(816) 435-1000
(Registrant’s telephone number, including area code)

No Changes
(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X]     No [ ]

Number of shares outstanding of the Company’s common stock as of April 30, 2003:
Common Stock $0.01 par value – 118,732,977

1

The brand, service or product names or marks referred to in this Report are trademarks or services marks, registered or otherwise, of DST Systems, Inc. or its subsidiaries, affiliates or of vendors to the Company.

2

The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2002.

The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year 2003.

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DST Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2002.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal interim closing procedures) necessary to present fairly the financial position of the Company and its subsidiaries at March 31, 2003 and December 31, 2002, and the results of operations and cash flows for the three months ended March 31, 2003 and 2002.

Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation.

The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year 2003.

On March 30, 2001, DST completed the acquisition of a 75% interest in EquiServe by purchasing interests held by FleetBoston Financial ("FleetBoston") and Bank One Corporation ("Bank One"). On July 31, 2001, DST completed the acquisition of the remaining 25%, which was owned by Boston Financial Data Services, on essentially the same terms provided to FleetBoston and Bank One.

A restructuring provision of $15.9 million was recorded for employee severances and supplier contract termination costs related to the acquisition. The Company utilized $1.4 million for the three months ended March 31, 2003 related to the restructuring provision for employee severances. The restructuring provision for employee severance costs, which affected employees across nearly all classifications and locations, was $12.5 million relating to approximately 610 employees, of which 582 employees have been separated from the Company as of March 31, 2003. The remaining employee severances of approximately $1.8 million are expected to be paid in 2003. Contract termination costs of approximately $3.4 million were paid in 2001 that related to facilities that were closed.

The Output Solutions segment is consolidating its operations into three primary facilities and is closing certain other smaller facilities, which the Company believes will result in operational efficiencies. The segment recorded costs associated with facility and other consolidations of $0.6 million for the three months ended March 31, 2003, consisting of facility closure and relocation costs of $0.3 million, asset impairments of $0.2 million and other costs of $0.1 million. Lease termination costs of $1.6 million are to be paid out over the remaining lease terms from 2003 to 2004. Approximately 330 employees have been separated from the Company as of March 31, 2003 and the remaining 125 employees are expected to be separated in 2003. The remaining employee severances to be paid out total approximately $2.3 million. Additional charges of $2 million to $3 million related to facility consolidations will be expensed when incurred, which the Company believes will be in 2003.

7

Investments are as follows (in millions):

Certain information related to the Company’s available-for-sale securities is as follows (in millions):

The Company recognized $4.3 million and $0.2 million of investment impairments for the three months ended March 31, 2003 and 2002, respectively. A decline in a security's net realizable value that is other than temporary is treated as a realized loss in the statement of operations and the cost basis of the security is reduced to its estimated fair value.

8

The following table summarizes equity in earnings (losses) of unconsolidated affiliates (in millions):

The following table summarizes intangible assets (in millions):

Amortization of intangible assets for the three months ended March 31, 2003 and 2002 was $1.9 million and $0.5 million, respectively. Annual amortization for intangible assets recorded as of March 31, 2003 is estimated at $7.5 million for each of the years 2003, 2004, 2005, 2006 and 2007.

The following table summarizes the changes in the carrying amount of goodwill for the three months ended March 31, 2003, by segment (in millions):

6. Stockholders’ Equity

Earnings per share. The computation of basic and diluted earnings per share is as follows (in millions, except per share amounts):

10

The Company applies APBO No. 25 and related interpretations in accounting for its plans, and accordingly, no compensation cost has been recognized for the Company’s fixed stock-based compensation. Had compensation cost been determined consistent with SFAS No. 123, as amended by SFAS No. 148, the Company's net income would have been reduced to the following pro forma amounts:

The Company uses the Black-Scholes option pricing model which requires the Company to make certain assumptions in order to estimate fair value.

The Company has entered into forward stock purchase agreements for the repurchase of its common stock as a means of securing fixed prices for future purchases of its stock. During 2002, the Company entered into two new forward purchase agreements, which expire in June 2003 and September 2003. The cost to settle the two outstanding agreements at March 31, 2003 would be approximately $114 million for approximately 3.4 million shares of common stock. The agreements allow the Company to elect net cash or net share settlement in lieu of physical settlement of the shares.

The Company has entered into an agreement to guarantee 100% of a $30 million revolving credit facility of a 50% owned real estate joint venture. The Company has entered into an agreement with the other 50% partner in the joint venture, whereby the Company can recover 50% of payments made pursuant to the guarantee on the revolving credit facility from the joint venture partner. The joint venture partner has also granted a security interest in its partnership interest in the joint venture as security for the partner’s obligations under the agreement. At March 31, 2003, borrowings of $22.3 million were outstanding under this credit facility.

The Company has entered into an agreement to guarantee 50% of a $4.9 million construction loan of a 50% owned real estate joint venture, and to guarantee 49% of a $2.2 million mortgage loan of a 50% owned real estate joint venture.

The Company and State Street Corporation ("State Street") have each guaranteed 50% of a lease obligation of International Financial Data Services, U.K. ("IFDS U.K."), which requires IFDS U.K. to make annual rent payments of approximately $2.8 million for the next 15 years for its use of a commercial office building. The commercial office building is owned by a wholly owned affiliate of International Financial Data Services, Canada ("IFDS Canada") and was financed with a $19.5 million mortgage from a bank. The loan has a floating interest rate based upon LIBOR and fully amortizes over the 15 year term. To fix the rate of borrowing costs, the IFDS Canada affiliate entered into a 15 year interest rate hedge agreement with the same bank. The interest rate hedge,

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which has an initial notional amount value of approximately $19.5 million and scheduled reductions that coincide with the scheduled principal payments for the mortgage loan, was entered into for the purpose of fixing the borrowing costs of the mortgage at approximately 6.3%. The Company and State Street have each guaranteed 50% of the amounts of the interest rate hedge obligations. The Company would pay 50% of the total amount to close out of the hedge, which is approximately $0.6 million at March 31, 2003.

The Company’s 50% owned joint ventures are generally governed by shareholder or partnership agreements. The agreements generally entitle the Company to elect one-half of the directors to the board in the case of corporations and to have 50% voting/managing interest in the case of partnerships.

The agreements generally provide that the Company or the other party has the option to establish a price payable in cash, or a promise to pay cash, for all of the other’s ownership in the joint venture and to submit an offer, in writing, to the other party to sell to the other party all of its ownership interests in the joint venture or to purchase all ownership interests owned by the other party at such offering price. The party receiving the offer generally has a specified period of time to either accept the offer to purchase, or to elect to purchase the offering party’s stock at the offering price. The Company cannot estimate the potential aggregate offering price that it could be required to receive or elect to pay in the event this option becomes operable, however the amount could be material.

In addition to the guarantees entered into above, the Company has also guaranteed certain obligations of certain joint ventures under service agreements entered into by the joint ventures and their customers. The amount of such obligations is not stated in the agreements. Depending on the negotiated terms of the guaranty and/or on the underlying service agreement, the Company’s liability under the guaranty may be subject to time and materiality limitations, monetary caps and other conditions and defenses.

In certain instances in which the Company licenses proprietary systems to customers, the Company gives certain warranties and infringement indemnities to the licensee, the terms of which vary depending on the negotiated terms of each respective license agreement, but which generally warrant that such systems will perform in accordance with their specifications. The amount of such obligations is not stated in the lease agreements. The Company’s liability for breach of such warranties may be subject to time and materiality limitations, monetary caps and other conditions and defenses.

From time to time, the Company enters into agreements with unaffiliated parties containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective agreement. The amount of such obligations is not stated in the agreements. The Company’s liability under such indemnification provisions may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnity obligations include the following:

The Company has entered into purchase and service agreements with its vendors, and consulting agreements with providers of consulting services to the Company, pursuant to which the Company has agreed to indemnify certain of such vendors and consultants, respectively, against third party claims arising from the Company’s use of the vendor’s product or the services of the vendor or consultant.

In connection with the acquisition or disposition of subsidiaries, operating units and business assets by the Company, the Company has entered into agreements containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective agreement, but which are generally described as follows: (i) in connection with acquisitions made by the Company, the Company has agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by the Company, the Company has agreed to indemnify the buyer against damages incurred by the buyer due to the buyer’s reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made.

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The Company has entered into agreements with certain third parties, including banks and escrow agents, that provide software escrow, fiduciary and other services to the Company or to its benefit plans or customers. Under such agreements, the Company has agreed to indemnify such service providers for third party claims relating to the carrying out of their respective duties under such agreements.

The Company has entered into agreements with lenders providing financing to the Company pursuant to which the Company agrees to indemnify such lenders for third party claims arising from or relating to such financings. In connection with real estate mortgage financing, the Company has entered into environmental indemnity agreements in which the Company has agreed to indemnify the lenders for any damage sustained by the lenders relating to any environmental contamination on the subject properties.

In connection with the acquisition or disposition of real estate by the Company, the Company has entered into real estate contracts containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective contract, but which are generally described as follows: (i) in connection with acquisitions by the Company, the Company has agreed to indemnify the seller against third party claims made against the seller arising from the Company’s on-site inspections, tests and investigations of the subject property made by the Company as part of its due diligence and against third party claims relating to the operations on the subject property after the closing of the transaction, and (ii) in connection with dispositions by the Company, the Company has agreed to indemnify the buyer for damages incurred by the buyer due to the buyer’s reliance on representations and warranties relating to the subject property made by the Company in the real estate contract if such r epresentations or warranties were untrue when made and against third party claims relating to operations on the subject property prior to the closing of the transaction.

In connection with the leasing of real estate by the Company, as landlord and as tenant, the Company has entered into occupancy leases containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective lease, but which are generally described as follows: (i) in connection with leases in which the Company is the tenant, the Company has agreed to indemnify the landlord against third party claims relating to the Company’s occupancy of the subject property, including claims arising from loss of life, bodily injury and/or damage to property thereon, and (ii) in connection with leases in which the Company is the landlord, the Company has agreed to indemnify the tenant against third party claims to the extent occasioned wholly or in part by any negligent act or omission of the Company or arising from loss of life, bodily injury and/or damage to property in or upon any of the common areas or other areas under the Company’s control.

Pursuant to the charter of the Company, the Company is obligated to indemnify the officers and directors of the Company to the maximum extent authorized by Delaware law. Pursuant to resolutions of the Company’s Board of Directors, the Company is obligated to indemnify its employees who are certified and/or licensed accountants and attorneys in connection with professional services they provide to the Company. The amount of such obligations is not stated in the charter or the resolutions and is subject only to limitations imposed by Delaware law.

At March 31, 2003, the Company had not accrued any liability on the aforementioned guarantees or indemnifications.

The Company has several operating business units that offer sophisticated information processing and software services and products. These business units are reported as three operating segments (Financial Services, Output Solutions and Customer Management). In addition, investments in equity securities and certain financial interests and the Company's real estate subsidiaries and affiliates have been aggregated into an Investments and Other segment. The Company evaluates the performance of its segments based on income before income taxes and interest expense, adjusted for certain items that are not necessarily ongoing in nature or have a high level of predictability associated with them or are non-operational in nature. Generally, these items include net gains (losses) associated with securities, restructuring costs and other similar items. Management believes the exclusion of these items provides a better basis for evaluating underlying business unit performance. Intersegment revenues are reflecte d at rates prescribed by the Company and may not be reflective of market rates.

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Summarized financial information concerning the segments is shown in the following tables (in millions):

The consolidated total income before interest and income taxes as shown in the segment reporting information above less interest expense of $3.4 million and $2.8 million for the three months ended March 31, 2003 and 2002, respectively, is equal to the Company's income before income taxes on a consolidated basis for the corresponding periods.

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

The Company has several operating business units that offer sophisticated information processing and software services and products. These business units are reported as three operating segments (Financial Services, Output Solutions and Customer Management). In addition, investments in equity securities and certain financial interests and the Company's real estate subsidiaries and affiliates have been aggregated into an Investments and Other segment.

Financial Services
The Financial Services segment provides sophisticated information processing and computer software services and products primarily to mutual funds, investment managers, corporations, insurance companies, banks, brokers and financial planners. The segment also provides design, management and transaction processing services for customized consumer equipment maintenance and debt protection programs.

Output Solutions
The Output Solutions segment provides single source, integrated print and electronic communications solutions, including customized and personalized bill and statement processing services and electronic bill payment and presentment solutions.

Customer Management
The Customer Management segment provides customer management, billing and marketing solutions to the video/broadband, direct broadcast satellite ("DBS"), wire-line and Internet Protocol ("IP") telephony, Internet and utility markets.

Investments and Other
The Investments and Other segment holds investments in equity securities and certain financial interests and the Company's real estate subsidiaries and affiliates.

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

Consolidated revenues

Consolidated total revenues (including Out-of-Pocket ("OOP") reimbursements) for the three months ended March 31, 2003 decreased $1.1 million, a decrease of 0.2% over the comparable period in 2002. Consolidated operating revenues (excluding OOP reimbursements) for the quarter were $431.7 million, an increase of $5.1 or 1.2% over the prior year period. U.S. operating revenues for the three months ended March 31, 2003 were $393.5 million, an increase of 0.3% over the same period in 2002. International operating revenues for the three months ended March 31, 2003 were $38.2 million, an increase of 11.7% over the same period in 2002.

Financial Services segment total revenues for the three months ended March 31, 2003 increased $8.7 million or 3.1% over the same period in 2002. Financial Services operating revenues for the three months ended March 31, 2003 increased $16.8 million or 7.1% over the comparable period in 2002. U.S. Financial Services segment operating revenues for the three months ended March 31, 2003 increased $14.5 million or 6.7% over the same period in 2002. The increase in U.S. revenues resulted from increased U.S. mutual fund servicing revenues and the inclusion of lock\line, LLC ("lock\line") revenues partially offset by a decrease in EquiServe revenues from lower demutualization activity and lower corporate action revenues from lower levels of general market activity. U.S. mutual fund servicing revenues increased as U.S. mutual fund open shareowner accounts processed totaled 85.1 million at March 31, 2003, an increase of 6.4% from the 80.0 million serviced at December 31, 2002 and an increase of 8.5% f rom the 78.4 million serviced at March 31, 2002. Financial Services segment operating revenues from international operations for the three months ended March 31, 2003 were $23.6 million, an increase of 10.8% over the same period in 2002. The changes are primarily from higher investment accounting and AWD maintenance, consulting and development revenues.

Output Solutions segment total revenues for the three months ended March 31, 2003 decreased $5.2 million or 1.7% over the same period in 2002. Output Solutions segment operating revenues for the quarter ended March 31, 2003 were $144.1 million, a decrease of $10.5 million or 6.8% from the comparable period in 2002. The revenue decline resulted from lower mutual fund, brokerage, transportation and telecommunication revenues due to lower volumes and changes in product mix. Output Solutions segment images produced for the three months ended March 31, 2003 increased 4.5% to 2.3 billion and items mailed decreased 5.5% to 447 million compared to the same period in 2002.

Customer Management segment total revenues for the three months ended March 31, 2003 decreased $3.2 million or 4.9% over the same period in 2002. Customer Management segment operating revenues for the quarter ended March 31, 2003 were $46.2 million, a decrease of $3.9 million or 7.8% over the same period in 2002, primarily from decreased equipment sales and decreased processing and software service revenues.

Investments and Other segment total revenues increased $1.7 million for the three months ended March 31, 2003, an increase of 13.0% as compared to the same period in 2002. Investments and Other segment operating revenues increased $1.7 million for the three months ended March 31, 2003, an increase of 13.1% as compared to the same period in 2002, primarily from increased real estate leasing activity. Segment revenues are primarily rental income for facilities leased to the Company’s operating segments.

Financial Services segment income from operations for the three months ended March 31, 2003 increased 0.4% or $0.2 million over the comparable prior year period to $55.8 million. The increase in income from operations resulted primarily from increased mutual fund shareowner servicing and the inclusion of lock\line, partially offset by a decrease in EquiServe revenues from lower demutualization activity and lower corporate action revenues from lower levels of general market activity.

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Output Solutions segment income from operations for the three months ended March 31, 2003 decreased $6.8 million or 41.5% over the same period in 2002. The decrease in 2003 primarily related to lower revenues and costs associated with facility and other consolidations of $0.6 million. Estimated additional charges of $2 million to $3 million related to facility consolidations will be expensed when incurred. There may be material differences between these estimates and actual costs.

Customer Management segment income from operations totaled $9.1 million for the three months ended March 31, 2003, an increase of 26.4% over the comparable prior year period. The increase is primarily attributable to lower processing costs and equipment costs.

Investments and Other segment income from operations totaled $2.9 million for the three months ended March 31, 2003, as compared to $2.1 million for the three months ended March 31, 2002.

Interest expense totaled $3.4 million for the three months ended March 31, 2003, an increase from $2.8 million recorded in the comparable period in 2002. Average debt balances were higher in 2003 compared to 2002, primarily as a result of the lock\line acquisition and common stock repurchases.

Other income was $4.2 million for the three months ended March 31, 2003 compared to $8.1 million recorded in the prior year quarter. First quarter 2003 results include $4.1 million primarily related to interest and dividend income and $0.1 million in net gains on securities. First quarter 2002 results include $4.2 million of income primarily related to interest and dividend income and $3.9 million related primarily to net gains on securities.

The Company’s effective tax rate was 34.0% for the quarter ended March 31, 2003 and 2002. The 2003 and 2002 tax rates were affected by tax aspects of certain international operations and of state tax income apportionment rules.

Revenues
Financial Services segment total revenues for the three months ended March 31, 2003 increased 3.1% over the same period in 2002 to $291.2 million. Financial Services segment operating revenues for the three months ended March 31, 2003 were $254.0 million, an increase of $16.8 million or 7.1% over the prior year period. U.S. Financial Services operating revenue increased 6.7% to $230.4 million for the three months ended March 31, 2003.

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The increase in U.S. revenues resulted from increased U.S. mutual fund servicing revenues and the inclusion of lock\line revenues partially offset by a decrease in EquiServe revenues from lower demutualization activity and lower corporate action revenues from lower levels of general market activity. U.S. mutual fund servicing revenues for the three months ended March 31, 2003 increased 10.2% over the prior year period as U.S. mutual fund open shareowner accounts processed increased 8.5% from 78.4 million at March 31, 2002 to 85.1 million at March 31, 2003. During the quarter, approximately 5.5 million shareowner accounts were converted for the AIM Management Group.

Financial Services segment operating revenues from international operations for the three months ended March 31, 2003 increased 10.8% over the prior year period to $23.6 million. The changes are primarily from higher investment accounting and AWD maintenance, consulting and development revenues.

Costs and expenses
Segment costs and expenses for the three months ended March 31, 2003 increased 3.1% to $213.8 million over the comparable period in 2002. Personnel costs for the three months ended March 31, 2003 increased 13.4% over the comparable prior year period. Costs and expenses increased for the three month period, primarily from the acquisition of lock\line and increased system development and implementation costs partially offset by lower EquiServe costs associated with reduced demutualization activities.

Depreciation and amortization
Segment depreciation and amortization increased 10.2% or $2.0 million for the three months ended March 31, 2003 over the comparable period in 2002. The increase is primarily the result of the acquisition of lock\line.

Income from operations
Segment income from operations for the three months ended March 31, 2003 increased 0.4% to $55.8 million over the comparable prior year period. The increase in income from operations resulted primarily from increased mutual fund shareowner servicing and the inclusion of lock\line, partially offset by a decrease in EquiServe revenues from lower demutualization activity and lower corporate action revenues from lower levels of general market activity.

Revenues
Output Solutions segment total revenues for the three months ended March 31, 2003 decreased 1.7% to $306.5 million as compared to the same period in 2002. Output Solutions segment operating revenues for the three months ended March 31, 2003 decreased 6.8% to $144.1 million as compared to the same period in 2002. The revenue decline resulted from lower mutual fund, brokerage, transportation and telecommunications revenues due to lower volumes and changes in product mix.

Costs and expenses
Segment costs and expenses for the three months ended March 31, 2003 increased 0.6% to $288.1 million over the comparable period in 2002. The segment results include $0.6 million of costs in 2003 associated with previously announced facility and other consolidations. Personnel costs for the three months ended March 31, 2003 decreased 3.3% over the comparable prior year period.

Depreciation and amortization
Segment depreciation and amortization was $8.8 million for the three months ended March 31, 2003 and 2002.

Income from operations
Segment income from operations for the three months ended March 31, 2003 decreased $6.8 million or 41.5% over the same period in 2002. The decrease in 2003 primarily related to lower revenues and costs associated with facility and other consolidations of $0.6 million. Estimated additional charges of $2 million to $3 million related to facility consolidations will be expensed when incurred. There may be material differences between these estimates and actual costs.

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Revenues
Customer Management segment total revenues for the three months ended March 31, 2003 decreased 4.9% to $62.4 million as compared to the same period in 2002. Customer Management segment operating revenues for the three months ended March 31, 2003 were $46.2 million, a decrease of $3.9 million or 7.8% over the comparable period in 2002. Processing and software service revenues decreased to $45.3 million for the three months ended March 31, 2003 from $46.3 million for the three months ended March 31, 2002. Processing and software service revenues decreased primarily as a result of lower custom software revenues. Equipment sales decreased to $0.9 million for the three months ended March 31, 2003 from $3.8 million for the three months ended March 31, 2002. Equipment sales decreased primarily from a significant hardware sale recorded in the first quarter 2002. Total cable and satellite subscribers serviced were 41.4 million at March 31, 2003, an increase of 0.7% compared to year end 2002 levels, principa lly from a net increase in U.S. satellite and international cable subscribers serviced.

As previously disclosed, Charter Communications Inc. ("Charter") plans to discontinue its processing agreement. At March 31, 2003, approximately 3.2 million Charter subscribers were serviced. In addition, a customer has notified the Company that it intends to reduce the number of cable subscribers serviced by 1.4 million over the next six months.

Costs and expenses
Segment costs and expenses for the three months ended March 31, 2003 decreased $5.0 million or 8.8% compared to the same period in 2002, primarily attributable to lower processing costs and equipment costs.

Depreciation and amortization
Segment depreciation and amortization for the three months ended March 31, 2003 decreased 5.6% to $1.7 million compared to the same period in 2002. The decrease is primarily from lower capitalized software amortization.

Income from operations
Customer Management segment income from operations for the three months ended March 31, 2003 increased $1.9 million or 26.4% compared to the prior year period. The increases are primarily attributable to lower processing costs and equipment costs.

Revenues
Investments and Other segment total revenues were $14.8 million for the three months ended March 31, 2003, an increase of $1.7 million as compared to the prior year period. Investments and Other segment operating revenues were $14.7 million for the three months ended March 31, 2003, an increase of $1.7 million as compared to the prior year period. The increase is primarily attributable to increased real estate leasing activity.

Costs and expenses
Segment costs and expenses increased $0.3 million for the three months ended March 31, 2003, as compared to the three months ended March 31, 2002 primarily as a result of additional real estate activities.

Depreciation and amortization
Segment depreciation and amortization increased $0.6 million for the three months ended March 31, 2003, respectively, over the same period in 2002.

Income from operations
The segment’s income from operations totaled $2.9 million for the three months ended March 31, 2003 as compared to $2.1 million for the three months ended March 31, 2002. The increase is primarily attributable to increased real estate leasing activity.

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The Company's cash flow from operating activities totaled $57.1 million for the three months ended March 31, 2003. Operating cash flows for the three months ended March 31, 2003 primarily resulted from net income of $51.4 million, depreciation and amortization of $35.1 million partially offset by decreases in accrued compensation and benefits of $26.3 million.

Cash flows used in investing activities totaled $72.0 million for the three months ended March 31, 2003. The Company expended $68.7 million during the three months ended March 31, 2003 for capital additions, of which $37.4 million related to the Financial Services, Output Solutions and Customer Management segments and $31.3 million related to the Investments and Other segment, which primarily related to acquisitions of buildings and building improvements. The Company made $13.8 million of investments in available-for-sale securities and expended $4.2 million for advances to affiliates and other investments. During the three months ended March 31, 2003, the Company received $11.1 million from the sale and maturities of investments in available-for-sale securities and $2.8 million primarily from the sale of other investments.

Cash flows used in financing activities totaled $15.6 million for the three months ended March 31, 2003. For the three months ended March 31, 2003, the Company repurchased $26.5 million of common stock. Net borrowings totaled $60.0 million for the three months ended March 31, 2003 on the Company’s $315 million revolving credit facility and there was $250.0 million outstanding at March 31, 2003. Net payments under the Company’s 364-day $50 million line of credit totaled $5.6 million for the three months ended March 31, 2003, bringing total net borrowings under this facility to $42.9 million at March 31, 2003.

On August 2, 2002, the Company acquired lock\line, LLC ("lock\line") for cash. lock\line provides administrative services to support insurance programs for wireless communication devices, extended warranty programs for land line telephone and consumer equipment and event based debt protection programs. The lock\line acquisition was accounted for as a purchase and the results of lock\line’s operations were included in the Company’s 2002 consolidated financial statements. The minimum purchase price of $190 million was paid in cash at closing. The purchase price was funded by the Company’s $315 million syndicated line of credit and a $100 million term bridge loan, which expired on December 30, 2002, and had essentially the same terms and financial covenants as the $315 million syndicated line of credit. There are provisions in the acquisition agreement that allow for additional consideration to be paid in cash if lock\ line’s revenues, as defined in the acquisition agreement, exceed certain targeted levels for 2003 and 2004. Goodwill will be increased by the amount of additional consideration paid.

On March 30, 2001, the Company completed the acquisition of a 75% interest in EquiServe, Inc. ("EquiServe") by purchasing interests held by FleetBoston Financial ("FleetBoston") and Bank One Corporation ("Bank One"). On July 31, 2001, the Company completed the acquisition of the remaining 25%, which was owned by Boston Financial Data Services, on essentially the same terms provided to FleetBoston and Bank One.

The EquiServe acquisitions were accounted for as a purchase and the results of EquiServe’s operations are included in the Company’s consolidated financial statements beginning March 30, 2001. The minimum purchase price of $186.7 million is to be paid in four installments. The first installments of approximately $58.5 million were paid at the closings. The second installments of $55.8 million were paid on March 8, 2002. The third installments of $50.8 million were paid on March 7, 2003. The remaining minimum installments, which are approximately $21.6 million (discounted to $18.9 million for accounting purposes) are payable on February 28, 2004. The remaining minimum purchase price installments can increase pursuant to a formula that provides for additional consideration to be paid in cash if EquiServe’s revenues, as defined in the agreements, for the years ending 2000, 2001, 2002 and 2003 exceed certain targeted levels. The aggregate minimum purchase price (discounted to $177.7 milli on for accounting purposes) has been allocated to the net assets acquired based upon their fair values as determined by a valuation. Goodwill will be increased by the amount of contingent consideration paid. Based upon management’s current expectations, the Company expects to pay approximately $52 million, of which approximately $30 million will be considered contingent consideration.

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In December 2001, the Company entered into a $285 million (increased to $315 million in February 2002) unsecured revolving credit facility with a syndicate of U.S. and international banks. The $315 million revolving credit facility replaced the Company’s previous $125 million five year revolving credit facility and $120 million 364-day revolving credit facility. The $315 million facility is comprised of a $210 million three-year facility and a $105 million 364-day facility. Borrowings under the facility are available at rates based on the offshore (LIBOR), Federal Funds or prime rates. An annual facility fee of 0.1% to 0.125% is required on the total facility. An additional utilization fee of 0.125% is required if the aggregate principal amount outstanding plus letter of credit obligations exceeds 33% of the total facility. The revolving credit facility has a grid that adjusts borrowing costs up or down based upon applicable credit ratings and the Company’s level of indebtedness. The grid may result in fluctuations in borrowing costs. Among other provisions, the revolving credit facility limits consolidated indebtedness, subsidiary indebtedness, asset dispositions and requires certain coverage ratios to be maintained. In addition, the Company is limited, on an annual basis, to making dividends or repurchasing its capital stock in any fiscal year in an amount not to exceed 20% of consolidated net tangible assets. In the event of default, which includes, but is not limited to, a default in performance of covenants, default in payment of principal of loans or change of control, as defined, the syndicated lenders may elect to declare the principal and interest under the syndicated line of credit as due and payable and in certain situations automatically terminate the syndicated line of credit. In the event the Company experiences a material adverse change, as defined in the revolving credit facility, the lenders may not be required to make additional loans under the facility.

One of the Company’s subsidiaries maintains a 364-day $50 million line of credit for working capital requirements and general corporate purposes. The line of credit is scheduled to mature May 2003. The Company plans to renew the facility. Borrowings under the facility are available at rates based on the Euro dollar, Federal Funds or LIBOR rates. Commitment fees of 0.1% to 0.2% per annum on the unused portions are payable quarterly. Among other provisions, the agreement requires the subsidiary to maintain unencumbered liquid assets and stockholder’s equity of at least $300 million and to maintain certain interest coverage ratios. In the event of non-compliance, an event of default may occur, which could result in the loan becoming immediately due and payable.

In September 2002, one of the Company’s subsidiaries borrowed $106.4 million in real estate mortgages scheduled to mature October 2009. Prepayment is allowed after the first year with a fee of 0% to 1.5% on the prepayment amount, as defined in the loan agreement. Payments are made monthly of principal and interest, based on a 15 year amortization, with interest based on the 30-day LIBOR rate. The loan is secured by real property owned by the Company.

During the first quarter ended March 31, 2003, the Company purchased 0.9 million shares of its common stock under previously announced share repurchase programs for $26.5 million. The purchase of the shares was financed from cash flow from operations and borrowings under the Company’s syndicated line of credit. The shares purchased will be utilized for the Company’s stock award, employee stock purchase and stock option programs and for general corporate purposes. At March 31, 2003, the Company had 5.3 million shares remaining to be purchased under these programs and had purchased 16.8 million shares since the programs commenced.

The Company has entered into forward stock purchase agreements for the repurchase of its common stock as a means of securing fixed prices for future purchases of its stock. During 2002, the Company entered into two new forward purchase agreements, which expire in June 2003 and September 2003. The cost to settle the two outstanding agreements at March 31, 2003 would be approximately $114 million for approximately 3.4 million shares of common stock. The agreements allow the Company to elect net cash or net share settlement in lieu of physical settlement of the shares.

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 suffice 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.

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The Company has guaranteed certain obligations of certain joint ventures under service agreements entered into by the joint ventures and their customers. The amount of such obligations is not stated in the agreements. Depending on the negotiated terms of the guaranty and/or on the underlying service agreement, the Company’s liability under the guaranty may be subject to time and materiality limitations, monetary caps and other conditions and defenses.

In certain instances in which the Company licenses proprietary systems to customers, the Company gives certain warranties and infringement indemnities to the licensee, the terms of which vary depending on the negotiated terms of each respective license agreement, but which generally warrant that such systems will perform in accordance with their specifications. The amount of such obligations is not stated in the lease agreements. The Company’s liability for breach of such warranties may be subject to time and materiality limitations, monetary caps and other conditions and defenses.

From time to time, the Company enters into agreements with unaffiliated parties containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective agreement. The amount of such obligations is not stated in the agreements. The Company’s liability under such indemnification provisions may be subject to time and materiality limitations, monetary caps and other conditions and defenses. Such indemnity obligations include the following:

The Company has entered into purchase and service agreements with its vendors, and consulting agreements with providers of consulting services to the Company, pursuant to which the Company has agreed to indemnify certain of such vendors and consultants, respectively, against third party claims arising from the Company’s use of the vendor’s product or the services of the vendor or consultant.

In connection with the acquisition or disposition of subsidiaries, operating units and business assets by the Company, the Company has entered into agreements containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective agreement, but which are generally described as follows: (i) in connection with acquisitions made by the Company, the Company has agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by the Company, the Company has agreed to indemnify the buyer against damages incurred by the buyer due to the buyer’s reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made.

The Company has entered into agreements with certain third parties, including banks and escrow agents, that provide software escrow, fiduciary and other services to the Company or to its benefit plans or customers. Under such agreements, the Company has agreed to indemnify such service providers for third party claims relating to the carrying out of their respective duties under such agreements.

The Company has entered into agreements with lenders providing financing to the Company pursuant to which the Company agrees to indemnify such lenders for third party claims arising from or relating to such financings. In connection with real estate mortgage financing, the Company has entered into environmental indemnity agreements in which the Company has agreed to indemnify the lenders for any damage sustained by the lenders relating to any environmental contamination on the subject properties.

In connection with the acquisition or disposition of real estate by the Company, the Company has entered into real estate contracts containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective contract, but which are generally described as follows: (i) in connection with acquisitions by the Company, the Company has agreed to indemnify the seller against third party claims made against the seller arising from the Company’s on-site inspections, tests and investigations of the subject property made by the Company as part of its due diligence and against third party claims relating to the operations on the subject property after the closing of the transaction, and (ii) in connection with dispositions by the Company, the Company has agreed to indemnify the buyer for damages incurred by the buyer due to the buyer’s reliance on representations and

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warranties relating to the subject property made by the Company in the real estate contract if such representations or warranties were untrue when made and against third party claims relating to operations on the subject property prior to the closing of the transaction.

In connection with the leasing of real estate by the Company, as landlord and as tenant, the Company has entered into occupancy leases containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective lease, but which are generally described as follows: (i) in connection with leases in which the Company is the tenant, the Company has agreed to indemnify the landlord against third party claims relating to the Company’s occupancy of the subject property, including claims arising from loss of life, bodily injury and/or damage to property thereon, and (ii) in connection with leases in which the Company is the landlord, the Company has agreed to indemnify the tenant against third party claims to the extent occasioned wholly or in part by any negligent act or omission of the Company or arising from loss of life, bodily injury and/or damage to property in or upon any of the common areas or other areas under the Company’s control.

Pursuant to the charter of the Company, the Company is obligated to indemnify the officers and directors of the Company to the maximum extent authorized by Delaware law. Pursuant to resolutions of the Company’s Board of Directors, the Company is obligated to indemnify its employees who are certified and/or licensed accountants and attorneys in connection with professional services they provide to the Company. The amount of such obligations is not stated in the charter or the resolutions and is subject only to limitations imposed by Delaware law.

At March 31, 2003, the Company had not accrued any liability on the aforementioned guarantees or indemnifications.

Comprehensive income (loss). The Company’s comprehensive income (loss) totaled $(20.3) million for the three months ended March 31, 2003, compared to $88.9 million for the comparable period in 2002. Comprehensive income (loss) consists of net income of $51.4 million and other comprehensive loss of $71.7 million for the three months ended March 31, 2003 and net income of $58.8 million and other comprehensive income of $30.1 million for the three months ended March 31, 2002. Other comprehensive income consists of unrealized gains (losses) on available-for-sale securities, net of deferred taxes, reclassifications for gains included in net income and foreign currency translation adjustments. The principal difference between net income and comprehensive net income is the net change in unrealized gains (losses) on available-for-sale securities.

Other than temporary impairments. At March 31, 2003, the Company’s available-for-sale securities had unrealized losses of $20.3 million. If it is determined that a security’s net realizable value is other than temporary, a realized loss will be recognized in the statement of operations and the cost basis of the security reduced to its estimated fair value. The Company does not believe that the unrealized losses recorded at March 31, 2003 are other than temporary.

The Company recognized $4.3 million and $0.2 million of investment impairments for the three months ended March 31, 2003 and 2002, respectively. A decline in a security's net realizable value that is other than temporary is treated as a loss in the statement of operations and the cost basis of the security is reduced to its estimated fair value.

Seasonality. Generally, the Company does not have significant seasonal fluctuations in its business operations. Processing and output solutions volumes for mutual fund and corporate securities transfer processing 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.

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In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. This Interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities created prior to February 1, 2003. Through its Investments and Other segment, the Company has investments in a number of real estate operations, along with the Company's wholly owned real estate, primarily for the purpose of providing facilities for lease to the Company's other business segments and its affiliates. As described in Liquidity and Capital Resources, the Company has outstanding commitments to certain of these operations, as well as loans to and other potential variable interests in these entities. The Company is evaluating whether these real estate operations are variable interest entities as defined in FIN 46 and whether FIN 46 otherwise impacts the Company's historical accounting for these relationships.

In the operations of its businesses, the Company’s financial results can be affected by changes in equity pricing, interest rates and currency exchange rates. Changes in interest rates and exchange rates have not materially impacted the consolidated financial position, results of operations or cash flows of the Company. Changes in equity values of the Company’s investments have had a material effect on the Company’s comprehensive income and financial position.

Available-for-sale equity price risk
The Company’s investments in available-for-sale equity securities are subject to price risk. The fair value of the Company’s available-for-sale investments as of March 31, 2003 was approximately $816 million. The impact of a 10% change in fair value of these investments would be approximately $49.7 million to comprehensive income. As discussed under "Comprehensive income (loss)" above, net unrealized gains on the Company’s investments in available-for-sale securities have had a material effect on the Company’s comprehensive income and financial position.

Interest rate risk
The Company derives a certain amount of its service revenues from investment earnings related to cash balances maintained in transfer agency customer bank accounts that the Company is agent to. The balances maintained in the bank accounts are subject to fluctuation. At March 31, 2003, there was approximately $1.2 billion of cash balances maintained in such accounts. The Company estimates that a 50 basis point change in interest earnings rate would be approximately $4.1 million of net income.

At March 31, 2003, the Company had $442.3 million of debt, of which $399.0 million was subject to variable interest rates (Federal Funds rates, LIBOR rates, Prime rates). The Company estimates that a 10% increase in interest rates would not be material to the Company’s consolidated pretax earnings or to the fair value of its debt.

Foreign currency exchange rate risk
The operation of the Company's subsidiaries in international markets results in exposure to movements in currency exchange rates. The principal currencies involved are the British pound, Canadian dollar and Australian dollar. Currency exchange rate fluctuations have not historically materially affected the consolidated financial results of the Company.

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. 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.

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Within 90 days prior to the filing of this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (i) are effective for recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission’s rules and forms, the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, and (ii) include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to all ow timely decisions regarding required disclosure. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the most recent evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses.

The Company is from time to time a party to litigation arising in the ordinary course of its business. Currently, there are no legal proceedings that management believes would have a material adverse effect upon the consolidated results of operations or financial condition of the Company.

None.

None.

If a stockholder desires to have a proposal included in DST’s Proxy Statement for the annual meeting of stockholders to be held in 2004, the Corporate Secretary of DST must receive such proposal on or before November 28, 2003, and the proposal must comply with the applicable SEC laws and rules and the procedures set forth in the DST By-laws.

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The following table presents operating data for the Company’s operating business segments: