16.1          16.6          46.2         48.1
Elimination Adjustments                          (15.1 )       (14.6 )       (42.9 )      (43.4 )
                                                 414.2         419.5       1,271.6      1,262.9
% change from prior year period                   (1.3 )%                      0.7 %

Out-of-pocket reimbursements
Financial Services                                17.5          16.5          54.3         48.0
Output Solutions                                 128.6         136.9         395.1        414.2
Investments and Other                              0.2                         0.4          0.2
Elimination Adjustments                           (0.1 )        (0.1 )        (0.3 )       (0.2 )
                                                 146.2         153.3         449.5        462.2
% change from prior year period                   (4.6 )%                     (2.7 )%

Total revenues                             $     560.4     $   572.8    $  1,721.1    $ 1,725.1
% change from prior year period                   (2.2 )%                     (0.2 )%

Income from operations
Financial Services                         $      70.0     $    65.3    $    213.9    $   198.0
Output Solutions                                   7.4           8.7          28.6         30.3
Investments and Other                              3.4           3.2           9.4         22.1
Elimination Adjustments                           (1.9 )        (1.9 )        (5.6 )       (5.6 )
                                                  78.9          75.3         246.3        244.8

Interest expense                                 (13.8 )       (11.6 )       (40.3 )      (49.2 )
Other income (expense), net                        2.8          14.9          (4.1 )       41.6
Gain on sale of Asurion                                        996.3                      996.3
Equity in earnings of unconsolidated
affiliates                                         9.0           5.4          29.3         52.7
Income before income taxes                        76.9       1,080.3         231.2      1,286.2
Income taxes                                      26.7         407.5          58.9        475.2
Net income                                 $      50.2     $   672.8    $    172.3    $   811.0

Basic earnings per share                   $      1.02     $   11.24    $     3.30    $   13.18
Diluted earnings per share                 $      0.91     $    9.62    $     2.91    $   11.37

Consolidated revenues

Consolidated total revenues (including out-of-pocket ("OOP") reimbursements) for the three and nine months ended September 30, 2008, decreased $12.4 million or 2.2% and $4.0 million or 0.2%, respectively, compared to the same periods in 2007. Consolidated operating revenues for the three months ended September 30, 2008, decreased $5.3 million or 1.3% as compared to the same period in 2007, primarily due to lower Output Solutions operating revenues, partially offset by increases in mutual fund shareowner processing revenues, professional services provided by DST Health Solutions and AWD license fee revenues. Consolidated operating revenues for the nine months ended September 30, 2008, increased $8.7 million or 0.7% as compared to the same period in 2007, primarily from increases in mutual fund shareowner processing services attributable to higher levels of accounts serviced, principally from new client conversions since second quarter 2007, partially offset by lower Output Solutions operating revenues attributable to lower images produced and a $3.1 million contract termination fee in first quarter 2007.

Consolidated OOP reimbursements during the three and nine months ended September 30, 2008 decreased $7.1 million or 4.6% and $12.7 million or 2.7%, respectively, as compared to 2007. Lower Output Solutions OOP reimbursement revenues primarily resulting from changes in customer postage programs were partially offset by higher Financial Services OOP reimbursement revenues from higher volumes.

Income from operations

Consolidated income from operations for the three months ended September 30, 2008 was $78.9 million, an increase of $3.6 million or 4.8% compared to the same period in 2007. Absent a $4.3 million charge for the partial termination of a non-qualified deferred compensation plan recorded during third quarter 2007, consolidated income from operations decreased $0.7 million or 0.9% as compared to third quarter 2007. Output Solutions income from operations decreased $2.1 million from lower revenues. Financial Services income from operations increased $1.4 million as increased contributions from DST Health Solutions and AWD were partially offset by lower contributions from international financial services operations. Consolidated income from operations for the nine months ended September 30, 2008 was $246.3 million, an increase of $1.5 million or 0.6% compared to the same period in 2007. Higher contributions from mutual fund shareowner processing services were partially offset by lower contributions from the Investments and Other Segment, which recorded a $12.4 million gain in 2007 from the sale of office buildings, lower contributions from international financial services operations in 2008 associated with lower revenues and higher personnel costs, and lower contributions from the Output Solutions Segment attributable to lower operating revenues (from lower images produced).

Interest expense

Interest expense for the three months ended September 30, 2008 was $13.8 million, an increase of $2.2 million or 19.0%, compared to the same period in 2007, primarily from higher average debt balances during 2008. As discussed below, the Company used proceeds from the Asurion sale in July 2007 to pay down debt. Increased share repurchase activity during 2008 has resulted in higher average debt balances. Interest expense for the nine months ended September 30, 2008 was $40.3 million, a decrease of $8.9 million or 18.1% compared to the same period in 2007 attributable to lower average interest rates partially offset by higher average debt balances. Costs associated with the accounts receivable securitization program, which began in May 2007, are included in other income (expense), as mentioned below.

Other income (expense), net

Other income, net for the three months ended September 30, 2008 was $2.8 million, as compared to $14.9 million in the same period in 2007. During the three months ended September 30, 2008, the Company recorded $7.1 million of investment impairments and $2.2 million of gains from the sale of investments as compared to the three months ended September 30, 2007 when the Company recorded $3.1 million of investment impairments and $3.1 million of gains from the sale of investments. Absent net gains (losses) on securities and other investments, other income decreased $7.2 million for the three months ended September 30, 2008 as compared to the same period in

2007. In July 2007, the Company received $980.0 million from the sale of Asurion Corporation. The majority of the proceeds from the Asurion transaction were used to pay down debt. The remainder of the proceeds was invested in cash and short-term investments and was used in December 2007 to satisfy income tax obligations associated with the Asurion sale. The decrease in other income (primarily interest income) as compared to third quarter 2007 is attributable to lower amounts of short-term investments, higher unrealized losses on marketable securities designated as trading and from higher accounts receivable securitization program costs associated with higher levels of accounts receivable sold.

Other income (expense), net for the nine months ended September 30, 2008 was a $4.1 million expense, versus income of $41.6 million in the same period in 2007. During the nine months ended September 30, 2008, the Company recorded $33.1 million of investment impairments and $11.7 million of gains from the sale of investments as compared to the nine months ended September 30, 2007 when the Company recorded $5.1 million of investment impairments and $13.1 million of gains from the sale of investments. Absent net gains (losses) on securities and other investments, other income decreased $16.3 million for the nine months ended September 30, 2008 attributable to increased unrealized losses on marketable securities designated as trading in the amount of $9.2 million, lower interest income from lower amounts of short-term investments in 2008, lower other income resulting from gains of $2.5 million recorded during the nine months ended September 30, 2007 from the favorable settlement of a prior business acquisition dispute and the recovery of a Chapter 11 bankruptcy claim of an amount due from a previous customer and higher accounts receivable securitization program costs associated with higher levels of accounts receivable sold, partially offset by higher dividend income in 2008.

Gain on sale of Asurion

During the three and nine months ended September 30, 2007, the Company recorded a $996.3 million gain from the sale of most of its investment in Asurion. In connection with the sale, DST received cash proceeds of $980.0 million and receivables of $45.5 million, of which $6.3 million were collected in fourth quarter 2007 and $39.2 million were collected in second quarter 2008.

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,
                  2008            2007          2008          2007

BFDS           $       4.6     $       7.6   $     15.2    $     23.6
IFDS, U.K.             2.6             3.0          8.5          10.4
IFDS, Canada           2.4             0.4          4.8           2.9
Argus                  0.0             1.5          0.4           3.4
Other                 (0.6 )          (7.1 )        0.4          (9.5 )
Asurion                                                          21.9
               $       9.0     $       5.4   $     29.3    $     52.7

Equity in earnings of unconsolidated affiliates increased $3.6 million for the three months ended September 30, 2008 and decreased $23.4 million for the nine months ended September 30, 2008, as compared to the same periods for 2007. The increase during the three months ended September 30, 2008 is attributable to no impairments recorded by DST's real estate joint ventures in 2008 (as compared to approximately $4.9 million, DST's share, in third quarter 2007) and increased earnings from IFDS Canada, partially offset by lower earnings from BFDS, IFDS U.K. and Argus Health Systems. As previously announced, DST sold the majority of its equity

interest in Asurion on July 3, 2007 and now accounts for this investment under the cost basis. The decrease in equity in earnings of unconsolidated affiliates during the nine months ended September 30, 2008 is primarily attributable to no equity in earnings of Asurion recorded in 2008 versus $21.9 million for the nine months ended September 30, 2007 and from lower earnings from BFDS, Argus and IFDS U.K., partially offset by increased earnings from other real estate joint ventures (due to impairments recorded in 2007) and from increases in earnings from IFDS Canada.

Certain of the Company's joint ventures and, to a lesser extent, the Company, derive investment earnings related to cash balances maintained on behalf of customers. Average daily balances invested by the joint ventures were $1.3 billion during third quarter of 2008 and $1.4 billion during third quarter 2007. Average interest rates earned on the balances declined from 4.81% in third quarter 2007 to 1.93% in third quarter 2008. The net effect of these fluctuations resulted in an approximate $11.3 million decline in interest earnings by the joint ventures, which resulted in a decrease of DST's equity of earnings of unconsolidated affiliates of $3.4 million. Average daily balances invested by the joint ventures were $1.4 billion during the nine months ended September 30, 2008 and $1.5 billion during the same period in 2007. Average interest rates earned on the balances declined from 4.79% during the nine months ended September 30, 2007 to 2.45% for the same period in 2008. The net effect of these fluctuations resulted in an approximate $27.5 million decline in interest earnings by the joint ventures, which resulted in a decrease of DST's equity of earnings of unconsolidated affiliates of approximately $8.4 million during the nine months ended September 30, 2008.

DST's equity in BFDS earnings for the three and nine months ended September 30, 2008 decreased $3.0 million and $8.4 million, respectively, compared to the same periods in 2007. The decline in earnings for the three months ended September 30, 2008 is primarily attributable to lower investment earnings resulting from lower interest rates on cash balances maintained by BFDS on behalf of customers and lower operating revenues from lower client volumes, partially offset by lower compensation and benefit costs due to lower headcount resulting from staff reductions in second quarter 2008. The decline in earnings for the nine months ended September 30, 2008 is primarily attributable to lower investment earnings resulting from lower interest rates and from costs associated with a reduction in staffing levels.

DST's equity in IFDS U.K. earnings for the three and nine months ended September 30, 2008 decreased $0.4 million and $1.9 million, respectively, compared to the same periods in 2007, primarily from higher compensation costs and higher income taxes, partially offset by higher operating revenues from increased volumes at existing clients and from new clients. Accounts serviced by IFDS U.K. were 5.9 million at September 30, 2008, an increase of 0.1 million accounts as compared to June 30, 2008, December 31, 2007 and September 30, 2007.

DST's equity in IFDS Canada earnings for the three and nine months ended September 30, 2008 increased $2.0 million and $1.9 million, respectively, compared to the same periods in 2007. The increase in earnings during the three months ended September 30, 2008 is primarily attributable to higher operating revenues associated with higher shareowner accounts, lower income taxes resulting from the recognition of a deferred tax benefit and lower client conversion costs. The increase in earnings during the nine months ended September 30, 2008 is attributable to the same reasons mentioned above, partially offset by costs associated with new customer conversions during 2008. Accounts serviced by IFDS Canada were 10.7 million at September 30, 2008, unchanged from June 30, 2008, an increase of 3.2 million accounts or 42.7% from December 31, 2007 and an increase of 3.3 million accounts or 44.6% from September 30, 2007, primarily from the January 2008 conversion of a new remote mutual fund client with approximately 3.2 million accounts.

DST's equity in Argus Health Systems earnings for the three and nine months ended September 30, 2008 decreased $1.5 million and $3.0 million, respectively, as compared to the same periods in 2007. The decline in earnings during the three months ended September 30, 2008 is primarily attributable to lower investment earnings from lower interest rates on cash balances maintained by Argus on behalf of customers and from lower processing revenues. The decline in earnings during the nine months ended September 30, 2008 is attributable to the same reasons mentioned above and higher operating costs.

The Other category in the table above includes principally various real estate joint ventures. DST's equity in other unconsolidated affiliates during the three and nine months ended September 30, 2008 increased $6.5 million and $9.9 million, respectively, as compared to the same periods in the prior year. The increase during the three months ended September 30, 2008 is attributable to lower impairments recorded by DST's real estate joint ventures in 2008 (approximately $4.9 million was recorded in third quarter 2007) and from lower depreciation expense in third quarter 2008. The increase during the nine months ended September 30, 2008 is attributable to the reasons mentioned above, a 2008 gain from the early extinguishment of debt at a real estate joint venture and from higher rental revenues and cost efficiencies on various real estate joint ventures.

Income taxes

In general, the Company records income tax expense during interim periods based on its best estimate of the full year's effective tax rate. Certain items, however, are given discrete period treatment and, as a result, the tax effects of such items are reported in full in the relevant interim period. The Company's effective tax rate was 34.7% and 25.5% for the three and nine months ended September 30, 2008, respectively, compared to 37.7% and 37.0% for the three and nine months ended September 30, 2007, respectively. The lower effective tax rate for the three months ended September 30, 2008, compared to the same period in the prior year, is primarily due to the absence of income taxes related to the Asurion sale which resulted in an increase in the effective tax rate in third quarter 2007 and from favorable international income tax items in third quarter 2008. The lower effective tax rate for the nine months ended September 30, 2008, compared to the same period in the prior year, is primarily due to an income tax benefit of approximately $23.9 million resulting from a net reduction in the Company's liabilities for FIN 48 (including approximately $10.4 million of interest and penalties) in first quarter 2008, and from the absence of income taxes related to the Asurion sale. The net decrease in FIN 48 liabilities is principally related to the resolution of an IRS examination matter (associated with a transaction that the Company consummated in the 2000 tax year) that was resolved in DST's favor. Excluding the effects of discrete period items, the Company expects its tax rate to be approximately 36.4% for the year ending December 31, 2008. The full year 2008 effective tax rate can be affected as a result of variances among the estimates and amounts of full year sources of taxable income (e.g., domestic consolidated, joint venture and/or international), the realization of tax credits (e.g., historic rehabilitation, research and experimentation and state incentive), adjustments which may arise from the resolution of tax matters under review and the Company's assessment of its liability for unrecognized tax benefits.

. . .