DST SYSTEMS INC - 10-K Annual Report

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________
to __________

Commission file number 1-14036

DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)

Delaware 43-1581814
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)

333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip code)

Company's telephone number, including area code (816) 435-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of exchange on which registered
Common Stock, $0.01 Per Share Par Value New York Stock Exchange
Chicago Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Aggregate market value of the voting and non-voting stock held by
non-affiliates of the Company as of February 27, 1998:
Common Stock, $.01 par value - $1,519,931,108

Number of shares outstanding of the Company's common stock
as of February 27, 1998:
Common Stock, $.01 par value - 49,009,168

Documents incorporated by reference:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:

Part of Form 10-K into which
Document document incorporated
- --------------------------------------------------------------------------------
Company's Definitive Proxy Statement for the Part III
1998 Annual Meeting of Stockholders, which will be
filed no later than 120 days after December 31, 1997
- --------------------------------------------------------------------------------

DST SYSTEMS, INC.
1997 FORM 10-K ANNUAL REPORT

Table of Contents

Cautionary Statement With Respect To Forward-Looking Comments........2

PART I

Item 1. Business ............................................................2
Item 2. Properties...........................................................12
Item 3. Legal Proceedings....................................................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
Executive Officers of the Company...................................13

PART II

Item 5. Market for the Company's Common Stock and
Related Stockholder Matters.........................................14
Item 6. Selected Consolidated Financial Data.................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........25
Item 8. Financial Statements and Supplementary Data..........................26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................50

PART III

Item 10. Directors and Executive Officers of the Company......................50
Item 11. Executive Compensation...............................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management.......50
Item 13. Certain Relationships and Related Transactions.......................50

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....51
Signatures...........................................................57

DST(TM), OTI(TM), Securities Transfer System(TM), STS(TM), TA2000(R), Portfolio
Accounting System(TM), PAS(TM), Global Portfolio System(R), GPS(R),
OpenPerformanceSystem(TM), OPS(TM), Integrated Pharmacy Network System(TM),
IPNS(R), Automated Work Distributor(TM), AWD(R), TRAC-2000(R), GPS2000(TM),
HiPortfolio/2(TM), Impart/2(TM), Uptix(TM), Paladign(TM), FAST2000(TM), FAN(R),
FanMail(R), Vision Mutual Fund Gateway(R), EnCorr(R), PowerStore(R), Customer
Service Workstation(R), Financial Asset Network(R) referred to in this Report
are included among the Company's trademarks. DirecTV(TM) referred to in this
Report is a trademark of Hughes Electronics, Inc. Fund/Serv(TM) and
Networking(TM) referred to in this Report are trademarks of National Securities
Clearing Corporation. Windows NT(R) and Windows(R) referred to in this Report
are trademarks of Microsoft Corporation. OS/2(R) and AS/400(R) referred to in
this Report are trademarks of IBM Corporation UNIX(R) referred to in this Report
is a trademark of X/Open Company, Ltd.

1

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS

The discussions set forth in this Annual Report on Form 10-K 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 Annual
Report, including assumptions about risks and uncertainties faced by the
Company. Readers can identify these forward-looking statements by their 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 identified in the Company's Current
Report on Form 8-K dated March 22, 1996, which is hereby incorporated by
reference. This report has been filed with the United States Securities and
Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can
be obtained by contacting the SEC's Public Reference Branch. Readers are
strongly encouraged to obtain and consider the factors listed in the March 22,
1996 Current Report and any amendments or modifications thereof when evaluating
any forward-looking statements concerning the Company. The Company will not
update any forward-looking statements in this Annual Report to reflect future
events or developments.

PART I

ITEM 1. BUSINESS

This discussion of the Company's business should be read in conjunction with,
and is qualified by reference to, Management's Discussion and Analysis of the
Company's Financial Condition and Results of Operations ("MD&A") under Item 7
herein. In addition, pursuant to rule 12b-23 under the Securities Exchange Act
of 1934, as amended, the information set forth under the headings "Introduction"
and "Seasonality" in the MD&A and the geographic information included in Item 8,
Note 15 are incorporated herein by reference in partial response to this Item 1.

The Company was originally established in 1969. Through a reorganization in
August 1995, the Company is now a corporation organized in the State of
Delaware. The Company operates in one segment.

RECENT DEVELOPMENTS IN THE COMPANY'S BUSINESS
The recent business developments of the Company and the Company's subsidiaries
follow.

Securities Transfer Developments
On February 10, 1998, Boston EquiServe, LLP ("Boston EquiServe"), a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50% owned
joint venture of the Company and State Street Corporation) and Bank of Boston
Corporation, announced an agreement to merge with First Chicago Trust Company of
New York ("First Chicago") which would create the largest securities transfer
agent in the United States, processing approximately 25 million accounts. The
merger of the two businesses, to be named EquiServe, LLP ("EquiServe"), is
expected to be completed in the second quarter of 1998.

DST is currently developing a new securities transfer system ("Fairway") to be
used by Boston EquiServe to process all of its accounts. In conjunction with the
merger, DST entered into a memorandum of understanding with Boston EquiServe and
First Chicago to complete development of the system for the exclusive use by
EquiServe to process all of its accounts. The Company has also agreed with
EquiServe to provide data processing services for EquiServe to use Fairway. The
terms and conditions of this memorandum of understanding will be set forth in a
definitive agreement, the completion of which is a condition to the closing of
the merger agreement between Boston EquiServe and First Chicago. Upon acceptance
of defined components of Fairway, DST will contribute Fairway and its
non-EquiServe stock transfer processing business (approximately 2 million
accounts) to EquiServe for a direct ownership interest in EquiServe. DST will
also continue to hold an indirect ownership interest in EquiServe through BFDS.

2

DBS Systems Corporation
In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems Corporation ("DBS") for $13.2 million in cash. The $11.6 million
excess of the purchase price over the net assets acquired has been assigned a
useful life of 12 years. On a pro forma basis, the acquisition did not have a
material impact on the Company's historical results of operations or financial
position.

DST Catalyst, Inc.
In August 1997, the Company formed DST Catalyst, Inc. by purchasing an 81%
interest in the international information technology subsidiary of the Chicago
Stock Exchange and the consulting practice of Catalyst Institute. DST Catalyst,
Inc. provides software and services to support automated securities exchange
activities and broker order interfaces primarily outside the United States. On
a pro forma basis, the acquisition did not have a material impact on the
Company's historical results of operations or financial position.

NARRATIVE DESCRIPTION OF BUSINESS

The Company provides sophisticated information processing and computer software
services and products, primarily to mutual funds, insurance companies, banks and
other financial services organizations. Set forth below is information regarding
the Company's sources of revenue.

SOURCES OF REVENUE
YEARS ENDED DECEMBER 31,
1995 1996 1997
---------------- ---------------- ----------------
(dollars in millions)

U. S. Revenues
Mutual Fund and
Investment Management
Data Processing Services $ 221.5 45.8% $ 257.8 44.4% $ 285.4 43.9%
Output Services 60.2 12.4 77.7 13.4 84.5 13.0
------- ------ ------- ------ ------- ------
281.7 58.2 335.5 57.8 369.9 56.9

Other Output Processing 81.4 16.8 90.5 15.6 97.4 15.0
Other 60.1 12.4 70.4 12.1 82.5 12.6
------- ------ ------- ------ ------- ------
Total U.S. revenues 423.2 87.4 496.4 85.5 549.8 84.5
International revenues 60.9 12.6 84.4 14.5 100.9 15.5
------- ------ ------- ------ ------- ------
Total Revenues $ 484.1 100.0% $ 580.8 100.0% $ 650.7 100.0%
======= ====== ======= ====== ======= ======

The Company's revenue growth is attributable to the growth of the mutual fund
industry and the implementation of the Company's business strategy. The primary
components of the Company's ongoing business strategy are: (i) enhancement of
the Company's technology base and development of new services and products to
strengthen its position as the leading provider of information processing
services to the United States mutual fund market; (ii) expansion into markets
where the Company can provide similar information processing and computer
software services and products; and (iii) formation of strategic alliances and
joint ventures with and acquisitions of established companies operating in the
Company's target markets, both in the United States and internationally.

The growing volume and complexity of transactions in the financial services
market and other markets have resulted in increasing demand for more
sophisticated systems to process information in a timely and accurate manner.
Computer technology has provided an effective means of addressing this demand,
but requires significant capital investment and expertise. As a result, many
organizations have relied on outside providers, such as the Company. The Company
expects the information processing needs of these organizations to continue to
grow in volume and complexity and believes that this will present the Company
with significant opportunities for its services and products.

3

DECEMBER 31, DECEMBER 31, DECEMBER 31,
OTHER OPERATING AND FINANCIAL DATA 1995 1996 1997
- ---------------------------------------------------- ------------ ------------ ------------

INVESTMENT MARKET VALUES (IN THOUSANDS) (1)
Computer Sciences Corporation (2) $ 354,466 $ 360,400
State Street Corporation $ 134,375 192,992 347,509
Euronet Services, Inc. (3) $ 1,167 $ 9,136

OTHER OPERATING DATA
Mutual fund shareowner accounts processed (millions)
U.S. 36.5 41.1 45.0
Canada 0.1 0.3 0.9
United Kingdom 0.2 0.4 1.0
TRAC-2000 mutual fund accounts (millions) (4) 1.4 1.3 1.9
TRAC-2000 participants (thousands) 588 560 696
Portfolio Accounting System portfolios 1,526 1,725 1,925
Automated Work Distributor workstations 10,700 19,700 35,100
Output Technologies pages printed (millions) 936 1,230 1,440
Argus pharmaceutical claims processed (millions) 129 129 145

(1) Based upon the closing price on the last trading day of the applicable
period at the exchange where principally
traded.
(2) On August 1, 1996, Continuum merged with Computer Sciences Corporation
("CSC") in a tax-free share exchange and as a result became a wholly owned
subsidiary of CSC. DST, which prior to the merger owned approximately 23%
of Continuum, received in the exchange CSC common stock with a value of
$295 million based upon the closing price of CSC common stock on August 1,
1996.
(3) Euronet Services, Inc. finalized its initial public offering in March 1997
(4) Included in TA2000 mutual fund shareowner accounts processed.

United States Mutual Fund and Investment Management

Most of the Company's mutual fund clients are "open-end" mutual fund companies,
which obtain funds for investment by making a continuous offering of their
shares. Purchases and sales (referred to as "redemptions") of open-end mutual
fund shares are typically effected between shareowners and the fund, rather than
between shareowners. These transactions are based on the net asset value of the
mutual funds on the date of purchase or redemption, which requires that the
assets of the fund and the interests of its shareowners be valued daily.
Accordingly, the timely and accurate accounting and recordkeeping of shareowner
and fund investment activity is a critical function.

In addition, as investors have been attracted to the wide array of investment
products with increasingly specialized features offered by mutual funds, the
mutual fund market has seen a significant increase in the number of mutual fund
shareowner accounts, in the volume of transactions and in the complexity of the
recordkeeping. The Company has made significant investments in computer capacity
and systems to handle the increasing volumes, to maintain its leadership
position and to improve quality and productivity.

The Company typically enters into multi-year written agreements with its
clients. The Company has long-term relationships with its mutual fund clients
and most of the shareowner accounts serviced by the Company are at mutual fund
organizations that have been clients of the Company for more than five years.

Shareowner Accounting and Recordkeeping
The Company's proprietary applications system for mutual fund recordkeeping and
accounting is TA2000, which performs shareowner related functions for mutual
funds, including processing purchases, redemptions, exchanges and transfers of
shares; maintaining shareowner identification and share ownership records;
reconciling cash and share activity; calculating and disbursing commissions to
broker-dealers and other distributors; processing dividends; creating and
tabulating proxies; reporting sales; and providing information for printing of
shareowner transaction data and year-end tax statements. The system processes
load, no-load, multi-class and money funds. TA2000 also performs many
specialized tasks, such as asset allocation, wrap fee calculations and broker
commissions. At December 31, 1997, the Company provided shareowner accounting
processing services for approximately 45 million U.S. mutual fund shareowner
accounts.
4

The Company offers its mutual fund shareowner services on a wide range of
levels. "Full" service processing includes all necessary administrative and
clerical support to process and maintain shareowner records, answer telephone
inquiries from shareowners, broker-dealers and others, and handle the TA2000
functions described above. "Remote" service processing is designed to allow
clients to have their own administrative and clerical staff access TA2000 at the
Winchester Data Center using the Company's telecommunications network.

Selection by a client of the level of service is influenced by a number of
factors, including cost and level of desired control over interaction with fund
shareowners. To address clients' desires to control shareowner interaction, the
Company structured its services to allow the clients' personnel to handle
customer telephone inquiries while the Company's or an affiliate's personnel
retain transaction processing functions. This service was facilitated by the
implementation of Automated Work Distributor (AWD), which images transactions
and makes them, together with the status of the transactions, electronically
available to the personnel handling the telephone calls.

The Company derives revenues from its mutual fund shareowner accounting services
through fees charged for use of the Company's proprietary software systems,
clerical processing services and other related products. These fees are
generally charged on an account and number of funds basis, for system processing
services and on an account, funds and transaction basis for clerical services.
The Company's policy is not to license TA2000.

Retirement Plan Accounting and Recordkeeping
The Company's TRAC-2000 product provides recordkeeping and administration for
defined contribution plans, including 401(k), 403b and 457 plans, Simplified
Employee Pensions and profit sharing plans that invest in mutual funds, company
stock, guaranteed investment contracts and other investment products. TRAC-2000
interfaces directly with TA2000 thereby eliminating the normal reconciliation
problems which occur when different systems are used for the participant
recordkeeping and mutual fund shareowner accounting. TRAC-2000 is offered on a
full-service basis through BFDS and on a remote basis by the Company. The
Company regards the retirement plan market as a significant growth opportunity
for its services and products because: (i) that market is relatively new and
experiencing significant expansion as more employers shift away from defined
benefit programs; (ii) mutual funds, because of their features, are increasingly
popular selections for investment by such plans; and (iii) each retirement plan
participant normally elects to use multiple mutual fund investment accounts.

Revenues from these services are based generally on the number of participants
in the defined contribution plans.

Additional Mutual Fund Services and Products
The Company has developed products to meet the changing service requirements and
distribution channels of the mutual fund market as well as the increasing
regulatory requirements affecting that market.

The Company maintains a high volume interface with Fund/Serv and Networking, two
systems developed by the National Securities Clearing Corporation for
broker-dealer distributed mutual funds. The Company has also developed systems
and communication infrastructure products that facilitate emerging channels of
mutual fund sales and distribution. One of these systems, FanMail, provides
independent financial planners with trade confirmations, account positions and
other data via public network access. A Windows-based enhancement to FanMail
called Vision Mutual Fund Gateway provides real-time inquiry capabilities for
broker-dealers and the financial planning community.

The Company has developed the Financial Access Network (FAN) to support emerging
forms of electronic distribution for mutual funds. FAN enables mutual fund
companies to transmit mutual fund literature via the Internet to shareowners and
potential investors who visit their proprietary web page. In addition, mutual
fund shareowners can review their accounts and direct mutual fund transactions,
such as purchases, redemptions and exchanges from personal computers.

Revenues from these new services and products are based generally on the number
of transactions processed.

5

Boston Financial Data Services, Inc. ("BFDS")
An important distribution channel for the Company's services and products is its
joint ventures. BFDS is a 50% owned joint venture with State Street Corporation
("State Street"), the parent company of State Street Bank & Trust Company. BFDS
combines use of the Company's proprietary applications and output processing
capabilities with the marketing capabilities and custodial services of State
Street to provide full-service shareowner accounting and recordkeeping services
to U.S. mutual funds. BFDS also offers remittance and proxy processing, class
action administration services, teleservicing and full-service support for
defined contribution plans using the Company's TRAC-2000 system. BFDS is the
Company's largest customer, accounting for approximately 11% of the Company's
revenues in 1997.

Automated Workflow Management

The Company's Automated Work Distributor (AWD) system is an image-based,
intelligent workflow management and customer support system. Introduced to
enhance the Company's mutual fund shareowner recordkeeping system, AWD captures
transactions at their source (such as paper, phone calls or faxes), converts
them into electronic images, stores them and electronically moves them to the
appropriate work area and person for processing. AWD integrates high-speed
scanning, character recognition, voice recognition, optical storage and
automated correspondence to automate work processes traditionally performed by
hand. AWD also performs statistical quality control sampling and provides
productivity reporting for each individual using the system.

AWD was designed to interface with a wide range of high volume application
processing systems. AWD utilizes a client server architecture that enables it to
operate on AS/400, Windows NT or UNIX servers utilizing either Windows or OS/2
client desktops. AWD interfaces with existing mainframe or other server lines of
business applications. AWD is primarily installed in investment management
firms, insurance companies and banks located in the United States, Canada,
United Kingdom, Europe, Australia, South Africa and Asia-Pacific. In addition,
Computer Sciences Corporation Financial Services Group ("CSC-FSG") has the
exclusive right to distribute the Company's AWD product to life and property and
casualty insurance companies worldwide and a non-exclusive right in the banking
industry.

The Company's Advanced Technology Group has developed a number of other products
that can be used with AWD. These products include Customer Service Work Station,
which presents all available customer information at the telephone
representative's workstation; EnCorr, which automates the creation and printing
of correspondence; and PowerStore, which enables optical media access for
stand-alone PCs, client/servers and other computer platforms.

The Company derives AWD revenues from license fees based on the number of
workstations accessing the software, fees for customized installation and
programming services and annual maintenance fees.

Output Processing

Output Technologies, Inc., a wholly owned subsidiary of the Company, performs
electronic printing, variable and selective insertion, pre-sorted mailing and
distribution of custom designed shareowner and other customer communications,
including transaction confirmations, dividend checks, account statements and
year-end tax reports. Additionally, Output Technologies offers
telemarketing/fulfillment services, computer output archival services, design
services and offset printing. Output Technologies has multiple locations
throughout the United States and Canada.

Output Technologies' strategy is to use technology to provide high volume
products and services of superior quality. Output Technologies' products enable
the Company to broaden its product offerings to its clients. Although Output
Technologies provides services to mutual fund and securities transfer clients of
the Company, significant revenues are derived from customers who are not
otherwise clients of DST.

Output Technologies holds a 20% interest in PSI Technologies Corporation
("PSI"), the developer of a Computer Output to Laser Disk (COLD) software
product for archiving documents. In conjunction with this investment, Output
Technologies exclusively markets a customized product using PSI's COLD software
to the mutual fund industry.

6

The revenues generated from Output Technologies' activities are generally
dependent on the volume of output transactions processed.

Portfolio Accounting and Investment Management Products

DST offers products that support the portfolio accounting and investment
management functions of the financial services industry. These products include
the Portfolio Accounting System (PAS), Global Portfolio System (GPS),
HiPortfolio/2 and OpenPerformanceSystem (OPS). DST offers a complete solution to
firms managing mutual funds, institutional advisory accounts, or both.

PAS is an integrated multi-currency fund accounting system that maintains
accounting records for mutual funds and unit investment trusts with U.S. and
international assets, computes daily income and expense for each portfolio and
calculates the fund's daily net asset value (NAV) which appears in the financial
media.

GPS is designed for medium and large investment management companies with
advisory accounts who want a customized solution. The system is a rules-based,
multi-currency transaction processing and portfolio accounting system with a
Windows-based graphical user interface (GUI) and a variety of reporting
alternatives. With its client server, relational database architecture (Sybase
or Oracle), GPS has seamless integration with OPS and can interface with a wide
range of third-party systems offering trading, portfolio management and
custodian communication.

HiPortfolio/2 is also designed for medium and large investment management firms
who are seeking a turn key system for investment accounting that can meet their
requirements with a minimum amount of customization. HiPortfolio/2 includes
OpenFrontOffice, a front office GUI based trading system as well as
OpenDataWarehouse, a complete data warehouse and reporting system.

OPS is a multi-currency performance measurement and attribution system that
enables investment companies to calculate and evaluate the performance of their
portfolios against industry standard benchmarks while adhering to the
performance presentation standards of the Association for Investment Management
and Research. OPS uses relational database architecture (Sybase or Oracle), and
offers multiple delivery options. OPS is available as a remote product or for
in-house installation on UNIX or Windows NT server platforms. OPS is offered
both on a fully integrated basis with the PAS, GPS or HiPortfolio/2 products or
on a stand-alone basis.

Securities Transfer Market

The Company's existing system to support the securities transfer market, the
Securities Transfer System (STS), provides a wide array of corporate stock and
bond security holder recordkeeping services, including maintaining ownership
records, recording ownership changes, issuing certificates, issuing and
tabulating proxies, calculating and disbursing dividends and interest,
processing dividend reinvestments, tax reporting and responding to shareowner
inquiries through on-line data access. STS also maintains shareowner activity
for closed-end mutual funds and unit investment trusts.

DST provides remote system access to a wide range of customers, including BFDS.
Significant consolidation of service providers in the 1990s has allowed DST to
pursue end user clients through BFDS.

The Company's largest STS customer is Boston EquiServe, which was created by the
1995 merger of BFDS's securities transfer business with the Bank of Boston
Corporation's securities transfer business. This joint venture created one of
the largest securities transfer agents in the United States, processing
approximately 14 million accounts. Boston EquiServe currently uses STS to
process approximately 4 million accounts with the remaining accounts processed
by the Bank of Boston on a system owned by the Bank of Boston. DST is currently
developing a new securities transfer system ("Fairway") to be used by Boston
EquiServe to process all of its accounts. Initial conversions of Boston
EquiServe's accounts onto Fairway commenced in late 1997 and other accounts will
be converted as additional functionality is delivered.

7

As discussed under Item 1. Business, Recent Developments in the Company's
Business, Boston EquiServe announced an agreement to merge with First Chicago
Trust Company of New York. In conjunction with the merger, DST entered into a
memorandum of understanding to complete development of Fairway for the exclusive
use by EquiServe to process all of its accounts. DST believes that an ownership
in EquiServe provides the most effective participation in the opportunities
presented by the continued consolidation of the stock transfer industry.

Winchester Information Processing Services

Winchester Information Processing Services supports DST's computing needs with
two data centers in Kansas City.

The Winchester Data Center ("Winchester"), provides the Company's primary
central computer operations and data processing facility. Winchester has a total
of 161,000 square feet, of which 74,000 square feet is a raised floor computer
room. Winchester has mainframe computers with a combined processing capacity of
over 3,300 million instructions per second (MIPS) and direct access storage
devices (DASD) with an aggregate storage capacity which exceeds 16 terrabytes.
Winchester also contains over 100 servers supporting NT, UNIX, and AS/400 small
and midrange computing environments. These servers are used to support DST's
products, automated voice response, Internet services and processing for certain
of the Company's affiliates. The facility is virtually disaster-proof and is
able to withstand tornado-force winds of over 260 miles per hour.

The Poindexter Data Center ("Poindexter") provides the Company's AWD Image
processing services. Poindexter has a total of 11,500 square feet, of which
8,500 are currently used for the computer room. The computer room houses IBM
AS/400 computers and optical storage systems, which support over 1,600 AWD Image
users. AWD users include DST's Full-Service area as well as several of the
Company's remote AWD customers. Poindexter also houses over 100 servers
supporting DST's products, Winchester's remote tape storage using IBM's
automated tape libraries and IBM's SP/2 computers, which support Argus Health
Systems, Inc. processing.

Both data centers are staffed 24-hours-a-day, seven-days-a-week and have
self-contained power plants with mechanical and electrical systems that operate
virtually without interruption in the event of commercial power loss. The data
centers utilize fully redundant telecommunications networks serving the
Company's clients. The network, which serves more than 92,000 computer users,
has redundant pathing and software which provide for automatic rerouting of data
transmission in the event of carrier circuit failure.

The Company has an agreement with a commercial disaster recovery provider for
computer processing in the event of a computer failure at Winchester. The
Company's data communications network is linked to the disaster recovery
provider's facility and network to enable client access to the disaster recovery
facility. Poindexter's AS/400 Processors are backed up real time to Winchester.
The Company tests the disaster recovery processes for both data centers on a
regularly scheduled basis.

Satellite TV Subscriber Management

DBS Systems Corporation ("DBS"), a wholly owned subsidiary of the Company, is a
developer and provider of subscriber management software for the DirecTV
satellite system, a product of DirecTV, Inc., a Hughes Electronics company. DBS'
software system manages DirecTV satellite television billing and
subscriber-related activities for DirecTV's U.S. residential satellite
television subscribers. Output Technologies performs the electronic printing and
mailing of subscriber invoices for DBS.

8

International Businesses

Europe and Others
DST International Limited ("DST International")
DST International, a United Kingdom company, provides investment management and
portfolio accounting software and services with over 500 installations in
various countries worldwide, serviced by offices in the United Kingdom,
Australia, New Zealand, Hong Kong, Singapore, Thailand and South Africa. Its
primary applications include HiPortfolio/2, a client server based investment
management system and OpenProducts, a series of GUI front end and back end
products directly integrated with HiPortfolio/2. Among DST International's other
products are Impart/2, Uptix and Paladign. In addition to investment management
and portfolio accounting software and services, DST International distributes
and supports AWD outside North America.

European Financial Data Services Limited ("EFDS")
A United Kingdom joint venture of DST and State Street Corporation, EFDS
provides full and remote service processing for unit trust and related products
serving nearly one million unit holder accounts at December 31, 1997. In 1998,
EFDS expects to implement FAST2000, a new unit trust accounting system developed
by EFDS for the United Kingdom market.

DST Catalyst, Inc. ("DST Catalyst")
DST Catalyst develops, markets, installs, and maintains computer systems to
support securities exchanges and brokerage firms and performs research and
consulting related to the development of financial markets and institutions.
During 1997, DST Catalyst primarily derived its revenues from international
projects in Bangkok, Manila, Johannesburg, Tel Aviv and Athens.

Canada
DST Canada, Inc. ("DST Canada")
DST Canada, formerly Corfax Benefit Systems Limited, provides remote mutual fund
shareowner processing and licenses its mutual fund shareowner system to mutual
fund companies primarily in the Canadian financial services market.

Xebec Imaging Services, Inc. ("Xebec")
Xebec, located principally in Toronto, provides computer output, archival and
print/mail services for various Canadian financial services companies.

CFDS Limited ("CFDS")
A Canadian subsidiary of BFDS, CFDS provides full-service processing to the
Canadian mutual fund industry using DST Canada's mutual fund system and
full-service processing for United States off-shore mutual funds using TA2000.

Prescription Claim Processing

Argus Health Systems, Inc. ("Argus") is a 50% owned joint venture of the Company
and a privately held life insurance holding company. Argus provides managed care
pharmaceutical claim processing services using its proprietary computer
processing system, Integrated Pharmacy Network System ("IPNS"). IPNS is an
interactive, database managed processing system for administration of
prescription drug claims, pharmacy and member reimbursement and drug utilization
review. IPNS, which provides substantial flexibility to accommodate varying
provider requirements, allows point-of-sale monitoring and control of pharmacy
plan benefits with on-line benefit authorization and alerts dispensing
pharmacists to potential medication problems arising from such factors as
duplicate prescriptions, incorrect dosage and drug interactions. Argus is
currently developing a new client/server based claims processing system which
will replace IPNS.

The Company provides data processing, telecommunications and output services to
Argus, and Argus operates IPNS at Winchester and Poindexter. Its primary clients
are providers of pharmacy benefit plans including insurance companies, health
maintenance organizations, preferred provider organizations and other pharmacy
benefit managers.

9

Marketing / Distribution

The Company's mutual fund systems and related services and products are marketed
to mutual fund management firms and to distributors of mutual fund shares, such
as banks, insurance companies, brokerage firms and third-party administration
firms. Increasingly, such firms manage multiple mutual fund products to address
different investment objectives. Generally, mutual fund products are promoted
and distributed in fund groups which provide investors with a variety of mutual
fund investments and the ability to exchange investments from one fund to
another within the group. This often means that a single service agent, such as
the Company, is used for all funds in the group.

The Company's output processing business has sixteen offices across North
America and distributes its products to the mutual fund, banking, brokerage,
insurance, healthcare, telecommunications, transportation and utilities
industries. A team of client administrators manages the needs of clients and a
national sales force supports efforts in the U.S. and Canada.

DST International markets its investment management and portfolio accounting
software and services to medium and large investment management firms through
its offices in the United Kingdom, Australia, New Zealand, Hong Kong, Singapore,
Thailand and South Africa. Generally, DST International's customers are seeking
a turn key system for investment accounting that can meet their requirements
with a minimum amount of customization. Each of DST International's offices has
a dedicated sales force and a team of consultants who can sell, install and
implement these products.

The Company identifies potential users of its products and services and tailors
its marketing programs to focus on their needs. The Company's marketing efforts
also include cross-selling the Company's wide range of services and products to
its existing clients. The Company's sales efforts are closely coordinated with
its joint venture and strategic alliance partners.

Sources of new business for the Company include (i) existing clients of the
Company, particularly with respect to complementary and new services and
products; (ii) companies relying on their own in-house capabilities and not
using outside vendors; (iii) companies using competitors' systems; and (iv) new
entrants into the markets served by the Company. The Company considers its
existing client base to be one of its best sources of new business.

Software Development and Maintenance

The Company continually upgrades and enhances its proprietary products and
services to meet the needs of its clients and the financial services industry.
The Company's Advanced Technology Group develops new products designed to
address emerging information processing needs of both existing and potential
markets. Operating costs include approximately $59.1 million, $82.1 million and
$92.1 million during the years ended December 31, 1995, 1996 and 1997,
respectively, for software development and maintenance and enhancements to its
proprietary systems and software products.

Competition

The Company believes that competition in the markets in which it operates is
based largely on quality of service, features offered including the ability to
handle rapidly changing transaction volumes, commitment to hardware capacity and
software development, and price. The Company believes there is significant
existing competition in its markets.

The Company's shareowner accounting systems compete not only with third-party
providers but also with in-house systems and broker-dealer firms distributing
mutual funds who retain the shareowner account processing. Financial
institutions competing with the Company may have an advantage because they can
take into consideration the value of their clients' funds on deposit in pricing
their services. The Company's ability to compete effectively is dependent on the
availability of capital. Some of the Company's competitors have greater
resources and greater access to capital than the Company and its affiliates.

10

The Company has significant competition with its portfolio accounting and
investment management systems. Principal competitors are third-party software
service providers and those companies which license their products. The key
competitive factors in the investment management systems are the accuracy and
timeliness of processed information provided to customers, features and
adaptability of the software, level and quality of customer support, level of
software development expertise and price. The Company believes that it competes
effectively in the market by its ongoing investment in its products and the
development of new products to meet the needs of the portfolio accountants and
investment managers.

The Company's automated workflow system competes with other data processing and
financial software vendors. Competitive factors include features and
adaptability of the software, level and quality of customer support, level of
software development expertise and price. The Company believes that it can
compete effectively in those markets the Company chooses to pursue.

The key competitive factors in output services of the Company are quality of
services, quality of customer support, ability to handle large volumes at month
and quarter ends and speed of production. The Company's principal competitors in
this business are local companies in the cities where the Company's printing
operations are located and several large national organizations. The Company
believes that it competes effectively with others in the market.

Employees

As of December 31, 1997, the Company and its majority owned subsidiaries
employed approximately 6,000 employees. In addition, 50% owned unconsolidated
affiliates of the Company and its subsidiaries employed approximately 3,200
employees, including approximately 2,400 at BFDS.

11

ITEM 2. PROPERTIES

PROPERTIES

The following table provides certain summary information with respect to the
principal properties owned or leased by the Company. The Company believes the
facilities, office space and other properties owned or leased are adequate for
its current operations.

LOCATION USE (1) OWNED/LEASED (2) SQUARE FEET
- -------- ------- ---------------- -----------

Kansas City, MO Data Center Owned 161,000
Kansas City, MO Office Space/Data Center Owned 477,000
Kansas City, MO (3) Office Space Leased 671,000
Kansas City, MO Production Owned 1,114,000
Kansas City, MO Production Leased 32,000
Boston, MA Office Space Leased 21,000
Charlotte, NC Office Space Leased 31,000
Denver, CO Production Leased 94,000
East Hartford, CT Production Leased 75,000
Miami, FL Production Leased 25,000
Mt. Prospect, IL Production Leased 110,000
New York, NY Production Leased 27,000
Phoenix, AZ Production Leased 20,000
St. Louis, MO Production Leased 39,000
Westwood, MA Production Leased 128,000
Wheeling, IL Production Leased 26,000
Australia Office Space Leased 30,000
Canada Office Space Leased 34,000
Canada Production Leased 88,000
United Kingdom Office Space Leased 49,000

(1) Property specified as being used for production in the above table includes
space used for storage and manufacturing and as warehouse space.

(2) Excluded from the table are a number of surface parking lots in the
downtown Kansas City, Missouri area. The table also excludes nine
properties outside the Kansas City, Missouri metropolitan area having an
aggregate 57,353 square feet of office or production space, which are each
less than 20,000 square feet. In addition to the property listed in the
table and discussed above, the Company, through its subsidiaries and joint
ventures, leases space in the Netherlands, Switzerland, Belgium, South
Africa, Hong Kong, Singapore, Thailand and New Zealand. The property listed
in the table as owned by the Company is subject to mortgage indebtedness in
an aggregate amount of approximately $34 million as of December 31, 1997.

(3) Includes 352,680 square feet master-leased by a wholly owned subsidiary of
the Company, of which 122,318 square feet is subleased to the Company or
its other subsidiaries.

The discussion under "Winchester Information Processing Services" in Item 1
hereto is hereby incorporated by reference in partial response to this Item 2.

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are involved in various legal proceedings
arising in the normal course of their businesses. While the ultimate outcome of
these legal proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with legal counsel, that the final outcome in
such proceedings, in the aggregate, would not have a material adverse effect on
the consolidated financial condition or results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to security holders during the fourth
quarter of calendar year 1997.

12

EXECUTIVE OFFICERS OF THE COMPANY

Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to paragraph
(b) of Item 401 of Regulation S-K, the following list is included as an
unnumbered Item in Part I of this Annual Report on Form 10-K in lieu of being
included in the Company's Definitive Proxy Statement in connection with its
annual meeting of stockholders scheduled for May 12, 1998.

All executive officers are elected by and serve at the discretion of the
Company's Board of Directors. Certain of the executive officers have employment
agreements with the Company. There are no arrangements or understandings between
the executive officers and any other person pursuant to which he or she was or
is to be selected as an officer, except with respect to the executive officers
who have entered into employment agreements, which agreements designate the
position or positions to be held by the executive officer. None of the executive
officers are related to one another by family.

THOMAS A. MCDONNELL, age 52, has served as director of the Company since 1971.
He has served as Chief Executive Officer of the Company since October 1984 and
as President of the Company since January 1973 (except for a 30 month period
from October 1984 to April 1987). He served as Treasurer of the Company from
February 1973 to August 1995 and as Vice Chairman of the Board from June 1984 to
September 1995. He served as Executive Vice President of Kansas City Southern
Industries ("KCSI") from February 1987 until October 1995 and as a director of
KCSI from 1983 until October 1995. He is a director of BHA Group, Inc., Cerner
Corporation, Computer Sciences Corporation, Euronet Services, Inc., and Informix
Software, Inc.

THOMAS A. MCCULLOUGH, age 55, is Executive Vice President of the Company. He has
served as a director of the Company since 1990 and as Executive Vice President
since April 1987. His responsibilities include full-service mutual fund
processing, remote-service mutual fund client servicing, information systems,
portfolio accounting, securities transfer and product sales and marketing.

ROBERT C. CANFIELD, age 59, has served as Senior Vice President, General Counsel
and Secretary since August 1995 and as Senior Vice President-Law of the Company
from March 1992 to August 1995.

MORTON B. COMER, age 65, has served as Senior Vice President of the Company
since April 1991. He was responsible for the Company's full-service mutual fund
processing and corporate support until February 1998 at which time he assumed
duties at the Company's affiliate, Boston EquiServe, LLP.

KENNETH V. HAGER, age 47, has served as Vice President and Chief Financial
Officer of the Company since April 1988 and as Treasurer since August 1995. He
is responsible for the financial, internal audit and data security functions of
the Company. He is a director of Digital Holdings, Inc.

JAMES P. HORAN, age 54, has served as Chief Information Officer of the Company
since July 1988. He is responsible for the Advanced Technology Group, AWD and
the Information Systems Division which includes mutual fund systems development
and support and remote mutual fund services.

JONATHAN J. BOEHM, age 37, joined the Company as a Group Vice President in
November 1997. He is responsible for the Company's full-service mutual fund
processing and corporate support. Prior to joining the Company, he had been
First Vice President with Kemper Service Company from July 1993 to November 1997
and Vice President of Kemper Service Company from October 1990 through July
1993.

JOHN W. MCBRIDE, age 55, has served as Group Vice President of the Company since
1993 and as Vice President of the Company from December 1985 to May 1993. He is
responsible for the operations of the Company's Winchester and Poindexter Data
Centers.

13

ROBERT L. TRITT, age 42, has served as Group Vice President of the Company since
1989. He is responsible for the Company's remote mutual fund processing
operations.

MICHAEL A. WATERFORD, age 55, has served as Group Vice President of the Company
since 1986. He is responsible for certain of the Company's development projects
and Year 2000 readiness.

J. PHILIP KIRK, JR., age 60, has served as Vice President of the Company since
January 1988 and as Chairman of DST Realty, Inc. since July 1996. From March
1987 to July 1996 he served as President of DST Realty, Inc.

CHARLES W. SCHELLHORN, age 49, has served as President of Output Technologies,
Inc. since 1990 and Chairman of the Board of Output Technologies, Inc.
since 1991.

J. MICHAEL WINN, age 50, has served since June 1993 as Managing Director of DST
International Limited, a wholly owned subsidiary of the Company. From February
1992 to June 1993, he was Managing Director of Clarke & Tilley Ltd. when it was
acquired by the Company.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's common stock trades under the symbol "DST" principally on the New
York Stock Exchange ("NYSE"). Additionally, the Company listed its common stock
on the Chicago Stock Exchange on January 21, 1998. As of February 27, 1998,
there were approximately14,000 beneficial owners of the Company's common stock .

No cash dividends have been paid since the initial public offering of the
Company's common stock on October 31, 1995. The Company intends to retain its
earnings for use in its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.

The information set forth in response to Item 201 of Regulation S-K in Part II
Item 8, Financial Statements, and Supplementary Data at Note 16, Quarterly
Financial Data (Unaudited) ("Note 16"), in this Form 10-K is incorporated by
reference in partial response to this Item 5. The prices set forth in Note 16 do
not include commissions and do not necessarily represent actual transactions.
The closing price of the Company's common stock on the NYSE on December 31, 1997
was $42.6875.

The Company did not have any unregistered sales of securities in 1997.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth in the following table have
been derived from the consolidated financial statements for the Company and
notes thereto. The consolidated statement of income data for the years ended
December 31, 1995, 1996 and 1997, and the consolidated balance sheet data as of
December 31, 1996 and 1997, are derived from the consolidated financial
statements of the Company and the related notes thereto, which have been audited
by Price Waterhouse LLP, independent accountants and which are included in Item
8 elsewhere in this Form 10-K. The consolidated income statement data for the
years ended December 31, 1993 and 1994, and the consolidated balance sheet data
as of December 31, 1993, 1994 and 1995, are derived from the consolidated
financial statements and notes thereto of the Company, which have also been
audited by Price Waterhouse LLP, but which are not contained herein. This data
should be read in conjunction with and is qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 in this Form 10-K and the Company's audited
consolidated financial statements, including the notes thereto and the
independent accountants report thereon and the other financial information
included in Item 8 in this Form 10-K.

14

YEARS ENDED DECEMBER 31,
1993 1994 1995 1996 1997
------- ------ ------- --------- ---------
(dollars in millions, except per share amounts)

Revenues $341.2 $401.7 $484.1 $ 580.8 $ 650.7
Income from operations 29.6 35.0 40.8 57.0 92.2
Interest expense (10.9) (14.0) (22.0) (6.9) (7.7)
Gains on sales of equity investments* 44.9 223.4 1.5
Equity in earnings (losses) of unconsolidated affiliates 11.7 22.2 6.5 (4.0) (1.3)
Income before income taxes and minority interests 31.7 46.6 73.8 273.6 88.7
Income from continuing operations* 22.8 33.4 27.7 167.2 59.0
Income per share from continuing operations
Basic** 0.74 1.09 0.82 3.35 1.20
Diluted** 0.74 1.09 0.82 3.32 1.18
Total assets 401.7 510.4 749.5 1,121.6 1,355.4
Long-term obligations $ 146.0 $175.8 $ 52.5 $ 75.9 $ 92.0
Cash dividends per common share** $ - $ -

* In the third quarter of 1996, the Company recognized a one-time gain on the
CSC/Continuum merger. See Note 4 to the consolidated financial statements.
** The Company's capital structure substantially changed as a result of the
initial public offering of the Company's common stock in the fourth quarter
of 1995. Earnings per share data prior to the public offering is reflective
of being a wholly owned subsidiary of Kansas City Southern Industries, Inc.
("KCSI"). The Company paid cash dividends of $6.2 million, $6.2 million and
$150.0 million to KCSI in 1993, 1994 and 1995, respectively, which have been
excluded from this table. The declaration and payment of dividends is at the
discretion of the Board of Directors which, prior to the public offering, was
controlled by KCSI.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The discussions set forth in this Annual Report on Form 10-K 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 Annual
Report, including assumptions about risks and uncertainties faced by the
Company. Readers can identify these forward-looking statements by their 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 identified in the Company's Current
Report on Form 8-K dated March 22, 1996, which is hereby incorporated by
reference. This report has been filed with the United States Securities and
Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can
be obtained by contacting the SEC's Public Reference Branch. Readers are
strongly encouraged to obtain and consider the factors listed in the March 22,
1996 Current Report and any amendments or modifications thereof when evaluating
any forward-looking statements concerning the Company. The Company will not
update any forward-looking statements in this Annual Report to reflect future
events or developments

INTRODUCTION

The Company provides sophisticated information processing and computer software
services and products, primarily to mutual funds, insurance providers, banks and
other financial services organizations.

The Company's revenues are generated from a variety of sources. The Company's
mutual fund, securities transfer and portfolio accounting processing revenues
are primarily dependent upon base or maintenance fees per account or portfolio.
Revenues from output services for printing and mailing of customer documents and
archival are dependent upon the volume of output transactions processed. The
Company provides data processing services to Argus and Computer Sciences
Corporation Financial Services Group ("CSC-FSG") to process their proprietary
applications. Revenues from Argus and CSC-FSG are primarily based upon data
center capacity that is utilized, which is significantly influenced by each
company's volume of transactions. The Company also licenses its work management
software, certain investment management and portfolio accounting software and
securities exchange systems and, outside the United States, certain mutual fund
shareowner accounting systems. Revenues for licensed software products are
primarily comprised of: (i) license fees; (ii) consulting and development
revenues which are based primarily on time and materials billings; and (iii)
annual maintenance fees. The license fee component of these revenues is not
material to the Company as a whole.

15

The Company derives part of its net income from its pro rata share in the
earnings (losses) of certain unconsolidated affiliates, primarily BFDS, Argus,
EFDS and prior to its merger with CSC discussed below, Continuum. BFDS provides
full-service transfer agency functions for mutual funds utilizing DST's
proprietary TA2000 system. BFDS also offers remittance and proxy processing,
class action administration services, teleservicing and full-service support for
defined contribution plans using the Company's TRAC2000 system. Argus provides
managed care pharmacy claim processing services to the health insurance industry
utilizing the Company's data center facilities. EFDS provides full and remote
services in the United Kingdom for unit trusts and related products, serving
nearly one million unitholder accounts in the United Kingdom at December 31,
1997.

Recent Events

Securities Transfer Developments
On February 10, 1998, Boston EquiServe, LLP ("Boston EquiServe"), a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50% owned
joint venture of the Company and State Street Corporation) and Bank of Boston
Corporation, announced an agreement to merge with First Chicago Trust Company of
New York ("First Chicago") which would create the largest securities transfer
agent in the United States, processing approximately 25 million accounts. The
merger of the two businesses, to be named EquiServe, LLP, is expected to be
completed in the second quarter of 1998.

DST is currently developing a new securities transfer system ("Fairway") to be
used by Boston EquiServe to process all of its accounts. In conjunction with the
merger, DST entered into a memorandum of understanding with Boston EquiServe and
First Chicago to complete development of the system for the exclusive use by
EquiServe to process all of its accounts. The Company has also agreed with
EquiServe to provide data processing services for EquiServe to use the new
system. The terms and conditions of this memorandum of understanding will be set
forth in a definitive agreement, the completion of which is a condition to the
closing of the merger agreement between Boston EquiServe and First Chicago. Upon
acceptance of defined components of Fairway, DST will contribute Fairway and its
non-EquiServe stock transfer processing business (approximately 2 million
accounts) to EquiServe for a direct ownership interest in EquiServe. DST will
also continue to hold an indirect ownership interest in EquiServe through BFDS.

DBS Systems Corporation
In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems Corporation ("DBS") for $13.2 million in cash. The $11.6 million
excess of the purchase price over the net assets acquired has been assigned a
useful life of 12 years. The Company had previously acquired 60% of DBS for $3.0
million in May 1993 and an additional 20% of DBS for $6.0 million in December
1995. On a pro forma basis, the acquisition did not have a material impact on
the Company's historical results of operations or financial position.

DST Catalyst, Inc.
In August 1997, the Company formed DST Catalyst, Inc. by purchasing an 81%
interest in the international information technology subsidiary of the Chicago
Stock Exchange and the consulting practice of Catalyst Institute. DST Catalyst,
Inc. provides software and services to support automated securities exchange
activities and broker order interfaces primarily outside the United States. On a
pro forma basis, the acquisition did not have a material impact on the Company's
historical results of operations or financial position.

16

First of Michigan
In July 1997, the Company sold its interest in First of Michigan Capital
Corporation for $9.6 million. The transaction, on an after-tax basis, did not
have a material effect on the Company's financial position or results of
operations.

Continuum
On August 1, 1996, The Continuum Company, Inc. ("Continuum") merged with
Computer Sciences Corporation ("CSC") in a tax-free share exchange and as a
result became a wholly owned subsidiary of CSC. DST, which prior to the merger
owned approximately 23% of Continuum, received in the exchange CSC common stock
with a value of $295 million based upon the closing price of CSC common stock on
August 1, 1996. DST recognized a one-time gain after taxes and other expenses of
$127.6 million. In connection with the merger, the Company elected to make a
one-time $13.7 million ESOP contribution to provide funding for certain
Continuum employee withdrawals from DST's ESOP. DST's shares of CSC represent an
approximate 6% interest in the combined company. As a result of the merger,
Continuum ceased to be an unconsolidated equity affiliate of DST and under
generally accepted accounting principles, no part of Continuum or CSC future
earnings since that time have been recognized by DST. DST recognized equity in
losses of Continuum of $1.1 million and $4.9 million in 1995 and 1996,
respectively. The Company's investment in CSC is accounted for as
available-for-sale securities. Although CSC does not currently pay cash
dividends, DST will recognize dividend income on any cash dividends received
from CSC.

DST currently provides data processing operations for Computer Sciences
Corporation Financial Services Group ("CSC-FSG"), formerly Continuum, through
DST's Winchester Data Center. The merger has not affected the Company's existing
agreements with CSC-FSG for distribution of DST's AWD work flow management
software to the insurance and banking industries.

Although DST has limited registration rights with respect to the sale of the CSC
stock DST owns, any dispositions of such stock may be restricted by securities
laws. DST has no present intention to dispose of such stock.

In March 1996, Continuum, a then 29% owned unconsolidated affiliate of the
Company, announced the completion of its merger with Hogan Systems, Inc. ("the
Hogan Merger"), a provider of software to banks and financial institutions, for
shares of Continuum stock. As a result of this merger, the Company's common
stock interest in Continuum was reduced from approximately 29% to approximately
23%. As a result, the Company recorded in March 1996 its estimated $9.4 million
after-tax share of a non-recurring charge recorded by Continuum in connection
with the Hogan Merger.

In December 1995, Continuum acquired SOCS Groupe SA, a French insurance software
firm. The Company recorded in December 1995 its estimated $7.7 million after-tax
share of a non-recurring charge in connection with this acquisition.

Stock Repurchase Program
In May 1996, the Board of Directors determined it was necessary for the Company
to have common stock available to provide to employees under its stock award
program and to provide to option holders who exercise options. The Board of
Directors authorized the purchase of up to 1.2 million shares during a
twenty-four month period in approximately equal monthly amounts subject to such
variations as management considers appropriate. All such purchases are made in
compliance with applicable SEC regulations. The Company has repurchased 1.0
million shares as of December 31, 1997 for approximately $32.7 million.

Initial Public Offering
In the fourth quarter of 1995, the Company and Kansas City Southern Industries,
Inc. ("KCSI") completed an initial public offering ("the Offerings") of 25.3
million shares of the Company's common stock at an offering price of $21 per
share. Of the 25.3 million shares offered, 19,450,000 were sold by the Company
and 5,850,000 were sold by KCSI. The Company received net proceeds of
approximately $384.8 million which were used primarily to repay all debt to KCSI
and certain bank term notes. In conjunction with the Offerings, KCSI exchanged
4,253,508 shares of its DST common stock for 1,820,000 shares of KCSI stock held
by The Employee Stock Ownership Plan ("ESOP").

Credit Agreements
In December 1996, the Company entered into an amended and restated five year
revolving credit facility of $105 million (increased to $125 million in February
1997) with a syndicate of U.S. and international banks. The facility replaced
the three year $150 million agreement entered into in May 1995. Borrowings under
the facility are available at rates based on the Eurodollar, Prime, Base CD, or
Federal Funds rates. A commitment fee of 0.085% per annum is required on the
total amount of the facility. An additional utilization fee of .050% is required
if the principal amount outstanding is greater than 50% of the total facility.
At December 31, 1997, borrowings of $30 million were outstanding.

17

The Company also maintains a $50 million bank line of credit to finance working
capital requirements which is available through May 1998. Borrowings under the
facility are available at rates tied to the Eurodollar or federal funds rates. A
commitment fee of 0.105% per annum is required on the unused portion of the line
of credit. At December 31, 1997, borrowings of $25.0 million were outstanding.

KCSI Dividend
In May 1995, the Company paid a cash dividend of $150 million to KCSI ("KCSI
Dividend"), which was financed by the Company's revolving credit facilities.

Output Processing Expansion
In January 1996, the Company's subsidiary, Output Technologies, acquired for
$5.5 million, Xebec Imaging Services, Inc. ("Xebec"), a Canadian company engaged
in output processing.

During 1997, Output Technologies increased its ownership in PSI Technologies
Corporation ("PSI") to 20% for $2.0 million. Output Technologies had previously
acquired a 15% interest in PSI for $2.9 million in 1996. PSI has developed a
Computer Output to Laser Disk (COLD) software product for archiving documents.
In conjunction with the investment, Output Technologies retains the exclusive
right to market a customized product using PSI's COLD software to the mutual
fund industry.

Kemper Agreements
In April 1995, the Company purchased substantially all of the assets and
business operations of Supervised Service Company, Inc. ("SSC"), a subsidiary of
Kemper Financial Services, Inc. ("Kemper"). The Company also acquired certain
assets, including computer software from Kemper. The total consideration for
these asset purchases was approximately $39.4 million. In addition, the Company
entered into long-term contracts with Kemper to provide mutual fund shareowner
system services and portfolio accounting system services for the Kemper Mutual
Funds including certain Kemper funds that had been previously processed by
Kemper. As a result of these transactions (the "Kemper Agreements"), the Company
continued to process the Kemper accounts already processed by the Company for
Kemper and began processing the additional accounts previously processed by
Kemper and SSC.

DST International Expansion
In February 1995, DST International purchased HiPortfolio Pty Ltd.
("HiPortfolio"), an Australian provider of portfolio accounting software and
services for $16.0 million. The acquisition was financed through borrowings from
KCSI.

IFTC Transaction
In January 1995, the Company received shares of State Street Corporation common
stock with a then-market value of $98.2 million in a tax-free exchange for the
Company's 50% interest in Investors Fiduciary Trust Company (the "IFTC
Transaction"). The Company recognized a pretax gain of $43.6 million and
recorded deferred income taxes of $35.0 million resulting in a net after-tax
gain of $8.6 million on the transaction. As a result of the IFTC Transaction,
equity in IFTC's earnings is no longer included in the Company's results of
operations and dividends on State Street's common stock are recorded as other
income.

Midland Data Systems, Inc.
In August 1995, the Company sold its joint venture interests in Midland Data
Systems, Inc. ("MDS") and Midland Loan Services L.P. ("MLS") to KCSI. The
transaction did not result in a material net gain or loss to the Company.

18

RESULTS OF OPERATIONS

The following table summarizes the Company's operating results for the years
ended December 31, (dollars in millions, except per share amounts).

OPERATING RESULTS 1995 1996 1997
-------- -------- --------

Revenues $ 484.1 $580.8 $ 650.7
Costs and expenses 373.6 431.6 479.1
Depreciation and amortization 69.7 78.5 79.4
Other expenses 13.7
Income from operations 40.8 57.0 92.2
Interest expense (22.0) (6.9) (7.7)
Other income, net 3.6 4.1 4.0
Gains on sales of equity investments 44.9 223.4 1.5
Equity in earnings (losses) of unconsolidated affiliates 6.5 (4.0) (1.3)
Income before income taxes and minority interests 73.8 273.6 88.7
Income taxes 46.1 105.9 29.2
Minority interests 0.5 0.5
Net income $ 27.7 $167.2 $ 59.0
Basic earnings per share $ 0.82 $ 3.35 $ 1.20
Diluted earnings per share $ 0.82 $ 3.32 $ 1.18

AS A PERCENTAGE OF REVENUES
Revenues 100.0% 100.0% 100.0%
Costs and expenses 77.2 74.3 73.6
Depreciation and amortization 14.4 13.5 12.2
Other expenses 2.4
Income from operations 8.4 9.8 14.2
Interest expense (4.5) (1.2) (1.2)
Other income, net 0.7 0.7 0.6
Gains on sales of equity investments 9.3 38.5 0.2
Equity in earnings (losses) of unconsolidated affiliates 1.3 (0.7) (0.2)
Income before income taxes and minority interests 15.2 47.1 13.6
Income taxes 9.5 18.2 4.4
Minority interests 0.1 0.1
Net income 5.7% 28.8% 9.1%

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

REVENUES. Consolidated revenues for the year ended December 31, 1997 increased
12.0% over the prior year to $650.7 million. U.S. revenues increased 10.7% to
$549.8 million in 1997. U.S. mutual fund processing revenues for 1997 increased
11.5% over the prior year as shareowner accounts serviced increased 9.5% from
41.1 million at December 31, 1996 to 45.0 million at December 31, 1997. Accounts
serviced at December 31, 1997 include approximately 900,000 accounts which were
converted to TA2000 during the fourth quarter. A remote client of the Company
internalized its processing subsequent to year-end causing a loss of
approximately one million accounts. Output Technologies' U.S. revenues in 1997
increased 8.1% over the prior year due to increased business volumes including a
16.8% increase in pages printed. U.S. AWD product revenues for 1997 increased
10.5% over the prior year primarily due to an increase in the number of AWD
workstations licensed. Subscriber management revenues increased over 50% versus
the prior year due to increases in the number of DirecTV satellite subscribers
serviced by DBS Systems Corporation.

Revenues from international operations for the year increased 19.6% to $100.9
million, driven primarily by increases in investment accounting and AWD license
and service revenues. In addition, revenues of $1.3 million were recorded by DST
Catalyst, Inc. which was acquired in August 1997.

COSTS AND EXPENSES. Consolidated costs and expenses for 1997 increased 11.0% to
$479.1 million.

U.S. costs and expenses increased $34.4 million or 9.8%. Personnel costs
increased 12.8% over 1996 as a result of increased staff levels to support
volume growth and increased wages primarily for data processing professionals.
Occupancy costs also increased to support increased staffing and business
volumes. Costs and expenses from international businesses for the year increased
$13.1 million or 16.5% due to the continued development of DST International's
new portfolio accounting system, GPS2000, and additional staffing to support the
increased investment management and AWD business volumes.

The Company has experienced some increases in costs necessary to hire and retain
computer programmers and other systems professionals. While these cost increases
have not materially affected the Company's overall cost structure to date, the
Company believes that the costs associated with computer programmers and other
systems professionals may continue to increase at least through the Year 2000 at
rates above general inflation.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
increased $0.8 million, or 1.0%. The containment of depreciation and
amortization expenses in 1997 is primarily the result of lower capital
expenditures in 1996 and 1997 compared to prior years, decreases in the unit
costs of electronic data processing equipment and the Company's use of
accelerated depreciation methods.

OTHER EXPENSES. In connection with the CSC/Continuum merger in 1996, the Company
accrued a one-time $13.7 million ESOP contribution which provided funding for
certain Continuum employee withdrawals from the ESOP.

INTEREST EXPENSE. Interest expense increased to $7.7 million, or 10.5%, for the
year on higher average debt balances.

OTHER INCOME. Other income consists mainly of dividends received on shares of
State Street stock held by the Company and amortization of deferred
non-operating gains.

GAINS ON SALES OF EQUITY INVESTMENTS. The 1997 amount primarily represents the
Company's gain on sale of its investment in First of Michigan. The 1996 amount
represents the Company's gain on the CSC/Continuum merger.

UNCONSOLIDATED AFFILIATES. Equity in earnings of unconsolidated affiliates
decreased $2.2 million in 1997 (excluding equity in earnings of Continuum from
1996 results) as a result of increased losses at EFDS, partially offset by
improved earnings at BFDS and Argus. Argus has received notice of termination
from a significant client whose contract terminates in the first quarter 1998.
DST recorded losses of $11.8 million from EFDS in 1997 as compared to $6.0
million in 1996. Increased losses at EFDS were the result of continued
development of the new FAST2000 software and a $1.0 million (DST share)
write-off of costs associated with hardware which is expected to be replaced by
FAST2000 and software in 1998. 1997 EFDS costs were also impacted by business
growth as accounts serviced increased to approximately one million, an increase
of 634,000, or 179% over the prior year.

INCOME TAXES. The Company's effective tax rate for 1997 was 32.9%. If all
Continuum related equity in earnings, gains and charges previously discussed
were eliminated, the Company's effective tax rate for 1996 would have been
35.2%. The primary difference between the Company's effective tax rate and the
combined federal and state statutory rates is the result of deferred taxes being
provided for unremitted earnings of U.S. unconsolidated affiliates net of the
dividends received deduction provided under current tax law and increased tax
benefits associated with international operations.

NET INCOME. The Company's 1997 net income was $59.0 million or $1.20 basic
earnings per share and $1.18 diluted earnings per share as compared to $167.2
million or $3.35 basic earnings per share and $3.32 diluted earnings per share
in 1996. If all Continuum related equity in earnings, gains and charges
previously discussed were eliminated, DST's net income for 1996 would have been
$44.0 million, or $0.88 earnings per share on both a basic and diluted basis.

20

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES. Consolidated revenues increased 20% to $580.8 million in 1996
primarily due to increased U.S. mutual fund processing, AWD and subscriber
management revenues, higher U.S. output volumes at Output Technologies and the
acquisition of Xebec in January 1996.

Total U.S. revenues increased 17% to $496.4 million in 1996. U.S. mutual fund
processing revenues for 1996 increased 15% over the prior year as shareowner
accounts serviced increased 13% from 36.5 million at December 31, 1995 to 41.1
million at December 31, 1996. In the last quarter of 1996, two new clients were
added with approximately 700,000 accounts. Output Technologies' U.S. revenues in
1996 increased 19% over the prior year due to increased business volumes
including a 32% increase in pages printed. U.S. AWD product revenues for 1996
increased 42% over the prior year primarily due to an increase in the number of
AWD workstations installed and increased royalties from workstations installed
internationally. Subscriber management revenues increased substantially over the
prior year on increases in the number of DirecTV satellite subscribers serviced
by DBS Systems Corporation. Revenues from international operations for the year
increased 39% to $84.4 million. The increase is primarily attributable to the
addition of $14.4 million in Canadian revenues resulting from the acquisition of
Xebec by Output Technologies in January 1996 and increased license and
development revenues from DST International.

COSTS AND EXPENSES. Consolidated costs and expenses for 1996 increased 16% to
$431.6 million, primarily as a result of higher operating volumes, increased
costs of international operations partially offset by the absence in 1996 of
certain other costs that were incurred in 1995.

U.S. costs and expenses increased $37.5 million or 12% primarily due to
increased business volumes and increased compensation and staffing to support
mutual fund, Output Technologies and AWD products. In addition, the development
and partial implementation of a new manufacturing and administration system at
Output Technologies increased 1996 costs by $4.3 million. Partially offsetting
these increases were certain costs incurred in 1995 which did not recur in 1996,
including (i) an accrual of $7.3 million for a performance-based incentive
compensation program at an Output Technologies subsidiary, which was completed
as of December 31, 1995, and (ii) costs of approximately $3.0 million in
transition activities associated with the Kemper Agreements, which activities
were substantially concluded at December 31, 1995.

Costs and expenses from international businesses for the year increased $20.5
million or 35% due to the continued development of new international investment
management and portfolio accounting applications, increased staffing to support
the investment management and AWD businesses and the addition of $11.9 million
of costs and expenses from the operations of Xebec which was acquired in January
1996.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $8.8
million, or 13%, for the year primarily because of increased operating
capacities at the Winchester Data Center and Output Technologies and increased
amortization expense related to the April 1995 Kemper Agreements.

OTHER EXPENSES. In connection with the CSC/Continuum merger, the Company accrued
a one-time $13.7 million ESOP contribution which provided funding for certain
Continuum employee withdrawals from the ESOP.

INTEREST EXPENSE. Interest expense decreased $15.0 million, or 68%, for the year
primarily from the retirement of debt with proceeds from the Company's initial
public offering in the fourth quarter of 1995. Additionally, the Company
capitalized $1.1 million of interest expense in 1996 related to certain
construction activities as compared to $1.6 million in the prior year.

OTHER INCOME. Other income increased $0.5 million in 1996 due primarily to the
increased dividends received on shares of State Street stock held by the
Company.

21

GAINS ON SALES OF EQUITY INVESTMENTS. The 1996 amount represents the Company's
gain on the CSC/Continuum merger. The 1995 amount includes the sales of the
Company's joint venture interests in IFTC to State Street and MDS and MLS to
KCSI.

UNCONSOLIDATED AFFILIATES. Equity in earnings of unconsolidated affiliates
decreased $10.5 million in 1996 primarily as a result of the discontinuance of
recording equity in Continuum earnings beginning in third quarter 1996 and the
Company's $10.3 million share (before taxes) of a non-recurring charge recorded
by Continuum related to the Hogan Merger in the first quarter of 1996. Argus
recorded lower earnings as a result of increased development costs for a new
claims processing system and lower unit revenues. Increased costs were also
incurred at EFDS due to an acceleration of the delivery timetable for the
FAST2000 unit trust product, which is currently expected to be substantially
completed in 1998. 1995 also included $1.1 million of equity in earnings of
Midland joint ventures which were sold in August 1995.

INCOME TAXES. 1996 income tax expense increased $59.7 million, or 129%,
primarily resulting from the Company's gain on the CSC/Continuum merger. The
Company recorded $82.1 million of income tax expense in 1996 as a result of the
Continuum/CSC merger to recognize the deferred tax liability on the difference
between the value of CSC stock received and the Company's tax basis in Continuum
less previous deferred taxes provided respecting Continuum and less the current
tax benefit of the ESOP contribution which provided funding for certain
Continuum employee withdrawals from the ESOP. The Company recorded $35.0 million
of deferred income tax expense in the first quarter 1995 as a result of the IFTC
transaction to recognize the deferred tax liability on the difference between
the value of State Street stock received and the Company's tax basis in IFTC
less previous deferred taxes provided.

Excluding the effects of the Continuum/CSC merger, ESOP contribution and the
effect of the one-time charge taken by Continuum in connection with the Hogan
Merger, the Company's effective tax rate for 1996 was approximately 33%. The
primary difference between the Company's effective tax rate and the combined
federal and state statutory rates is the result of deferred taxes being provided
for unremitted earnings of U.S. unconsolidated affiliates net of the dividends
received deduction provided under current tax law and certain tax credits
recognized by the Company in conjunction with the rehabilitation of historic
property that will be used as office space.

NET INCOME. The Company's net income was $167.2 million, or $3.35 basic earnings
per share and $3.32 diluted earnings per share, as compared to $27.6 million, or
$0.82 earnings per share on both a basic and diluted basis. If all Continuum
related equity in earnings, gains and charges previously discussed were
eliminated, DST's net income for 1996 would have been $44.0 million, or $0.88
earnings per share on both a basic and diluted basis.

LIQUIDITY AND CAPITAL RESOURCES

The Company uses its cash available from operating activities, borrowings from
banks and financing from third-party vendors and others to fund operating,
investing and financing activities.

The Company's cash flow from operating activities totaled $51.7 million, $112.2
million and $127.4 million for the years ended December 31, 1995, 1996 and 1997,
respectively. 1997 operating cash flows were partially offset by a $13.7 million
ESOP contribution (accrued in 1996) to fund the withdrawal of certain Continuum
employees from the ESOP.

Operating costs include software development and maintenance costs relating to
proprietary systems of approximately $59.1 million, $82.1 million and $92.1
million for the years ended December 31, 1995, 1996 and 1997, respectively.

During the years ended December 31, 1995, 1996 and 1997, the Company expended
approximately $95.6 million, $78.7 million and $73.8 million, respectively, in
capital expenditures for equipment and facilities which includes amounts
directly paid by third-party lenders. Capital expenditures in 1995 include
approximately $12.6 million in facility additions and improvements related to
the expansion of the Winchester Data Center, which was substantially completed
in 1995. The Company incurred an additional $21.0 million in mortgage
indebtedness in 1995 to finance, in part, these capital additions. Future
capital expenditures are expected to be funded primarily by cash flows from
operating activities, secured term notes or bank lines of credit as required.

22

The Company expended approximately $9.2 million, $23.3 million and $37.8 million
primarily for investments and advances to unconsolidated affiliates during 1995,
1996 and 1997, respectively. In addition, the Company expended $53.3 million,
$3.2 million and $14.8 million during 1995, 1996 and 1997, respectively, for
acquisitions previously described, net of cash acquired. The Company received
proceeds of $12.4 million in 1997 from the sale of equity investments including
$9.6 million from the sale of First of Michigan.

The Company paid a cash dividend to KCSI of $150.0 million in 1995. As
previously noted, the Company has not paid any dividends since the initial
public offering and does not expect to pay any cash dividends in the foreseeable
future.

In May 1996, the Board of Directors determined it was necessary for the Company
to have common stock available to provide to employees under its stock award
program and to provide to option holders who exercise options. The Board of
Directors authorized the purchase of up to 1.2 million shares during a
twenty-four month period in approximately equal monthly amounts subject to such
variations as management deems appropriate. The Company has purchased 1.0
million shares through December 31, 1997 for approximately $32.7 million.

The Company maintains a $50 million bank line of credit to finance working
capital requirements of the Company which is available through May 1998. The
Company also maintains a $125 million line of credit with a syndicate of U.S.
and international banks which is available through December 2001. Borrowings
under these facilities totaled $55.0 million at December 31, 1997.

The Company believes that its existing cash balances and other current assets,
together with cash provided by operating activities and, as necessary, the
Company's bank and revolving credit facilities, will be sufficient to meet the
Company's operating and debt service requirements and other current liabilities
for at least the next 12 months. Further, the Company believes that its longer
term liquidity and capital requirements will also be met through cash provided
by operating activities and bank credit facilities, as well as the Company's
$125 million revolving credit facility described above.

OTHER

SEASONALITY. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output volumes for
mutual fund customers are usually highest during the quarter ended March 31 due
primarily to processing year-end transactions and printing and mailing of
year-end statements and tax forms during January. The Company has historically
added operating equipment in the last half of the year in preparation for
processing year-end transactions which has the effect of increasing costs for
the second half of the year. Revenues and operating results from individual
license sales depend heavily on the timing and size of the contract.

UNREALIZED GAIN ON SECURITIES. The Company holds, among others, approximately
4.3 million shares of Computer Sciences Corporation common stock and
approximately 6.0 million shares of State Street Corporation common stock as
investments. At December 31, 1996, the market value of the Company's investments
in available-for-sale securities reflected an aggregate unrealized gain of
$155.3 million. At December 31, 1997, these investments had an aggregate
unrealized gain of $323.2 million. The $167.9 million unrealized gain in 1997 on
the Company's investments in these securities, net of deferred taxes of $65.5
million, has been recorded in stockholders' equity in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."

FOREIGN CURRENCY TRANSLATION. The Company's international subsidiaries use the
local currency as the functional currency. The Company translates all assets and
liabilities at year end exchange rates and income and expense accounts at
average rates during the year. Foreign currency fluctuations have historically
had an immaterial effect on the Company and the comparability of financial
information. While it is generally not the Company's practice to enter into
derivative contracts, from time to time the Company and its subsidiaries do
utilize forward foreign currency exchange contracts to minimize the impact of
currency movements.

23

COMPREHENSIVE INCOME. The Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" in June 1997. The new statement
requires that all changes in equity during a period except those resulting from
investments by and distributions to owners be reported as "comprehensive income"
in the financial statements beginning in 1998. Upon implementation, the Company
will include the net unrealized gain or loss on its available-for-sale
securities and foreign currency translation effects in the computation of
comprehensive income.

YEAR 2000. Many computer programs use only two digits to identify a year in a
date field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000.These Year 2000 related
issues are of particular importance to the Company. The Company depends upon its
computer and other systems and the computer and other systems of third-parties
to conduct and manage the Company's business. Additionally, the Company's
products and services are dependent upon using accurate dates in order to
function properly. These Year 2000-related issues may also adversely affect the
operations and financial performance of one or more of the Company's customers
or suppliers. As a result, the failure of the Company's computer and other
systems, products or services, the computer systems and other systems upon which
the Company depends, or of the Company's customers or suppliers to be Year 2000
ready could have a material adverse effect on the Company's results of
operations, financial position and cash flows.

The Company recognizes the significance of the Year 2000 problem and is
executing a program to achieve Year 2000 readiness. The Company's Year 2000
program is supported by a corporate-wide structure of project teams, a
governance structure and a central Project Office. The Project Office was
established to lead the readiness efforts for the Company and manage the overall
progress of the project. The Company has redirected some of its development
employees to address the Year 2000 issues.

The program's purpose is to identify, evaluate and resolve potential Year 2000
related issues for the Company's products, services, internal systems, hardware,
communications and other systems. The program includes the following key steps:
1. Identification of systems and applications that must be modified
2. Evaluation of alternatives (modification, replacement or discontinuance)
3. Establishment of plans which include timely milestones and appropriate
testing to ensure that the systems and applications are ready for the Year
2000.

The program also includes:
1. Projects to ensure that external vendors and services are also ready
2. The development of alternatives where necessary
3. Interoperability testing with clients and key organizations in the
financial services industry.

The Company's goal is to be ready, internally, for the Year 2000 by December 31,
1998. This goal allows for one full year of testing with clients and the
industry prior to the Year 2000. The Company's Year 2000 program is under way,
and the Company expects to achieve its goal.

The expenses associated with the program will be expensed as incurred. The
Company does not believe the amount to be spent on Year 2000 issues will be
material to the Company's results of operations, liquidity or capital resources.

However, although the Company is not aware of any material operational or
financial Year 2000 related issues, the Company cannot make any assurances that
its computer systems, products, services or other systems or the computers and
other systems of others upon which the Company depends will be Year 2000 ready
on schedule, that the costs of its Year 2000 program will not become material or
that the Company's alternative plans will be adequate. The Company is currently
unable to anticipate accurately the magnitude, if any, of the Year 2000 related
issues arising from the Company's customers and suppliers. If any such risks
(either with respect to the Company or its customers or suppliers) materialize,
the Company could experience material adverse consequences to its business which
could have material adverse effects on the Company's results of operations,
financial position and cash flows.

24

SEGMENT INFORMATION. The Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in June 1997. This statement requires that publicly traded companies report
certain information about their operating segments, products and services,
geographic areas in which they operate, and major customers beginning in 1998.
The Company is currently evaluating the effect that implementation of the new
standard will have on the information disclosed in its financial statements.

EARNINGS PER SHARE. The Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("EPS") ("SFAS 128") in February 1997. SFAS 128
replaces the presentation of "Primary EPS" and "Fully Diluted EPS" with "Basic
EPS" and "Diluted EPS", respectively. The Company's financial statements have
been adjusted for the required new disclosures.

SOFTWARE REVENUE RECOGNITION. The Accounting Standards Executive Committee
("ACSEC") of the American Institute of Certified Public Accountants recently
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
providing guidance on applying Generally Accepted Accounting Principles in
recognizing revenue from software transactions. The Company believes
implementation of the new statement will not have a material effect on the
consolidated results of operations of the Company.

INTERNAL USE SOFTWARE. The ACSEC recently issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The new
statement is effective for fiscal periods beginning after December 15, 1998 and
concludes that costs for the development of internal use software are an asset.
Accordingly, certain primary types of development activities should be
capitalized, including coding and software configuration costs, costs of testing
and installing the software, and when clearly distinguishable from maintenance,
the costs of upgrades and enhancements. The Company currently expenses costs of
internally developed proprietary software as it is incurred. The Company is
currently evaluating the effect that implementation of the new standard will
have on its software development accounting policies and is unable to determine
the effects on the Company's results of operations at this time.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

To the Stockholders of DST Systems, Inc.

The accompanying consolidated financial statements of DST Systems, Inc. and its
subsidiaries were prepared by management in conformity with generally accepted
accounting principles. In preparing the financial statements, management has
made judgments and estimates based on currently available information. Other
financial information included in this annual report is consistent with that in
the consolidated financial statements.

The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that its financial
records are reliable. Management monitors the system for compliance, and the
Company's internal auditors measure its effectiveness and recommend possible
improvements thereto.

Independent accountants provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
regularly evaluate the system of internal accounting controls and perform such
tests and other procedures as they deem necessary to express an opinion on the
fairness of the consolidated financial statements.

The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting controls through its Audit Committee which is
composed solely of directors who are not officers or employees of the Company.
This committee meets regularly with the independent accountants, management and
internal auditors to discuss the scope and results of their work and their
comments on the adequacy of internal accounting controls and the quality of
external financial reporting.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
of DST Systems, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
DST Systems, Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP
Kansas City, Missouri
February 26, 1998

26

DST Systems, Inc.
Consolidated Balance Sheet
(dollars in thousands, except per share amounts)
DECEMBER 31,
1996 1997
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 8,279 $ 15,833
Accounts receivable 138,622 158,069
Accounts receivable-related parties 15,472 12,630
Inventories 10,690 11,369
Other assets 28,232 33,423
----------- -----------
201,295 231,324

Investments 620,437 820,577
Properties 243,989 242,153
Intangibles and other assets 55,867 61,350
----------- -----------
Total assets $1,121,588 $ 1,355,404
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 15,159 $ 13,898
Accounts payable 44,944 49,763
Accrued compensation and benefits 33,276 28,319
Deferred revenues and gains 14,553 22,679
Other liabilities 17,772 26,334
----------- -----------
125,704 140,993

Long-term debt 75,895 92,005
Deferred income taxes 180,853 241,782
Other liabilities 42,939 43,534
----------- -----------
425,391 518,314
----------- -----------
Commitments and contingencies (Note 14)
----------- -----------

Minority interests 972 1,380
----------- -----------

Stockholders' equity
Preferred stock, $0.01 par, 10,000,000 shares
authorized and unissued
Common stock, $0.01 par, 125,000,000 shares
authorized, 50,000,000 shares issued 500 500
Additional paid-in capital 408,807 408,610
Retained earnings 203,638 261,010
Treasury stock, at cost (12,345) (31,404)
Net unrealized gain on investments 94,625 196,994
----------- -----------
Total stockholders' equity 695,225 835,710
----------- -----------
Total liabilities and stockholders' equity $ 1,121,588 $ 1,355,404
=========== ===========

The accompanying notes are an integral part of these financial statements.

27

DST Systems, Inc.
Consolidated Statement of Income
(in thousands, except per share amounts)

FOR THE YEARS ENDED DECEMBER 31,
1995 1996 1997
--------- ---------- ----------

Revenues $ 380,187 $ 470,705 $ 538,074
Revenues - related parties 103,944 110,103 112,604
--------- ---------- ----------

Total revenues 484,131 580,808 650,678

Costs and expenses 373,561 431,563 479,103
Depreciation and amortization 69,749 78,572 79,335
Other expense 13,700
--------- ---------- ----------

Income from operations 40,821 56,973 92,240

Interest expense (21,964) (6,940) (7,670)
Other income, net 3,627 4,176 4,020
Gains on sales of equity investments 44,895 223,438 1,464
Equity in earnings (losses) of unconsolidated
affiliates, net of income taxes 6,452 (4,028) (1,345)
--------- ---------- ----------

Income before income taxes and minority interests 73,831 273,619 88,709

Income taxes 46,174 105,920 29,178
--------- ---------- ----------

Income before minority interests 27,657 167,699 59,531

Minority interests 17 497 534
--------- ---------- ----------

Net income $ 27,640 $ 167,202 $ 58,997
========= ========== ==========

Average common shares outstanding 33,791 49,871 49,308

Basic earnings per share $ 0.82 $ 3.35 $ 1.20
Diluted earnings per share $ 0.82 $ 3.32 $ 1.18

The accompanying notes are an integral part of these financial statements.

28

DST Systems, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)

$.01 PAR $.01 PAR ADDITIONAL NET UNREALIZED TOTAL
PREFERRED COMMON PAID-IN RETAINED TREASURY GAIN (LOSS) ON STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK INVESTMENTS EQUITY
--------- -------- ----------- --------- ---------- ----------- -----------

BALANCE, DECEMBER 31, 1994 $ $ 306 $ 24,214 $157,676 $ $ (1,635) $ 180,561
Net income 27,640 27,640
Dividend to KCSI (150,000) (150,000)
Issuance of 19,450,000 shares of
common stock, net of issuance costs 194 384,593 384,787
Unrealized gain on investments, net 23,698 23,698
Other (328) (328)
--------- -------- ----------- --------- ---------- ----------- -----------

BALANCE, DECEMBER 31, 1995 500 408,807 34,988 22,063 466,358
Net income 167,202 167,202
Purchase of 400,000 shares of
common stock (12,470) (12,470)
Unrealized gain on investments, net 72,562 72,562
Other 1,448 125 1,573
--------- -------- ----------- --------- ---------- ----------- -----------

BALANCE, DECEMBER 31, 1996 500 408,807 203,638 (12,345) 94,625 695,225

Net income 58,997 58,997
Purchase of 600,000 shares of
common stock (20,256) (20,256)
Unrealized gain on investments, net 102,369 102,369
Other (197) (1,625) 1,197 (625)
--------- -------- ----------- --------- ---------- ----------- -----------

BALANCE, DECEMBER 31, 1997 $ $ 500 $ 408,610 $261,010 $ (31,404) $ 196,994 $ 835,710
========= ======== =========== ========= ========== =========== ===========

The accompanying notes are an integral part of these financial statements.

29

DST Systems, Inc.
Consolidated Statement of Cash Flows
(dollars in thousands)

FOR THE YEARS ENDED DECEMBER 31,
1995 1996 1997
---------- ---------- ---------
CASH FLOWS - OPERATING ACTIVITIES:

Net income $ 27,640 $ 167,202 $ 58,997
---------- ---------- ---------

Depreciation and amortization 69,749 78,572 79,335
Equity in (earnings) losses of unconsolidated affiliates (6,452) 4,028 1,345
Cash dividends received from unconsolidated affiliates 853 8,000
Gains on sales of equity investments (44,895) (223,438) (1,464)
Deferred taxes on gains on sales of equity investments 35,028 87,254
Changes in accounts receivable (29,415) (16,995) (16,305)
Changes in inventories and other current assets (6,103) 862 (5,782)
Changes in accounts payable and accrued liabilities (2,383) 6,376 11,505
Other, net 7,646 342 (240)
---------- ---------- ---------
Total adjustments to net income 24,028 (54,999) 68,394
---------- ---------- ---------
Net 51,668 112,203 127,391
---------- ---------- ---------

CASH FLOWS - INVESTING ACTIVITIES:
Investments and advances to unconsolidated affiliates (9,150) (23,336) (37,759)
Capital expenditures (65,449) (73,935) (67,063)
Payment for purchases of subsidiaries, net of cash acquired (53,303) (3,183) (14,788)
Other, net 6,470 3,930 14,838
---------- ---------- ---------
Net (121,432) (96,524) (104,772)
---------- ---------- ---------

CASH FLOWS - FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 384,787
Proceeds from issuance of long-term debt-KCSI 24,000
Proceeds from issuance of long-term debt-other 171,000
Principal payments on long-term debt (342,083) (20,430) (14,261)
Net increase (decrease) in short-term notes payable (1,334) (11,999) 2,574
Net increase in revolving credit facilities 33,554 21,496
Dividends to KCSI (150,000)
Common stock repurchased (12,470) (20,256)
Other, net (7,520) (9,112) (4,618)
---------- ---------- ---------
Net 78,850 (20,457) (15,065)
---------- ---------- ---------

Net increase (decrease) in cash 9,086 (4,778) 7,554
Cash at beginning of year 3,971 13,057 8,279
---------- ---------- ---------
Cash at end of year $ 13,057 $ 8,279 $ 15,833
========== ========== =========

The accompanying notes are an integral part of these financial statements.

30

DST Systems, Inc.
Notes to Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS

DST Systems, Inc. (the "Company" or "DST") provides sophisticated information
processing and computer software services and products, primarily to mutual
funds, insurance providers, banks and other financial organizations. Its
software systems include shareowner accounting and recordkeeping systems offered
to the U.S. mutual fund industry; shareowner accounting and recordkeeping system
offered to non U.S. mutual funds and unit trusts; a securities transfer system
offered primarily to corporate trustees and securities transfer agents; a
variety of portfolio accounting and investment management systems offered to
U.S. and international fund accountants and investment management firms; an
image-based work management system offered primarily to mutual funds, insurance
companies and other financial services businesses; a subscriber management
system for the satellite television industry; and securities exchange and broker
order systems offered to brokers and companies involved in the exchange of
equity, bond and derivative securities primarily outside the U.S. Its output
products include customized printing and mailing, computer output archival
services, design services and offset printing.

The Company licenses its work management software and certain investment
management software, non-U.S. mutual fund shareowner accounting software and
securities exchange and broker order systems. The Company distributes its
services and products on a direct basis and through various subsidiaries or
joint venture affiliates in the U.S., Canada, United Kingdom, Europe, Australia,
South Africa and Asia-Pacific.

The Company and Kansas City Southern Industries, Inc. ("KCSI") completed an
initial public offering ("the Offerings") in the fourth quarter of 1995 of 25.3
million shares of the Company's common stock. KCSI owned approximately 41% of
the Company's outstanding common stock at December 31, 1997.

2. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include all
majority-owned subsidiaries of DST. All significant intercompany balances and
transactions have been eliminated.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION. Computer processing and output revenues are recognized upon
completion of the service provided. Software license fees, maintenance fees and
other ancillary fees are recognized as services are provided or delivered and
all customer obligations have been met. The Company generally does not have
customer obligations that extend past one year.

COSTS AND EXPENSES. Costs and expenses include all costs, excluding depreciation
and amortization, incurred by the Company to produce revenues. The Company
believes that the nature of its business as well as its organizational
structure, in which virtually all officers and associates have operational
responsibilities, does not allow for a meaningful segregation of selling,
general and administrative costs. These costs, which the Company believes to be
immaterial, are also included in costs and expenses. Substantially all
depreciation and amortization are directly associated with the production of
revenues.

SOFTWARE DEVELOPMENT AND MAINTENANCE. Purchased software is recorded at cost and
is amortized over the estimated economic lives of three to ten years. Costs of
internally developed proprietary software, used for producing processing
revenues, are expensed as incurred. Costs of internally developed software, that
will be exclusively sold or licensed to third parties, have not been material
and have been expensed as incurred. A portion of the Company's development costs
is funded by customers through various programs, including product support and
shared-cost arrangements.

31

Operating costs include software development and maintenance costs relating to
internal proprietary systems of approximately $59.1 million, $82.1 million, and
$92.1 million for the years ended December 31, 1995, 1996 and 1997,
respectively.

CASH EQUIVALENTS. Short-term liquid investments with a maturity of three months
or less are considered cash equivalents. Due to the short-term nature of these
investments, carrying value approximates market value.

INVENTORIES. Inventories are valued at the lower of cost or market. Cost is
determined on the specific identification or first-in, first-out basis.
Inventories are comprised of paper and envelope stocks.

INVESTMENTS IN SECURITIES. The equity method of accounting is used for all
entities in which the Company or its subsidiaries have at least 20% but not more
than 50% voting control interest or significant influence; the cost method of
accounting is used for investments of less than 20% voting control interest.
Investments classified as available-for-sale securities are reported at fair
value, with unrealized gains and losses excluded from earnings and recorded net
of deferred taxes directly to stockholders' equity as net unrealized holding
gains or losses.

PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost with major
additions and improvements capitalized. Cost includes the net amount of interest
cost associated with significant capital additions. Depreciation of buildings is
recorded using the straight-line method over 15 to 30 years. Equipment and
furniture are depreciated using straight-line and accelerated methods over the
estimated useful lives, principally 5 to 7 years. Leasehold improvements are
depreciated using the straight-line method over the term of the leases. The
Company reviews, on a quarterly basis, its property and equipment for possible
impairment. In management's opinion, no such impairment exists at December 31,
1997.

INTANGIBLES. Goodwill resulting from the cost of investments in excess of the
underlying fair value of identifiable net assets acquired is amortized over
periods ranging from 7 to 20 years. On a quarterly basis, the Company reviews
the recoverability of goodwill. The measurement of possible impairment is based
primarily on the ability to recover the balance of the goodwill from expected
future operating cash flows on an undiscounted basis. These analyses are
performed on an individual investment basis with the primary focus of the
analyses being the expected future cash flows from significant products of each
of the investments. In management's opinion, no such impairment exists at
December 31, 1997.

INCOME TAXES. Deferred income tax effects of transactions reported in different
periods for financial reporting and income tax return purposes are recorded by
the liability method. This method gives consideration to the future tax
consequences of deferred income or expense items and immediately recognizes
changes in income tax laws upon enactment. The income statement effect is
generally derived from changes in deferred income taxes on the balance sheet.

Prior to 1993, the Company generally did not provide deferred income taxes for
unremitted earnings of certain investees accounted for under the equity method
in so much as those earnings have been and will continue to be reinvested.
Beginning in 1993, pursuant to the provisions of Statement of Financial
Accounting Standards No. 109 ("SFAS 109") (Note 10), the Company began providing
deferred taxes for unremitted earnings of U.S. unconsolidated affiliates net of
the 80% dividends received deduction provided for under current tax law. Through
December 31, 1997, the cumulative amount of such unremitted earnings was
$36,981,000. These amounts would become taxable to the Company if distributed by
the affiliates as dividends, in which case the Company would be entitled to the
dividends received deduction for 80% of the dividends; alternatively, these
earnings could be realized by the sale of the affiliates' stock, which would
give rise to tax at federal capital gains rates and state ordinary income tax
rates, to the extent the stock sale proceeds exceeded the Company's tax basis.
Deferred taxes provided on unremitted earnings through December 31, 1996 and
1997 were $1,785,000 and $2,343,000, respectively. Determination of the amount
of the unrecognized deferred tax liability related to investments in
international subsidiaries, including but not limited to unremitted earnings and
cumulative translation adjustments, is not practicable.

32

FOREIGN CURRENCY TRANSLATION. The Company's international subsidiaries use the
local currency as the functional currency. The Company translates all assets and
liabilities at year end exchange rates and income and expense accounts at
average rates during the year. Translation adjustments are recorded in
stockholders' equity and were not material at December 31, 1996 and 1997. While
it is generally not the Company's practice to enter into derivative contracts,
from time to time the Company and its subsidiaries do utilize forward foreign
currency exchange contracts to minimize the impact of currency movements.

EARNINGS PER SHARE. The Company adopted Statement of Financial Accounting
Standards No. 128 in 1997 and accordingly restated prior year amounts. Basic
earnings per share is determined by dividing net income by the weighted average
number of common shares outstanding during the year. The dilutive effect of all
potential common shares outstanding during the year has been included in diluted
earnings per share. The computation of basic and diluted earnings per share for
the years ended December 31 is as follows (in thousands, except per share
amounts):

1995 1996 1997
-------------- -------------- --------------

Net income $ 27,640 $ 167,202 $ 58,997
============== ============== ==============

Average common shares outstanding 33,791 49,871 49,308
Incremental shares from assumed conversions of stock options 57 464 530
-------------- -------------- --------------

Dilutive potential common shares 33,848 50,335 49,838
============== ============== ==============

Basic earnings per share $ 0.82 $ 3.35 $ 1.20
Diluted earnings per share $ 0.82 $ 3.32 $ 1.18

Options to purchase 61,500 shares and 204,000 share of common stock,
respectively, at weighted average exercise prices of $34.75 and $36.33,
respectively, were outstanding during 1996 and 1997, but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares and
therefore, the effect would be antidilutive.

STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25 and has presented the
required pro forma disclosures in Note 11.

NEW ACCOUNTING PRONOUNCEMENTS

COMPREHENSIVE INCOME. The Financial Accounting Standards Board issued
Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income" in June
1997. The new statement requires that all changes in equity during a
period except those resulting from investments by and distributions to
owners be reported as "comprehensive income" in the financial statements
beginning in 1998.

The Company holds, among others, approximately 4.3 million shares of
Computer Sciences Corporation common stock and approximately 6.0 million
shares of State Street Corporation common stock as investments. At
December 31, 1996, the market value of the Company's investments in
available-for-sale securities reflected an aggregate unrealized gain of
$155.3 million. At December 31, 1997, these investments had an aggregate
unrealized gain of $323.2 million. The $167.9 million unrealized gain in
1997 on the Company's investments in these securities, net of deferred
taxes of $65.5 million, has been recorded in stockholders' equity in
accordance with SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities." Upon implementation of SFAS 130, DST will include the
net unrealized gain or loss on its available-for-sale securities in the
computation of comprehensive income.

33

SEGMENT INFORMATION. The Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997. This statement requires that publicly
traded companies report certain information about their operating
segments, products and services, geographic areas in which they operate,
and major customers beginning in 1998. The Company is currently
evaluating the effect that implementation of the new standard will have
on the information disclosed in its financial statements.

SOFTWARE REVENUE RECOGNITION. The Accounting Standards Executive
Committee ("ACSEC") of the American Institute of Certified Public
Accountants recently issued Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" providing guidance on applying GAAP in recognizing
revenue from software transactions. The Company believes the
implementation of the new statement will not have a material effect on
the consolidated results of operations of the Company.

INTERNAL USE SOFTWARE. The ACSEC recently issued SOP 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." The new statement is effective for fiscal periods beginning after
December 15, 1998 and concludes that costs for the development of
internal use software are an asset. Accordingly, certain primary types of
development activities should be capitalized, including coding and
software configuration costs, costs of testing and installing the
software, and when clearly distinguishable from maintenance, the costs of
upgrades and enhancements. The Company currently expenses costs of
internally developed proprietary software as it is incurred. The Company
is currently evaluating the effect that implementation of the new
standard will have on its software development accounting policies and is
unable to determine the effects on the Company's results of operations at
this time.

3. MAJOR CUSTOMER

Boston Financial Data Services, Inc. (Note 7) is the Company's largest customer
representing 12%, 12% and 11% of consolidated revenues for the years ended
December 31, 1995, 1996 and 1997, respectively.

4. ACQUISITIONS AND DISPOSITIONS

CONTINUUM
On August 1, 1996, The Continuum Company, Inc. ("Continuum") merged with
Computer Sciences Corporation ("CSC") in a tax-free share exchange accounted for
as a pooling-of-interests. DST, which prior to the merger owned approximately
23% of Continuum, received in the exchange shares of CSC common stock with a
value of $295 million based upon the closing price of CSC common stock on August
1, 1996. DST recognized a one-time gain after taxes and other expenses of $127.6
million. In connection with the merger, the Company elected to make a one-time
$13.7 million ESOP contribution to provide funding for certain Continuum
employee withdrawals from DST's ESOP. DST's shares of CSC represent an
approximate 6% interest in the combined company. As a result of the merger,
Continuum ceased to be an unconsolidated equity affiliate of DST and under
generally accepted accounting principles, no part of Continuum or CSC earnings
since that time have been recognized by DST. DST recognized equity in losses of
Continuum of $1.1 million and $4.9 million in 1995 and 1996, respectively. The
Company's investment in CSC is accounted for as available-for-sale securities.
Although CSC does not currently pay cash dividends, DST will recognize dividend
income on any cash dividends received from CSC.

In March 1996, Continuum, a then 29% owned unconsolidated affiliate of the
Company, announced the completion of its merger with Hogan Systems, Inc., (the
"Hogan Merger") a provider of software to banks and financial institutions, for
shares of Continuum stock. As a result of this transaction, the Company's common
stock interest in Continuum was reduced from approximately 29% to approximately
23%. The Company recorded in March 1996 its estimated $9.4 million after-tax
share of a non-recurring charge recorded by Continuum in connection with the
Hogan Merger.

In December 1995, Continuum acquired SOCS Groupe SA, a French insurance software
firm. The Company recorded in December 1995 its estimated $7.7 million after-tax
share of a non-recurring charge in connection with this acquisition.

34

OTHER ACQUISITIONS AND DISPOSITIONS
Boston EquiServe, LLP ("Boston EquiServe") is a 50% owned joint venture between
Boston Financial Data Services, Inc. ("BFDS") (a 50% owned joint venture of the
Company and State Street Corporation) and Bank of Boston Corporation. In
February 1998, Boston EquiServe and First Chicago Trust Company of New York
announced an agreement to merge operations which would create the largest
securities transfer agent in the United States, which is to be called EquiServe.
In conjunction with the merger, DST entered into a memorandum of understanding
to complete development of a new securities transfer system ("Fairway") for the
exclusive use of EquiServe to process all of its accounts. The Company has also
agreed to provide data processing services for EquiServe. Upon acceptance of
defined components of Fairway, DST will contribute the software and its
non-EquiServe stock transfer processing business to EquiServe for a direct
ownership interest in EquiServe.

In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems Corporation. for $13.2 million in cash. The excess of the purchase
price over the net assets acquired of $11.6 million has been assigned a useful
life of 12 years. The Company had previously acquired 60% of DBS for $3.0
million in May 1993 and an additional 20% of DBS for $6.0 million in December
1995. On a pro forma basis, the acquisition did not have a material impact on
the Company's historical results of operations or financial position.

In August 1997, the Company formed DST Catalyst, Inc. by purchasing an 81%
interest in the international information technology subsidiary of the Chicago
Stock Exchange and the consulting practice of Catalyst Institute. DST Catalyst
provides software and services to support automated securities exchange
activities and broker order interfaces primarily outside the U. S. On a pro
forma basis, the acquisition did not have a material impact on the Company's
historical results of operations or financial position.

In July 1997, the Company sold its interest in First of Michigan Capital
Corporation for $9.6 million. The transaction, on an after-tax basis, did not
have a material effect on the Company's financial position or results of
operations.

During 1997, Output Technologies increased its ownership in PSI Technologies
Corporation ("PSI") to 20% for $2.0 million. Output Technologies had previously
acquired a 15% interest in PSI for $2.9 million in 1996. PSI has developed a
Computer Output to Laser Disk (COLD) software product for archiving documents.
In conjunction with the investment, Output Technologies retains the exclusive
right to market a customized product using PSI's COLD software to the mutual
fund industry.

The Company established its output services business in the Canadian market with
the $5.5 million acquisition of Xebec Imaging Services, Inc. which was completed
in January 1996.

In August 1995, the Company sold its joint venture interests in Midland Data
Systems, Inc. ("MDS") and Midland Loan Services L.P. ("MLS") to KCSI for
approximately $5.7 million. The transaction did not result in a material net
gain or loss to the Company. The Company recorded equity in income of MDS and
MLS of $1,053,000 for the year ended December 31, 1995.

In April 1995, the Company purchased substantially all of the assets and
business operations of Supervised Service Company, Inc. ("SSC"), a subsidiary of
Kemper Financial Services, Inc. ("Kemper") and the mutual fund shareowner
servicing system software owned by Kemper Services Company used to service
certain of the Kemper Mutual Funds as well as various third-party mutual funds.
In conjunction with and subject to the SSC transaction, DST also agreed to enter
into long-term contracts with Kemper to provide mutual fund shareowner systems
services and portfolio accounting systems services for the Kemper Mutual Funds.
Total consideration for these asset purchases was approximately $39.4 million
and was financed from the Company's revolving credit facilities. Of the total
consideration, the Company allocated $17.4 million to data processing software
and $22.0 million to intangible assets to be amortized over a seven-year life.
On a pro forma basis, the acquisition did not have a material impact on the
Company's historical results of operations or financial position.

35

In February 1995, the Company's wholly owned subsidiary, DST International
Limited ("DST International"), purchased HiPortfolio Pty Ltd. ("HiPortfolio"),
an Australian provider of portfolio accounting software and services for $16.0
million in cash. The acquisition was financed through borrowings from KCSI. On a
pro forma basis, the acquisition did not have a material impact on the Company's
historical results of operations or financial position.

On January 31, 1995, the Company closed the sale of its 50% interest in
Investors Fiduciary Trust Company ("IFTC") to State Street Corporation ("State
Street"). At closing, DST received shares of State Street common stock with a
then-market value of $98.2 million, in a tax-free exchange. DST recognized a
pre-tax gain on the transaction of $43.6 million and deferred taxes of $35.0
million resulting in a net book gain of $8.6 million. With the closing of the
transaction, IFTC ceased to be an unconsolidated equity affiliate of the Company
and no further equity in earnings of IFTC were recorded by the Company. The
Company records income on dividends received from State Street. The Company's
investment in State Street is accounted for as available-for-sale securities.

5. ACCOUNTS RECEIVABLE AND RELATED PARTY INFORMATION

Accounts receivable information is as follows at December 31, (in thousands):
1995 1996 1997
--------- --------- ----------

Accounts receivable (including related parties) $ 139,616 $ 158,619 $ 176,960
Less allowance for doubtful accounts
3,302 4,525 6,261
--------- --------- ----------
Accounts receivable, net $ 136,314 $ 154,094 $ 170,699
========= ========= ==========
Doubtful account expense $ 2,477 $ 3,314 4,384
========= ========= ==========

The Company has entered into various agreements with related parties to utilize
the Company's data processing facilities and its computer software systems. The
Company believes that the terms of the contracts with related parties are fair
to the Company and are no less favorable to the Company than those obtained from
unaffiliated parties.

Accounts receivable from unconsolidated affiliates aggregated $14,172,000,
$11,850,000 and $9,493,000 at December 31, 1995, 1996 and 1997, respectively.
Accounts receivable from other related parties aggregated $5,009,000, $3,622,000
and $3,137,000 at December 31, 1995, 1996 and 1997, respectively. Revenues
earned by the Company from unconsolidated affiliates aggregated $85,501,000,
$89,588,000 and $90,214,000 in 1995, 1996 and 1997, respectively, including
revenues from Continuum through July 1996. Revenues earned by the Company from
other related parties aggregated $18,443,000, $20,515,000 and $22,390,000 in
1995, 1996 and 1997, respectively.

6. PROPERTIES

Properties and related accumulated depreciation are as follows at December 31,
(in thousands):

1996 1997
---------- ----------

Land $ 13,269 $ 16,884
Buildings 92,482 100,668
Data processing equipment 193,399 217,044
Data processing software 87,261 93,217
Furniture, fixtures and other equipment 121,791 134,823
Leasehold improvements 22,370 23,274
Capitalized leases 6,103 4,701
Construction-in-progress 5,755 8,556
---------- ----------
542,430 599,167
Less accumulated depreciation and amortization 298,441 357,014
---------- ----------

Net properties $ 243,989 $ 242,153
========== ==========

36

Depreciation expense for the years ended December 31, 1995, 1996 and 1997, was
$62,063,000, $70,818,000 and $71,286,000, respectively. Cost includes the net
amount of interest cost associated with significant capital additions.
Capitalized interest was $1,565,000, $1,135,000 and $51,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.

7. INVESTMENTS

Investments are as follows at December 31, (in thousands):
1997
OWNERSHIP CARRYING VALUE
PERCENTAGE 1996 1997
---------- -------------- -------------
Computer Sciences Corporation 6% $ 354,466 $ 360,400
State Street Corporation 4% 192,992 347,509
Boston Financial Data Services, Inc. 50% 26,032 32,262
Argus Health Systems, Inc. 50% 6,140 10,649
Euronet Services, Inc. 7% 1,167 9,136
European Financial Data Services Ltd. 50% 4,447 6,196
Other 35,193 54,425
-------------- -------------
$ 620,437 $ 820,577
============== =============

Computer Sciences Corporation ("CSC") is a provider of outsourcing, system
integration, information technology, management consulting and other
professional services to industry and government. The Company's investment in
CSC is a result of the merger of CSC with The Continuum Company, Inc. on August
1, 1996, as described in Note 4. Continuum is an international software systems
and services provider specializing in the development and installation of
advanced computing software for life and property and casualty insurance,
annuities and other financial services products. The aggregate market value of
the Company's investment in CSC's common stock at December 31, 1996 and 1997,
respectively, was $354.5 million and $360.4 million based on the closing price
on the New York Stock Exchange.

State Street Corporation ("State Street") is a leading provider of securities
custody and recordkeeping services to the mutual fund industry. State Street
also provides corporate banking services to New England middle market companies,
as well as specialized lending and international banking services. The aggregate
market value of the Company's investment in State Street's common stock at
December 31, 1996 and 1997 was $193.0 million and $347.5 million, respectively,
based on the closing price on the New York Stock Exchange. The Company received
$1.5 million , $2.2 million and $2.5 million in dividends from State Street in
1995, 1996 and 1997, respectively, which have been recorded in other income.

Boston Financial Data Services, Inc. ("BFDS") is a corporate joint venture of
the Company and State Street Corporation, the parent of State Street Bank and
Trust Company. BFDS performs shareowner accounting services for mutual fund
companies using the Company's proprietary application system for mutual fund
shareowner recordkeeping, TA2000, and retirement plan recordkeeping services
using TRAC2000. BFDS also performs remittance and proxy processing,
teleservicing and class action administration services.

Argus Health Systems, Inc. ("Argus") is a corporate joint venture of the Company
and a privately held life insurance holding company. Argus provides pharmacy
benefit plan processing services to the health care industry. Argus utilizes the
Company's data processing facility for its claims processing services. In
December 1996, the Company received a $9.5 million dividend from Argus, of which
$8.0 million was cash. The dividend was recorded as a reduction of the Company's
investment in Argus.

Euronet Services, Inc. operates an independent, non-bank owned automatic teller
machine network in Hungary and Poland as a service provider to banks and other
financial institutions. Euronet consummated an initial public offering of its
common stock in March 1997. Since that date, the Company's investment in Euronet
has been accounted for as available-for-sale securities in accordance with
Statement of Financial Accounting Standards No. 115. Prior to March 1997, the
Company's investment was carried at cost. The aggregate market value of the
Company's investment in Euronet's common stock at December 31, 1997 was
approximately $9.1 million based on the closing price on the New York Stock
Exchange.

37

European Financial Data Services Limited ("EFDS") is a United Kingdom joint
venture of DST and State Street. EFDS provides full and remote processing for
United Kingdom unit trusts and related products. EFDS is also developing a new
unit trust accounting system for the United Kingdom market.

The Company's retained earnings include equity in the unremitted earnings of its
unconsolidated affiliates of $17,060,000 and $12,233,000 at December 31, 1996
and 1997, respectively.

Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
provided by the unconsolidated affiliates and related goodwill amortization is
as follows for the years ended December 31, (in thousands):

1995 1996 1997
-------- --------- ---------
Boston Financial Data Services, Inc. $ 5,159 $ 5,421 $ 6,226
Argus Health Systems, Inc. 4,144 1,743 4,509
The Continuum Company, Inc.* (1,151) (4,891)
European Financial Data Services Limited (2,705) (5,969) (11,832)
Other 1,005 (332) (248)
-------- --------- ---------
$ 6,452 $ (4,028) $ (1,345)
======== ========= =========
*Through the period ended June 30, 1996.

Certain condensed financial information of the unconsolidated affiliates follows
(in thousands):

For the Year For the Six
Ended Months Ended
December 31, June 30,
1995 1996
------------ ------------
The Continuum Company, Inc.
Revenues $ 388,625 $ 271,037
Costs and expenses 381,672 292,417
Net income (loss) 6,953 (21,380)
Current assets 218,800
Noncurrent assets 136,364
Current liabilities 168,909
Noncurrent liabilities 57,401
Stockholders' equity 128,854

FOR THE YEARS ENDED DECEMBER 31,
1995 1996 1997
------------ ----------- ----------
Boston Financial Data Services, Inc.
Revenues $ 158,452 $ 194,385 $ 224,128
Costs and expenses 148,134 183,543 211,676
Net income 10,318 10,842 12,452
Current assets 55,080 55,598
Noncurrent assets 28,061 35,887
Current liabilties 26,374 22,120
Noncurrent liabilities 4,749 5,109
Stockholders' equity 52,018 64,256

38

FOR THE YEARS ENDED DECEMBER 31,
1995 1996 1997
--------- ---------- ----------
Other Unconsolidated Affiliates (Combined)
Revenues $ 153,832 $ 149,310 $ 112,012
Costs and expenses 147,131 157,470 125,905
Net income (loss) 6,701 (8,160) (13,893)
Current assets 121,247 44,275
Noncurrent assets 113,115 159,583
Current liabilities 86,423 19,424
Noncurrent liabilities 105,422 169,561
Partners' and stockholders' equity 42,517 14,873

8. INTANGIBLES AND OTHER ASSETS

Intangibles and other assets include the following items at December 31, (in
thousands):

1996 1997
--------- -----------
Intangibles $ 75,340 $ 91,048
Less accumulated amortization 24,641 32,185
Net ---------- -----------
50,699 58,863
Other assets 5,168 2,487
---------- -----------
Total $ 55,867 $ 61,350
========== ===========

Intangibles exclude goodwill of $1,122,000 and $370,294 at December 31, 1996 and
1997, respectively, related to unconsolidated affiliates which is classified as
part of the investments in the unconsolidated affiliates. Amortization expense,
including amortization related to goodwill recorded in investments, totaled
$10,024,000, $8,983,000 and $8,116,000 for the years ended December 31, 1995,
1996 and 1997, respectively.

9. LONG-TERM DEBT

The Company is obligated under notes and other indebtedness as follows at
December 31, (in thousands):

1996 1997
-------------- --------------

Secured notes payable $ 17,469 $ 11,463
Revolving credit facilities 33,620 57,690
Mortgage notes 36,202 33,985
Other 3,763 2,765
-------------- --------------
91,054 105,903
Less debt due within one year 15,159 13,898
-------------- --------------
Long-term debt $ 75,895 $ 92,005
============== ==============

In December 1996, the Company entered into an amended and restated five-year
revolving credit facility of $105 million (increased to $125 million in February
1997) with a syndicate of U.S. and international banks. Borrowings under the
facility are available at rates based on the Eurodollar, Prime, Base CD, or
Federal Funds rates. A commitment fee of 0.085% per annum is required on the
total amount of the facility. An additional utilization fee of .050% is required
if the principal amount outstanding is greater than 50% of the total facility.
Among other provisions, the agreement limits subsidiary indebtedness and sales
of assets and requires the Company to maintain certain coverage and leverage
ratios. Borrowings of $30.0 million were outstanding at December 31, 1996 and
1997.

The Company also maintains a $50 million line of credit used to finance working
capital requirements of the Company available through May 1998. Borrowings under
the facility are available at rates tied to the Eurodollar or federal funds
rates. A commitment fee of 0.105% per annum is required on the unused portion of
the $50 million line of credit. Borrowings of $3.5 million and $25.0 million
were outstanding at December 31, 1996 and 1997, respectively.

39

The secured notes payable primarily represent notes which are secured by data
processing and production equipment. Equipment notes are generally payable over
24 to 60 month periods with interest rates from 3.9% to 6.5% at December 31,
1997.

The mortgage notes represent real estate borrowings due in installments with the
balance due at the end of the term. Interest rates are based on floating prime
or fixed and range from 8.39% to 10.0% at December 31, 1997.

Future principal payments of indebtedness at December 31, 1997 are as follows
(in thousands):

1998 $ 13,898
1999 6,115
2000 4,327
2001 57,863
2002 3,074
Thereafter 20,626
---------
Total $ 105,903
=========

Based upon the borrowing rates currently available to the Company and its
subsidiaries for indebtedness with similar terms and average maturities, the
fair value of debt was approximately $91.7 million and $109.1 million at
December 31, 1996 and 1997, respectively.

10. INCOME TAXES

The Company and its consolidated U.S. subsidiaries join in filing a consolidated
federal income tax return. Prior to the initial public offering on October 31,
1995, the Company and its consolidated U.S. subsidiaries were included in the
consolidated federal income tax return filed by KCSI and other members of KCSI's
group of consolidated U.S. subsidiaries. For 1995, the Company was included in
the KCSI consolidated federal income tax return from January 1, 1995, through
October 31, 1995. The Company filed a separate consolidated return for the
period from November 1, 1995, to December 31, 1995. While a member of the KCSI
consolidated federal income tax return, the Company computed federal income tax
expense and current federal income taxes payable to KCSI using an intercompany
tax allocation policy. The federal income tax expense using this policy was, in
all material respects, in accordance with the separate return method.

Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense (benefit) is generally the result of changes in
the assets or liabilities for deferred taxes.

Prior to 1993, the Company did not provide deferred taxes for unremitted
earnings of certain investees accounted for under the equity method in so much
as those earnings have been and will continue to be reinvested. Beginning in
1993, pursuant to SFAS 109, the Company began providing deferred taxes for
unremitted earnings for U.S. unconsolidated affiliates net of the 80% dividends
received deduction provided under current tax law.

40

The following summarizes pretax income (loss) for the years ended December 31,
(in thousands):
1995 1996 1997
-------------- -------------- --------------

U.S. $ 79,027 $ 281,829 $ 99,977
International (5,196) (8,210) (11,268)
-------------- -------------- --------------
Total $ 73,831 $ 273,619 $ 88,709
============== ============== ==============

Income tax expense consists of the following components for the years ended
December 31, (in thousands):
1995 1996 1997
------------- -------------- --------------

Current
Federal $ 11,149 $ 16,789 $ 27,934
State and local 1,800 2,154 4,268
International 652 469 3,077
-------------- -------------- --------------
Total current 13,601 19,412 35,279
-------------- -------------- --------------
Deferred
Federal 28,304 72,842 (3,437)
State and local 5,316 13,833 (1,416)
International (1,047) (167) (1,248)
-------------- -------------- --------------
Total deferred 32,573 86,508 (6,101)
-------------- -------------- --------------
Total income tax expense $ 46,174 $ 105,920 $ 29,178
============== ============== ==============

Differences between the Company's effective income tax rate and the U.S.
federal income tax statutory rate are as follows for the years ended December
31, (in thousands):

1995 1996 1997
-------------- -------------- --------------

Income tax expense using the
statutory rate in effect $ 25,841 $ 95,767 $ 31,048
Tax effect of:
State and local income taxes, net 4,626 10,391 1,854
International income taxes, net 374 1,087 1,534
Losses of international unconsolidated affiliates 1,050 2,089
Earnings of U.S. unconsolidated affiliates (2,890) (1,274) (3,104)
Sale of IFTC (Note 4) 16,118
Other 1,055 (2,140) (2,154)
-------------- -------------- --------------
Total income tax expense $ 46,174 $ 105,920 $ 29,178
============== ============== ==============

Effective tax rate 62.5% 38.7% 32.9%
Statutory federal tax rate 35.0% 35.0% 35.0%

41

The federal and state deferred tax assets (liabilities) recorded on the
Consolidated Balance Sheet at December 31, are as follows (in thousands):

1996 1997
----------- -----------
Liabilities:
Investments in available for sale securities $ (189,784) $ (255,371)
Unconsolidated affiliates and investments (3,208) (2,832)
----------- -----------
Gross deferred tax liabilities (192,992) (258,203)
----------- -----------

Assets:
Book reserves not currently deductible for tax 9,094 10,016
Deferred compensation and other employee benefits 2,948 3,215
International operating loss carryforwards 998 2,180
Vacation accrual 1,366 1,611
Deferred gains 625 255
Depreciation and amortization 1,636 6,037
Other, net 399 657
----------- -----------
Gross deferred tax assets 17,066 23,971
----------- -----------

Deferred tax asset valuation allowance (314) (1,949)
----------- -----------
Net deferred tax liability $ (176,240) $ (236,181)
=========== ===========

The Company had federal operating loss carryforwards from DBS of $1.3 million at
December 31, 1995 which were used to reduce taxable income in 1996.
Additionally, the Company had operating loss carryforwards related to certain
international operations of approximately $2.5 million at December 31, 1996 and
$4.4 million at December 31, 1997. There is no assurance that certain loss
carryforwards will be utilized. Accordingly, the Company has recognized a
valuation allowance for the benefit of certain loss carryforwards of $0.3
million at December 31, 1996 and $1.9 million at December 31, 1997.

11. STOCKHOLDERS' EQUITY

In August 1995, the Company was merged into a Delaware corporation. Upon
completion of the merger, the Company had 125 million shares of $.01 par value
common stock authorized of which 28.5 million shares were issued and outstanding
and held by its sole shareowner, KCSI. In addition, the Company is authorized to
issue 10 million shares of preferred stock, par value $.01 per share. No
preferred shares have been issued.

On October 31, 1995, in conjunction with and immediately prior to the Offerings,
the Company distributed to KCSI a stock dividend of 2,050,000 shares of common
stock. Appropriate share data has been retroactively restated in the
consolidated balance sheet to reflect the effect of the stock dividend and
merger into a Delaware corporation.

On October 31, 1995, the Company and KCSI completed an initial public offering
("the Offerings") of 22 million shares of the Company's common stock at an
offering price of $21 per share. Of the 22 million shares offered, 19,450,000
were sold by the Company and 2,550,000 were sold by KCSI. The Company received
net proceeds of approximately $384.8 million which were used to repay all debt
to KCSI and certain bank term notes. In conjunction with the Offerings, KCSI
exchanged 4,253,508 shares of its DST common stock for 1,820,000 shares of KCSI
stock held by The Employee Stock Ownership Plan. On November 6, 1995,
over-allotment options granted by KCSI to the underwriters totaling 3,300,000
shares of the Company's common stock were exercised in full.

In September 1995, the Company established the Stock Option and Performance
Award Plan which provides for the availability of 6,000,000 shares of the
Company's common stock for the grant of awards to officers, directors and other
designated employees. The awards may take the form of an option, stock
appreciation right, limited right, performance share or unit, dividend
equivalent, or any other right, interest or option relating to shares of common
stock granted under the plan. The option prices must be at least equal to the
fair market value of the underlying shares on the date of grant. Options become
exercisable and expire as determined by the Compensation Committee of the Board
of Directors at or subsequent to the date of grant.

42

A summary of stock option activity is presented in the table below:

1995 1996 1997
---------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------------- ------------- ------------ ------------ ---------- ------------

Outstanding at January 1 2,281 $21.00 2,262 $21.41
Granted 2,287 $21.00 72 33.95 918 33.66
Exercised (40) 21.00
Canceled (6) 21.00 (91) 21.00 (79) 22.45
============= ============ ============
Outstanding at December 31 2,281 $21.00 2,262 $21.41 3,061 $25.06
============= ============ ============

Exercisable at December 31 887 $21.11 1,261 $21.20

EXERCISE PRICE RANGES: LOW HIGH LOW HIGH LOW HIGH
- ---------------------- ------------- ------------- ------------ ------------- ------------ -------------
for all outstanding options $21.00 $21.00 $21.00 $35.56 $21.00 $38.38
for all exercisable options $21.00 $32.69 $21.00 $35.31

Had compensation cost been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income would have been reduced to the following pro forma amounts:

1995 1996 1997
-------- --------- ---------
Net income (000's): As reported $ 27,640 $ 167,202 $ 58,997
Pro forma 26,931 162,787 52,024

Basic earnings per share: As reported $ 0.82 $ 3.35 $ 1.20
Pro forma 0.80 3.26 1.06

Diluted earnings per share: As reported $ 0.82 $ 3.32 $ 1.18
Pro forma 0.80 3.23 1.04

The weighted average fair value of options granted was $7.10, $11.64 and $11.78
for 1995, 1996 and 1997, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1995, 1996 and
1997, respectively: expected option terms of 5.3, 5.0 and 5.0 years, volatility
of 22%, 23% and 24%, dividend yield of 0% and risk-free interest rates of 5.9%,
6.3% and 6.3%. Given the limited trading history of DST's common stock, the
volatility factor was determined by using the average of the volatility,
calculated weekly over the three preceding calendar years, of the stock of three
peer companies.

In May 1996, the Board of Directors determined it was necessary for the Company
to have common stock available to provide to employees under its stock award
program and to provide to option holders who exercise options. The Board of
Directors authorized the purchase of up to 1.2 million shares during a
twenty-four month period in approximately equal monthly amounts subject to such
variations as management deems appropriate. All such purchases are in compliance
with applicable SEC regulations. The Company has purchased 1.0 million shares as
of December 31, 1997 for approximately $32.7 million. The Company had 396,000
and 956,942 shares held in treasury at December 31, 1996 and 1997, respectively.
After considering shares held in treasury, the Company had 49,604,000 and
49,043,058 shares of common stock outstanding at December 31, 1996 and 1997,
respectively.

43

The Company entered into a Stockholder's Right Agreement (the "Rights Plan") in
1995. Each share of the Company's common stock held of record on October 18,
1995, (KCSI was then the sole stockholder) and all shares of common stock issued
in the Offerings received one Right. Each Right entitles their holder (other
than those held by an acquiring person or group) to purchase 1/1000th share of
preferred stock of the Company or in some circumstances, other securities of the
Company. In certain circumstances the Rights entitle their holders (other than
those held by an acquiring person or group) to purchase shares in a surviving
entity or its affiliates resulting from transactions in which the Company is not
the surviving entity or disposes of more than 50% of the Company's assets or
earnings power.

The Rights, which are automatically attached to common stock, are not
exercisable or transferable separately from shares of common stock until ten
days following the earlier of an announcement that a person or group has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of the Company's common stock, or ten days following
the commencement or announcement of an intention to make a tender offer or
exchange offer that would result in an acquiring person or group owning 15% or
more of the outstanding common stock, unless the Board of Directors sets a later
date in either event. KCSI is excluded from the definition of an acquiring
person under the Rights Plan unless there is a change in control of KCSI,
followed by acquisition of additional company common stock.

The Rights Plan is intended to encourage a potential acquiring person or group
to negotiate directly with the Board of Directors, but may have certain
anti-takeover effects. The Rights Plan could significantly dilute the interests
in the Company of an acquiring person or group. The Rights Plan may therefore
have the effect of delaying, deterring or preventing a change in control of the
Company.

On May 8, 1995, the Company paid a cash dividend of $150 million to KCSI, the
proceeds for which were obtained through the Company's long-term revolving
credit agreement.

Net unrealized gains on investments represents the Company's unrealized holding
gains on its investments in available-for-sale securities. At December 31, 1996
and 1997, the Company's unrealized gains were $94,625,000 and $196,994,000,
respectively, which were net of deferred taxes of $60,625,000 and $126,212,000,
respectively.

12. RETIREMENT PLANS

The Company has a qualified profit sharing plan which covers all of its
employees following the completion of an eligibility period. Contributions to
the plan are made at the discretion of the Board of Directors, with the
limitation that the annual contribution may not exceed the maximum allowable
income tax deduction. Profit sharing expense was $129,000, $2,686,000 and
$2,500,000 for the years ended December 31, 1995, 1996 and 1997, respectively.

The Company has a 401(k) plan which covers all of its employees following the
completion of an eligibility period. Contributions to the plan are made at the
discretion of the Board of Directors. No discretionary contributions were made
during 1995, 1996 or 1997.

Prior to the Offerings in 1995, the Company participated in the KCSI ESOP. In
connection with the Offerings, the KCSI ESOP was renamed The Employee Stock
Ownership Plan ("ESOP") and amended to consist of two portions: a KCSI portion
and a Company portion. The account balances in the ESOP attributable to Company
employees became the Company portion of the ESOP. The Company portion initially
was invested in KCSI stock. Approximately one half of the value of the account
balances of Company employees at the time of the IPO were converted into common
stock of the Company through an exchange with KCSI of KCSI stock held by the
ESOP for shares of the Company's common stock. As of January 1, 1998, the
Company formed The DST Systems, Inc. Employee Stock Ownership Plan ("DST ESOP")
and transferred all balances from the Company portion of the ESOP to the DST
ESOP.

For the years ended December 31, 1995, 1996 and 1997, ESOP expense was
$11,021,000, $13,700,000 and $2,000,000, respectively. In 1995, such amounts
represent an allocated portion of the consolidated KCSI ESOP expense. Interest
incurred on ESOP indebtedness was $0.4 million in 1995; this amount includes an
allocated portion of interest expense on ESOP debt guaranteed by KCSI. All ESOP
indebtedness was retired in 1995. The ESOP loan principal payments were
accounted for as employee benefit expense in the year of allocation to
participants; interest payments were recorded as interest expense using an
accrual method.

44

13. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosure of cash flow information for the years ended December
31, (in thousands):

1995 1996 1997
------- ------- -------
Interest paid during the year $25,307 $ 7,930 $ 6,727
Income taxes paid during the year 15,892 21,098 30,495

In December 1996, the Company received a $9.5 million dividend from Argus, $8.0
million of which was received in cash and $1.5 million of which was received in
the form of a note receivable from a related party.

In connection with the Offerings in 1995, the Company incurred underwriting
commissions of approximately $22.6 million which have been reflected in the net
proceeds from the Offerings.

The Company purchased mainframe computer equipment and other capital additions
in the amount of $30,163,000, $4,754,000 and $5,964,000 in 1995, 1996 and 1997,
respectively, through secured notes payable or vendor financed installment notes
which required no direct outlay of cash.

The Company acquired an additional 20% interest in DBS Systems Corporation in
December 1995 for a $6.0 million note payable which was paid in January 1996.

14. COMMITMENTS AND CONTINGENCIES

The Company leases facilities, data processing and other equipment under various
operating leases. Lease terms generally range from 1 to 25 years not including
options to extend the leases for various lengths of time. Rental expense was
$24,519,000, $30,825,000 and $33,356,000 for the years ended December 31, 1995,
1996 and 1997, respectively. Future minimum rentals for the non-cancelable term
of all operating leases are as follows (in thousands):

1998 $ 19,711
1999 14,497
2000 10,851
2001 5,646
2002 4,953
Thereafter 15,643
---------
$ 71,301

Certain leases have clauses that call for the annual rents to be increased
during the term of the lease. Such lease payments are expensed on a
straight-line basis.

The Company leases certain facilities from unconsolidated affiliates and
incurred occupancy expenses of $4,158,000, $4,674,000 and $6,642,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.

The Company has also entered into agreements with co-participants in certain
joint venture subsidiaries whereby upon defined circumstances constituting a
change in control of either party to the venture, the other party has the right
to acquire, at a specified price, the entire interest in the joint venture.

The Company has entered into agreements with the minority stockholders of DST
Catalyst whereby the minority stockholder has the option to sell to the Company
shares of DST Catalyst stock. If the provisions of the agreements were
exercised, the Company would be required to purchase the respective minority
interests at fair market value, currently estimated at approximately $1.0
million.

45

The Company has committed to make additional investments approximating $3.0
million related to certain private equity partnerships.

The Company has entered into agreements with certain officers whereby upon
defined circumstances constituting a change in control of the Company, certain
benefit entitlements are automatically funded and such officers are entitled to
specific cash payments upon termination of employment.

The Company has also established trusts to provide for the funding of corporate
commitments and entitlements of Company officers, directors, employees and
others in the event of a change in control of the Company. Assets held in such
trusts at December 31, 1997 were not significant.

The Company and its subsidiaries are involved in various legal proceedings
arising in the normal course of their businesses. While the ultimate outcome of
these legal proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with legal counsel, that the final outcome in
such proceedings, in the aggregate, would not have a material adverse effect on
the consolidated financial condition or results of operations of the Company.

46

15. GEOGRAPHIC INFORMATION

Financial information by geographic region for the Company is presented below
(in thousands):

YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------
UNITED EUROPE
STATES CANADA & OTHERS TOTAL
---------------- ---------------- ---------------- ----------------

Revenues $ 319,294 $ 7,924 $ 52,969 $ 380,187
Revenues - related parties 103,944 103,944
---------------- ---------------- ---------------- ----------------
Total $ 423,238 $ 7,924 $ 52,969 $ 484,131
================ ================ ================ ================
Income (loss) from operations $ 42,689 $(1,904) $ 36 $ 40,821
Equity in earnings (losses) of unconsoliated
affiliates, net of affiliate taxes 9,822 (3,370) 6,452

YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
UNITED EUROPE
STATES CANADA & OTHERS TOTAL
---------------- ---------------- ---------------- ----------------

Revenues $ 389,964 $21,071 $ 59,670 $ 470,705
Revenues - related parties 106,471 3,632 110,103
---------------- ---------------- ---------------- ----------------
Total $ 496,435 $24,703 $ 59,670 $ 580,808
================ ================ ================ ================
Income (loss) from operations $ 58,635 $ 276 $ (1,938) $ 56,973
Equity in earnings (losses) of unconsoliated
affiliates, net of affiliate taxes 4,106 (1,068) (7,066) (4,028)
Total assets 1,041,155 15,965 64,468 1,121,588

YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------
UNITED EUROPE
STATES CANADA & OTHERS TOTAL
---------------- ---------------- ---------------- ----------------

Revenues $ 440,865 $22,341 $ 74,868 $ 538,074
Revenues - related parties 108,910 3,568 126 112,604
---------------- ---------------- ---------------- ----------------
Total $ 549,775 $25,909 $ 74,994 $ 650,678
================ ================ ================ ================
Income (loss) from operations $ 91,108 $(4,570) $ 5,702 $ 92,240
Equity in earnings (losses) of unconsoliated
affiliates, net of affiliate taxes 13,036 (1,271) (13,110) (1,345)
Total assets 1,255,147 19,708 80,549 1,355,404

47

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data follows (dollars in thousands, except per share
amounts):

YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 1996
------------ ------------- ------------- ------------- ------------

Revenues $ 144,262 $ 143,216 $ 139,569 $ 153,761 $ 580,808
Cost and expenses 106,389 106,565 104,343 114,266 431,563
Depreciation and amortization 18,688 19,192 19,804 20,888 78,572
Other expenses 13,700 (2) 13,700
------------ ------------- ------------- ------------- ------------
Income from operations 19,185 17,459 1,722 18,607 56,973
Interest expense (2,102) (1,653) (1,356) (1,829) (6,940)
Other income, net 931 981 912 1,352 4,176
Gain on sales of equity investment 223,438 (2) 223,438
Equity in earnings (losses) of unconsolidated
affiliates, net of taxes (7,641) (1) 3,140 (45) 518 (4,028)
------------ ------------- ------------- ------------- ------------
Income before income taxes and minority interests 10,373 19,927 224,671 18,648 273,619
Income taxes 5,963 7,549 85,897 6,511 105,920
------------ ------------- ------------- ------------- ------------
Income before minority interests 4,410 12,378 138,774 12,137 167,699
Minority interests (7) 51 144 309 497
------------ ------------- ------------- ------------- ------------
Net income $ 4,417 $ 12,327 $ 138,630 $ 11,828 $ 167,202
============ ============= ============= ============= ============

Basic average shares outstanding 50,000 49,965 49,841 49,679 49,871
Basic earnings per share $ 0.09 $ 0.25 $ 2.78 $ 0.24 $ 3.35(3)

Diluted average shares outstanding 50,465 50,496 50,238 50,142 50,335
Diluted earnings per share $ 0.09 $ 0.24 $ 2.76 $ 0.24 $ 3.32(3)

Common stock price ranges - High $ 34.88 $ 37.75 $ 32.75 $ 34.38 $ 37.75
- Low $ 27.38 $ 29.50 $ 25.63 $ 29.00 $ 25.63

(1) Includes one-time Continuum charge from Hogan Merger (Note 4)
(2) Gain on CSC / Continuum Merger and related charges (Note 4)
(3) The accumulation of 1996's quarterly earnings per share is greater than the
earnings per share for the year ended December 31, 1996 due to repurchases
of Company common stock throughout the year.

48

YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 1997
------------- ------------- -------------- -------------- --------------

Revenues $ 158,684 $ 155,394 $ 159,863 $ 176,737 $ 650,678
Cost and expenses 115,354 114,983 118,811 129,955 479,103
Depreciation and amortization 19,629 19,468 19,453 20,785 79,335
------------- ------------- -------------- -------------- --------------
Income from operations 23,701 20,943 21,599 25,997 92,240
Interest expense (2,163) (1,884) (1,960) (1,663) (7,670)
Other income, net 979 1,019 989 1,033 4,020
Gain on sale of equity investment 212 1,252 1,464
Equity in earnings (losses) of unconsolidated
affiliates, net of taxes 1,044 820 (507) (2,702) (1,345)
------------- ------------- -------------- -------------- --------------
Income before income taxes and minority interests 23,561 21,110 21,373 22,665 88,709
Income taxes 8,302 7,064 7,097 6,715 29,178
------------- ------------- -------------- -------------- --------------
Income before minority interests 15,259 14,046 14,276 15,950 59,531
Minority interests 156 229 222 (73) 534
------------- ------------- -------------- -------------- --------------
Net income $ 15,103 $ 13,817 $ 14,054 $ 16,023 $ 58,997
============= ============= ============== ============== ==============

Basic average shares outstanding 49,529 49,374 49,236 49,099 49,308
Basic earnings per share $ 0.30 $ 0.28 $ 0.29 $ 0.33 $ 1.20

Diluted average shares outstanding 50,021 49,762 49,804 49,770 49,838
Diluted earnings per share $ 0.30 $ 0.28 $ 0.28 $ 0.32 $ 1.18

Common stock price ranges - High $ 35.63 $ 33.31 $ 37.81 $ 44.56 $ 44.56
- Low $ 28.50 $ 24.25 $ 32.19 $ 34.56 $ 24.25

49

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The Company has incorporated by reference certain information in response or
partial response to the Items under this Part III of this Annual Report on Form
10-K pursuant to General Instruction G(3) of this Form 10-K and Rule 12b-23
under the Exchange Act. The Company's definitive proxy statement in connection
with its annual meeting of stockholders scheduled for May 12, 1998 (the
"Definitive Proxy Statement") will be filed with the Securities and Exchange
Commission no later than 120 days after December 31, 1997.

(a) DIRECTORS OF THE COMPANY

The information set forth in response to Item 401 of Regulation S-K under the
heading "Proposal - Election of Two Directors" and "The Board of Directors" in
the Company's Definitive Proxy Statement is hereby incorporated herein by
reference in partial response to this Item 10.

(b) EXECUTIVE OFFICERS OF THE COMPANY
The information set forth in response to Item 401 of Regulation S-K under the
heading "Executive Officers of the Company" in Part I of this Form 10-K is
incorporated herein by reference in partial response to this Item 10. The
information set forth in response to Item 405 of Regulation S-K under the
heading "Other Matters-Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's Definitive Proxy Statement is hereby incorporated herein by
reference in partial response to this Item 10.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth in response to Item 402 of Regulation S-K under "The
Board of Directors - Compensation of Directors" and under "Executive
Compensation" in the Company's Definitive Proxy Statement (other than The
Compensation Committee Report on Executive Compensation and the Stock
Performance Graph) is hereby incorporated herein by reference in response to
this Item 11.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders and Stockholdings of Management" in the
Company's Definitive Proxy Statement is hereby incorporated herein by reference
in response to this Item 12.

The Company has no knowledge of any arrangement the operation of which may at a
subsequent date result in a change of control of the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth in response to Item 404 of Regulation S-K under the
heading "Compensation Committee Interlocks and Insider Participation" in the
Company's Proxy Statement is incorporated herein by reference in response to
this Item 13.

50

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) List of Documents filed as part of this Report

(1) Consolidated Financial Statements

The consolidated financial statements and related notes, together with the
report of Price Waterhouse LLP dated February 26, 1998 appear in Part II Item 8
Financial Statements and Supplementary Data of this Form 10-K.

(2) Consolidated Financial Statement Schedules

All schedules have been omitted because they are not applicable, insignificant
or the required information is shown in the consolidated financial statements or
notes thereto.

(3) List of Exhibits

(a) Exhibits

The Company has incorporated by reference herein certain exhibits as specified
below pursuant to Rule 12b-32 under the Exchange Act.

2. Plan of acquisition, reorganization, arrangement, liquidation or
succession

Not applicable.

3. Articles of Incorporation and by-laws

3.1 The Company's Amended Delaware Certificate of Incorporation, as
restated, which is attached as exhibit 3.1 to the Company's
Registration Statement dated September 1, 1995, as amended
August 31, 1995 (Commission file no. 33-96526) (the
"Registration Statement"), is hereby incorporated by reference
as Exhibit 3.1.

3.2 The Company's Amended and Restated By-laws as adopted August 28,
1995, which are attached as Exhibit 3.2 to the Company's
Registration Statement, are hereby incorporated by reference as
Exhibit 3.2.

4. Instruments defining the rights of security holders, including
indentures

4.1 The Registration Rights Agreement dated October 24, 1995,
between the Company and Kansas City Southern Industries, Inc.
("KCSI"), which is attached as Exhibit 4.1 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 4.1.

4.2 The Certificate of Designations dated October 16, 1995,
establishing the Series A Preferred Stock of the Company, which
is attached as Exhibit 4.3 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 4.2.

4.3 The Summary of the preferred stock purchase rights set forth in
Form 8-A dated November 15, 1995 (Commission file no. 1-14036),
and the related Rights Agreement dated as of October 6, 1995,
between the Company and State Street Bank and Trust Company, as
rights agent, which is attached as exhibit 4.4 to the Company's
Registration Statement, are hereby incorporated by reference as
Exhibit 4.3.

51

4.4 The Registration Rights Agreement dated October 31, 1995,
between the Company and UMB Bank, N.A. as trustee of The
Employee Stock Ownership Plan of DST Systems, Inc. ("UMB") which
is attached as Exhibit 4.4 to the Company's Annual Report for
the year ended December 31, 1995(Commission file no. 1-14036),
is hereby incorporated by reference as Exhibit 4.4.

4.5 The Stock Exchange Agreement dated October 26, 1995, between
KCSI and UMB, which is attached as Exhibit 4.6 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 4.5.

4.6 The description of the Company's common stock, par value $0.01
per share, set forth under the headings "Description of Capital
Stock" and "Dividend Policy" in the Company's Registration
Statement of the common stock on Form 8-A declared effective
October 31, 1995 (Commission file no. 1-14036), is hereby
incorporated by reference as Exhibit 4.6.

4.7 Paragraphs fourth, fifth, sixth, seventh, tenth, eleventh, and
twelfth of Exhibit 3.1 are hereby incorporated by reference as
Exhibit 4.7.

4.8 Article I, Sections 1, 2, 3, and 11 of Article II, Article V,
Article VIII, Article IX of Exhibit 3.2 are hereby
incorporated by reference as Exhibit 4.8.

The Company agrees to furnish to the Commission a copy of any long-term debt
agreements that do not exceed 10 percent of the total assets of the Company upon
request.

9. VOTING TRUST AGREEMENT

Not applicable.

10. MATERIAL CONTRACTS

10.1 The Registration Rights Agreement incorporated by reference as
Exhibit 4.1 hereto, is also hereby incorporated by reference as
Exhibit 10.1.

10.2 The Company's Executive Plan effective as of October 31, 1995,
attached as Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 (Commission file no.
1-14036), is hereby incorporated by reference as Exhibit 10.2

10.3 The Company's 1995 Stock Option and Performance Award Plan,
effective September 1, 1995, which is attached as Exhibit 10.3
to the Company's registration statement on Form S- 1 dated
September 1, 1995 (Commission file no. 33-96526), is hereby
incorporated by reference as Exhibit 10.3.

10.3.1 The First Amendment to the 1995 Stock Option and Performance
Award Plan approved May 13, 1997, attached as Exhibit 10.3.1 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (Commission file no. 1-14036).

10.4 The Tax Disaffiliation Agreement between the Company and KCSI
dated October 23, 1995, which is attached as Exhibit 10.4 to the
Company's Registration Statement, is hereby incorporated by
reference as Exhibit 10.4.

10.5 The Stock Purchase, Sale of Assets, Assignment and Assumption
Agreement dated August 30, 1995, among the Company, DST Realty,
Inc., Tolmak, Inc., Mulberry Western Company and KCSI, which is
attached as Exhibit 10.5 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.5.

52

10.6 The Employee Stock Ownership Plan and Trust Agreement of DST
Systems, Inc. dated January 1, 1998 is attached as Exhibit 10.6
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (Commission file no. 1-14036).

10.7 The 1996 Restatement of the Company's Profit Sharing Plan and
Trust Agreement dated December 31, 1996 (the "1996 Profit
Sharing Plan"), is attached as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(Commission file no. 1-14036).

10.7.1 The First Amendment dated February 27, 1998, to the 1996 Profit
Sharing Plan is attached as Exhibit 10.7.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(Commission file no. 1-14036).

10.8 The Employment Agreement among the Company, KCSI and Thomas A.
McDonnell, Amended and Restated as of March 18, 1993 and October
9, 1995, which is attached as Exhibit 10.8 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.8.

10.8.1 The Employment Agreement between the Company and Thomas A.
McDonnell dated October 9, 1995, which is attached as Exhibit
10.8.1 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.8.1.

10.9 The Employment Agreement between the Company, KCSI and Thomas A.
McCullough dated April 1, 1992, as amended October 9, 1995,
which is attached as Exhibit 10.9 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.9.

10.10 The Employment Agreement between the Company, KCSI and James P.
Horan dated April 1, 1992, as amended October 9, 1995, which is
attached as Exhibit 10.10 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.10.

10.11 The Employment Agreement between the Company, KCSI and Robert C.
Canfield, dated April 1, 1992, as amended October 9, 1995, which
is attached as Exhibit 10.11 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.11.

10.12 The Employment Agreement between the Company, KCSI and Charles
W. Schellhorn, dated April 1, 1992, as amended October 9, 1995,
which is attached as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996
(Commission file no. 1-14036), is hereby incorporated by
reference as Exhibit 10.12.

10.13 The Company's 1994 Restatement of its 401(k) Plan and Trust
Agreement dated September 12, 1994 (the "1994 401(K) Plan"),
which is attached as Exhibit 10.13 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.13.

10.13.1The First Amendment dated June 1, 1995, to the Company's 1994
401(k) Plan, which is attached as Exhibit 10.13.1 to the
Company's Registration Statement, is hereby incorporated by
reference as Exhibit 10.13.1.

10.13.2The Second Amendment dated October 31, 1995, to the Company's
1994 401(k) Plan is attached as Exhibit 10.13.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995
(Commission file no. 1-14036), is hereby incorporated by
reference as Exhibit 10.13.2.

53

10.13.3The Third Amendment dated March 21, 1996, to the Company's 1994
401(k) Plan is attached as Exhibit 10.13.3 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(Commission file no. 1-14036).

10.13.4The Fourth Amendment dated February 9, 1998, to the Company's
1994 401(k) Plan is attached as Exhibit 10.13.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(Commission file no. 1-14036).

10.14 The Agreement between State Street Boston Financial Corporation
and Data-Sys-Tance dated June 1, 1974 (the "State Street
Agreement"), which is attached as Exhibit 10.14 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.14.

10.14.1The Amendment to the State Street Agreement between the Company
and State Street, dated October 1, 1987, which is attached as
Exhibit 10.14.1 to the Company's Registration Statement, is
hereby incorporated by reference as Exhibit 10.14.1.

10.15 The Data Processing Services Agreement between The Company and
The Continuum Company, Inc. dated October 1, 1993, which is
attached as Exhibit 10.15 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.15.

10.16 The Agreement among the Company, Financial Holding Corporation,
KCSI and Argus Health Systems, Inc. dated June 30, 1989, which
is attached as Exhibit 10.16 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.16.

10.16.1The Stock Transfer Restriction and Option Agreement between the
Company, Argus Health Systems, Inc. and Financial Holding
Corporation dated June 30, 1989, which is attached as Exhibit
10.16.1 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.16.1.

10.17 The Five-Year Competitive Advance and Revolving Credit Facility
Agreement among the Company, the lenders named therein, The
Chase Manhattan Bank, N.A. as Documentation, Syndication, and
Administrative Agent dated December 30, 1996, which is attached
as Exhibit 10.17 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (Commission file no.
1-14036), is hereby incorporated by reference as Exhibit 10.17.

10.18 The Master Lease Agreement between the Company and Irkan Corp.
dated December 30, 1987 for property at 1004 Baltimore in Kansas
City, Missouri which is attached as Exhibit 10.18 to the
Company's Registration Statement, is hereby incorporated by
reference as Exhibit 10.18.

10.18.1The Master Lease Agreement between the Company and Irkan Corp.
dated December 30, 1987, for property at 127 West Tenth Street
in Kansas City, Missouri which is attached as Exhibit 10.18.1 to
the Company's Registration Statement, is hereby incorporated by
reference as Exhibit 10.18.1.

10.18.2The Lease Agreement dated February 24, 1988, between the
Company and Broadway Square Partners for property at 1055
Broadway in Kansas City, Missouri, which is attached as Exhibit
10.18.2 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.18.2.

10.19 The Company's Directors' Deferred Fee Plan effective September
1, 1995, which is attached as Exhibit 10.19 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.19.

54

10.20 The Trust Agreement between the Company as settlor and United
Missouri Bank of Kansas City, N.A. as Trustee dated December 31,
1987, which is attached as Exhibit 10.20 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.20.

10.20.1Trust Agreement by and between the Company as settlor and
United Missouri Bank of Kansas City, N.A., Trustee dated June
30, 1989, for the benefit of James Horan, which is attached as
Exhibit 10.20.1 to the Company's Registration Statement, is
hereby incorporated by reference as Exhibit 10.20.1.

10.21 DST Systems, Inc. Master Trust agreement dated December 31, 1997
is attached as Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (Commission file
no. 1-14036).

11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS

Not applicable.

12. STATEMENTS RE COMPUTATION OF RATIOS

Not applicable.

13. ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT TO SECURITY
HOLDERS

Not applicable.

16. LETTER RE CHANGE IN CERTIFYING ACCOUNTANT

Not applicable.

18. LETTER RE CHANGE IN ACCOUNTING PRINCIPLES

Not applicable.

21. SUBSIDIARIES OF THE COMPANY

The list of the Company's significant subsidiaries, which is attached
as Exhibit 21.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, (Commission file no. 1-14036).

22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS

Not applicable.

23. CONSENTS OF EXPERTS AND COUNSEL

The consent dated March 16, 1998 of Price Waterhouse LLP to the
incorporation by reference of their report included in this Annual
Report on Form 10-K is attached hereto as Exhibit 23.1.

24. POWER OF ATTORNEY

Not applicable.

55

27. FINANCIAL DATA SCHEDULE

A Financial Data Schedule prepared in accordance with Item 601 (c) of
Regulation S-K is attached hereto as Exhibit 27.1.

99. ADDITIONAL EXHIBITS

Not applicable.

(B) REPORTS ON FORM 8-K DURING THE LAST CALENDAR QUARTER

The Company filed a Form 8-K dated October 16, 1997, under Item 5 of
such form, reporting the announcement of financial results for the
quarter ended September 30, 1997.

56

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

DST SYSTEMS, INC.

By: /s/ Thomas A. McDonnell
-----------------------------------------------
THOMAS A. MCDONNELL
President and Chief Executive Officer, Director

Dated: February 26, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
capacities indicated on February 26, 1998.

/s/ Thomas A. McDonnell /s/ A. Edward Allinson
- ----------------------------------------------- ------------------------------
THOMAS A. MCDONNELL A. EDWARD ALLINSON
President and Chief Executive Officer, Director Director

/s/ Thomas A. McCullough /s/ Michael G. Fitt
- ----------------------------------------------- ------------------------------
THOMAS A. MCCULLOUGH MICHAEL G. FITT
Executive Vice President, Director Director

/s/ Kenneth V. Hager /s/ William C. Nelson
- ----------------------------------------------- ------------------------------
KENNETH V. HAGER WILLIAM C. NELSON
Vice President, Chief Financial Officer Director
and Treasurer
(Principal Financial Officer)

/s/ John J. Faucett /s/ M. Jeannine Strandjord
- ------------------------------------------------ ------------------------------
JOHN J. FAUCETT M. JEANNINE STRANDJORD
Controller (Principal Accounting Officer) Director

57

DST SYSTEMS, INC.,
1997 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS

The following Exhibits are attached hereto.* See Part IV of this Annual Report
on Form 10-K for a complete list of exhibits.

EXHIBIT
NUMBER DOCUMENT
10.3.1 First Amendment to the 1995 Stock Option and Performance Award Plan
10.6 The Employee Stock Ownership Plan and Trust Agreement of DST Systems,Inc
10.7 DST Systems, Inc. Profit Sharing and Trust Agreement (1996 Restatement)
10.7.1 First Amendment to the 1996 Restatement of the Profit Sharing Plan
10.13.3 Third Amendment to the Company's 1994 401(k) Plan
10.13.4 Fourth Amendment to the Company's 1994 401(k) Plan
10.21 DST Systems, Inc. Master Trust
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule

- --------------------------------------------------------------------------------

*The above exhibits are not included in this Form 10-K, but are
on file with the Securities and Exchange Commission
- --------------------------------------------------------------------------------
58