Discover Financial Services (Form: 10-Q, Received: 04/08/2009 17:07:56)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2009

¨	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 001-33378

DISCOVER FINANCIAL SERVICES

(Exact name of registrant as specified in its charter)


Delaware		36-2517428
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2500 Lake Cook Road Riverwoods, Illinois 60015		(224) 405-0900
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (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 registrant 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

As of March 31, 2009 there were 481,601,773 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

DISCOVER FINANCIAL SERVICES

Quarterly Report on Form 10-Q

For the quarterly period ended February 28, 2009

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Statements of Financial Condition		3
Consolidated Statements of Income		4
Consolidated Statements of Changes in Stockholders’ Equity		5
Consolidated Statements of Cash Flows		6
Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		60
Item 4. Controls and Procedures		61

Part II. OTHER INFORMATION		62
Item 1. Legal Proceedings		62
Item 1A. Risk Factors		63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65
Item 3. Defaults Upon Senior Securities		65
Item 4. Submission of Matters to a Vote of Security Holders		65
Item 5. Other Information		65
Item 6. Exhibits		65

Except as otherwise indicated or unless the context otherwise requires, “Discover Financial Services,” “Discover,” “DFS,” “we,” “us,” “our,” and “the Company” refer to Discover Financial Services and its subsidiaries.

We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover ^® , PULSE ^® , Cashback Bonus ^® , Discover ^® More ^® Card, Discover ^® Motiva ^SM Card, Discover ^® Open Road ^® Card, Discover ^® Network and Diners Club International ^® . All other trademarks, trade names and service marks included in this quarterly report on Form 10-Q are the property of their respective owners.

Part I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

DISCOVER FINANCIAL SERVICES

Consolidated Statements of Financial Condition


	February 28, 2009			November 30, 2008
	(unaudited)
	(dollars in thousands, except per share amounts)
Assets
Cash and due from banks	$	411,398		$	793,585
Federal Funds sold		—			1,050,000
Interest-earning deposits		8,312,810			8,327,558

Cash and cash equivalents		8,724,208			10,171,143
Investment securities:
Available-for-sale (amortized cost of $1,286,118 and $1,211,245 at February 28, 2009 and November 30, 2008, respectively)		1,202,537			1,127,119
Held-to-maturity (fair value of $89,842 and $84,167 at February 28, 2009 and November 30, 2008, respectively)		100,043			100,825

Total investment securities		1,302,580			1,227,944
Loan receivables:
Credit card		26,156,681			23,814,307
Other		1,877,527			1,402,304

Total loan receivables		28,034,208			25,216,611
Allowance for loan losses		(1,878,942	)		(1,374,585	)

Net loan receivables		26,155,266			23,842,026
Accrued interest receivable		150,100			159,021
Amounts due from asset securitization		1,847,193			2,233,600
Premises and equipment, net		544,219			552,502
Goodwill		255,421			255,421
Intangible assets, net		201,398			203,319
Other assets		1,426,133			1,247,406

Total assets	$	40,606,518		$	39,892,382

Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing deposit accounts	$	28,252,147		$	28,452,146
Non-interest bearing deposit accounts		82,171			78,375

Total deposits		28,334,318			28,530,521
Short-term borrowings		2,375,000			500,000
Long-term borrowings		1,432,631			1,735,383
Accrued interest payable		252,161			268,967
Special dividend – Morgan Stanley		473,000			473,000
Accrued expenses and other liabilities		1,740,057			2,468,688

Total liabilities		34,607,167			33,976,559
Commitments, contingencies and guarantees (Note 12)
Stockholders’ Equity:
Preferred stock, par value $0.01 per share; 200,000,000 shares authorized; none issued or outstanding		—			—
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized; 482,836,847 and 480,517,188 shares issued at February 28, 2009 and November 30, 2008, respectively		4,828			4,805
Additional paid-in capital		2,938,043			2,938,657
Retained earnings		3,136,977			3,046,956
Accumulated other comprehensive (loss)		(66,079	)		(66,338	)
Treasury stock, at cost; 1,378,199 and 530,549 shares at February 28, 2009 and November 30, 2008, respectively		(14,418	)		(8,257	)

Total stockholders’ equity		5,999,351			5,915,823

Total liabilities and stockholders’ equity	$	40,606,518		$	39,892,382

See Notes to Consolidated Financial Statements.

DISCOVER FINANCIAL SERVICES

Consolidated Statements of Income


	For the Three Months Ended
	February 28, 2009			February 29, 2008
	(unaudited)
	(dollars in thousands, except per share amounts)
Interest income:
Credit card loans	$	733,499		$	543,989
Other loans		35,233			9,232
Federal Funds sold		3,262			41,279
Investment securities		15,584			5,987
Deposits		20,500			22,437
Other interest income		7,715			39,878

Total interest income		815,793			662,802
Interest expense:
Deposits		297,126			309,799
Short-term borrowings		1,183			90
Long-term borrowings		14,411			29,552

Total interest expense		312,720			339,441

Net interest income		503,073			323,361
Provision for loan losses		937,813			305,632

Net interest income after provision for loan losses		(434,740	)		17,729

Other income:
Securitization income		417,883			713,497
Loan fee income		68,022			88,258
Discount and interchange revenue		75,267			51,896
Fee products		74,776			59,333
Merchant fees		12,837			18,844
Transaction processing revenue		28,866			25,954
Loss on investment securities		(805	)		(1,184	)
Antitrust litigation settlement		474,841			—
Other income		38,269			18,946

Total other income		1,189,956			975,544
Other expense:
Employee compensation and benefits		219,488			217,370
Marketing and business development		111,433			141,553
Information processing and communications		74,897			78,276
Professional fees		70,123			73,672
Premises and equipment		18,072			19,641
Other expense		65,110			71,831

Total other expense		559,123			602,343

Income from continuing operations before income tax expense		196,093			390,930
Income tax expense		75,699			152,101

Income from continuing operations		120,394			238,829
Loss from discontinued operations, net of tax		—			(157,615	)

Net income	$	120,394		$	81,214

Basic earnings per share:
Income from continuing operations	$	0.25		$	0.50
Loss from discontinued operations, net of tax		—			(0.33	)

Net income	$	0.25		$	0.17

Diluted earnings per share:
Income from continuing operations	$	0.25		$	0.50
Loss from discontinued operations, net of tax		—			(0.33	)

Net income	$	0.25		$	0.17

Dividends paid per share	$	0.06		$	0.06

See Notes to Consolidated Financial Statements

DISCOVER FINANCIAL SERVICES

Consolidated Statements of Changes in Stockholders’ Equity


	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Treasury Stock			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Treasury Stock			Total Stockholders’ Equity
	(unaudited)
	(dollars and shares in thousands)
Balance at November 30, 2007	477,762	$	4,777	$	2,846,127		$	2,717,905		$	32,032		$	(1,419	)	$	5,599,422
Adoption of FASB Interpretation No. 48	—		—		—			(8,743	)		—			—			(8,743	)
Comprehensive income:
Net income	—		—		—			81,214			—			—			81,214
Foreign currency translation, net of tax	—		—		—			—			(20,000	)		—
Net unrealized losses on investment securities, net of tax	—		—		—			—			(6,841	)		—

Other comprehensive loss	—		—		—			—			(26,841	)		—			(26,841	)

Total comprehensive income	—		—		—			—			—			—			54,373
Purchases of treasury stock	—		—		—			—			—			(993	)		(993	)
Common stock issued under employee benefit plans	1,138		12		16,125			—			—			—			16,137
Common stock issued and stock-based compensation expense	369		4		23,358			—			—			—			23,362
Dividends	—		—		—			(29,217	)		—			—			(29,217	)

Balance at February 29, 2008	479,269	$	4,793	$	2,885,610		$	2,761,159		$	5,191		$	(2,412	)	$	5,654,341


Balance at November 30, 2008	480,517	$	4,805	$	2,938,657		$	3,046,956		$	(66,338	)	$	(8,257	)	$	5,915,823
Adoption to initially apply the measurement date provision of FASB Interpretation of No. 158, net of tax	—		—		—			(1,110	)		—			—			(1,110	)
Comprehensive income:
Net income	—		—		—			120,394			—			—			120,394
Adjustments related to investment securities, net of tax	—		—		—			—			498			—
Adjustments related to pension and postretirement, net of tax	—		—		—			—			(239	)		—

Other comprehensive income	—		—		—			—			259			—			259

Total comprehensive income	—		—		—			—			—			—			120,653
Purchases of treasury stock	—		—		—			—			—			(6,161	)		(6,161	)
Common stock issued and stock-based compensation expense	2,320		23		11,060			—			—			—			11,083
Income tax deficiency on stock-based compensation plans	—		—		(11,674	)		—			—			—			(11,674	)
Dividends	—		—		—			(29,263	)		—			—			(29,263	)

Balance at February 28, 2009	482,837	$	4,828	$	2,938,043		$	3,136,977		$	(66,079	)	$	(14,418	)	$	5,999,351

See Notes to Consolidated Financial Statements.

DISCOVER FINANCIAL SERVICES

Consolidated Statements of Cash Flows


	For the Three Months Ended
	February 28, 2009			February 29, 2008
	(unaudited)
	(dollars in thousands)
Cash flows from operating activities
Net income	$	120,394		$	81,214
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of disposal group		—			172,469
Loss on investments securities		805			1,184
Gain on equipment		(14	)		—
Stock-based compensation expense		11,083			39,550
Income tax deficiency on stock-based compensation expense		(11,674	)		—
Deferred income taxes		(196,763	)		34,403
Depreciation and amortization on premises and equipment		24,945			29,755
Other depreciation and amortization		1,133			30,826
Provision for loan losses		937,813			324,477
Amortization of deferred revenues		(1,860	)		(5,587	)
Changes in assets and liabilities:
(Increase) decrease in amounts due from asset securitization		386,408			103,244
(Increase) decrease in other assets		9,469			(30,053	)
Increase (decrease) in accrued expenses and other liabilities		(753,360	)		40,155

Net cash provided by operating activities		528,379			821,637
Cash flows from investing activities
Maturities of investment securities		906			23,105
Purchases of investment securities		(73,897	)		(17,962	)
Proceeds from securitization and sale of loans held for investment		—			2,548,650
Net principal disbursed on loans held for investment		(3,229,840	)		(3,109,438	)
Proceeds from sale of equipment		1,139			—
Purchases of premises and equipment		(18,126	)		(20,359	)

Net cash (used for) investing activities		(3,319,818	)		(576,004	)
Cash flows from financing activities
Net increase (decrease) in short-term borrowings		1,875,000			(208,973	)
Repayment of long-term debt and bank notes		(302,456	)		(157,677	)
Purchases of treasury stock		(6,161	)		(993	)
Net increase (decrease) in deposits		(192,616	)		221,807
Dividends paid		(29,263	)		(29,217	)

Net cash (used for) provided by financing activities		1,344,504			(175,053	)
Effect of exchange rate changes on cash and cash equivalents		—			(23,500	)

Net increase (decrease) in cash and cash equivalents		(1,446,935	)		47,080
Cash and cash equivalents, at beginning of period		10,171,143			8,787,095

Cash and cash equivalents, at end of period	$	8,724,208		$	8,834,175

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest expense	$	327,345		$	389,201

Income taxes, net of income tax refunds	$	(208	)	$	(1,902	)

Non-cash transactions:
Acquisition of certificated beneficial interests in DCENT	$	—		$	385,000

See Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

(unaudited)

1.	Background and Basis of Presentation

Description of Business . Discover Financial Services (“DFS” or the “Company”) is a leading credit card issuer and electronic payment services company. The Company provides its services through its main subsidiaries Discover Bank and DFS Services LLC, the latter of which, directly or through its subsidiaries, operates Discover’s signature card network (the “Discover Network”), the PULSE Network (“PULSE”) and Diners Club International (“Diners Club”). Discover Bank is a Delaware state-chartered bank that offers its customers a variety of credit card, other consumer loan and deposit products. Discover Network operates a credit card transaction processing network for Discover Card-branded and third-party issued credit cards. PULSE operates an electronic funds transfer network, providing financial institutions issuing debit cards on the PULSE network with access to ATMs, as well as point of sale terminals at retail locations throughout the U.S. for debit card transactions. Diners Club is a global payments network that offers transaction processing and marketing services to licensees globally.

The Company’s business segments are U.S. Card and Third-Party Payments. The U.S. Card segment includes Discover Card-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through the Company’s Discover Bank subsidiary. The Third-Party Payments segment includes the PULSE Network, Diners Club and the Company’s third-party issuing business.

On March 31, 2008, the Company sold its Goldfish credit card business, based in the United Kingdom, to Barclays Bank PLC. This business represented substantially all of the Company’s International Card segment. The International Card segment is presented in discontinued operations in this report and except where noted, all amounts in the notes to the consolidated financial statements relate solely to continuing operations.

Basis of Presentation . The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the financial statements reflect all adjustments which are necessary for a fair presentation of the results for the quarter. All such adjustments are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related disclosures. Actual results could differ from these estimates. These interim consolidated financial statements should be read in conjunction with the Company’s 2008 audited consolidated and combined financial statements filed with the Company’s annual report on Form 10-K for the year ended November 30, 2008.

Recently Issued Accounting Pronouncements

In January 2009, the FASB issued FASB Staff Position No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (“FSP EITF 99-20-1”). This FSP amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets , to align it with the impairment guidance within Statement No. 115 by removing from EITF 99-20 the requirement to place exclusive reliance on market participants’ assumptions about future cash flows when evaluating an asset for other-than-temporary impairment. Both standards will now require that assumptions about future cash flows consider reasonable management judgment about the probability that the holder of an asset will be unable to collect all amounts due. FSP EITF 99-20-1 applies to the Company’s certificated retained interests in DCENT and its

investments in the credit card asset-backed securities of other issuers. The FSP is effective for interim and annual reporting periods ending after December 15, 2008. The application of this guidance did not impact the Company’s financial condition, results of operations or cash flows.

In December 2008, the FASB issued FASB Staff Position 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. Required disclosures include how investment allocation decisions are made, the inputs and valuation techniques used to measure the fair value of plan assets and significant concentrations of risk. The FSP is effective for fiscal years ending after December 15, 2009. The application of this guidance will only affect disclosures and therefore will not impact the Company’s financial condition, results of operations or cash flows.

In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). This FSP was issued in advance of the finalization of other proposed amendments to FASB Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended (“Statement No. 140”) and FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51 (“FIN 46R”) and requires additional disclosures about transfers of financial assets and about an entity’s involvement with variable interest entities. This FSP is applicable to financial statements issued for periods ending after December 15, 2008. Adoption of this FSP affected disclosures only and therefore had no impact on the Company’s financial condition, results of operations or cash flows.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”), which addresses whether unvested equity-based awards are participating securities and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128, Earnings per Share . FSP EITF 03-6-1 is effective for the Company beginning December 1, 2009 and cannot be adopted early. All prior period earnings per share data presented in financial statements that are issued after the effective date shall be adjusted retrospectively to conform to the new guidance. The adoption of FSP EITF 03-6-1 will not impact the Company’s financial condition, results of operations or cash flows.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“Statement No. 161”). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures designed to help investors better understand their effects on an entity’s financial condition, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of Statement No. 161 impacted disclosures only and therefore had no impact on the Company’s financial condition, results of operations or cash flows.

2.	Discontinued Operations

On March 31, 2008, the Company sold its Goldfish credit card business, based in the United Kingdom and previously reported as the International Card segment, to Barclays Bank PLC. The aggregate sale price under the agreement was £35 million (which was equivalent to approximately $70 million), which was paid in cash at closing.

The following table provides summary financial information for discontinued operations related to the sale of the Company’s Goldfish business (dollars in thousands):


	For the Three Months Ended February 29, 2008
Revenues ⁽¹⁾	$	98,564

Income from discontinued operations	$	23,630
Loss on impairment of discontinued operations		(235,630	)

Pretax loss from discontinued operations		(212,000	)
Income tax benefit		(54,385	)

Loss from discontinued operations, net of tax	$	(157,615	)

(1)	Revenues are the sum of net interest income and other income.

3.	Investment Securities

The Company’s investment securities consist of the following (dollars in thousands):


	February 28, 2009		November 30, 2008
U.S. Treasury and other U.S. government agency obligations	$	15,848	$	16,495
States and political subdivisions of states		70,135		70,290
Other securities:
Certificated retained interests in DCENT		977,204		981,742
Credit card asset-backed securities of other issuers		165,732		85,762
Asset-backed commercial paper notes		59,586		59,586
Other debt and equity securities		14,075		14,069

Total other securities		1,216,597		1,141,159

Total investment securities	$	1,302,580	$	1,227,944

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity investment securities are as follows (dollars in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At February 28, 2009
Available-for-Sale Investment Securities ⁽¹⁾
Certificated retained interests in DCENT	$	1,065,000	$	—	$	(87,796	)	$	977,204
Credit card asset-backed securities of other issuers		161,517		5,016		(801	)		165,732
Asset-backed commercial paper notes		59,586		—		—			59,586
Equity securities ⁽²⁾		15		—		—			15

Total available-for-sale investment securities	$	1,286,118	$	5,016	$	(88,597	)	$	1,202,537

Held-to-Maturity Investment Securities ⁽³⁾
U.S. Treasury and other U.S. government agency obligations:
Mortgage-backed securities	$	14,800	$	535	$	—		$	15,335
Other		1,048		1		—			1,049

Total U.S. Treasury and other U.S. government agency obligations		15,848		536		—			16,384
States and political subdivisions of states		70,135		—		(10,737	)		59,398
Other debt securities		14,060		—		—			14,060

Total held-to-maturity investment securities	$	100,043	$	536	$	(10,737	)	$	89,842


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At November 30, 2008
Available-for-Sale Investment Securities ⁽¹⁾
Certificated retained interests in DCENT	$	1,065,000	$	—	$	(83,258	)	$	981,742
Credit card asset-backed securities of other issuers		85,843		627		(708	)		85,762
Asset-backed commercial paper notes		59,586		—		—			59,586
Equity securities ⁽²⁾		816		—		(787	)		29

Total available-for-sale investment securities	$	1,211,245	$	627	$	(84,753	)	$	1,127,119

Held-to-Maturity Investment Securities ⁽³⁾
U.S. Treasury and other U.S. government agency obligations:
Mortgage-backed securities	$	15,449	$	379	$	—		$	15,828
Other		1,046		2		—			1,048

Total U.S. Treasury and other U.S. government agency obligations		16,495		381		—			16,876
States and political subdivisions of states		70,290		93		(17,132	)		53,251
Other debt securities		14,040		—		—			14,040

Total held-to-maturity investment securities	$	100,825	$	474	$	(17,132	)	$	84,167

(1)	Available-for-sale investment securities are reported at fair value.

(2)	For the three months ended February 28, 2009 and February 29, 2008, the Company recorded other-than-temporary impairments of $0.8 million and $1.2 million, respectively, related to an equity investment classified as available-for-sale.

(3)	Held-to-maturity investment securities are reported at amortized cost.

Certificated retained interests in DCENT are certificated Class B and Class C notes issued by DCENT, which the Company now holds as other retained beneficial interests. For more information on the fair value calculations of these investment securities, see Note 13: Fair Value Disclosures. The changes in the fair value of available-for-sale investment securities are recorded in other comprehensive income. During the three months ended February 28, 2009 and February 29, 2008, the Company recorded $4.5 million of gross unrealized losses and $12.1 million of gross unrealized losses, respectively, and no unrealized gains through other comprehensive income on these investment securities.

Credit card asset-backed securities of other issuers are investments in highly rated third-party credit card asset-backed securities which the Company purchased in the fourth quarter 2008 and first quarter 2009. During the three months ended February 28, 2009, the Company recorded $4.4 million of gross unrealized gains and $0.1 million of gross unrealized losses through other comprehensive income on these investment securities.

At February 28, 2009, the Company had $10.7 million of net unrealized losses on its held-to-maturity investment securities in state and political subdivisions, compared to $17.0 million of net unrealized losses at November 30, 2008. The Company believes the unrealized loss on these investments is the result of changes in interest rates subsequent to the Company’s acquisitions of these securities and that the reduction in value is temporary. Additionally, the Company expects to collect all amounts due according to the contractual terms of these securities.

4.	Loan Receivables

Loan receivables consist of the following (dollars in thousands):


	February 28, 2009			November 30, 2008
Credit card loans:
Discover Card ⁽¹⁾	$	25,704,794		$	23,348,134
Discover Business Card		451,887			466,173

Total credit card loans		26,156,681			23,814,307
Other consumer loans:
Personal loans		1,162,094			1,028,093
Student loans		642,624			299,929
Other		72,809			74,282

Total other consumer loans		1,877,527			1,402,304

Total loan receivables		28,034,208			25,216,611
Allowance for loan losses		(1,878,942	)		(1,374,585	)

Net loan receivables	$	26,155,266		$	23,842,026

(1)	Amount includes $16.7 billion and $14.8 billion of the Company’s seller’s interest in credit card securitizations at February 28, 2009 and November 30, 2008, respectively. See Note 5: Credit Card Securitization Activities for further information.

Activity in the allowance for loan losses is as follows (dollars in thousands):


	For the Three Months Ended
	February 28, 2009			February 29, 2008
Balance at beginning of period	$	1,374,585		$	759,925
Additions:
Provision for loan losses		937,813			305,632
Deductions:
Charge-offs		(481,279	)		(245,628	)
Recoveries		47,823			40,449

Net charge-offs		(433,456	)		(205,179	)

Balance at end of period	$	1,878,942		$	860,378

Information regarding net charge-offs of interest and fee revenues on credit card loans is as follows (dollars in thousands):


	For the Three Months Ended
	February 28, 2009		February 29, 2008
Interest and fees accrued subsequently charged off, net of recoveries (recorded as a reduction of interest income)	$	111,380	$	56,973
Fees accrued subsequently charged off, net of recoveries (recorded as a reduction to other income)	$	41,118	$	24,069

Information regarding loan receivables that are over 90 days delinquent and accruing interest and loan receivables that are not accruing interest is as follows (dollars in thousands):


	February 28, 2009		November 30, 2008
Loans over 90 days delinquent and accruing interest	$	623,564	$	444,324
Loans not accruing interest	$	204,682	$	173,123

5.	Credit Card Securitization Activities

The Company has accessed the term asset securitization market through the Discover Card Master Trust I and, beginning July 26, 2007, DCENT, into which credit card loan receivables generated in the U.S. Card segment are transferred to securitization trusts and from which beneficial interests are issued to investors. The Company continues to own and service the accounts that generate the transferred loan receivables. The Discover Card Master Trust I debt structure consists of Class A, triple-A rated certificates and Class B, single-A rated certificates held by third parties, with credit enhancement provided by the subordinated Class B certificates and a cash collateral account. DCENT includes up to four classes of securities sold to investors, the most senior class generally receiving a triple-A rating. In this structure, in order to issue senior, higher rated, classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower rated classes of notes. These trusts are not subsidiaries of the Company, and as such, are excluded from the consolidated financial statements in accordance with GAAP. The Company’s securitization activities generally qualify as sales under GAAP and accordingly are not treated as secured financing transactions. As such, credit card loan receivables equal to the amount of the investor interests in transferred loan receivables are removed from the consolidated statements of financial condition.

The Company’s retained interests in credit card asset securitizations include an undivided seller’s interest, certain subordinated tranches of notes, accrued interest receivable on securitized credit card receivables, cash collateral accounts, servicing rights, the interest-only strip receivable and other retained interests. The undivided seller’s interest is not represented by security certificates and is reported in loan receivables. The Company’s undivided seller’s interest ranks pari passu with investors’ interests in the securitization trusts. The remaining retained interests are subordinate to certain investors’ interests and, as such, may not be realized by the Company if needed to absorb deficiencies in cash flows that are allocated to the investors of the trusts. Subordinated retained interests represented by a security are recorded in available-for-sale investment securities at amounts that approximate fair value, with changes in the fair value estimates recorded in other comprehensive income, net of tax. All other subordinated retained interests are recorded in amounts due from asset securitization at amounts that approximate fair value. Changes in the fair value estimates of these other subordinated retained interests are recorded in securitization income. For more information on the fair value calculations of these retained interests, see Note 13: Fair Value Disclosures.

In addition to changes in fair value estimates, securitization income also includes annual servicing fees received by the Company and excess servicing income earned on the transferred loan receivables from which beneficial interests have been issued. Annual servicing fees are based on a percentage of the monthly investor principal balance outstanding and approximate adequate compensation to the Company for performing the servicing. Accordingly, the Company does not recognize servicing assets or servicing liabilities for these

servicing rights. Failure to service the transferred loan receivables in accordance with contractual requirements may lead to a termination of the servicing rights and the loss of future servicing fees.

The following table summarizes the Company’s retained interests in credit card securitizations (dollars in thousands):


	February 28, 2009		November 30, 2008
Available-for-sale investment securities	$	977,204	$	981,742
Loan receivables (seller’s interest) ⁽¹⁾		16,659,695		14,831,938
Amounts due from asset securitization:
Cash collateral accounts ⁽²⁾		956,105		1,121,447
Accrued interest receivable		403,851		473,694
Interest-only strip receivable		198,536		300,120
Other subordinated retained interests		274,607		315,823
Other		14,094		22,516

Amounts due from asset securitization		1,847,193		2,233,600

Total retained interests	$	19,484,092	$	18,047,280

(1)	Loan receivables net of allowance for loan losses were $15.6 billion and $14.0 billion at February 28, 2009 and November 30, 2008, respectively.

(2)	$0.9 billion and $1.0 billion at February 28, 2009 and November 30, 2008, respectively, are pledged as security against a long-term borrowing. See Note 8: Long-Term Borrowings.

The Company’s retained interests are subject to credit, payment and interest rate risks on the transferred credit card receivables. To protect investors, the securitization structures include certain features that could result in earlier-than-expected repayment of the securities, which could cause the Company to sustain a loss of one or more of its retained interests and could prompt the need for the Company to seek alternative sources of funding. The primary investor protection feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the insufficiency of which triggers early repayment of the securities. The Company refers to this as the “economic early amortization” feature. Investors are allocated cash flows derived from activities related to the accounts comprising the securitized pool of receivables, the amounts of which reflect finance charges billed, certain fee assessments, allocations of discount and interchange, and recoveries on charged off accounts. From these cash flows, investors are reimbursed for charge-offs occurring within the securitized pool of receivables and receive a contractual rate of return and the Company is paid a servicing fee as servicer. Any cash flows remaining in excess of these requirements are paid to the Company and recorded as excess spread, included in securitization income on the Company’s consolidated statements of income. An excess spread of less than 0% for a contractually specified period, generally a three month average, would trigger an economic early amortization event. Once the excess spread falls below 0%, the receivables that would have been subsequently purchased by the trust from the Company will instead continue to be recognized on the Company’s statement of financial condition since the cash flows generated in the trust would be used to repay principal to investors. Such an event could result in the Company incurring losses related to its subordinated retained interests, including amounts due from asset securitization and available-for-sale investment securities. The investors and the securitization trusts have no recourse to the Company’s other assets for a shortage in cash flows.

Another feature, which is applicable only to the notes issued from DCENT, is one in which excess cash flows generated by the transferred loan receivables are held at the trust for the benefit of the investors, rather than paid to the Company. This reserve account funding is triggered when DCENT’s three month average excess spread rate decreases to below 4.50% with increasing funding requirements as excess spread levels decline below preset levels to 0%. Similar to economic early amortization, this feature also is designed to protect the investors’ interests from loss.

In addition to performance measures associated with the transferred credit card loan receivables, there are other events or conditions which could trigger an early amortization event. As of February 28, 2009, no economic or other early amortization events have occurred. In addition, excess spread rates have been in excess of levels which would require excess cash flows to be held at the trust and not paid to the Company.

The table below provides information concerning investor interest and related excess spreads at February 28, 2009 (dollars in thousands):


	Investor Interest		# of Series Outstanding	3-Month Rolling Average Excess Spread
Interchange series ⁽¹⁾	$	11,915,795	14	7.38	%
Non-interchange series ⁽²⁾		2,789,475	3	4.43	%

Discover Card Master Trust I		14,705,270	17	4.43	%
Discover Card Execution Note Trust ⁽¹⁾		7,865,000	20	6.00	%

Total Company	$	22,570,270	37

(1)	Discover Card Master Trust I certificates issued on or after November 4, 2004 and all notes issued by DCENT include cash flows derived from discount and interchange revenue earned by Discover Bank.

(2)	The non-interchange series is not part of DCENT and is therefore not subject to the 4.50% excess spread trigger that requires cash to be held at the trust.

During the three months ended February 28, 2009 and February 29, 2008, the Company recognized a net revaluation of its subordinated retained interests, principally the interest-only strip receivable, consisting of losses of $98.2 million and gains of $75.0 million, respectively, in securitization income in the consolidated statements of income. Included in the February 29, 2008 amount is $36.8 million of initial gains on new securitization transactions, net of issuance discounts, as applicable. For the three months ended February 28, 2009, the Company did not complete any credit card securitizations and, therefore, had no initial gains.

The following table summarizes certain cash flow information related to the securitized pool of loan receivables (dollars in millions):


	For the Three Months Ended
	February 28, 2009		February 29, 2008
Proceeds from third-party investors in new credit card securitizations	$	—	$	2,549
Proceeds from collections reinvested in previous credit card securitizations	$	10,026	$	14,139
Contractual servicing fees received	$	124	$	137
Cash flows received from retained interests	$	633	$	719
Purchases of previously transferred credit card receivables (securitization maturities)	$	2,989	$	3,816

The Company did not complete any credit card securitizations during the three months ended February 28, 2009. Key estimates used in measuring the fair value of the interest-only strip receivable at the date of securitization that resulted from credit card securitizations completed during the three months ended February 29, 2008 were as follows:


	For the Three Months Ended
	February 28, 2009	February 29, 2008
Weighted average life (in months)	N/A	4.3 – 5.0
Payment rate (rate per month)	N/A	19.80%
Principal charge-offs (rate per annum)	N/A	5.10%
Discount rate (rate per annum)	N/A	12.00%

Key estimates and the sensitivity of the reported fair value of the interest-only strip receivable to immediate 10% and 20% adverse changes in those estimates were as follows (dollars in millions):


	February 28, 2009			November 30, 2008
Interest-only receivable strip (carrying amount/fair value)	$	199		$	300
Weighted average life (in months)		5.1			4.6
Weighted average payment rate (rate per month)		17.90	%		18.52	%
Impact on fair value of 10% adverse change	$	(12	)	$	(21	)
Impact on fair value of 20% adverse change	$	(23	)	$	(39	)
Weighted average principal charge-offs (rate per annum)		8.47	%		6.83	%
Impact on fair value of 10% adverse change	$	(76	)	$	(55	)
Impact on fair value of 20% adverse change	$	(122	)	$	(110	)
Weighted average discount rate (rate per annum)		15.00	%		12.50	%
Impact on fair value of 10% adverse change	$	(1	)	$	(1	)
Impact on fair value of 20% adverse change	$	(2	)	$	(3	)
Cash collateral accounts (carrying amount/fair value)	$	956		$	1,121
Weighted average discount rate (rate per annum)		2.43	%		2.59	%
Impact on fair value of 10% adverse change	$	(5	)	$	(7	)
Impact on fair value of 20% adverse change	$	(11	)	$	(13	)
Certificated retained beneficial interests (carrying amount/fair value)	$	977		$	982
Weighted average discount rate (rate per annum)		11.34	%		10.29	%
Impact on fair value of 10% adverse change	$	(12	)	$	(13	)
Impact on fair value of 20% adverse change	$	(25	)	$	(25	)

The sensitivity analyses of the interest-only strip receivable, cash collateral accounts and certificated retained beneficial interests are hypothetical and should be used with caution. Changes in fair value based on a 10% or 20% variation in an estimate generally cannot be extrapolated because the relationship of the change in the estimate to the change in fair value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of the interest-only strip receivable, specifically, is calculated independent of changes in any other estimate; in practice, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower payments and increased charge-offs), which might magnify or counteract the sensitivities. In addition, the sensitivity analyses do not consider any action that the Company may take to mitigate the impact of any adverse changes in the key estimates.

The table below presents quantitative information about delinquencies, net principal charge-offs and components of managed credit card loans, including securitized loans (dollars in millions):


	February 28, 2009				For the Three Months Ended February 28, 2009
	Loans Outstanding		Loans Delinquent		Average Loans		Net Principal Charge-offs
Managed credit card loans	$	49,011	$	2,651	$	50,254	$	820
Less: Securitized credit card loans		22,854		1,261		24,145		396

Owned credit card loans	$	26,157	$	1,390	$	26,109	$	424


	November 30, 2008				For the Three Months Ended November 30, 2008
	Loans Outstanding		Loans Delinquent		Average Loans		Net Principal Charge-offs
Managed credit card loans	$	49,693	$	2,317	$	49,420	$	686
Less: Securitized credit card loans		25,879		1,234		27,761		391

Owned credit card loans	$	23,814	$	1,083	$	21,659	$	295

6.	Deposits

A summary of interest-bearing deposit accounts is as follows (dollars in thousands):


	February 28, 2009			November 30, 2008
Certificates of deposit in amounts less than $100,000 ⁽¹⁾	$	22,031,180		$	22,083,962
Certificates of deposit in amounts of $100,000 ⁽¹⁾ or greater		2,142,897			1,808,320
Savings deposits, including money market deposit accounts		4,078,070			4,559,864

Total interest-bearing deposits	$	28,252,147		$	28,452,146

Average annual interest rate		4.30	%		4.67	%

(1)	Represents the basic insurance amount covered by the FDIC. Effective October 23, 2008, the United States Congress temporarily increased FDIC deposit insurance to $250,000 through December 31, 2009.

At February 28, 2009, certificates of deposit maturing over the next five years and thereafter were as follows (dollars in thousands):


Year	Amount
2009	$	6,522,797
2010	$	6,122,403
2011	$	3,466,083
2012	$	2,934,754
2013	$	3,452,794
Thereafter ⁽¹⁾	$	1,675,246

(1)

Includes certificates of deposits which may be called by the Company prior to their contractual maturity at specific intervals of time.

7.	Short-Term Borrowings

Short-term borrowings consist of term and overnight Federal Funds purchased and other short-term borrowings with original maturities less than one year. The following table identifies the balances and weighted average interest rates on short-term borrowings outstanding at period end (dollars in thousands):


	February 28, 2009				November 30, 2008
	Amount		Weighted Average Interest Rate		Amount		Weighted Average Interest Rate
Overnight Federal Funds purchased	$	375,000	0.28	%	$	—	—
Other short-term borrowings ⁽¹⁾		2,000,000	0.25	%		500,000	0.60	%

Total short-term borrowings	$	2,375,000	0.26	%	$	500,000	0.60	%

(1)	Other short-term borrowings consist of amounts borrowed under the Federal Reserve’s Term Auction Facility. The Company was required to pledge $2.7 billion and $0.7 billion of loan receivables against this borrowing as of February 28, 2009 and November 30, 2008, respectively.

8.	Long-Term Borrowings

Long-term borrowings consist of borrowings and capital leases having original maturities of one year or more. The following table provides a summary of the outstanding amounts and general terms of the Company’s long-term borrowings (dollars in thousands):


	February 28, 2009				November 30, 2008
Funding source	Outstanding		Interest Rate		Outstanding		Interest Rate		Interest Rate Terms	Maturity
Bank notes	$	—	—		$	249,977	2.54	%	3-month LIBOR ⁽¹⁾ + 15 basis points	February 2009
Secured borrowings		630,001	0.87	%		682,456	3.05	%	Commercial paper rate + 50 basis points	December 2010 ⁽²⁾
Unsecured borrowings:
Floating rate senior notes		400,000	2.63	%		400,000	3.35	%	3-month LIBOR + 53 basis points	June 2010
Fixed rate senior notes		399,324	6.45	%		399,304	6.45	%	6.45% fixed	June 2017

Total unsecured borrowings		799,324				799,304
Capital lease obligations		3,306	6.26	%		3,646	6.26	%	6.26% fixed	various

Total long-term borrowings	$	1,432,631			$	1,735,383

(1)	London Interbank Offered Rate (“LIBOR”).

(2)	Repayment is dependent upon the available balances of the cash collateral accounts at the various maturities of underlying securitization transactions, with final maturity in December 2010.

The Company entered into a 59-month unsecured credit agreement that became effective July 2, 2007. The agreement provides for a revolving credit commitment of up to $2.4 billion (of which the Company may borrow up to 30% and Discover Bank may borrow up to 100% of the total commitment). As of February 28, 2009, the Company had no outstanding balances due under the facility. The credit agreement provides for a commitment fee on the unused portion of the facility, which can range from 0.07% to 0.175% depending on the index debt ratings. Loans outstanding under the credit facility bear interest at a margin above the Federal Funds rate, LIBOR, the EURIBOR or the Euro Reference rate. The terms of the credit agreement include various affirmative and negative covenants, including financial covenants related to the maintenance of certain capitalization and tangible net worth levels, and certain double leverage, delinquency and tier 1 capital to managed loans ratios. The credit agreement also includes customary events of default with corresponding grace periods, including, without limitation, payment defaults, cross-defaults to other agreements evidencing indebtedness for borrowed money and bankruptcy-related defaults. The commitment may be terminated upon an event of default.

9.	Employee Benefit Plans

The Company sponsors defined benefit pension and other postretirement plans for its eligible U.S. employees; however, in October 2008, the Company announced to its employees the discontinuation of the accrual of future benefits in its defined benefit pension plans effective December 31, 2008. For more information, see the Company’s annual report on Form 10-K for the year ended November 30, 2008.

Net periodic benefit (income) cost expensed by the Company included the following components (dollars in thousands):


	Pension						Postretirement
	For the Three Months Ended						For the Three Months Ended
	February 28, 2009			February 29, 2008			February 28, 2009			February 29, 2008
Service cost, benefits earned during the period	$	255		$	4,206		$	194		$	269
Interest cost on projected benefit obligation		5,047			4,998			394			361
Expected return on plan assets		(6,027	)		(6,009	)		—			—
Net amortization		(2	)		(560	)		(38	)		(116	)

Net periodic benefit (income) cost	$	(727	)	$	2,635		$	550		$	514

On December 1, 2008, the Company adopted the measurement date provision of FASB Interpretation of Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) , resulting in a $1.8 million pretax reduction of retained earnings ($1.1 million after tax).

10.

Income Taxes

Income tax expense from continuing operations consisted of the following (dollars in thousands):


	For the Three Months Ended
	February 28, 2009			February 29, 2008
Current:
U.S. federal	$	241,256		$	127,700
U.S. state and local		30,231			21,752
International		975			(5	)

Total		272,462			149,447
Deferred:
U.S. federal		(178,019	)		2,247
U.S. state and local		(18,744	)		407

Total		(196,763	)		2,654

Income tax expense	$	75,699		$	152,101

The following table reconciles the Company’s effective tax rate from continuing operations to the U.S. federal statutory income tax rate:


	For the Three Months Ended
	February 28, 2009		February 29, 2008
U.S. federal statutory income tax rate	35.0	%	35.0	%
U.S. state and local income taxes, net of U.S. federal income tax benefits	3.8		3.2
Other	(0.2	)	0.7

Effective income tax rate	38.6	%	38.9	%

11.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities.

The following table presents the calculation of basic and diluted EPS (dollars and shares in thousands, except per share amounts):


	For the Three Months Ended
	February 28, 2009		February 29, 2008
Numerator:
Income from continuing operations	$	120,394	$	238,829
Loss from discontinued operations, net of tax		—		(157,615	)

Net income	$	120,394	$	81,214

Denominator:
Weighted average common shares outstanding		480,497		478,518
Effect of dilutive stock options and restricted stock units		4,546		3,226

Weighted average common shares outstanding and common stock equivalents		485,043		481,744

Basic earnings per share:
Income from continuing operations	$	0.25	$	0.50
Loss from discontinued operations, net of tax		—		(0.33	)

Net income	$	0.25	$	0.17

Diluted earnings per share:
Income from continuing operations	$	0.25	$	0.50
Loss from discontinued operations, net of tax		—		(0.33	)

Net income	$	0.25	$	0.17

For the three months ended February 28, 2009 and February 29, 2008, the Company had 7.4 million and 5.9 million, respectively, of anti-dilutive securities related to stock options and restricted stock units. As a result, these securities were excluded from the computation of diluted EPS.

12.

Commitments, Contingencies and Guarantees

Lease commitments . The Company leases various office space and equipment under capital and non-cancelable operating leases which expire at various dates through 2013. At February 28, 2009, future minimum payments on leases with remaining terms in excess of one year, consist of the following (dollars in thousands):


	February 28, 2009
	Capitalized Leases		Operating Leases
2009	$	1,184	$	4,633
2010		1,579		5,859
2011		790		4,612
2012		—		4,537
2013		—		3,037
Thereafter		—		14,167

Total minimum lease payments		3,553	$	36,845

Less: amount representing interest		247

Present value of net minimum lease payments	$	3,306

Unused commitments to extend credit. At February 28, 2009, the Company had unused commitments to extend credit for consumer and commercial loans of approximately $193 billion. Such commitments arise primarily from agreements with customers for unused lines of credit on certain credit cards, provided there is no

violation of conditions established in the related agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage and customer creditworthiness.

Guarantees. The Company has certain obligations under certain guarantee arrangements, including contracts and indemnification agreements that contingently require the Company to make payments to the guaranteed party based on changes in an underlying asset, liability or equity security of a guaranteed party, rate or index. Also included as guarantees are contracts that contingently require the Company to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. The Company’s use of guarantees is disclosed below by type of guarantee.

Discontinued Operations. Under the sale and purchase agreement to sell the Company’s Goldfish business, the Company indemnified the purchasers of the Goldfish business, including Barclays Bank PLC, against certain liabilities and losses. Such indemnities are customary in sale and purchase transactions and are contingent upon the purchasers incurring liabilities or losses that are not otherwise recoverable from third parties. Indemnification obligations of the Company include those related to the enforceability and transferability of the Goldfish credit card receivables. The maximum potential payments by the Company under the enforceability and transferability indemnification obligations is £129 million (approximately $184 million as of February 28, 2009), and Barclays Bank PLC must provide notice to the Company of any such claims within 12 months of the transaction closing date, March 31, 2008. At February 28, 2009, there were no material amounts recorded in the Company’s consolidated financial statements related to indemnification obligations under the agreement for the sale of the Goldfish business, and management believes that there is a low probability of any future material payments under these arrangements.

Securitized Asset Representations and Warranties . As part of the Company’s securitization activities, the Company provides representations and warranties that certain securitized assets conform to specified guidelines. The Company may be required to repurchase such assets or indemnify the purchaser against losses if the assets do not meet certain conforming guidelines. Due diligence is performed by the Company to ensure that asset guideline qualifications are met. The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of all assets subject to such securitization activities. The Company has not recorded any contingent liability in the consolidated financial statements for these representations and warranties, and management believes that the probability of any payments under these arrangements is low.

Diners Club. Diners Club has entered into contractual relationships with certain international merchants, which generally include travel-related businesses, for the benefit of all Diners Club licensees. The licensees hold the primary liability to settle the transactions of their cardmembers with these merchants. However, Diners Club retains a counterparty exposure if a licensee fails to meet its financial payment obligation to one of these merchants. While Diners Club has contractual remedies to offset this counterparty exposure, in the event that all licensees were to become unable to settle their transactions with these merchants, the Company estimates its maximum potential counterparty exposure to be approximately $573 million based on historical transaction volume with these merchants.

Additionally, Diners Club retains counterparty exposure if a licensee fails to settle amounts resulting from cardmember transactions processed in the territory of another licensee. While Diners Club has contractual remedies to offset this counterparty exposure, in the event all licensees were to become unable to settle their transactions with another licensee, the Company estimates its maximum potential counterparty exposure to be approximately $79 million based on historical transaction volume between licensees.

With regard to the two counterparty exposures discussed above, the Company believes that the estimated amounts of maximum potential future payments are not representative of the Company’s actual potential loss exposure given Diners Club’s insignificant historical losses with regard to these counterparty exposures. As of February 28, 2009, the Company has not recorded any contingent liability in the consolidated financial statements for these counterparty exposures, and management believes that the probability of any payments under these arrangements is low.

Merchant Chargeback Guarantees. The Company issues credit cards and owns and operates the Discover Network. The Company is contingently liable for certain transactions processed on the Discover Network in the event of a dispute between the cardholder and a merchant. The contingent liability arises if the disputed transaction involves a merchant or merchant acquirer with whom the Discover Network has a direct relationship. If a dispute is resolved in the cardholder’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its cardholder’s account. The Discover Network will then charge back the transaction to the merchant or merchant acquirer. If the Discover Network is unable to collect the amount from the merchant or merchant acquirer, it will bear the loss for the amount credited or refunded to the cardholder. In most instances, a payment obligation by the Discover Network is unlikely to arise because most products or services are delivered when purchased, and credits are issued by merchants on returned items in a timely fashion. However, where the product or service is not scheduled to be provided to the cardholder until some later date following the purchase, the likelihood of a contingent payment obligation by the Discover Network increases. The maximum potential amount of future payments related to such contingent obligations is estimated to be the portion of the total Discover Network transaction volume processed to date for which timely and valid disputes may be raised under applicable law and relevant issuer and cardholder agreements. However, the Company believes that amount is not representative of the Company’s actual potential loss exposure based on the Company’s historical experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputed transactions.

The table below summarizes certain information regarding merchant chargeback guarantees:


	For the Three Months Ended
	February 28, 2009		February 29, 2008
Losses related to merchant chargebacks (in thousands)	$	1,655	$	1,896
Aggregate transaction volume (in millions) ⁽¹⁾	$	22,926	$	24,691

(1)	Represents period transactions processed on Discover Network to which a potential liability exists which, in aggregate, can differ from credit card sales volume.

The amount of contingent liability related to the Company’s merchant chargeback guarantee was not material at February 28, 2009 and November 30, 2008. The Company mitigates this risk by withholding settlement from merchants or obtaining escrow deposits from certain merchant acquirers or merchants that are considered higher risk due to various factors such as time delays in the delivery of products or services.

The table below provides information regarding the Company’s settlement withholdings and escrow deposits (dollars in thousands):


	February 28, 2009		November 30, 2008
Settlement withholdings and escrow deposits	$	50,591	$	73,388

Settlement withholdings and escrow deposits are recorded in either interest-bearing deposit accounts or accrued expenses and other liabilities on the Company’s consolidated statements of financial condition.

13.

Fair Value Disclosures

In accordance with FASB Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments , the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve some degree

of judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

The following table provides the estimated fair values of financial instruments (dollars in thousands):


	February 28, 2009				November 30, 2008
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets
Cash and cash equivalents	$	8,724,208	$	8,724,208	$	10,171,143	$	10,171,143
Investment securities:
Available-for-sale	$	1,202,537	$	1,202,537	$	1,127,119	$	1,127,119
Held-to-maturity	$	100,043	$	89,842	$	100,825	$	84,167
Net loan receivables	$	26,155,266	$	26,421,116	$	23,842,026	$	24,058,173
Amounts due from asset securitization	$	1,847,193	$	1,847,193	$	2,233,600	$	2,233,600
Derivative financial instruments	$	6,382	$	6,382	$	4,102	$	4,102

Financial Liabilities
Deposits	$	28,334,318	$	29,281,471	$	28,530,521	$	28,715,427
Short-term borrowings	$	2,375,000	$	2,375,000	$	500,000	$	500,000
Long-term borrowings	$	1,432,631	$	1,352,810	$	1,735,383	$	1,638,067
Derivative financial instruments	$	47	$	47	$	1,895	$	1,895

Cash and cash equivalents . The carrying value of cash and cash equivalents approximates fair value due to maturities of less than three months.

Available-for-sale investment securities . Investment securities classified as available-for-sale are recorded at their fair values. Investment securities consist primarily of certificated subordinated interests issued by DCENT that have been acquired by the Company, credit card asset-backed securities issued by other institutions and mortgage-backed commercial paper notes of one issuer. Fair values of certificated retained interests and credit card asset-backed securities of other issuers are estimated utilizing discounted cash flow analyses, where estimated contractual principal and interest cash flows are discounted at current market rates for the same or comparable transactions. For certificated subordinated interests issued by DCENT that were acquired by the Company for which there is little or no market activity, discount rates are derived from indicative pricing observed in the most recent active market for such instruments, adjusted for changes occurring thereafter in relative credit spreads and liquidity risk premiums. The commercial paper notes classified as available for sale are currently in default. Because they are no longer traded, fair value of the notes is determined utilizing a valuation analysis reflecting an estimate of the market value of the assets held by the issuer.

Held-to-maturity investment securities . The estimated fair values of investment securities classified as held-to-maturity are based on quoted market prices utilizing public information for the same or comparable securities or information estimated through market pricing data.

Net loan receivables . The Company’s loan receivables include loans to consumers and commercial loans. To estimate the fair value of loan receivables, loans are aggregated into pools of similar loan types, characteristics and expected repayment terms. The fair values of the loans are estimated by discounting expected future cash flows using a rate at which similar loans could be made under current market conditions.

Amounts due from asset securitization . Carrying values of the portion of amounts due from asset securitization that are short-term in nature approximate their fair values. Fair values of the remaining assets recorded in amounts due from asset securitization reflect the present value of estimated future cash flows utilizing management’s best estimate of key assumptions with regard to credit card receivable performance and interest rate environment projections.

Deposits . The carrying values of money market deposit, non-interest bearing deposits, interest bearing demand deposits and savings accounts approximate their fair values due to the liquid nature of these deposits. For time deposits for which readily available market rates do not exist, fair values are estimated by discounting expected future cash flows using market rates currently offered for deposits with similar remaining maturities.

Short-term borrowings. Short-term borrowings have original maturities of less than one year. As a result of their short-term nature, the carrying values of short-term borrowings approximate their fair values.

Long-term borrowings. Long-term borrowings include fixed and floating rate debt. The fair values of long-term borrowings having fixed rates are determined by discounting cash flows of future interest accruals at market rates currently offered for borrowings with similar remaining maturities or repricing terms. The carrying values of long-term borrowings having floating rates approximate their fair values due to their automatic ability to reprice with changes in the interest rate environment.

Derivative financial instruments. As part of its interest rate risk management program, the Company may enter into interest rate swap agreements with institutions that are established dealers and that maintain certain minimum credit criteria established by the Company. The values of these agreements are derived using models which use primarily market observable inputs such as interest yield curves, credit curves and option volatility, and are recorded in other assets at their gross positive fair values and accrued expenses and other liabilities at their gross negative fair values.

The Company is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates, such as LIBOR, and uses interest rate swaps to manage its exposure to changes in fair value of these obligations attributable to changes in LIBOR. These interest rate swaps involve the receipt of fixed rate amounts from counterparties in exchange for the Company making variable rate payments over the life of the agreement without the exchange of the underlying notional amount. Most of these agreements are designated to hedge interest-bearing deposits and qualify as fair value hedges in accordance with Statement No. 133. The Company also has interest rate swap agreements that are not designated as hedges. Such agreements are not speculative and are also used to manage interest rate risk but are not designated for hedge accounting or do not meet the strict hedge accounting requirements of Statement No. 133. The following tables identify the notional amounts, fair values and classification in the statement of financial condition of the Company’s outstanding interest rate swaps at February 28, 2009 (dollars in thousands):


	Notional Amount		Weighted Average Years to Maturity
Interest rate swaps designated as fair value hedging instruments:	$	265,635	8.0
Interest rate swaps not designated as hedging instruments:	$	97,365	4.6


	Derivative Assets As of February 28, 2009			Derivative Liabilities As of February 28, 2009
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps designated as hedging instruments:	Other assets	$	3,683	Accrued expenses and other liabilities	$	42

Interest rate swaps not designated as hedging instruments:	Other assets	$	2,699	Accrued expenses and other liabilities	$	5

For the Company’s derivative financial instruments that were designated as hedging instruments, changes in the fair value of the derivative contracts and the interest-bearing deposits were recorded in interest expense. Interest expense also included the effect of the termination of derivatives and hedged deposits, and the amortization of basis adjustments to the fair value of the interest-bearing deposits that arose from the previous designated hedging relationships. For derivative contracts that were not designated or did not quality as fair value

hedges, the Company recorded changes in the fair values of these derivative contracts in other income. The table below presents the effect of the Company’s derivatives on the consolidated statement of income (dollars in thousands):


	For the Three Months Ended February 28, 2009
	Location of Gain/(Loss) Recognized in Income	Gain/(Loss) on Derivative		Gain/(Loss) on Hedged Item			Net Amount of Gain/(Loss) Recognized in Income
Derivatives designated as fair value hedging instruments:	Interest expense- Ineffectiveness	$	1,279	$	(2,200	)	$	(921	)
	Interest expense- Other	$	6,408	$	4,460		$	10,868

Derivatives not designated as hedging instruments:	Other income	$	1,408	$	—		$	1,408

The Company limits its credit exposure on derivatives by entering into contracts with institutions that are established dealers and that maintain certain minimum credit criteria established by the Company. The Company does not have any credit support arrangements with respect to outstanding derivative contracts that would require the posting of collateral when in a liability position. The Company’s exposure to counterparties at February 28, 2009 was not material.

Assets and Liabilities Measured at Fair Value on a Recurring Basis. Statement of Financial Accounting Standards No. 157, Fair Value Measurements , defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at February 28, 2009, and indicates the level within the fair value hierarchy with which each of those items is associated. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Fair values determined by Level 3 inputs utilize unobservable inputs, and include situations where there is little, if any, market activity for the asset or liability. In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The FASB has recently clarified in FSP FAS 157-3 that in inactive markets, the use of Level 3 inputs may result in

fair value estimates that are more reliable than those that would be indicated by the use of quoted prices. Disclosures concerning assets and liabilities measured at fair value on a recurring basis at February 28, 2009 are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis at February 28, 2009

(dollars in thousands)


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at February 28, 2009
Assets
Available-for-sale investment securities	$	15	$	—	$	1,202,522	$	1,202,537
Amounts due from asset securitization ⁽¹⁾	$	—	$	—	$	1,154,641	$	1,154,641
Derivative financial instruments ⁽²⁾	$	—	$	6,382	$	—	$	6,382
Liabilities
Derivative financial instruments ⁽²⁾	$	—	$	47	$	—	$	47

(1)	Balances represent only the components of amounts due from asset securitization that are marked to fair value.

(2)	The Company does not offset the fair value of derivative contracts with a negative fair value against the fair value of contracts with a positive fair value.

The Company considers relevant and observable market prices in its valuations, evaluating the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when comparing similar transactions to assess the relevance of those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2. If relevant and observable prices are not available, other valuation techniques would be used and the fair values of the financial instruments would be classified as Level 3. The Company utilizes both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category. The level to which an asset or liability is classified is based upon the lowest level of input that is significant to the fair value measurement. If the fair value of an asset or liability is measured based on observable inputs as well as unobservable inputs which contributed significantly to the determination of fair value, the asset or liability would be classified in Level 3 of the fair value hierarchy.

The Level 3 category includes the Company’s certificated interests in the form of Class B and Class C notes issued by DCENT, which are reported in available-for-sale investment securities. Prior to the fourth quarter of 2008, the Company’s valuation of these investments utilized the discount rate reflecting bid-ask spreads derived from observable transactions. At February 28, 2009, and in accordance with FSP FAS 157-3, the Company utilized a discount rate reflective of the implied rate of return as of September 25, 2008, the last date on which the Company considered the market for these assets to be active, adjusted for changes occurring thereafter in relative credit spreads and liquidity risk premiums. We considered the following factors in determining that the market for credit card asset-backed securities has been inactive since the fourth calendar quarter of 2008:

•

Primary market credit card asset-backed securitization transactions averaged $6 billion to $9 billion monthly from the beginning of 2006 through May 2008, decreasing to a level of approximately $4 billion per month through September 2008, followed by a lack of primary issuance transactions altogether after September 25, 2008 (excluding issuances to related parties). Given the absence of primary market transactions since that date, more recent observable data did not exist as of February 28, 2009.

•

Prior to October 2008, quoted market spreads of primary market credit card asset-backed securitizations, which the Company historically relied on in valuing its certificated retained interests, demonstrated relatively little variability among the various pricing sources. Beginning in October 2008 and continuing through the first quarter of 2009, these indicative spreads have reflected a high degree of variability among different pricing sources.

•

Beginning in October 2008 and continuing through the first quarter of 2009, bid-ask spreads have widened significantly among credit card asset-backed securities market participants, resulting in the absence of primary market transactions after September 25, 2008.

The weighted average discount rate assumptions used in valuing the Class B and Class C notes were 9.06% and 12.50%, respectively, at February 28, 2009. These discount rates reflect incremental liquidity risk premiums of 125 basis points and 175 basis points on our Class B and Class C notes, respectively, added to the rates in the fourth quarter of 2008 and incremental credit risk premiums of 110 basis points and 155 basis points on the Class B and Class C notes, respectively, added to the rates in the first quarter of 2009. In determining these risk premiums, we considered the following information:

•

Changes to 1-month LIBOR, including a peak rate of 4.5875% in October 2008, and related widening of the spread between LIBOR and overnight indexed swaps by as much as 132 basis points;

•

A 100 basis point decline in the Federal Funds target rate in the fourth quarter of 2008; and

•

Recent ratings watch actions by ratings agencies impacting several of the largest credit card asset-backed securities issuers, including Discover on February 4, 2009, in response to deteriorating credit quality.

The Level 3 available-for-sale investment securities category also includes credit card asset-backed securities of other issuers which are investments in highly rated third-party credit card asset-backed securities and the Company’s investment in asset-backed commercial paper notes of Golden Key U.S. LLC. The fair value of the credit card asset-backed securities of other issuers reflects the low end of market indicative pricing based on a small number of recent distressed transactions. The fair value of the commercial paper notes of Golden Key U.S. LLC reflects an estimate of the market value of those assets held by the issuer, which has become increasingly reliant upon unobservable data as the market for mortgage-backed securities has continued to experience significant disruption.

Also included in the Level 3 category are cash collateral accounts deposited at the trust as credit enhancement to certain transferred receivables against which beneficial interests have been issued and the interest-only strip receivable, both of which are included in amounts due from asset securitization. The Company estimates the fair value of the cash collateral accounts utilizing the discounted present value of estimated contractual cash flows. The Company estimates the fair value of the interest-only strip receivable based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield, loan losses and payment rates, the interest rate paid to investors, and a discount rate commensurate with the risks involved.

The following table provides changes in the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis. Net transfers in and/or out of Level 3 are presented using beginning of the period fair values.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

(dollars in thousands)


	Balance at November 30, 2008		Total Realized and Unrealized Gains (Losses)			Purchases, Sales, Other Settlements and Issuances, net			Net Transfers In and/or Out of Level 3		Balance at February 28, 2009
Assets
Available-for-sale investment securities	$	1,127,090	$	1,633	⁽²⁾	$	73,799		$	—	$	1,202,522
Amounts due from asset securitization ⁽¹⁾	$	1,421,567	$	(98,242	) ⁽³⁾	$	(168,684	)	$	—	$	1,154,641

(1)	Balances represent only the components of amounts due from asset securitization that are marked to fair value.

(2)

Includes $1.9 million of accreted income recorded in other income, partially offset by a net unrealized pretax loss of $0.3 million recorded in other comprehensive income in the consolidated statement of financial condition. Amounts included in other comprehensive income are recorded on an after tax basis.

(3)	This unrealized loss is recorded in securitization income in the consolidated statement of income.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis. The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired. During the three months ended February 28, 2009, the Company had no impairments related to these assets.

As of February 28, 2009, the Company has not made any fair value elections with respect to any of its eligible assets and liabilities as permitted under the provisions of FASB Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities–Including an amendment of FASB Statement No. 115 .

14.

Segment Disclosures

The Company’s business activities are managed in two segments: U.S. Card and Third-Party Payments.

•

U.S. Card. The U.S. Card segment includes Discover Card-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer products and services, including installment loans, prepaid cards and other consumer lending and deposit products offered through the Company’s Discover Bank subsidiary.

•

Third-Party Payments. The Third-Party Payments segment includes PULSE, an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and the Company’s third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties.

The business segment reporting provided to and used by the Company’s chief operating decision maker is prepared using the following principles and allocation conventions:

•

Segment information is presented on a managed basis because management considers the performance of the entire managed loan portfolio in managing the business. A managed basis presentation, which is a non-GAAP presentation, involves reporting securitized loans with the Company’s owned loans in the managed basis statements of financial condition and reporting the earnings on securitized loans in the same manner as the owned loans instead of as securitized income. The managed basis presentation generally reverses the effects of securitization transactions.

•

Other accounting policies applied to the operating segments are consistent with the accounting policies described in Note 2: Summary of Significant Accounting Policies to the audited consolidated and combined financial statements included in the Company’s annual report on Form 10-K for the year ended November 30, 2008.

•

Corporate overhead is not allocated between segments; all corporate overhead is included in the U.S. Card segment.

•

Through its operation of the Discover Network, the U.S. Card segment incurs fixed marketing, servicing and infrastructure costs, which are not specifically allocated among the operating segments.

•

The assets of the Company are not allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.

•

Income taxes are not specifically allocated among the operating segments in the information reviewed by the Company’s chief operating decision maker.

The following table presents segment data on a managed basis and a reconciliation to a GAAP presentation (dollars in thousands):


	Managed Basis						Securitization Adjustment ⁽²⁾			GAAP Basis
For the Three Months Ended	U.S. Card		Third-Party Payments ⁽¹⁾		Total		Securitization Adjustment ⁽²⁾			Total
February 28, 2009
Interest income	$	1,603,362	$	487	$	1,603,849	$	(788,056	)	$	815,793
Interest expense		438,338		79		438,417		(125,697	)		312,720

Net interest income		1,165,024		408		1,165,432		(662,359	)		503,073
Provision for loan losses		1,333,673		—		1,333,673		(395,860	)		937,813
Other income ⁽³⁾		863,223		60,234		923,457		266,499			1,189,956
Other expense		527,407		31,716		559,123		—			559,123

Income from continuing operations before income tax expense	$	167,167	$	28,926	$	196,093	$	—		$	196,093

February 29, 2008
Interest income	$	1,651,987	$	628	$	1,652,615	$	(989,813	)	$	662,802
Interest expense		668,951		2		668,953		(329,512	)		339,441

Net interest income		983,036		626		983,662		(660,301	)		323,361
Provision for loan losses		627,068		—		627,068		(321,436	)		305,632
Other income		602,411		34,268		636,679		338,865			975,544
Other expense		582,976		19,367		602,343		—			602,343

Income from continuing operations before income tax expense	$	375,403	$	15,527	$	390,930	$	—		$	390,930

(1)	Diners Club was acquired on June 30, 2008.

(2)

The Securitization Adjustment column presents the effect of loan securitizations by recharacterizing as securitization income the portions of the following items that relate to the securitized loans: interest income, interest expense, provision for loan losses, discount and interchange revenue and loan fee revenues. Securitization income is reported in other income.

(3)	The three months ended February 28, 2009 includes $475 million of income related to the Visa and MasterCard antitrust litigation settlement, which is included in the U.S Card segment.

15.

Subsequent Events

Participation in Capital Purchase Program. On March 13, 2009, the Company issued and sold to the United States Department of the Treasury (the “U.S. Treasury”) under the U.S. Treasury’s Capital Purchase Program (“CPP”) 1,224,558 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “senior preferred stock”), with a liquidation preference of $1,000 per share, and a ten-year warrant to purchase 20,500,413 shares of its common stock at an exercise price of $8.96 per share, subject to anti-dilution adjustments, for an aggregate purchase price of approximately $1.2 billion.

The senior preferred stock qualifies as Tier 1 capital and pays a cumulative dividend rate of five percent per annum for the first five years and a rate of nine percent per annum thereafter. The senior preferred stock is generally non-voting, other than class voting rights on certain matters that could amend the rights of or adversely affect the stock. The senior preferred stock terms provide that the stock may not be redeemed, as opposed to repurchased, prior to May 15, 2012 unless we have received aggregate gross proceeds from one or more qualified equity offerings (as described below) equal to $306,147,000. In such a case, we may redeem the senior preferred stock, in whole or in part, subject to the approval of the Federal Reserve Board, upon notice, up to a maximum amount equal to the aggregate net cash proceeds received by us from such qualified equity offerings. A “qualified equity offering” is a sale and issuance for cash by us, to persons other than us or our subsidiaries after March 13, 2009, of shares of perpetual preferred stock, common stock or a combination thereof, that in each case

qualify as Tier 1 capital at the time of issuance under the applicable risk-based capital guidelines of the Federal Reserve Board. On or after May 15, 2012, the senior preferred stock may be redeemed by us at any time, in whole or in part, subject to the approval of the Federal Reserve Board and notice requirements.

Notwithstanding the foregoing, pursuant to a letter agreement between us and the U.S. Treasury, we are permitted, after obtaining the approval of the Federal Reserve Board, to repay the senior preferred stock at any time, and when such senior preferred stock is repaid, the U.S. Treasury is required to liquidate the warrant, all in accordance with The American Recovery and Reinvestment Act of 2009, as it may be amended from time to time, and any rules and regulations thereunder. The U.S. Treasury may transfer the senior preferred stock to a third party at any time. The U.S. Treasury may only transfer or exercise an aggregate of one half of the shares of common stock underlying the warrant prior to the earlier of the redemption of all of the shares of senior preferred stock and December 31, 2009.

Participation in the CPP restricts the Company’s ability to increase dividends on its common stock or to repurchase its common stock until three years have elapsed, unless (i) all of the senior preferred stock issued to the U.S Treasury is redeemed, (ii) all of the senior preferred stock issued to the U.S Treasury has been transferred to third parties, or (iii) the Company receives the consent of the U.S. Treasury. Participation in the CPP has required the Company to adopt the U.S. Treasury’s standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds equity issued under the CPP.

Immediately prior to the issuance of the senior preferred stock and the warrant to the U.S. Treasury, the Company became a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. Registration as a bank holding company subjects the Company to new legal and regulatory requirements, including minimum capital requirements, and subjects the Company to oversight, regulation and examination by the Federal Reserve.

Cash Dividend. On March 19, 2009, the Company’s board declared a cash dividend of $0.02 per share, payable on April 22, 2009, to stockholders of record at the close of business on April 1, 2009, a reduction from the $0.06 dividend declared in prior quarters.

Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this quarterly report. This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report, and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: the actions and initiatives of current and potential competitors; our ability to manage credit risks and securitize our receivables at acceptable rates and under sale accounting treatment; changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment and the levels of consumer confidence and consumer debt; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; the availability and cost of funding and capital; access to U.S. debt and deposit markets; the ability to manage our liquidity risk; losses in our investment portfolio; the ability to increase or sustain Discover Card usage or attract new cardmembers and introduce new products or services; our ability to attract new merchants and maintain relationships with current merchants; our ability to successfully achieve interoperability among our networks and maintain relationships with network participants; material security breaches of key systems; unforeseen and catastrophic events; our reputation; the potential effects of technological changes; the effect of political, economic and market conditions and geopolitical events; unanticipated developments relating to lawsuits, investigations or similar matters; the impact of current, pending and future legislation, regulation and regulatory and legal actions, including the Federal Reserve Board’s new rules limiting or modifying certain credit card practices and legislation related to government programs to stabilize the financial markets; our ability to attract and retain employees; the ability to protect our intellectual property; the impact of any potential future acquisitions; investor sentiment; resolution of our dispute with Morgan Stanley; and the restrictions on our operations resulting from financing transactions.

Additional factors that could cause our results to differ materially from those described below can be found under “Part II. Other Information—Item 1A. Risk Factors” in this quarterly report and “Part I.—Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended November 30, 2008 filed with the SEC and available at the SEC’s internet site (http://www.sec.gov).

Introduction and Overview

Discover Financial Services is a leading credit card issuer and electronic payment services company. We offer credit cards as well as other financial products and services to qualified customers. We are also a leader in payment processing and related services for merchants and financial institutions. Our fiscal year ends on November 30 of each year.

Our primary revenues come from interest income earned on loan receivables, securitization income derived from the transfer of credit card loan receivables to securitization trusts and subsequent issuance of beneficial interests through securitization transactions, and fees earned from cardmembers, merchants and issuers. The primary expenses required to operate our business include funding costs (interest expense), loan loss provisions, cardmember rewards, and expenses incurred to grow, manage and service our loan receivables.

Our business activities are funded primarily through the raising of consumer deposits, the process of asset securitization, and both secured and unsecured debt. In a credit card securitization, loan receivables are first transferred to the securitization trust, from which beneficial interests are issued to investors. We continue to own

and service the accounts that generate the securitized loans. The trusts utilized by us to facilitate asset securitization transactions are not our subsidiaries. These trusts are excluded from our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). Because our securitization activities qualify as sales under GAAP and accordingly are not treated as secured financing transactions, we remove credit card loan receivables equal to the amount of the investor interests in securitized loans from our consolidated statements of financial condition. As a result, asset securitizations have a significant effect on our consolidated financial statements in that the portions of interest income, provision for loan losses and certain components of other income related to the securitized loans against which beneficial interests have been issued are no longer recorded in our consolidated statements of income; however, they remain significant factors in determining the securitization income we receive on our retained beneficial interests in those transactions. See “—Accounting Treatment for Off-Balance Sheet Securitizations” below for information regarding proposed amendments to the accounting standards applicable to asset securitizations and see “—Outlook” below for a discussion of the current state of the securitization markets.

Our senior management evaluates business performance and allocates resources using financial data that is presented on a managed basis. Managed loans consist of our on-balance sheet loan portfolio, loans held for sale and loan receivables that have been securitized and against which beneficial interests have been issued. Owned loans, a subset of managed loans, refer to our on-balance sheet loan portfolio and loans held for sale and include the undivided seller’s interest we retain in our securitizations. A managed basis presentation, which is not a presentation in accordance with GAAP, involves reporting securitized loans with our owned loans in the managed basis statements of financial condition and reporting the earnings on securitized loans in the same manner as the owned loans instead of as securitization income. See “—GAAP to Managed Data Reconciliations.”

Key Highlights

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Net income for the first quarter of 2009 was $120 million, up from $81 million in the first quarter of 2008. Net income for the first quarter of 2009 includes after tax revenue of approximately $297 million related to the Visa and MasterCard antitrust litigation settlement, as described in “Part II. Other Information—Item 1. Legal Proceedings.” The first quarter of 2008 includes a loss from discontinued operations related to the sale of the Goldfish business in March 2008 of $158 million.

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The deteriorating economic environment, including higher unemployment, continues to put pressure on our customers, and thus, our delinquency and charge-off rates. The managed charge-off rate for the first quarter 2009 was 6.48%, compared to 4.33% for the first quarter of 2008. The managed over 30 days delinquency rate was 5.25% at February 28, 2009, up from 3.90% as of February 29, 2008 and, as a result, we have increased our reserve rate to 6.70%, up from 4.16% at February 29, 2008. The continued trends of higher charge-offs and lack of new securitization activity led to a revaluation loss on our interest-only strip receivable of $98 million in the first quarter 2009 compared to a gain of $75 million in the first quarter 2008.

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Managed loans of $51 billion remained relatively unchanged from November 30, 2008, as declining sales volumes were offset by the effects of slowing payment rates and loan growth due to seasonal funding of our student loans. Our owned loans grew $2.8 billion, to $28 billion, primarily because approximately $3 billion of securitization maturities in the first quarter of 2009 were not replaced with new securitizations. The additional receivables contributed to approximately $165 million of the total addition of $504 million to our allowance for loan losses.

At the end of 2008, we increased our liquidity reserve and deposit issuance in anticipation of these first quarter 2009 securitization maturities. We continued to grow our direct-to-consumer and affinity deposit products in the first quarter, adding more than $800 million since November 30, 2008. For the remainder of 2009, we have approximately $2 billion of securitizations that mature primarily in the second half of the year. As our near-term funding needs are lower at February 28, 2009 compared to November 30, 2008, we have reduced our liquidity reserve by $1.1 billion to $8.3 billion.

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Our net interest income increased $180 million from the first quarter 2008, to $503 million, and our interest rate spread rose 120 basis points to 4.44%. Higher on-balance sheet loans positively impacted interest income and the lower interest rate environment favorably impacted our cost of funds and interest expense. As we increase the use of deposits to fund higher levels of owned loan receivables, our on-balance sheet interest expense has grown as well, and has partially offset the favorable impact of the lower interest rate environment on our cost of funds.

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During the quarter, we had higher transaction volume in our Third-Party Payments segment in comparison to first quarter 2008. Transaction volume in this segment grew 33% over the prior year to $35 billion, including a $6.3 billion volume contribution from Diners Club, which was acquired on June 30, 2008.

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On March 13, 2009, we issued and sold shares of our preferred stock and a warrant to purchase shares of our common stock to the U.S. Department of the Treasury as part of the Capital Purchase Program for approximately $1.2 billion in cash. See “—U.S. Treasury Capital Purchase Program” below for more information.

Outlook

Our financial results continue to be adversely impacted by the challenging economic environment. Unemployment levels rose at a faster rate than many expected as the national unemployment rate reached 8.5% in March 2009. In addition, housing prices remain depressed, foreclosures are increasing, and consumer confidence remains low. We believe that these factors are contributing to lower payment rates and higher delinquency and charge-off rates in the industry overall. We expect to continue to operate in a very difficult environment for the remainder of 2009.

As a result of higher charge-offs and owned loan growth, and in anticipation of higher future charge-offs, we recorded a higher provision for loan losses in the first quarter of 2009. Our underwriting and portfolio management strategies are designed to manage exposure to credit losses. However, we expect the continued challenges in the consumer credit environment will lead to increasingly higher charge-off and reserve rates throughout 2009.

We remain committed to maintaining strong liquidity and capital positions, with $6.0 billion of equity and $8.3 billion in our liquidity reserve as of February 28, 2009. In March, we closed on our participation in the U.S. Treasury Capital Purchase Program and received approximately $1.2 billion of additional capital. We also decreased our dividend from $.06 per share to $.02 per share of common stock, which, if maintained at that level going forward, would preserve approximately $20 million of capital per quarter. We are also focused on portfolio management to limit our balance sheet exposure to risk and higher capital requirements. We have approximately $2 billion in asset-backed securities maturing during the remainder of 2009, and approximately $10 billion maturing during 2010. We will continue to seek to grow direct-to-consumer deposits as a source of funding in addition to utilizing other options to fund higher levels of owned loan receivables as a result of the disruptions in the asset-backed securitization market.

We obtain deposits through the brokered deposit market, in which third-party securities brokers offer our certificates of deposit to their customers; through the direct-to-consumer deposit market, in which we offer our deposit products directly to consumers; and through the affinity deposit market, in which we offer our deposit products through our affinity partners. Although our total deposits did not change significantly in the first quarter, we did increase our direct-to-consumer and affinity deposit products by more than $800 million. We expect that our direct-to-consumer and affinity deposit business will continue to grow during the remainder of 2009.

We are beginning to implement the comprehensive new rules on credit card practices and disclosures that were adopted by the Federal Reserve Board in December 2008, which will take effect in July 2010. These new

rules limit or modify rate increases, payment allocation, default pricing, notice periods, two-cycle balance computation and consumer disclosures. In certain areas, such as two-cycle balance computation and timely payment, we have already implemented some changes or are already largely in compliance. We are working toward early compliance with respect to other requirements, but actual timing is unclear as we need to make significant systems and operational changes. We expect to be in full compliance by July 2010. Implementation of the rules may potentially have a negative impact on net interest margin. Legislation has been approved by Congressional committees that would accelerate the effective date of the Federal Reserve rules described above, and would impose additional requirements, including limitations on late and overlimit fees. It is unclear at this time whether any legislation will be adopted by Congress and, if adopted, what the content of such legislation will be.

Our Third-Party Payments segment experienced growth in transaction volume, revenues and pretax income in the first quarter of 2009. Diners Club contributed $6.3 billion of the total $35 billion in transaction volume, resulting in higher revenues. The inclusion of Diners Club in the first quarter 2009 also resulted in higher expenses. During the remainder of 2009, we do not expect revenues to be as high on a quarterly basis as Diners Club’s volume-based pricing system results in higher revenues at the beginning of the calendar year. Additionally, we expect expenses in this segment to rise throughout the rest of the year as we invest in the integration of Diners Club with our other networks.

Accounting Treatment for Off-Balance Sheet Securitizations

The Financial Accounting Standards Board (“FASB”) has issued proposed amendments to Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended (“Statement No. 140”), and FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). Under the proposed amendment to Statement No. 140, the concept of a qualifying special purpose entity (“QSPE”) will be eliminated. QSPEs are currently exempt from the consolidation provisions of FIN 46R, and as a result, amendments to that standard are being considered as well. Exposure drafts for proposed amendments to each standard were issued on September 15, 2008, and each was subject to a 60-day public comment period. Based on comments it received and other considerations, the FASB has reconsidered certain of its proposed changes, and the FASB may further revise the amendments before issuing final guidance. The changes to these standards, if adopted as proposed, may make it more difficult for us to maintain or establish sale accounting treatment in connection with transfers of financial assets in securitization transactions and could result in consolidation of the securitization entities by us. This would have a significant impact on our consolidated financial statements. For example, the impact of the potential consolidation, if applied as of February 28, 2009, would require us to add approximately $22 billion of securitized receivables to our assets and add the related debt issued to third-party investors to our liabilities. As proposed, each amended standard would become effective for us on December 1, 2009. For a discussion of certain risks to us associated with the proposed amendments, see the discussion under “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended November 30, 2008.

On September 15, 2008, the federal banking agencies issued a joint press release stating that they are evaluating the potential impact that these proposals could have on banking organizations’ financial statements, regulatory capital, and other regulatory requirements. In addition, a new FASB Staff Position, which requires additional disclosures for securitization activities prior to the effective date of the amendments to Statement No. 140 and FIN 46R, was issued on December 15, 2008. That guidance, FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”), requires inclusion of the new disclosures beginning with this report. See “Part I. Item 1. Financial Statements—Notes to Consolidated Financial Statements—5. Credit Card Securitization Activities.”

U.S. Treasury Capital Purchase Program

On March 13, 2009, we issued and sold to the U.S. Department of the Treasury (the “U.S. Treasury”) 1,224,558 shares of senior preferred stock and a ten-year warrant to purchase 20,500,413 shares of our common

stock at an exercise price of $8.96 per share, subject to anti-dilution adjustments, for an aggregate purchase price of approximately $1.2 billion. The issuance is part of the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”), under which the U.S. Treasury is purchasing senior preferred stock and warrants in eligible institutions to increase the flow of credit to businesses and consumers and to support the economy. For details regarding the terms of the sale of our securities, see “—Liquidity and Capital Resources—U.S. Treasury Capital Purchase Program.”

We are subject to certain restrictions on executive compensation for our senior executive officers and the next 20 most highly compensated employees under the Emergency Economic Stabilization Act of 2008, as amended (the “EESA”). Our “senior executive officers” for this purpose include our chief executive officer, chief financial officer and the three most highly compensated executive officers other than the chief executive officer and chief financial officer. We agreed that for such time as the U.S. Treasury continues to own any of our securities under the CPP, we will take all necessary action to ensure that our compensation and other benefit plans with respect to our senior executive officers and certain other employees comply with EESA restrictions relating to executive compensation, which include (i) limits on compensation and incentives to take unnecessary and excessive risks that would threaten the value of the company, (ii) a provision for recovery (i.e., clawback) of amounts of compensation that later prove to have been based on materially inaccurate financial statements or other performance metrics, and (iii) limitations on golden parachute payments. Also, we may not deduct for tax purposes executive compensation in excess of $500,000 for any of our senior executive officers. The executive compensation restrictions under EESA have been significantly expanded recently, as described below in “—Legislative and Regulatory Developments—American Recovery and Reinvestment Tax Act of 2009.”

Participation in the CPP subjects us to increased oversight by the U.S. Treasury and banking regulators. The U.S. Treasury has the power to unilaterally amend the terms of the purchase agreement to the extent required to comply with changes in applicable federal law and to inspect our corporate books and records through our federal banking regulators. In addition, the U.S. Treasury has the right to appoint two directors to our board if we miss dividend payments for six dividend periods, whether or not consecutive, on the preferred stock. Participation in the CPP also subjects us to increased Congressional scrutiny, as described below in “—Legislative and Regulatory Developments.”

In connection with participating in the CPP, we became a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. Registration as a bank holding company subjects us to new legal and regulatory requirements, including minimum capital requirements, and subjects us to oversight, regulation and examination by the Federal Reserve.

Legislative and Regulatory Developments

American Recovery and Reinvestment Tax Act of 2009

On February 17, 2009, the American Recovery and Reinvestment Tax Act of 2009 (“ARRA”) was signed into law. Included among the many provisions in the ARRA are restrictions affecting financial institutions that participate in TARP, including the CPP, which are set forth in the form of amendments to the EESA. These amendments provide that during the period in which any obligation under the TARP remains outstanding (other than obligations relating to outstanding warrants), TARP recipients are subject to standards for executive compensation and corporate governance to be set forth in regulations to be issued by the U.S. Treasury. Among the executive compensation and corporate governance provisions included in the ARRA are the following:

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a limitation on incentive compensation paid or accrued to our five senior executive officers (as defined above) and the next 20 most highly compensated employees. Under this provision, incentive compensation paid to such individuals may not exceed one-third of the individual’s annual compensation and must be paid in restricted stock that does not fully vest during the period in which any obligation arising from financial assistance provided under TARP remains outstanding;

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an expansion of the coverage of the incentive compensation “clawback” provision (as described above) to include the next 20 most highly compensated employees after the senior executive officers;

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an expansion of the prohibition on certain golden parachute payments to cover any severance payment for a departure for any reason (with limited exceptions) made to any senior executive officer and the next five most highly compensated employees;

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a requirement that the chief executive officer and chief financial officer provide a written certification of compliance with certain executive compensation and corporate governance provisions in annual securities filings;

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a requirement that companies adopt a company-wide policy regarding excessive or luxury expenditures;

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a requirement that companies permit a separate, non-binding shareholder vote to approve the compensation of our senior executive officers; and

•

limitations on hiring workers under the H1-B visa program.

These executive compensation restrictions may impair our ability to retain and recruit key personnel. See “Part II. Item 1A. Risk Factors.”

Recent Initiatives Related to EESA

Congress has held hearings on implementation of TARP. On January 21, 2009, the U.S. House of Representatives approved legislation amending the TARP provisions of EESA to include quarterly reporting requirements with respect to lending activities, examinations by an institution’s primary federal regulator of use of funds and compliance with program requirements, restrictions on acquisitions by depository institutions receiving TARP funds, and authorization for U.S. Treasury to have an observer at board meetings of recipient institutions, among other things. In addition, on April 1, 2009, the U.S. House of Representatives approved legislation amending the TARP provisions of the EESA that would impose additional limitations on the compensation arrangements of TARP recipients while the TARP capital investment remains outstanding. If adopted, such limitations would prohibit compensation payments (other than longevity bonuses or restricted stock payments) to any executive or employee that are unreasonable or excessive as defined by the Secretary of the Treasury or that include any bonus or other supplemental payment that is not directly determined by performance based measures.

Although it is unclear whether such legislation will be enacted into law, its provisions, or similar ones, may be imposed administratively by the U.S. Treasury. In addition, Congress may adopt other legislation impacting financial institutions that obtain funding under the TARP or changing lending practices that legislators believe led to the current economic situation. Such provisions could restrict or require changes to our lending, executive compensation or governance practices or increase governmental oversight of our businesses.

Term Asset-Backed Securities Loan Facility

On March 3, 2009, the Federal Reserve announced the launch of the Term Asset-Backed Securities Loan Facility (the “TALF”) in an effort to facilitate the issuance of asset-backed securities by offering financing on relatively favorable terms. Under the TALF, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to certain holders of newly issued AAA-rated asset-backed securities for a term of three years. The underlying credit exposures of eligible securities used for collateral must be newly or recently originated auto loans, student loans, credit card loans, small business loans fully guaranteed by the U.S. Small Business Administration, residential mortgage servicing advance receivables, loans or leases relating to business equipment, leases of vehicle fleets, and floorplan loans. In connection with the Financial Stability Plan, which was announced by the U.S. Treasury pursuant to EESA in February 2009, the TALF may be expanded to as much as $1 trillion through the addition of new categories of eligible assets underlying the securities.

We are currently evaluating the terms of the TALF. Depending on investor demand, pricing considerations and funding alternatives, we potentially have access to approximately $6.5 billion in proceeds from new

issuances under the TALF, subject to the highest rated securities issued out of the securitization trusts maintaining a AAA rating from at least two of the nationally recognized rating agencies. We do not know at this time whether we will issue under the TALF or what impact the TALF will have on returning the credit card securitization market to historical capacity and pricing levels.

FDIC Assessments

On February 27, 2009, the Federal Deposit Insurance Corporation (“FDIC”) approved an interim rule imposing an emergency special assessment and a final rule on risk-based assessments in order to replenish the deposit insurance fund. The interim rule allows the FDIC to charge banks a special assessment of 20 basis points (“bps”) on the assessment base as of June 30, 2009, to be collected September 30, 2009. The cost to us of a 20 bps special assessment would be approximately $56 million, based on our assessment base at February 28, 2009 and assuming the same level at June 30, 2009. The interim rule also permits the FDIC to impose additional emergency special assessments after June 30, 2009, of up to 10 bps per quarter if the reserve ratio is estimated to fall below a level that would adversely affect public confidence or be close to zero or negative at the end of a calendar quarter. The final rule on risk-based assessments became effective April 1, 2009 and provides for future rates that are based on an institution’s risk, with riskier institutions bearing a greater share of the proposed increase. This final rule will apply to our assessment base as of June 30, 2009, to be collected September 30, 2009.

Additionally, for the first calendar quarter of 2009 only, the FDIC adopted new assessment rates, raising previous rates uniformly by seven bps. This increase applies to our assessment base as of March 31, 2009, to be collected June 30, 2009.

Bankruptcy Legislation

On March 5, 2009, the U.S. House of Representatives approved legislation empowering bankruptcy judges to modify the terms of first mortgages for consumers who file for Chapter 13 bankruptcy relief. The Senate is expected to consider similar legislation. Under the legislation, courts could change home mortgage loan terms and reduce the secured portion of the loan to the value of the property securing the loan. Such a change could lead to an increase in filings by making bankruptcy relief a more attractive loan modification vehicle for distressed homeowners. Congress is also considering legislation that would make “high cost” consumer loans fully dischargeable in bankruptcy and exclude debtors who have such loans from the bankruptcy “means test.” An increase in bankruptcy filings could lead to increased credit losses in our lending businesses, which could adversely impact our results of operations.

Credit Card Legislation and Regulation

In December 2008, the Federal Reserve Board promulgated final rules amending Regulation AA (Unfair or Deceptive Acts or Practices) and Regulation Z (Truth in Lending Act) that limit or modify certain credit card practices and require increased disclosures to consumers. These rules become effective July 1, 2010. The credit card practices addressed by the rules include, but are not limited to, restrictions on the application of rate increases to existing and new balances, payment allocation, default pricing and two-cycle balance computation. See “—Outlook” above for the status of our implementation of these rules.

The 111th Congress, which convened in January 2009, is considering legislation addressing practices in the credit card industry. Legislation has been approved by Congressional committees that would accelerate the effective date of the Federal Reserve rules described above, and would impose additional requirements, including limitations on late and overlimit fees. It is unclear at this time whether any legislation will be adopted by Congress and, if adopted, what the content of such legislation will be.

Legislation has been introduced to create a “financial products safety commission” modeled on the Consumer Products Safety Commission. The new agency would have broad authority to regulate credit card and

other consumer financial services, which could entail restricting or prohibiting business practices, fees or interest rates. The legislation could be considered as part of the Congressional effort to strengthen the regulation of the financial services sector. Some legislators are opposed to establishing a stand-alone consumer regulatory regime for banks, believing that the current system of combining consumer regulation and safety and soundness regulation is preferable. Prospects for the enactment of this legislation are uncertain.

Federal Family Education Loan Program

On February 26, 2009, the Obama administration released its 2010 fiscal year budget blueprint, which, among other things, proposes eliminating the Federal Family Education Loan Program (“FFELP”) in 2010. Under the FFELP, the federal government guarantees student loans originated by private lenders, such as Discover Bank. The budget proposes originating all new federal student loans through the Direct Loan program, which is funded directly by the U.S. Treasury and managed by the U.S. Department of Education. It is unclear at this time whether Congress will support the Obama administration’s proposal to eliminate FFELP. In the event that FFELP is eliminated, we would no longer originate federal student loans, but we would expect to continue originating private student loans.

* * *

The remaining discussion provides a summary of our results of operations for the three months ended February 28, 2009, and February 29, 2008, as well as our financial condition at February 28, 2009 and November 30, 2008. All information and comparisons are based solely on continuing operations.

Segments

We manage our business activities in two segments: U.S. Card and Third-Party Payments. In compiling the segment results that follow, the U.S. Card segment bears all overhead costs that are not specifically associated with a particular segment and all costs associated with Discover Network marketing, servicing and infrastructure, with the exception of an allocation of direct and incremental costs driven by the Third-Party Payments segment.

U.S. Card . The U.S. Card segment includes Discover Card-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through our Discover Bank subsidiary.

Third-Party Payments . The Third-Party Payments segment includes the PULSE Network (“PULSE”), an automated teller machine, debit and electronic funds transfer network; Diners Club, a global payments network; and our third-party issuing business, which includes credit, debit and prepaid cards issued on the Discover Network by third parties.

The following table presents segment data on a managed basis and a reconciliation to a GAAP presentation (dollars in thousands):


	Managed Basis									GAAP Basis
For the Three Months Ended	U.S. Card		Third-Party Payments ⁽¹⁾		Total		Securitization Adjustment ⁽²⁾			Total
February 28, 2009
Interest income	$	1,603,362	$	487	$	1,603,849	$	(788,056	)	$	815,793
Interest expense		438,338		79		438,417		(125,697	)		312,720

Net interest income		1,165,024		408		1,165,432		(662,359	)		503,073
Provision for loan losses		1,333,673		—		1,333,673		(395,860	)		937,813
Other income ⁽³⁾		863,223		60,234		923,457		266,499			1,189,956
Other expense		527,407		31,716		559,123		—			559,123

Income from continuing operations before income tax expense	$	167,167	$	28,926	$	196,093	$	—		$	196,093

February 29, 2008
Interest income	$	1,651,987	$	628	$	1,652,615	$	(989,813	)	$	662,802
Interest expense		668,951		2		668,953		(329,512	)		339,441

Net interest income		983,036		626		983,662		(660,301	)		323,361
Provision for loan losses		627,068		—		627,068		(321,436	)		305,632
Other income		602,411		34,268		636,679		338,865			975,544
Other expense		582,976		19,367		602,343		—			602,343

Income from continuing operations before income tax expense	$	375,403	$	15,527	$	390,930	$	—		$	390,930

(1)	Diners Club was acquired on June 30, 2008.

(2)

(3)	The three months ended February 28, 2009 includes $475 million of income related to the Visa and MasterCard antitrust litigation settlement, which is included in the U.S Card segment.

The following table presents information on transaction volume (amounts in thousands):


	For the Three Months Ended
	February 28, 2009		February 29, 2008		February 28, 2009 vs. February 29, 2008
Volume
PULSE Network	$	27,454,173	$	24,783,895	$	2,670,278		11%
Third-Party Issuers		1,362,446		1,545,943		(183,497	)	(12%)
Diners Club International ⁽¹⁾		6,293,574		—		6,293,574		NM

Total Third-Party Payments		35,110,193		26,329,838		8,780,355		33%
Discover Network – Proprietary		22,424,367		24,074,331		(1,649,964	)	(7%)

Total Volume	$	57,534,560	$	50,404,169	$	7,130,391		14%

Discover Card Volume	$	23,964,577	$	26,207,028	$	(2,242,451	)	(9%)
Discover Card Sales Volume	$	21,293,757	$	23,155,253	$	(1,861,496	)	(8%)

Transactions Processed on Networks
Discover Network		369,647		378,912		(9,265	)	(2%)
PULSE Network		686,527		621,072		65,455		11%

Total		1,056,174		999,984		56,190		6%

(1) Diners Club was acquired on June 30, 2008.

The segment discussions that follow for the three months ended February 28, 2009 and February 29, 2008 are on a managed basis.

U.S. Card

Our U.S. Card segment reported pretax income of $167.2 million for the three months ended February 28, 2009, down 55% as compared to February 29, 2008. The decrease in pretax income was driven principally by higher provision for loan losses, partially offset by income related to the Visa and MasterCard antitrust litigation settlement and higher net interest income. Net interest income increased $182.0 million, or 19%, as we benefited from lower cost of funds, the accretion of balance transfer fees, previously recorded in loan fee income, and a reduction in promotional rate balances, partially offset by higher interest charge-offs and lower yields on variable rate assets. Provision for loan losses increased $706.6 million, or 113%, as a result of higher net charge-offs and a higher reserve rate, each of which is reflective of current economic conditions and recent delinquency trends, as well as owned loan growth due to maturing securitizations. Other income increased $260.8 million, or 43%, due to the $474.8 million of income related to the Visa and MasterCard antitrust litigation settlement and an increase in discount and interchange revenue partially offset by a write-down of the interest-only strip receivable, which resulted in a year-over-year decrease of $173.2 million and the inclusion of balance transfer fees in interest income beginning in the third quarter of 2008. Other expenses decreased $55.6 million, or 10%, primarily due to lower account acquisition and a decrease in costs related to litigation.

The managed loan balance of $50.9 billion at February 28, 2009 was up 7% from February 29, 2008. This increase in loans is attributable to lower cardmember payments and growth in our installment loans, slightly offset by a decrease in credit card sales volume, down 8% in the three months ending February 28, 2009, as a result of lower gasoline prices and a decrease in overall spending. This increase was also offset by lower balance transfer activity in the three months ending February 28, 2009. The weakening economic environment adversely impacted cardmember delinquencies and charge-offs. The managed over 30 days delinquency rate for the segment, including non-credit card loans, was 5.25%, 135 basis points higher than last year, and the managed credit card over 30 days delinquency rate was 5.41%, up 148 basis points from last year. For the three months ended February 28, 2009, the managed segment and credit card charge-off rates were 6.48% and 6.61%, up 215 and 224 basis points from the comparable prior year periods, respectively. Owned loan growth, as a result of refinancing on-balance sheet $3.1 billion of loan receivables related to maturing securitizations, combined with the deterioration in the credit environment led to a $504.4 million increase to our reserves over and above our net charge-offs for the quarter.

Third-Party Payments

Transaction volumes, revenues and pretax income in the Third-Party Payments segment grew significantly in first quarter of 2009 from the first quarter in 2008, primarily as a result of our acquisition of Diners Club in the third quarter of 2008. Transaction volume of $35.1 billion in the first quarter 2009 was up $8.8 billion from the first quarter of 2008. Diners Club transactions represented $6.3 billion of the increase in transaction volume while PULSE transaction volumes continue to benefit from new issuers and increased volume from existing issuers. The growth in transaction volume from Diners Club and PULSE was partially offset by lower transaction volume from third-party issuers as a result of lower gasoline prices and lower overall spending.

This increase in volume drove increases in both revenues and pretax income. Our Third-Party Payments segment reported pretax income of $28.9 million for the three months ended February 28, 2009, up $13.4 million as compared to the three months ended February 29, 2008. Revenues increased $26.0 million due to the inclusion of $22.2 million of Diners Club revenues, higher PULSE transaction volume and higher fee income allocated to the Third-Party Payments segment, partially offset by the absence of a $3 million one-time contractual payment received in the first quarter of 2008. Diners Club revenues of $22.2 million in the first quarter 2009 were up sequentially compared to $12.5 million and $15.1 million of revenues in the third and fourth quarters of 2008, respectively, as a result of Diners Club’s tiered pricing system where licensees qualify for lower royalty rate tiers

as cumulative volume grows during the course of the year. Volumes reset annually at the beginning of the calendar year, which results in higher revenues in the first half of the year compared to second half of the year. Expenses in the Third-Party Payments segment also rose $12.3 million, to $31.7 million for the three months ended February 28, 2009. This increase was due to the inclusion of $8.5 million of Diners Club expenses as well as expenses related to the expansion of ATM access globally.

GAAP to Managed Data Reconciliations

Our senior management evaluates business performance and allocates resources using financial data that is presented on a managed basis. Securitized loans against which beneficial interests have been issued to third parties are removed from our GAAP statements of financial condition. Instances in which we retain certificated beneficial interests in the securitization transactions result in a reduction to loan receivables of the amount of the retained interest and a corresponding increase in available-for-sale investment securities. The portions of interest income, provision for loan losses and certain components of other income related to the securitized loans against which beneficial interests have been issued are no longer recorded in our GAAP statements of income; however, they remain significant factors in determining the securitization income we receive on our retained beneficial interests in those transactions. We do not establish an allowance for loan losses on our securitized loans, although a factor for uncollectibility is incorporated into the initial gain on sale of securitized loans.

The managed basis presentation generally reverses the effects of securitization transactions; however, there are certain assets that arise from securitization transactions that are not reversed. Specifically, these assets are the cash collateral accounts that provide credit enhancement to the investors in the transactions and cardmember payments allocated to the securitized loans, both of which are held at the trusts. These assets also include the interest-only strip receivable, reflecting the estimated fair value of the excess cash flows allocated to securitized loans and retained certificated beneficial interests. Income derived from these assets representing interest earned on accounts at the trusts, changes in the fair value of the interest-only strip receivable and interest income on investment securities also are not reversed in a managed presentation.

Managed loan data is relevant because we service the securitized and owned loans, and the related accounts, in the same manner without regard to ownership of the loans. Management believes it is useful for investors to consider the credit performance of the entire managed loan portfolio to understand the quality of loan originations and the related credit risks inherent in the owned portfolio and retained interests in securitizations. Loan receivables on a GAAP (or owned) basis and related performance measures, including yield, charge-offs and delinquencies can vary from those presented on a managed basis. Generally, loan receivables included in the securitization trusts are derived from accounts that are more seasoned, while owned loan receivables represent a greater concentration of newer accounts, occurring as a result of the degree to which receivables from newer accounts are added to the trusts. The seasoning of an account is measured by the age of the account relationship. In comparison to more seasoned accounts, loan receivables of newer accounts typically carry lower interest yields resulting from introductory offers to new cardmembers and lower charge-offs and delinquencies.

Financial measures using managed data are non-GAAP financial measures. Beginning with “—Earnings Summary,” the discussion of our results of operations and financial condition is on a GAAP basis. The following table provides a reconciliation of the loan receivables and related statistics that are impacted by asset securitization, and which are shown on a managed basis in this quarterly report on Form 10-Q, to the most directly comparable GAAP-basis financial measure:

Reconciliation of GAAP to Managed Data


	For the Three Months Ended
	February 28, 2009			February 29, 2008
Loan Receivables
Total Loans
GAAP Basis	$	28,034,208		$	21,042,681
Securitization Adjustment		22,854,496			26,457,729

Managed Basis	$	50,888,704		$	47,500,410


Average Total Loans
GAAP Basis	$	27,733,143		$	21,523,606
Securitization Adjustment		24,144,702			27,339,560

Managed Basis	$	51,877,845		$	48,863,166


Interest Yield
GAAP Basis		11.24	%		10.34	%
Securitization Adjustment		13.24	%		14.56	%
Managed Basis		12.17	%		12.70	%

Net Principal Charge-off Rate
GAAP Basis		6.34	%		3.83	%
Securitization Adjustment		6.65	%		4.73	%
Managed Basis		6.48	%		4.33	%

Delinquency Rate (over 30 days)
GAAP Basis		5.04	%		3.63	%
Securitization Adjustment		5.52	%		4.11	%
Managed Basis		5.25	%		3.90	%

Delinquency Rate (over 90 days)
GAAP Basis		2.57	%		1.82	%
Securitization Adjustment		2.83	%		2.08	%
Managed Basis		2.69	%		1.96	%


	For the Three Months Ended
	February 28, 2009			February 29, 2008

Credit Card Loans
Total Credit Card Loans
GAAP Basis	$	26,156,681		$	20,556,810
Securitization Adjustment		22,854,496			26,457,729

Managed Basis	$	49,011,177		$	47,014,539


Average Credit Card Loans
GAAP Basis	$	26,109,533		$	21,148,252
Securitization Adjustment		24,144,702			27,339,560

Managed Basis	$	50,254,235		$	48,487,812


Interest Yield
GAAP Basis		11.39	%		10.35	%
Securitization Adjustment		13.24	%		14.56	%
Managed Basis		12.28	%		12.72	%

Net Principal Charge-off Rate
GAAP Basis		6.58	%		3.90	%
Securitization Adjustment		6.65	%		4.73	%
Managed Basis		6.61	%		4.37	%

Delinquency Rate (over 30 days)
GAAP Basis		5.32	%		3.69	%
Securitization Adjustment		5.52	%		4.11	%
Managed Basis		5.41	%		3.93	%

Delinquency Rate (over 90 days)
GAAP Basis		2.73	%		1.86	%
Securitization Adjustment		2.83	%		2.08	%
Managed Basis		2.78	%		1.98	%

Critical Accounting Estimates

In preparing our consolidated financial statements in conformity with GAAP, management must make judgments and use estimates and assumptions about the effects of matters that are uncertain. For estimates that involve a high degree of judgment and subjectivity, it is possible that different estimates could reasonably be derived for the same period. For estimates that are particularly sensitive to changes in economic or market conditions, significant changes to the estimated amount from period to period are also possible. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain cases, could have a material adverse effect on our consolidated financial condition. Management has identified the estimates related to allowance for loan losses, asset securitization transactions, the valuation of certificated retained interests in the Discover Card Execution Note Trust (“DCENT”), the accrual of cardmember rewards cost, the evaluation of goodwill and other nonamortizable intangible assets for potential impairment and the accrual of income taxes as critical accounting estimates.

These critical accounting policies are discussed in greater detail in our annual report on Form 10-K for the year ended November 30, 2008. That discussion can be found within Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading Critical Accounting Policies. There have not been any material changes in the critical accounting policies from those discussed in our annual report on Form 10-K for the year ended November 30, 2008.

Earnings Summary

The following table outlines changes in the consolidated statements of income for the periods presented (dollars in thousands):


	For the Three Months Ended					2009 vs. 2008 increase (decrease)
	February 28, 2009			February 29, 2008		$			%
Interest income	$	815,793		$	662,802	$	152,991		23	%
Interest expense		312,720			339,441		(26,721	)	(8	%)

Net interest income		503,073			323,361		179,712		56	%
Provision for loan losses		937,813			305,632		632,181		207	%

Net interest income after provision for loan losses		(434,740	)		17,729		(452,469	)	NM
Other income		1,189,956			975,544		214,412		22	%
Other expense		559,123			602,343		(43,220	)	(7	%)

Income from continuing operations before income tax expense		196,093			390,930		(194,837	)	(50	%)
Income tax expense		75,699			152,101		(76,402	)	(50	%)

Income from continuing operations	$	120,394		$	238,829	$	(118,435	)	(50	%)

Income from continuing operations for the three months ended February 28, 2009 was $120.4 million, down 50% compared to the three months ended February 29, 2008, driven by an increase in provision for loan losses, partially offset by higher other income, higher net interest income and lower other expense. The provision for loan losses increased reflecting higher net charge-offs and a higher allowance for loan losses as a result of the weakening economic environment. Other income increased $214.4 million largely due to revenues related to the Visa and MasterCard antitrust litigation settlement, partially offset by a decrease in the net revaluation of retained interests. Other expenses decreased primarily due to lower account acquisition and a decrease in costs related to litigation.

Net Interest Income

Net interest income represents the difference between interest income earned on interest-earning assets which we own and the interest expense incurred to finance those assets. Net interest margin represents interest income, net of interest expense, as a percentage of total interest-earning assets. Our interest-earning assets consist of loan receivables, our liquidity reserve which includes Federal Funds sold and money market mutual funds, certain retained interests in securitization transactions included in amounts due from asset securitization, and investment securities. Interest-earning assets do not include investor interests in securitization transactions that have been transferred to third parties since they are not assets which we own. Similarly, interest income does not include the interest yield on the related loans. Our interest-bearing liabilities consist primarily of deposits, both brokered and direct. Net interest income is influenced by the following:

•

The level and composition of interest-earning assets and liabilities, including the percentage of floating rate credit card loan receivables we own and the percentage of floating rate liabilities we owe;

•

Changes in the interest rate environment, including the levels of interest rates and the relationship between interest rate indices;

•

Credit performance of our loans, particularly with regard to charge-offs of finance charges which reduce interest income;

•

The terms of certificates of deposit upon initial offering, including maturity and interest rate; and

•

Effectiveness of interest rate swaps in our interest rate risk management program.

During the first quarter of 2009, net interest income grew approximately $180 million, or 56%, compared to the first quarter of 2008. During the same period, our net interest margin and interest rate spread increased to 5.23% and 4.44%, respectively, up from 4.05% and 3.24%, respectively.

Interest income on credit card loans increased $190 million from the first quarter of 2008, as a result of retaining more loan receivables on-balance sheet as securitized receivables matured as well as an increase in interest yield of 104 basis points. The increase in yield was driven by the inclusion of balance transfer fees in interest income beginning in the third quarter 2008, an increase in interest rates on loans in default status and a reduction in promotional rate offers. This was partially offset by rising interest charge-offs which increased 95% to $111 million.

Interest income on other consumer loans increased $26 million from the first quarter of 2008 reflecting growth in both personal and student loans partially offset by a 109 basis point decrease in interest yield. The yield decreased as the proportion of student loans increased which bears lower interest rates.

Interest income on other assets decreased $32 million from the first quarter of 2008, reflecting the unfavorable impact of the lower interest rate environment on our liquidity reserve and assets due from securitization.

Lower interest expense and a lower cost of funds also contributed to higher net interest income. Beginning in the second half of 2008, we increased our deposit issuance in order to fund more loan receivables on-balance sheet as a result of securitization maturities. Since that time, benchmark interest rates have declined, also driving down deposit rates. These lower deposit rates contributed to 80 basis points of the total 103 basis point decrease in our cost of funds and net interest spread. Lower interest expense on deposits contributed $13 million to net interest income as the lower deposit rates were significantly offset by the increase in the level of deposit funding.

The following tables provide further analysis of net interest income, net interest margin and the impact of rate and volume changes (dollars in thousands):

Average Balance Sheet Analysis


	For the Three Months Ended
	February 28, 2009							February 29, 2008
	Average Balance			Rate		Interest		Average Balance			Rate		Interest
Assets
Interest-earning assets:
Interest-earning deposits in other banks	$	6,946,776		1.20	%	$	20,500	$	2,222,748		4.06	%	$	22,437
Federal Funds sold		343,889		3.85	%		3,262		4,252,623		3.90	%		41,279
Investment securities		1,262,145		5.01	%		15,584		529,302		4.55	%		5,987
Loan receivables: ⁽¹⁾
Credit cards ⁽²⁾		26,109,533		11.39	%		733,499		21,148,252		10.35	%		543,989
Other		1,623,610		8.80	%		35,233		375,354		9.89	%		9,232

Total loan receivables		27,733,143		11.24	%		768,732		21,523,606		10.34	%		553,221
Other interest-earning assets		2,730,081		1.15	%		7,715		3,561,479		4.50	%		39,878

Total interest-earning assets		39,016,034		8.48	%		815,793		32,089,758		8.31	%		662,802
Allowance for loan losses		(1,571,483	)						(796,214	)
Other assets		3,118,383							2,809,875
Assets of discontinued operations		—							3,886,838

Total assets	$	40,562,934						$	37,990,257

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits ⁽³⁾	$	24,258,018		4.67	%		279,434	$	20,305,060		5.20	%		262,353
Money market deposits		4,320,522		1.65	%		17,592		4,521,061		4.21	%		47,272
Other interest-bearing deposits		37,247		1.09	%		100		45,395		1.54	%		174

Total interest-bearing deposits		28,615,787		4.21	%		297,126		24,871,516		5.01	%		309,799
Borrowings:
Short-term borrowings		1,141,656		0.42	%		1,183		8,723		4.15	%		90
Long-term borrowings		1,662,540		3.52	%		14,411		2,071,366		5.74	%		29,552

Total borrowings		2,804,196		2.26	%		15,594		2,080,089		5.73	%		29,642

Total interest-bearing liabilities		31,419,983		4.04	%		312,720		26,951,605		5.07	%		339,441
Other liabilities and stockholders’ equity
Liabilities of discontinued operations		—							2,956,482
Other liabilities and stockholders’ equity		9,142,951							8,082,170

Total other liabilities and stockholders’ equity		9,142,951							11,038,652

Total liabilities and stockholders’ equity	$	40,562,934						$	37,990,257

Net interest income						$	503,073						$	323,361

Net interest margin ⁽⁴⁾				5.23	%						4.05	%
Interest rate spread ⁽⁵⁾				4.44	%						3.24	%

(1)	Average balances of loan receivables include non-accruing loans and these loans are therefore included in the yield calculations. If these balances were excluded, there would not be a material impact on the amounts reported above.

(2)	Interest income on credit card loans includes $33.5 million of amortization of balance transfer fees for the three months ended February 28, 2009.

(3)	Includes the impact of interest rate swap agreements used to change a portion of fixed rate funding to floating rate funding.

(4)	Net interest margin represents net interest income as a percentage of total interest-earning assets on an annualized basis.

(5)	Interest rate spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.

Rate/Volume Variance Analysis ⁽ ¹ ⁾


	For the Three Months Ended February 28, 2009 vs. February 29, 2008
	Volume			Rate			Total
	(dollars in thousands)
Increase (decrease) in net interest income due to changes in:
Interest-earning assets:
Interest-earning deposits in other banks	$	94,113		$	(96,050	)	$	(1,937	)
Federal Funds sold		(37,422	)		(595	)		(38,017	)
Investment securities		8,946			651			9,597
Loans:
Credit cards		132,367			57,143			189,510
Other consumer loans		33,099			(7,098	)		26,001

Total loans		165,466			50,045			215,511
Other interest-earning assets		(7,692	)		(24,471	)		(32,163	)

Total interest income		223,411			(70,420	)		152,991
Interest-bearing liabilities:
Interest-bearing deposits:
Time deposits		151,597			(134,516	)		17,081
Money market deposits		(2,020	)		(27,660	)		(29,680	)
Other interest-bearing deposits		(28	)		(46	)		(74	)

Total interest-bearing deposits		149,549			(162,222	)		(12,673	)
Borrowings:
Short-term borrowings		1,731			(638	)		1,093
Long-term borrowings		(5,111	)		(10,030	)		(15,141	)

Total borrowings		(3,380	)		(10,668	)		(14,048	)

Total interest expense		146,169			(172,890	)		(26,721	)

Net interest income	$	77,242		$	102,470		$	179,712

(1)	The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances based on the percentage of the rate or volume variance to the sum of the two absolute variances.

Loan Quality

Loan receivables consist of the following (dollars in thousands):


	February 28, 2009			November 30, 2008			November 30, 2007			November 30, 2006			November 30, 2005			November 30, 2004
Loans held for sale	$	—		$	—		$	—		$	1,056,380		$	2,437,060		$	1,505,574
Loan portfolio:
Credit Card:
Discover Card		25,704,794			23,348,134			20,345,787			19,582,675			18,000,767			17,106,211
Discover Business Card		451,887			466,173			234,136			59,088			—			—

Total credit card		26,156,681			23,814,307			20,579,923			19,641,763			18,000,767			17,106,211
Other consumer loans:
Personal loans		1,162,094			1,028,093			165,529			24,968			52,837			107,825
Student loans		642,624			299,929			12,820			155			242			364
Other		72,809			74,282			72,845			66,978			120,400			174,146

Total other consumer loans		1,877,527			1,402,304			251,194			92,101			173,479			282,335

Total loan portfolio		28,034,208			25,216,611			20,831,117			19,733,864			18,174,246			17,388,546

Total loan receivables		28,034,208			25,216,611			20,831,117			20,790,244			20,611,306			18,894,120
Allowance for loan losses		(1,878,942	)		(1,374,585	)		(759,925	)		(703,917	)		(795,722	)		(910,261	)

Net loan receivables	$	26,155,266		$	23,842,026		$	20,071,192		$	20,086,327		$	19,815,584		$	17,983,859

Provision for Loan Losses

Provision for loan losses is the expense related to maintaining the allowance for loan losses at a level adequate to absorb the estimated probable losses in the loan portfolio at each period end date. Factors that influence the provision for loan losses include the level and direction of loan delinquencies and charge-offs, changes in consumer spending and payment behaviors, bankruptcy trends, regulatory changes or new regulatory guidance, the seasoning of our loan portfolio, interest rate movements and their impact on consumer behavior, and changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio. We also consider the credit quality of the loan portfolio in determining the allowance for loan losses. Credit quality at any time reflects, among other factors, our credit granting practices and effectiveness of collection efforts, the impact of general economic conditions on the consumer, and the seasoning of the loans.

For the three months ended February 28, 2009, the provision for loan losses increased $632.2 million, or 207%, compared with the three months ended February 29, 2008, reflecting an increase in the level of allowance for loan losses and higher net charge-offs. In the three months ended February 28, 2009, we added $504.4 million to the allowance for loan losses to bring the total allowance to $1.9 billion, an increase of 118% over the three months ended February 29, 2008. This increase in the allowance reflects an increase in the loan loss reserve rate due to rising delinquency and charge-off rates as well as loan growth. During the first quarter of 2009, we retained an additional $3.1 billion of loan receivables from maturing securitizations on our balance sheet as a result of not entering into any new securitization transactions due to disruptions in the securitization markets. The factors impacting the changes in credit quality across these periods are discussed further in “— Net Charge-offs” and “— Delinquencies” below.

Allowance for Loan Losses

Amounts are provided for total loan receivables as charge-offs and recoveries are primarily related to the consumer credit card loans on Discover Card, which also make up substantially all of the allowance for loan losses. Charge-offs, recoveries and the portion of the allowance related to the Discover Business Card and other consumer loans is not material. The following table provides a summary of the activity in the allowance for loan losses (dollars in thousands):


	For the Three Months Ended
	February 28, 2009			February 29, 2008
Balance at beginning of period	$	1,374,585		$	759,925
Additions:
Provision for loan losses		937,813			305,632
Deductions:
Charge-offs		(481,279	)		(245,628	)
Recoveries		47,823			40,449

Net charge-offs		(433,456	)		(205,179	)

Balance at end of period	$	1,878,942		$	860,378

Net Charge-offs

Our net charge-offs include the principal amount of losses charged off less principal recoveries and exclude charged-off interest and fees, recoveries of interest and fees and fraud losses. Charged-off and recovered interest and fees are recorded in interest and loan fee income for loan receivables and in securitization income for securitized loans while fraud losses are recorded in other expense. Credit card loans are charged off at the end of the month during which an account becomes 180 days contractually past due, except in the case of cardmember bankruptcies and probate accounts. Cardmember bankruptcies and probate accounts are charged off at the end of

the month 60 days following the receipt of notification of the bankruptcy or death but not later than the 180-day contractual time frame. The net charge-off rate is calculated by dividing net charge-offs for the period by the average loan receivables for the period.

The following table presents amounts and rates of net charge-offs of loan receivables (dollars in thousands):


	For the Three Months Ended
	February 28, 2009				February 29, 2008
	$		%		$		%
Net charge-offs	$	433,456	6.34	%	$	205,179	3.83	%

The net charge-off rate on our loan receivables increased 251 basis points for the three months ended February 28, 2009 compared to the three months ended February 29, 2008. The higher net charge-off rate was due to higher delinquencies beginning in the fourth quarter of 2008, reflecting the weakening economic environment as a result of rising unemployment, declining housing prices and the decrease in the availability of consumer credit, as well as an increase in bankruptcy-related charge-offs.

Delinquencies

Delinquencies are an indicator of credit quality at any point in time. Loan balances are considered delinquent when contractual payments on the loan become 30 days past due. Loan receivables are placed on non-accrual status upon receipt of notification of the bankruptcy or death of a cardmember, as part of certain collection management processes, and other instances in which management feels collectibility is not assured.

The following table presents the amounts and delinquency rates of loan receivables over 30 days past due, loan receivables over 90 days delinquent and accruing interest and loan receivables that are not accruing interest, regardless of delinquency (dollars in thousands):


	February 28, 2009				November 30, 2008
	$		%		$		%
Loans over 30 days delinquent	$	1,412,344	5.04	%	$	1,096,627	4.35	%
Loans over 90 days delinquent and accruing interest	$	623,564	2.22	%	$	444,324	1.76	%
Loans not accruing interest	$	204,682	0.73	%	$	173,123	0.69	%

The delinquency rates of loans over 30 days delinquent and loans over 90 days delinquent and accruing interest increased 69 basis points and 46 basis points, respectively, for the three months ended February 28, 2009, as compared to February 29, 2008. The increase in both measures reflected the impact of the weaker economic environment on our cardmembers’ ability to pay their loan balances. Delinquency rates normally rise as charge-offs rise, however, since the third quarter of 2008, we have been experiencing a pattern of charge-offs rising faster than delinquencies due to greater percentage of delinquent accounts flowing into the later stages of delinquency and eventually into charge-off and due to an increase in consumer bankruptcy filings. Loan receivables not accruing interest for the three months ended February 28, 2009 increased 4 basis points to 0.73%, as compared to the three months ended February 29, 2008, as a result of an increase in bankruptcy notifications.

Other Income

The principal component of other income is securitization income. The following table presents the components of other income for the periods presented (dollars in thousands):


	For the Three Months Ended						2009 vs. 2008 increase (decrease)
	February 28, 2009			February 29, 2008			$			%
Securitization income	$	417,883		$	713,497		$	(295,614	)	(41	%)
Loan fee income		68,022			88,258			(20,236	)	(23	%)
Discount and interchange revenue ⁽¹⁾		75,267			51,896			23,371		45	%
Fee products		74,776			59,333			15,443		26	%
Merchant fees		12,837			18,844			(6,007	)	(32	%)
Transaction processing revenue		28,866			25,954			2,912		11	%
Loss on investment securities		(805	)		(1,184	)		379		32	%
Antitrust litigation settlement		474,841			—			474,841		100	%
Other income		38,269			18,946			19,323		102	%

Total other income	$	1,189,956		$	975,544		$	214,412		22	%

(1)	Net of rewards, including Cashback Bonus rewards, of $165.0 million and $183.3 million for the three months ended February 28, 2009 and February 29, 2008, respectively.

Total other income increased $214.4 million, or 22%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008, primarily as a result of $475 million in income related to the Visa and MasterCard antitrust litigation settlement, partially offset by lower securitization income and a decline in loan fee income as balance transfer fees were reported in interest income beginning in the third quarter 2008.

Securitization Income

Securitization income is a significant source of our income and is derived through the securitization and continued servicing of a portion of the credit card receivables we originated. The issuance of asset-backed securities to investors has the effect of removing the owned loan receivables from the consolidated statements of financial condition. Also, portions of interest income, provision for loan losses and certain components of other income related to the securitized loans against which beneficial interests have been issued are no longer reported in our statements of income; however, they remain significant factors in determining securitization income we receive on our residual interests in those transactions. Investors in securitizations are allocated the cash flows derived from interest and loan fee revenue earned on securitized loans. In addition, we allocate portions of our discount and interchange revenue to a majority of securitized receivables. These cash flows are used to pay investors in the transactions a contractual fixed or floating rate of return on their investment, to reimburse investors for losses of principal resulting from charged-off loans, net of recoveries, and to pay us a contractual fee for servicing the securitized loans. Any excess cash flows remaining are paid to us. Both servicing fees and excess spread are recorded in securitization income. Securitization income also includes the net revaluation of the interest-only strip receivable and certain other retained interests, reflecting adjustments to the fair values of the retained interests that result from changes in the level of securitized loans and assumptions used to value the retained interests.

The table below presents the components of securitization income (dollars in thousands):


	For the Three Months Ended						2009 vs. 2008 increase (decrease)
	February 28, 2009			February 29, 2008			$			%
Excess spread	$	402,427		$	505,033		$	(102,606	)	(20	%)
Servicing fees on securitized loans		119,215			138,263			(19,048	)	(14	%)
Net revaluation of retained interests		(98,242	)		74,997			(173,239	)	(231	%)
Other (principally transaction costs)		(5,517	)		(4,796	)		(721	)	(15	%)

Securitization income	$	417,883		$	713,497		$	(295,614	)	(41	%)

For the three months ended February 28, 2009, securitization income decreased $295.6 million, or 41%, as compared to the three months ended February 29, 2008 primarily reflecting a decrease in the net revaluation of retained interests and lower excess spread on securitized loans, which are detailed further in the tables and discussion below. Securitization income is significantly influenced by the level of average securitized loans. For the three months ended February 28, 2009, the average securitized loans declined to $24.1 billion compared to $27.3 billion for the three months ended February 29, 2008, as a result of retaining maturing securitized loans on-balance sheet.

Excess spread. The following table provides the components of excess spread (dollars in thousands):


	For the Three Months Ended						2009 vs. 2008 increase (decrease)
	February 28, 2009			February 29, 2008			$			%
Interest income on securitized loans	$	788,056		$	989,813		$	(201,757	)	(20	%)
Interest paid to investors in asset-backed securities		(125,697	)		(329,512	)		203,815		62	%

Net interest income		662,359			660,301			2,058		0	%
Other fee revenue on securitized loans		255,143			304,431			(49,288	)	(16	%)
Net charge-offs on securitized loans		(395,860	)		(321,436	)		(74,424	)	(23	%)

Net revenues on securitized loans		521,642			643,296			(121,654	)	(19	%)
Servicing fees on securitized loans		(119,215	)		(138,263	)		19,048		14	%

Excess spread	$	402,427		$	505,033		$	(102,606	)	(20	%)

For the three months ended February 28, 2009, excess spread on securitized loans decreased $102.6 million, or 20%, as compared to the three months ended February 29, 2008. The decrease was attributable to higher net charge-offs, reflective of the current economic environment, and lower other fee revenue on securitized loans offset slightly by lower servicing fees, both a result of the lower level of outstanding securitized loans. Net interest income remained relatively flat as the lower interest expense as a result of a lower average LIBOR on floating rate investor interests was largely offset by a decline in interest income as a result of the lower level of securitized loans.

Servicing fees on securitized loans. We are paid a servicing fee from the cash flows generated by the securitized loans. Servicing fees are paid to the Company for servicing the transferred loan receivables in accordance with contractual requirements. These cash flows include interest income and loan fee income as well as discount and interchange revenue for certain securitized loans. For the three months ended February 28, 2009, servicing fees decreased $19.0 million, or 14%, from the prior year due to a lower level of securitized loans outstanding during the period.

Net revaluation of retained interests. The components of net revaluation of retained interests are summarized in the table below (dollars in thousands):


	For the Three Months Ended					2009 vs. 2008 increase (decrease)
	February 28, 2009			February 29, 2008		$
Initial gain on new securitization transactions ⁽¹⁾	$	—		$	36,755	$	(36,755	)
Revaluation of retained interests		(98,242	)		38,242		(136,484	)

Net revaluation of retained interests	$	(98,242	)	$	74,997	$	(173,239	)

(1)	Net of issuance discounts, as applicable.

The net revaluation of retained interests for the three months ended February 28, 2009 decreased $173.2 million, as compared to the three months ended February 29, 2008. For the three months ended February 28, 2009 there were no new third-party securitization transactions as compared to $2.6 billion of new third-party securitization transactions for the three months ended February 29, 2008, which resulted in $36.8 million of initial gains. The unfavorable revaluation of retained interests of $98.2 million for the three months ended February 28, 2009 largely related to unfavorable changes in assumptions used to value the interest-only strip receivable as compared to the previous period end, including higher projected charge-offs, partially offset by lower interest rate paid to investors.

Loan Fee Income

Loan fee income consists primarily of fees on credit card loans and includes late, overlimit, cash advance and other miscellaneous fees. Loan fee income decreased $20.2 million, or 23%, for the three months ended February 28, 2009, as compared to February 29, 2008, respectively, as a result of deferrals of balance transfer fees beginning in the second quarter of 2008 historically accounted for in loan fee income offset in part by higher late fees.

Discount and Interchange Revenue

Discount and interchange revenue includes discount revenue and acquirer interchange net of interchange paid to third-party issuers in the United States. We earn discount revenue from fees charged to merchants with whom we have entered into card acceptance agreements for processing cardholder purchase transactions and acquirer interchange revenue from merchant acquirers on all Discover Network card transactions made by cardholders at merchants with whom merchant acquirers have entered into card acceptance agreements for processing cardholder purchase transactions. We incur an interchange cost to card issuing entities that have entered into contractual arrangements to issue cards on the Discover Network. This cost is contractually established and is based on the card issuing organizations’ transaction volume and is reported as a reduction to discount and interchange revenue. We offer our cardmembers various reward programs, including the Cashback Bonus reward program, pursuant to which we pay certain cardmembers a percentage of their purchase amounts based on the type and volume of the cardmember’s purchases. Reward costs are recorded as a reduction to discount and interchange revenue.

Discount and interchange revenue increased $23.4 million, or 45% for the three months ended February 28, 2009, compared to the three months ended February 29, 2008. This increase was primarily attributable to lower rewards costs due to a decline in sales volume and higher revenues earned on a higher level of owned loans in the first quarter 2009 compared to the first quarter 2008.

Fee Products

We earn revenue related to fees received for marketing credit-related ancillary products including debt deferment/debt cancellation contracts and identity theft protection services to cardmembers. The amount of

revenue recorded is generally based on a percentage of a cardmember’s outstanding balance or a flat fee and is recognized over the agreement or contract period as earned. Fee products income increased $15.4 million, or 26%, for the three months ended February 28, 2009, as compared to the three months ended February 29, 2008, primarily related to an increase in the number of cardmembers enrolled in these products and higher balances upon which the fees are based.

Antitrust Litigation Settlement

Amounts received in conjunction with the Visa and MasterCard antitrust litigation settlement, including related interest, are recorded in this line item when earned. During the three months ended February 28, 2009, we received a payment of $472 million from Visa as payment in part for its portion of the settlement and accrued $3 million in related interest income. We entered into an agreement with Morgan Stanley at the time of our spin-off to give us sole control over the prosecution and settlement of the litigation and to determine how proceeds from the litigation would be shared. We have notified Morgan Stanley that it breached the agreement and the amount due to Morgan Stanley, if any, is a matter of dispute. The dispute is a subject of litigation between the parties. See “Part II. Other Information—Item 1. Legal Proceedings.”

Other Income

Other income includes revenues from the sale of merchant portfolios to third-party acquirers, royalty revenues earned by Diners Club, revenues from the referral of declined applications to certain third-party issuers on the Discover Network, unrealized gains and losses related to derivative contracts and other miscellaneous revenue items. Other income increased $19.3 million during the three months ended February 28, 2009, primarily due to the inclusion of $22.2 million of Diners Club revenue, partially offset by lower revenues earned from the referral of declined applications to third-party issuers.

Other Expense

The following table represents the components of other expense for the periods presented (dollars in thousands):


	For the Three Months Ended				2009 vs. 2008 increase (decrease)
	February 28, 2009		February 29, 2008		2009 vs. 2008 increase (decrease)
Employee compensation and benefits	$	219,488	$	217,370	$	2,118		1	%
Marketing and business development		111,433		141,553		(30,120	)	(21	%)
Information processing and communications		74,897		78,276		(3,379	)	(4	%)
Professional fees		70,123		73,672		(3,549	)	(5	%)
Premises and equipment		18,072		19,641		(1,569	)	(8	%)
Other expense		65,110		71,831		(6,721	)	(9	%)

Total other expense	$	559,123	$	602,343	$	(43,220	)	(7	%)

Total other expense decreased $43.2 million, or 7% for the three months ended February 28, 2009, as compared to February 29, 2008. The decrease was primarily driven by lower marketing expenditures, lower information processing and communications and lower professional fees, partially offset by the inclusion of $8.5 million of Diners Club expenses. Marketing decreased $30.1 million, or 21%, due to lower account acquisition. Professional fees decreased $3.5 million, or 5%, primarily due to lower legal fees related to the Visa and MasterCard antitrust litigation settlement. Other expense decreased $6.7 million, or 9%, primarily due to lower fraud costs in the current period.

Income Tax Expense

The following table reconciles our effective tax rate to the U.S. federal statutory income tax rate:


	For the Three Months Ended
	February 28, 2009		February 29, 2008
U.S. federal statutory income tax rate	35.0	%	35.0	%
U.S. state and local income taxes, net of U.S. federal income tax benefits	3.8		3.2
Other	(0.2	)	0.7

Effective income tax rate	38.6	%	38.9	%

Liquidity and Capital Resources

We maintain liquidity, capital and funding strategies designed to optimize our credit ratings and provide that our bank capitalization levels are sufficient to allow for cost-effective access to debt and deposit markets, thus providing sufficient liquidity to fund our business over both the short and long term. Our liquidity and funding risk management strategies are designed to mitigate the risk that we may be unable to access adequate financing to fund our business and service our financial obligations when they come due. Liquidity risk is addressed through various funding criteria and targets that guide our access to the long-term and short-term debt capital markets and various deposit distribution channels, the maturity profile of our liabilities, the diversity of our funding sources and investor base, as well as the level of our liquidity reserve.

Liquidity risk is assessed by several measures including our maturity profile, which measures funding in various maturity tranches. The maturities of the various funding instruments are reviewed during the funding planning and execution process to ensure the maturities are appropriately staggered. The mix of funding sources and the composition of our investor base are also reviewed during the funding process to assess whether there is appropriate diversification. Our primary funding sources include deposits (sourced directly or through brokers), term asset-backed securitizations, asset-backed commercial paper conduit financing and short-term borrowings.

We monitor and review liquidity and capital management strategies seeking to maintain prudent levels of liquidity and capital. Our senior management reviews financial performance relative to these strategies, monitors the availability of alternative financing sources, evaluates liquidity risk and capital adequacy, and assesses the interest rate sensitivity of our assets and liabilities.

Certain of our borrowing costs and the ability to raise funds in specific ratings sensitive markets are directly impacted by our credit ratings. Discover Bank and Discover Financial Services have maintained investment grade ratings. Discover Bank has a BBB rating from Standard & Poor’s, a Baa2 deposit and Baa2 senior unsecured rating from Moody’s Investors Service and a BBB rating from Fitch Ratings. Discover Financial Services has a BBB- long-term rating from Standard & Poor’s, a Baa3 senior unsecured rating from Moody’s Investors Service and a BBB long-term rating from Fitch Ratings. Moody’s Investors Service changed its outlook for the credit ratings of Discover Financial Services and Discover Bank from “Stable” to “Negative” in November 2008. A security rating is not a recommendation to buy, sell or hold securities, it may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.

We maintain a process designed to evaluate our liquidity position and our vulnerabilities to disruptions in our funding markets. This process results in contingency funding plans that model a range of potential cash outflows during a liquidity stress event, including, but not limited to: (i) repayment of all debt maturing within an assumed stress period; (ii) expected funding requirements from receivable maintenance, growth and/or volatility; and (iii) customer cash withdrawals from interest-bearing deposits. These stress scenarios are designed to evaluate both short-term liquidity stress as well as a prolonged liquidity stress event. In a liquidity stress event,

we would seek to increase deposits, liquidate investments and use contingent funding sources to meet our other liquidity needs. At February 28, 2009, our contingent funding sources included approximately $8.3 billion in our liquidity reserve (primarily invested in triple-A rated money market mutual funds), $1.5 billion of unutilized commitments from third-party commercial paper asset-backed conduits for securitization funding, a portion of which will mature in the second quarter of 2009, and $2.4 billion of unsecured committed credit. In addition, we had $4.5 billion of available capacity through the Federal Reserve discount window, which includes remaining access to $1.2 billion through the Federal Reserve Term Auction Facility. The Federal Reserve has announced changes to the discount window to be effective April 27, 2009. The changes will reduce our capacity under the discount window and Term Auction Facility based on assets pledged at February 28, 2009. In addition, management could seek to reduce business funding requirements by implementing asset reduction strategies.

We continue to focus on maintaining a strong balance sheet with appropriate levels of capital and liquidity to fund operations. For the first quarter of 2009, we funded our business operations by utilizing multiple funding sources described in further detail below, with a primary reliance on deposits. We expect to be able to satisfy all maturing obligations and fund business activities for the next 12 months through access to our multiple funding sources, relying primarily on deposit issuance. In the event that existing access to deposit channels becomes disrupted and/or access to the capital markets continues to be disrupted during the next 12 months, we believe that we would be able to satisfy all maturing obligations and fund business operations during that time by utilizing our contingent funding sources, including our liquidity reserve, remaining asset-backed commercial paper conduit capacity, committed credit facility capacity, and Federal Reserve discount window capacity. In addition to these contingent funding sources, we potentially have access to approximately $6.5 billion of issuance of asset-backed securities through the TALF government program, subject to investor demand, pricing considerations, funding alternatives and the highest rated securities issued out of the securitization trusts maintaining a AAA rating from at least two of the nationally recognized rating agencies as more fully described below and in “—Legislative and Regulatory Developments.” On March 13, 2009, we issued and sold to the U.S. Treasury shares of senior preferred stock and a ten-year warrant to purchase shares of our common stock for an aggregate purchase price of approximately $1.2 billion pursuant to the U.S. Treasury Capital Purchase Program (“CPP”). The senior preferred stock qualifies as Tier 1 capital and provides us with a stronger equity capital position. See below for more information.

U.S. Treasury Capital Purchase Program. On March 13, 2009, we issued and sold to the U.S. Treasury 1,224,558 shares of senior preferred stock and a ten-year warrant to purchase 20,500,413 shares of our common stock at an exercise price of $8.96 per share, subject to anti-dilution adjustments, for an aggregate purchase price of approximately $1.2 billion. The senior preferred stock qualifies as Tier 1 capital and pays a cumulative dividend rate of five percent per annum for the first five years and a rate of nine percent per annum after year five. The senior preferred stock is generally non-voting, other than class voting rights on certain matters that could amend the rights of or adversely affect the stock. The senior preferred stock terms provide that the stock may not be redeemed, as opposed to repurchased, prior to May 15, 2012 unless we have received aggregate gross proceeds from one or more qualified equity offerings (as described below) equal to $306,147,000. In such a case, we may redeem the senior preferred stock, in whole or in part, subject to the approval of the Federal Reserve Board, upon notice, up to a maximum amount equal to the aggregate net cash proceeds received by us from such qualified equity offerings. A “qualified equity offering” is a sale and issuance for cash by us, to persons other than us or our subsidiaries after March 13, 2009, of shares of perpetual preferred stock, common stock or a combination thereof, that in each case qualify as Tier 1 capital at the time of issuance under the applicable risk-based capital guidelines of the Federal Reserve Board. On or after May 15, 2012, the senior preferred stock may be redeemed by us at any time, in whole or in part, subject to the approval of the Federal Reserve Board and notice requirements.

common stock underlying the warrant prior to the earlier of the redemption of all of the shares of senior preferred stock and December 31, 2009. Participation in the CPP restricts our ability to increase dividends on our common stock or to repurchase our common stock until three years have elapsed, unless (i) all of the senior preferred stock issued to the U.S Treasury is redeemed, (ii) all of the senior preferred stock issued to the U.S Treasury has been transferred to third parties, or (iii) we receive the consent of the U.S. Treasury. The U.S. Treasury has the right to appoint two directors to our board if we miss dividend payments for six dividend periods, whether or not consecutive, on the preferred stock. For additional information, see “—U.S. Treasury Capital Purchase Program” at the beginning of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Equity Capital Management. Management views equity capital as an important source of financial strength. We determine the level of capital necessary to support our business based on our managed loan receivables, goodwill and other intangible assets, taking into account, among other things, regulatory requirements, rating agency guidelines and internally managed requirements to sustain growth.

Equity increased to $6.0 billion in February 28, 2009 from $5.9 billion in November 30, 2008. Our capital level has been positively impacted by the closing of our transaction under the U.S. Treasury Capital Purchase Program in March 2009 described above. The level of capital throughout 2009 is expected to be positively impacted by the Visa and Master Card antitrust litigation settlement more fully described below.

Under regulatory capital requirements adopted by the Federal Deposit Insurance Corporation (the “FDIC”) and other bank regulatory agencies, FDIC-insured financial institutions must maintain minimum levels of capital that are dependent upon the risk of the financial institution’s assets, specifically (a) 3% to 5% of Tier 1 capital, as defined, to average assets (“leverage ratio”), (b) 4% to 6% of Tier 1 capital, as defined, to risk-weighted assets (“Tier 1 risk-weighted capital ratio”) and (c) 8% to 10% of total capital, as defined, to risk-weighted assets (“total risk-weighted capital ratio”). At February 28, 2009, the leverage ratio, Tier 1 risk-weighted capital ratio and total risk-weighted capital ratio of Discover Bank as well as those of our other FDIC-insured financial institution, Bank of New Castle, exceeded these regulatory minimums.

In connection with our participation in the CPP, we became a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. Registration as a bank holding company subjects us to new legal and regulatory requirements, including minimum capital requirements, and subjects us to oversight, regulation and examination by the Federal Reserve. Currently, bank holding companies are required to maintain Tier 1 and total capital equal to at least 4% and 8% of its total risk-weighted assets, respectively. Bank holding companies are also required to maintain a minimum leverage ratio of 3% to 5%, depending upon criteria defined and assessed by the Federal Reserve. At February 28, 2009, we believe Discover Financial Services exceeded these regulatory minimums.

Dividend Policy. Our Board of Directors declared a cash dividend of $.02 per share on March 19, 2009, payable on April 22, 2009 to holders of record on April 1, 2009. The reduction in the dividend from $.06 per share declared in prior quarters was made to enhance our capital position. If the quarterly dividend is maintained at $.02 per share going forward, we would strengthen our capital base by approximately $20 million per quarter. The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our Board of Directors and will depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. Accordingly, there can be no assurance that we will declare and pay any dividends. In addition, as a result of applicable banking regulations and provisions that may be contained in our borrowing agreements or the borrowing agreements of our subsidiaries, our ability to pay dividends to our stockholders may be further limited. Under the terms of our CPP transaction, we are prohibited from increasing dividends on our common stock above historical levels for a period of three years unless (i) all of the senior preferred stock issued to the U.S. Treasury is redeemed, (ii) all of the senior preferred stock issued to the U.S. Treasury has been transferred to third parties, or (iii) we receive the consent of the U.S. Treasury. Furthermore, so long as any of the preferred stock is outstanding, dividend payments on our common stock will be prohibited unless all accrued and unpaid dividends are paid on such preferred stock.

Stock Repurchase Program. On December 3, 2007, we announced that our Board of Directors authorized the repurchase of up to $1 billion of our outstanding shares of common stock under a new share repurchase program. This share repurchase program expires on November 30, 2010, and may be terminated at any time. At February 28, 2009, we had not repurchased any stock under this program. Under the terms of our CPP transaction, we are prohibited from repurchasing our common stock for a period of three years, except in connection with the administration of an employee benefit plan in the ordinary course of business consistent with past practice, unless (i) all of the senior preferred stock issued to the U.S. Treasury is redeemed, (ii) all of the senior preferred stock issued to the U.S. Treasury has been transferred to third parties, or (iii) we receive the consent of the U.S. Treasury. Furthermore, so long as any of the preferred stock issued under the CPP is outstanding, we may not repurchase any of our shares of common stock unless all accrued and unpaid dividends are paid on such preferred stock.

Settlement of Visa and MasterCard Antitrust Litigation. On October 27, 2008, we settled our antitrust litigation with Visa and MasterCard for $2.75 billion. We received a lump sum amount of $862.5 million from MasterCard in the fourth quarter 2008 and $475 million from Visa in the first quarter of 2009, which we recorded in other income in the U.S. Card segment. We expect to earn $472 million in each of the remaining quarters of 2009. We entered into an agreement with Morgan Stanley at the time of our spin-off to give us sole control over the prosecution and settlement of the litigation and to determine how proceeds from the litigation would be shared. We have notified Morgan Stanley that it breached the agreement and the amount due to Morgan Stanley, if any, is a matter of dispute. The dispute is a subject of litigation between the parties. See “Part II. Other Information—Item 1. Legal Proceedings.”

Impact of Proposed Revisions to FASB Statement No. 140 and FASB Interpretation 46R. The trusts used in our securitizations currently are not consolidated on our financial statements for reporting purposes because the trusts are qualifying special purpose entities under Statement of Financial Accounting Standards No. 140 (“Statement No. 140”). The Financial Accounting Standards Board (“FASB”) has issued proposed amendments to Statement No. 140 and FASB Interpretation No. 46R. As currently drafted, these amendments will require us to consolidate our securitization trusts on our balance sheet, which could have a significant impact on our consolidated financial statements, including our capital requirements. We currently expect the FASB to finalize the proposed amendments in May 2009 and that the amendments would be effective for us on December 1, 2009.

Securities Available-for-Sale. For the three months ended February 28, 2009, we held $1.2 billion in available-for-sale investment securities marked at fair value. This amount includes $977.2 million of certificated retained interests in DCENT. Our available-for-sale investment securities also include $165.7 million of investments made in highly rated third-party credit card asset-backed securities. As of February 29, 2008, the weighted average life of all of our available-for-sale investment securities was approximately 1 year.

Funding Sources

Deposits. We utilize deposits to diversify funding sources and to reduce our reliance on short-term credit sensitive funding sources, thus enhancing our liquidity position. Our response to the disruptions in the securitization market described below has been, and we anticipate will continue to be, increased utilization of deposits. We obtain our deposits through two channels: (1) contractual arrangements with securities brokerage firms, which place deposits with their customers and other brokerage firms; and, increasingly, (2) products offered directly to consumers through direct mail, internet origination and affinity relationships, including certificates of deposit and money market accounts. We currently utilize six of the largest securities brokerage firms to obtain deposit funding through distribution of our certificates of deposit to their customers. Five of these six brokerage firms have external selling group capability, which allows them to distribute deposits through other brokerage firms. We have elected to use the selling group capabilities of these brokerage firms to extend deposit gathering capabilities for cost effectiveness.

Our certificates of deposit have maturities ranging from one month to fifteen years, and had a weighted average maturity of 26 months at February 28, 2009, which is up from 20 months at February 29, 2008 as a result of issuances of deposits with longer maturities. Total interest-bearing deposits at February 28, 2009 were $28.3 billion, the remaining maturities of which are summarized in the following table (dollars in thousands):


	Total		Three Months or Less		Over Three Months Through Six Months		Over Six Months Through Twelve Months		Over Twelve Months
Certificates of deposit in amounts less than $100,000 ⁽¹⁾	$	22,031,180	$	2,830,671	$	1,655,804	$	2,608,801	$	14,935,904
Certificates of deposit in amounts of $100,000 ⁽¹⁾ or greater		2,142,897		265,606		269,212		538,718		1,069,361
Savings deposits, including money market deposit accounts		4,078,070		4,078,070		—		—		—

Total interest-bearing deposits	$	28,252,147	$	7,174,347	$	1,925,016	$	3,147,519	$	16,005,265

(1)	Represents the basic insurance amount covered by the FDIC. Effective October 23, 2008, the United States Congress temporarily increased FDIC deposit insurance to $250,000 through December 31, 2009.

Securitization Financing. Historically, we have used the securitization of credit card receivables as our largest single source of funding, including both the public securitization market and the privately placed asset-backed commercial paper conduit financing market. Due to recent market events and continued disruption in the capital markets, the securitization markets have not been available at volumes and pricing levels that would be attractive to us. Our last public securitization transaction closed on June 18, 2008, and our last private asset-backed commercial paper conduit transaction closed on August 28, 2008. It is difficult to predict if or when the securitization markets will return to historical capacity and pricing levels, but we currently do not expect to access these markets during 2009 to meet our funding needs.

On March 3, 2009, the Federal Reserve announced the launch of the Term Asset-Backed Securities Loan Facility (the “TALF”) in an effort to facilitate the issuance of asset-backed securities by offering financing on relatively favorable terms. Under the TALF, the Federal Reserve Bank of New York will lend up to $200 billion (potentially expanding to $1 trillion) on a non-recourse basis to holders of certain AAA-rated asset-backed securities backed by newly and recently originated consumer and small business loans. Depending on investor demand, pricing considerations and funding alternatives, we potentially have access to approximately $6.5 billion in proceeds from new issuances under the TALF, subject to the highest rated securities issued out of the securitization trusts maintaining a AAA rating from at least two of the nationally recognized rating agencies. However, it is unclear at this time whether we will issue under the TALF or what impact the TALF will have on returning the credit card securitization market to historical capacity and pricing levels. For more information on the TALF, see “—Legislative and Regulatory Developments.”

We use non-consolidated securitization trusts to securitize our credit card loan receivables. Securitized loans against which beneficial interests have been issued are accounted for as sold and, accordingly, are removed from the consolidated statements of financial condition. We have historically securitized between approximately 50% and 60% of our managed credit card loan receivables however, due to the disruptions in the securitization market, only 47% of managed loans at February 28, 2009 are securitized. Outstanding public and private asset-backed commercial paper conduit financing for the three months ended February 28, 2009 were $19.9 billion and $2.7 billion, respectively. At February 28, 2009, we had $1.5 billion in unused asset-backed commercial paper conduit capacity, $750 million of which will expire in each of the second and third quarters of 2009.

The following table summarizes scheduled maturities of the investors’ interests in securitizations at February 28, 2009 (dollars in thousands):


	Total		Less Than One Year		One Year Through Three Years		Four Years Through Five Years		After Five Years
Scheduled maturities of the investors’ interest in securitizations	$	22,570,270	$	6,763,949	$	10,111,582	$	4,455,265	$	1,239,474

We access the public asset securitization market through the Discover Card Master Trust I and, beginning July 26, 2007, DCENT, using receivables generated by our U.S. Card business. Through the Discover Card Master Trust I, we have used a structure utilizing Class A, triple-A rated certificates and Class B, single-A rated certificates held by third parties, with credit enhancement provided by the subordinated Class B certificates and a cash collateral account. DCENT includes three classes of securities sold to investors, the most senior class generally receiving a triple-A rating. In this structure, in order to issue senior, higher rated classes of notes, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of junior, lower rated classes of notes. On February 4, 2009 Standard & Poor’s placed the ratings of DCMT Series 1996-4 Class A (AAA-rated) and all series of DCENT Class C Notes (BBB-rated) on negative credit watch due to concerns about trust performance and credit enhancement levels. In order to maintain the ratings of these securities, the rating agencies may require us to take certain actions to provide additional credit enhancement. See “Part II. Item 1A. Risk Factors.”

For the three months ended February 28, 2009, we had triple-A rated note issuance capacity of $5.0 billion in DCENT, subject to market availability. In order to maintain this level of triple-A rated note issuance capacity, we have purchased $1.1 billion principal amount of subordinated notes issued by DCENT, which are classified as available-for-sale investment securities for accounting purposes. In the future, we may purchase additional subordinated notes to maintain our triple-A rated note issuance capacity.

As of February 28, 2009, the balance of cash collateral account loans on which we provided funding was $995.0 million and is recorded in amounts due from asset securitization in the consolidated statement of financial condition at its fair value of $956.1 million. A majority of this funding was obtained through a loan facility entered into between a consolidated special purpose subsidiary, DRFC Funding LLC, and third-party lenders. At February 28, 2009, $630.0 million of the DRFC Funding LLC loan facility remains outstanding and is recorded in long-term borrowings in the consolidated statement of financial condition. Repayment of this loan facility is secured by $945.0 million of cash collateral account loans at February 28, 2009.

The following table summarizes scheduled maturities of the cash collateral accounts at February 28, 2009 (dollars in thousands):


	Total		Less Than One Year		One Year Through Three Years		Four Years Through Five Years		After Five Years
Scheduled maturities of cash collateral accounts	$	995,001	$	260,526	$	547,369	$	127,895	$	59,211

The securitization structures include certain features designed to protect investors that could result in earlier- than-expected repayment of the underlying securities, accelerating the need for alternative funding. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements the insufficiency of which triggers early repayment of the securities. We refer to this as “economic early amortization.” In the event of an economic early amortization (which would occur if the “excess spread” (the amount by which income received by a trust during a collection period, including interest collections, fees and interchange, exceeds the fees and expenses of the trust during such collection period, including interest expense, servicing fees and charged-off receivables) falls below 0% for a contractually specified period, generally a three-month rolling average), the receivables that otherwise would have been subsequently purchased by the trust from us would instead continue to be recognized on our consolidated

statement of financial condition since the cash flows generated in the trust would instead be used to repay investors in the asset-backed securities. As of February 28, 2009, no economic early amortization events have occurred. The table below provides information concerning investor interest and related excess spreads at February 28, 2009 (dollars in thousands):


	Investor Interest		# of Series Outstanding	3-Month Rolling Average Excess Spread
Interchange series ⁽¹⁾	$	11,915,795	14	7.38	%
Non-interchange series		2,789,475	3	4.43	%

Discover Card Master Trust I		14,705,270	17	4.43	%
Discover Card Execution Note Trust ⁽¹⁾		7,865,000	20	6.00	%

Total investor interest	$	22,570,270	37

(1)	Discover Card Master Trust I certificates issued on or after November 4, 2004 and all notes issued by DCENT include cash flows derived from discount and interchange revenue earned by Discover Card.

Short-Term Borrowings. Short-term borrowings consist of borrowings through the Federal Reserve’s Term Auction Facility, term, overnight Federal Funds purchased and other short-term borrowings with original maturities of less than one year. At February 28, 2009, we had borrowed $375 million of overnight Federal Funds and $2.0 billion through the Term Auction Facility at an interest rate of 0.25%. The borrowings under the Term Auction Facility allowed us to obtain funding at a lower interest rate than alternatives existing at that time.

Long-Term Borrowings and Bank Notes. At February 28, 2009, we had $400 million principal amount of floating rate senior notes outstanding which mature in June 2010 and $400 million principal amount of fixed rate senior notes outstanding which mature in June 2017. Additionally, we had $250 million principal amount of bank notes which matured in February 2009. In October 2008, the Federal Deposit Insurance Corporation established the Temporary Liquidity Guarantee Program (the “TLGP”) pursuant to which the FDIC will guarantee the timely payment of interest and principal on certain newly-issued senior unsecured debt of eligible entities issued on or before October 31, 2009. Discover Bank has opted into the TLGP and is eligible to receive the benefit of the TLGP guarantee in connection with the issuance of senior unsecured debt of up to $312.5 million. While it is unclear at this time whether Discover Bank will be issuing unsecured debt pursuant to the TLGP, our participation in this program may provide us access to an additional source of funding.

Available Credit Facilities

Secured Committed Credit Facilities. The maintenance of revolving committed credit agreements serves to further diversify our funding sources. In connection with our asset securitization program, we have access to committed undrawn funding capacity through privately placed asset-backed commercial paper conduits to support credit card loan receivables funding requirements. At February 28, 2009, we had used $2.7 billion of capacity under these conduits and had $1.5 billion available to us, $750 million of which will expire in each of the second and third quarters of 2009. The original commitments of these facilities range from 364-day renewable agreements to multi-year extendable commitments.

Unsecured Committed Credit Facilities. As of February 28, 2009, our unsecured committed credit facility of $2.4 billion had a remaining life of 39 months. This facility serves to diversify our funding sources and enhance our liquidity. This facility became effective at the time of the spin-off, is provided by a group of major global banks, and is available to both Discover Financial Services and Discover Bank (Discover Financial Services may borrow up to 30% and Discover Bank may borrow up to 100% of the total commitment). We anticipate that the facility will support general liquidity needs and may be drawn to meet short-term funding needs from time to time. At February 28, 2009, we had no outstanding balances due under the facility.

Federal Reserve. Discover Bank has access to the Federal Reserve Bank of Philadelphia’s discount window and has participated in the Federal Reserve’s Term Auction Facility. In December 2007, the Federal Reserve

announced the establishment of a temporary Term Auction Facility. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program are eligible to participate in Term Auction Facility auctions. Discover Bank had $4.5 billion of available capacity through the Federal discount window as of February 28, 2009, which includes remaining capacity under the Term Auction Facility of $1.2 billion. The Federal Reserve has announced changes to the discount window to be effective April 27, 2009. The changes will reduce our capacity under the discount window and Term Auction Facility based on assets pledged at February 28, 2009. At February 28, 2009, we had borrowed $2.0 billion under the Term Auction Facility.

Off-Balance Sheet Arrangements

See “—Liquidity and Capital Resources—Funding Sources—Securitization Financing.”

Guarantees

Guarantees are contracts or indemnification agreements that contingently require us to make payments to a guaranteed party based on changes in an underlying asset, liability, or equity security of a guaranteed party, rate or index. Our guarantees relate to certain representations and warranties made with regard to securitized loans, transactions processed on the Discover Network, transactions processed by Diners Club licensees and indemnifications made in conjunction with the sale of the Goldfish business. Also included in guarantees are contracts that contingently require the guarantor to make payments to a guaranteed party based on another entity’s failure to perform under an agreement. See Note 12: Commitments, Contingencies and Guarantees to the consolidated financial statements for further discussion regarding our guarantees.

Contractual Obligations and Contingent Liabilities and Commitments

In the normal course of business, we enter into various contractual obligations that may require future cash payments. Contractual obligations at February 28, 2009, which include deposits, long-term borrowings, purchase obligations and operating and capital lease obligations, were $30.4 billion. For a description of our contractual obligations as on November 30, 2008, see our annual report on Form 10-K for the fiscal year ending November 30, 2008 under “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Contractual Obligations and Contingent Liabilities and Commitments.”

During the three months ended February 28, 2009, we increased our owned loans by $2.8 billion. As part of our risk management strategies, we reduced our unused commitments by $14 billion from November 30, 2008 to $193 billion, as a result of closing inactive accounts. Such commitments arise primarily from agreements with customers for unused lines of credit on certain credit cards, provided there is no violation of conditions established in the related agreement. These commitments, substantially all of which we can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage and customer creditworthiness. In addition, in the ordinary course of business, we guarantee payment on behalf of subsidiaries relating to contractual obligations with external parties. The activities of the subsidiaries covered by these guarantees, if any, are included in our consolidated financial statements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for a position or portfolio. We are exposed to market risk primarily from changes in interest rates.

Interest Rate Risk . Changes in interest rates impact interest-earning assets, principally managed loan receivables. Changes in interest rates also impact interest sensitive liabilities that finance these assets, including asset-backed securitizations, deposits, and short-term and long-term borrowings.

Our interest rate risk management policies are designed to measure and manage the potential volatility of earnings that may arise from changes in interest rates by having a financing portfolio that reflects the existing repricing schedules of credit card loan receivables. To the extent that asset and related financing repricing characteristics of a particular portfolio are not matched effectively, we may utilize interest rate derivative contracts, such as swap agreements, to achieve our objectives. Interest rate swap agreements effectively convert the underlying asset or financing from fixed to floating rate or from floating to fixed rate.

We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month period from our reporting date, we assume that all interest rate sensitive assets and liabilities will be impacted by a hypothetical, immediate 100 basis point increase in interest rates as of the beginning of the period. The sensitivity is based upon the hypothetical assumption that all relevant types of interest rates that affect our results would increase instantaneously, simultaneously and to the same degree.

Our interest rate sensitive assets include certain loan receivables, Federal Funds sold, certain amounts due from asset securitizations, interest-earning deposits and certain investment securities. Portions of our credit card loan receivables have fixed interest rates, although we currently have the right, with notice to cardmembers, to subsequently reprice these receivables to a new interest rate unless the account has been closed or the cardmember opts out of repricing actions. Assets with rates that are fixed at period end but which will mature, or otherwise contractually reset to a market-based indexed rate or other fixed rate prior to the end of the 12-month period, are considered to be rate sensitive. The latter category includes certain credit card loans that may be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with our normal market-based pricing structure. For purposes of measuring rate sensitivity for such loans, only the effect of the hypothetical 100 basis point change in the underlying market-based indexed rate or other fixed rate has been considered rather than the full change in the rate to which the loan would contractually reprice. For assets that have a fixed interest rate at the fiscal period end but which contractually will, or are assumed to, reset to a market-based indexed rate or other fixed rate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest rate sensitive assets, earnings sensitivity is calculated net of expected loan losses.

Interest rate sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period. Thus, liabilities that vary with changes in a market-based index, such as Federal Funds or LIBOR, which will reset before the end of the 12-month period, or liabilities whose rates are fixed at the fiscal period end but which will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the 12-month period, also are considered to be rate sensitive. For these fixed rate liabilities, earnings sensitivity is measured from the expected repricing date.

Assuming an immediate 100 basis point increase in the interest rates affecting all interest rate sensitive assets and liabilities at February 28, 2009, we estimate that the pretax income of lending and related activities (reported on a managed basis) over the following 12-month period would be reduced by approximately $30 million. We estimated the comparable reduction of pretax income for the 12-month period following November 30, 2008 to be approximately $38 million. At February 28, 2009, we are slightly less asset sensitive due to changes in our asset and funding composition and timing.

Foreign Currency Exchange Risk . As of February 28, 2009, we believe our foreign currency exchange risk is immaterial.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and

procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.

Legal Proceedings.

In the normal course of business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with our activities. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. We have historically relied on the arbitration clause in our cardmember agreements, which has limited the costs of, and our exposure to, litigation. We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our business, including, among other matters, accounting and operational matters, some of which may result in adverse judgments, settlements, fines, penalties, injunctions, or other relief. Litigation and regulatory actions could also adversely affect our reputation.

We contest liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, we cannot predict with certainty the loss or range of loss, if any, related to such matters, how such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, we believe, based on current knowledge and after consultation with counsel, that the outcome of the pending matters will not have a material adverse effect on our financial condition, although the outcome of such matters could be material to our operating results and cash flows for a particular future period, depending on, among other things, our level of income for such period.

We filed a lawsuit captioned Discover Financial Services, Inc. v. Visa USA Inc., MasterCard Inc. et al. in the U.S. District Court for the Southern District of New York on October 4, 2004. Through this lawsuit we sought to recover substantial damages and other appropriate relief in connection with Visa’s and MasterCard’s illegal anticompetitive practices that, among other things, foreclosed us from the credit and debit network services markets. The lawsuit followed the U.S. Supreme Court’s October 2004 denial of Visa’s and MasterCard’s petition for review of the decision of the U.S. Court of Appeals affirming a lower court decision in a case brought by the U.S. Department of Justice in which the court found that Visa’s and MasterCard’s exclusionary rules violated the antitrust laws and harmed competition and consumers by foreclosing us from offering credit and debit network services to banks. During the third quarter of 2008, the court issued rulings on the parties’ motions for summary judgment. Among other things, the court’s rulings precluded Visa and MasterCard from relitigating elements of our core claim that were already decided in the U.S. Department of Justice lawsuit and otherwise limited the remaining issues for trial, which was scheduled for October 14, 2008.

We executed an agreement to settle the lawsuit with MasterCard and Visa on October 27, 2008. The agreement became effective on November 4, 2008 upon receipt of the approval of Visa’s Class B shareholders. Under the settlement, Visa and MasterCard agreed to pay us up to $2.75 billion in exchange for our agreement to dismiss the lawsuit and release all claims. MasterCard agreed to pay us a lump sum in the amount of $862.5 million, which we received in the fourth quarter of 2008. Visa agreed to pay us up to an aggregate amount of approximately $1.9 billion, in four installments of up to $472 million each on December 15, 2008, March 13, 2009, June 15, 2009 and September 28, 2009, plus interest. The payments from Visa are contingent on the Company achieving certain financial performance measures. For each of the first three fiscal quarters in 2009, Visa agreed to pay us an amount equal to 5% of each quarter’s total combined transaction sales volume for Company payment cards, including payment cards issued by the Company and payment cards issued by third parties on the Discover, PULSE and Diners Club networks, up to the maximum amount for each quarter stated above. For the fourth payment, which covers a three-week period in the fourth fiscal quarter of 2009, Visa agreed to pay us an amount equal to 21% of the period’s total combined transaction sales volume, up to the maximum quarterly payment amount stated above. The settlement agreement provides for adjustments to the maximum amounts and for other adjustments based on whether we achieve the financial performance measures. On December 15, 2008 and March 13, 2009, we received quarterly payments from Visa in the amounts of $472 million each.

At the time of our 2007 spin-off from Morgan Stanley, we entered into an agreement with Morgan Stanley regarding the manner in which the antitrust case against Visa and MasterCard was to be pursued and settled and how proceeds of the litigation were to be shared (the “Special Dividend Agreement”). As previously disclosed, the agreement provided that, upon resolution of the litigation, after expenses, we would be required to pay Morgan Stanley the first $700 million of value of cash or non-cash proceeds (increased at the rate of 6% per annum until paid in full) (the “minimum proceeds”), plus 50% of any proceeds in excess of $1.5 billion, subject to certain limitations and a maximum potential payment to Morgan Stanley of $1.5 billion. All payments by us to Morgan Stanley would be net of taxes payable by us with respect to such proceeds. On October 21, 2008, Morgan Stanley filed a lawsuit against us in New York Supreme Court for New York County seeking a declaration that Morgan Stanley did not breach the Special Dividend Agreement, did not interfere with any of our existing or prospective agreements for resolution of the antitrust case against Visa and MasterCard and that Morgan Stanley is entitled to receive a portion of the settlement proceeds as set forth in the Special Dividend Agreement. On November 18, 2008, we filed our response to Morgan Stanley’s lawsuit, which includes counterclaims against Morgan Stanley for interference with our efforts to resolve the antitrust lawsuit against Visa and MasterCard and willful and material breach of the Special Dividend Agreement, which expressly provided that we would have sole control over the investigation, prosecution and resolution of the antitrust lawsuit. Through our counterclaims we seek a ruling that because of Morgan Stanley’s willful, material breach of the Special Dividend Agreement it has no right to any of the proceeds from the settlement. We have also requested damages in an amount to be proven at trial.

Item 1A.

Risk Factors.

You should carefully consider each of the risks described below, which supplement the risks disclosed in our annual report on Form 10-K for the year ended November 30, 2008. You should also consider all of the other risks disclosed in our annual report on Form 10-K in evaluating us. Our business, financial condition, cash flows and/or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks.

Certain actions that may be required by the rating agencies to maintain the ratings of securities issued by our securitization trusts could, if executed, result in additional regulatory capital requirements and/or a reversal of sale accounting treatment for our securitized receivables, each of which could adversely impact our earnings, liquidity and capital.

We access the public asset-backed securitization market through the Discover Card Master Trust I (“DCMT”) and the Discover Card Execution Note Trust (“DCENT”) using receivables generated by our U.S.

Card business. Our DCMT structure issues Class A and Class B certificates, with credit enhancement provided by the subordinated Class B certificates, a cash collateral account and the excess cash flows generated by the receivables in the trust. The DCENT structure issues Class A, Class B and Class C notes, with credit enhancement provided by the Class B and Class C notes and the excess cash flows generated by the receivables in the trust.

On February 4, 2009, Standard & Poor’s Ratings Services (“S&P”) placed on credit watch with negative implications its AAA rating on the Class A certificates from DCMT Series 1996-4 and its BBB rating on the Class C notes of DCENT, which represent $1.9 billion of loan receivables, or 8.4% of the aggregate amount of securities outstanding under DCMT and DCENT. According to S&P, the credit watch actions primarily reflect the gradual increase in the charge-off rate of DCMT and DCENT in 2008 and S&P’s expectation that the trust performance variables could further weaken in 2009.

The Class A certificates from DCMT Series 1996-4 currently have less credit enhancement than the rest of the DCMT Class A certificates, thereby making them more vulnerable if the performance of receivables in DCMT deteriorates further. The DCENT Class C notes are currently supported solely by excess cash flows (“excess spread”) generated by the securitized receivables. S&P stated that it believes that this credit enhancement based solely on excess spread will be under pressure if performance trends continue to deteriorate in 2009. As of February 28, 2009, the three-month average excess spread for DCENT was at 6.0%. If the three-month average excess spread declines below 4.5%, the trustee would be required to fund the Class C reserve account by trapping a portion of the excess cash flows that is typically returned to Discover Bank as additional credit enhancement for holders of the DCENT Class C notes.

The credit watch with negative implications status applies for 90 days, at which time S&P will reevaluate for possible downgrade the ratings of the certificates and notes, based on its ongoing review of the credit performance of the underlying receivables and the available credit enhancement. S&P has indicated that it believes that any downgrades, if warranted, would not likely exceed one rating category.

In order to maintain the ratings of DCENT and DCMT securities, S&P (and/or other rating agencies) may require certain actions to be taken to provide additional credit enhancement. These actions may in some cases require amendments to the related agreements, possibly subject to investor consent. These actions, if taken, could result in an increase in our risk-weighted assets, triggering additional capital requirements, and/or a reversal of sale accounting treatment for the receivables under GAAP, resulting in increased reserves and a writedown of the interest-only strip receivable, which could adversely impact our earnings, liquidity and capital. Failure to take these actions may limit our future ability to access the securitization markets.

The rating agencies are continuously examining the ratings of the securities issued by the securitization trusts. It is possible that one or more rating agencies other than S&P may place on credit watch or downgrade the rating of the aforementioned securities. It is also possible that one or more of the rating agencies may place on credit watch or downgrade the ratings of other securities issued by the securitization trusts.

Our business could be materially adversely affected if we are unable to recruit, retain and motivate key officers and employees as a result of executive compensation restrictions imposed on us as a participant in the U.S. Treasury Capital Purchase Program.

Our success depends, in large part, on our ability to retain, recruit and motivate key officers and employees to manage our business. As a participant in the U.S. Treasury Capital Purchase Program, we are subject to significant restrictions on how we may compensate our top five senior executive officers (“SEOs”) and our next 20 most highly compensated employees under the Emergency Economic Stabilization Act of 2008, as amended (“EESA”). The EESA generally limits the amount of bonus or incentive compensation payable to our SEOs and our next 20 most highly compensated employees to one-third of the total amount of their annual compensation and limits the form of such payments to long-term restricted stock that does not fully vest during the period in

which the senior preferred stock is held by the U.S. Treasury. In addition, the EESA could require the clawback of previously paid compensation to these employees. The EESA also restricts golden parachute payments for our SEOs and our next five most highly compensated employees except for payments for services performed or benefits accrued. We may be subject to further restrictions under expected U.S. Treasury regulations implementing EESA and any other future legislation or regulation limiting executive compensation. These restrictions could negatively impact our ability to compete with other companies in recruiting and retaining key officers and employees. Some of the companies with which we compete for senior talent may not be subject to such compensation limitations. The financial institutions that are larger than we are may be subject to such limitations, but such limitations may not apply to the individuals in the positions for which we seek to retain and recruit talent. If we are unable to recruit, retain and motivate key personnel, our business could be materially adversely affected.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The table below sets forth the information with respect to purchases of our common stock made by us or on our behalf during the three months ended February 28, 2009:


Period	Total Number of Shares Purchased ⁽²⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
December 1 – 31, 2008
Repurchase program ⁽¹⁾	—	$	—	—	$	1 billion
Employee transactions ⁽²⁾	3,074	$	10.07	N/A		N/A
January 1 – 31, 2009
Repurchase program ⁽¹⁾	—	$	—	—	$	1 billion
Employee transactions ⁽²⁾	843,626	$	7.27	N/A		N/A
February 1—28, 2009
Repurchase program ⁽¹⁾	—	$	—	—	$	1 billion
Employee transactions ⁽²⁾	950	$	7.21	N/A		N/A

Total
Repurchase program ⁽¹⁾	—	$	—	—	$	1 billion
Employee transactions ⁽²⁾	847,650	$	7.28	N/A		N/A

(1)

On December 3, 2007, we announced that our Board of Directors authorized the repurchase of up to $1 billion of our outstanding stock under a new share repurchase program. This share repurchase program expires on November 30, 2010, and may be terminated at any time. At February 28, 2009, we had not repurchased any stock under this program.

(2)	Reflects shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units or upon the exercise of stock options.

Item 3.

Defaults Upon Senior Securities.

None

Item 4.

Submission of Matters to a Vote of Security Holders.

None

Item 5.

Other Information.

None

Item 6.

Exhibits.

See “Exhibit Index” for documents filed herewith and incorporated herein by reference.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Discover Financial Services (Registrant)

By:		/ S / R OY G UTHRIE
		Roy Guthrie Executive Vice President and Chief Financial Officer

Date: April 8, 2009

Exhibit Index


Exhibit Number		Description

3.1		Restated Certificate of Incorporation of Discover Financial Services.

3.2		Amended and Restated Bylaws of Discover Financial Services, as amended and restated on January 22, 2009 (filed as Exhibit 3.1 to Discover Financial Services’ Current Report on Form 8-K filed on January 23, 2009 and incorporated herein by reference thereto).

4.1		Form of Certificate for the Series A Preferred Stock (filed as Exhibit 4.1 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).

4.2		Warrant for Purchase of Shares of Common Stock (filed as Exhibit 4.2 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).

10.1		Letter Agreement, dated March 13, 2009, between Discover Financial Services and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and the Warrant (filed as Exhibit 10.1 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).

10.2		Side Letter, dated March 13, 2009, between Discover Financial Services and the United States Department of the Treasury (filed as Exhibit 10.2 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).

10.3		Form of Waiver, executed by each of Discover Financial Services’ senior executive officers and certain other employees (filed as Exhibit 10.3 to Discover Financial Services’ Current Report on Form 8-K filed on March 13, 2009 and incorporated herein by reference thereto).

10.4		Form of Executive Compensation Agreement, dated March 13, 2009, executed by each of Discover Financial Services’ senior executive officers and certain other employees.

10.5		Discover Financial Services Omnibus Incentive Plan (filed as an attachment to Discover Financial Services’ Proxy Statement on Schedule 14A filed on February 27, 2009 and incorporated herein by reference thereto).

10.6		Amendment No. 2, dated as of March 11, 2009, to the Credit Agreement, dated as of June 6, 2007, among Discover Financial Services, Discover Bank, the subsidiary borrowers from time to time party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.

10.7		2008 Year End Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.21 to Discover Financial Services’ Annual Report on Form 10-K for the year ended November 30, 2008 filed on January 28, 2009 and incorporated herein by reference thereto).

10.8		2008 Special Grant Form of Restricted Stock Unit Award Under Discover Financial Services Omnibus Incentive Plan (filed as Exhibit 10.22 to Discover Financial Services’ Annual Report on Form 10-K for the year ended November 30, 2008 filed on January 28, 2009 and incorporated herein by reference thereto).

31.1		Certification of Chief Executive Officer of Discover Financial Services pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer of Discover Financial Services pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Chief Executive Officer and Chief Financial Officer of Discover Financial Services pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Exhibit 3.1

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

DISCOVER FINANCIAL SERVICES

Discover Financial Services, a Delaware corporation, the original Certificate of Incorporation of which was filed with the Secretary of State of the State of Delaware on July 25, 1960 under the name Allstate Enterprises, Inc., HEREBY CERTIFIES that this Amended and Restated Certificate of Incorporation restating, integrating and amending its Certificate of Incorporation was duly proposed by its Board of Directors and adopted by its stockholders in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware.

ARTICLE 1

NAME

The name of the corporation (which is hereinafter referred to as the “ Corporation ”) is: Discover Financial Services.

ARTICLE 2

ADDRESS

The address of the Corporation’s registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the Corporation’s registered agent at such address is The Corporation Trust Company.

ARTICLE 3

PURPOSE

The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized and incorporated under the General Corporation Law of the State of Delaware.

ARTICLE 4

CAPITALIZATION

The total number of shares of stock which the Corporation shall have authority to issue is two billion two hundred million (2,200,000,000), consisting of two hundred million (200,000,000) shares of Preferred Stock, par value $0.01 per share (hereinafter referred to as “ Preferred Stock ”), and two billion (2,000,000,000) shares of Common Stock, par value $0.01 per share (hereinafter referred to as “ Common Stock ”). Upon the effectiveness of this Amended and Restated Certificate of Incorporation (the “ Effective Time ”), each share of Common Stock issued and outstanding immediately prior to the Effective Time shall be automatically subdivided and converted, without further action on the part of the Corporation or any holder of such Common Stock, into 526,233.731 shares of Common Stock.

The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware (hereinafter referred to as a “ Preferred Stock Designation ”), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:

The designation of the series, which may be by distinguishing number, letter or title.

The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding).

The amounts payable on, and the preferences, if any, of shares of the series in respect of dividends, and whether such dividends, if any, shall be cumulative or non-cumulative.

Dates at which dividends, if any, shall be payable.

The redemption rights and price or prices, if any, for shares of the series.

The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series.

The amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series of such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made.

Restrictions on the issuance of shares of the same series or of any other class or series.

10.

The voting rights, if any, of the holders of shares of the series.

11.

Such other powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, as the Board of Directors determines.

The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Except as may be provided in this Certificate of Incorporation or in a Preferred Stock Designation or by applicable law, the holders of shares of Common Stock shall be entitled

to one vote for each such share upon all questions presented to the stockholders, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. The holders of the shares of Common Stock shall at all times, except as otherwise provided in this Certificate of Incorporation or as required by law, vote as one class, together with the holders of any other class or series of stock of the Corporation accorded such general voting rights.

The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law.

ARTICLE 5

BY-LAWS

In furtherance of, and not in limitation of, the powers conferred by law, the Board of Directors is expressly authorized and empowered:

to adopt, amend or repeal the Bylaws of the Corporation; provided , however , that the Bylaws adopted by the Board of Directors under the powers hereby conferred may be amended or repealed by the Board of Directors or by the stockholders having voting power with respect thereto; provided further that, in the case of amendments by stockholders, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required in order for the stockholders to alter, amend or repeal any provision of the Bylaws or to adopt any additional Bylaw; and

from time to time to determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of stockholders; and, except as so determined or as expressly provided in this Certificate of Incorporation or in any Preferred Stock Designation, no stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law.

The Corporation may in its Bylaws confer powers upon the Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law.

ARTICLE 6

ACTION OF STOCKHOLDERS

Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders.

ARTICLE 7

BOARD OF DIRECTORS

Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in this Certificate of Incorporation, to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed in such manner as prescribed in the Bylaws of the Corporation and may be increased or decreased from time to time in such manner as prescribed in the Bylaws.

Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot.

The directors, other than those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation, shall be elected annually at each annual meeting of stockholders of the Corporation to hold office for a term expiring at the next annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified.

Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in this Certificate of Incorporation, to elect additional directors under specified circumstances, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders, and until such director’s successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director.

Any director may be removed from office at any time, with or without cause.

ARTICLE 8

INDEMNIFICATION

Each person who is or was a director or officer of the Corporation shall be indemnified by the Corporation to the fullest extent permitted from time to time by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, if permitted by applicable law, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. The Corporation may, by action of the Board of Directors, provide indemnification to employees and agents (other than a director or officer) of the Corporation, to directors, officers, employees or agents of a subsidiary, and to each person serving as a director, officer, partner, member, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, at the request of the Corporation, with the same scope and effect as the foregoing indemnification of directors and officers of the Corporation. The Corporation shall be required to indemnify any person seeking indemnification in

connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors or is a proceeding to enforce such person’s claim to indemnification pursuant to the rights granted by this Certificate of Incorporation or otherwise by the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article 8. Any amendment or repeal of this Article 8 shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal.

ARTICLE 9

DIRECTOR’S LIABILITY

A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the General Corporation Law of the State of Delaware, or (4) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of this Article 9 shall not adversely affect any right or protection of a director of the Corporation existing hereunder in respect of any act or omission occurring prior to such amendment or repeal.

If the General Corporation Law of the State of Delaware shall be amended to authorize corporate action further eliminating or limiting the liability of directors, then a director of the Corporation, in addition to the circumstances in which he is not liable immediately prior to such amendment, shall be free of liability to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended.

ARTICLE 10

AMENDMENTS

Except as may be expressly provided in this Certificate of Incorporation, the Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or a Preferred Stock Designation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article 10; provided, however , that any amendment or repeal of Article 8 or 9 of this Certificate of Incorporation shall not adversely affect any right or protection existing thereunder in respect of any act or omission occurring prior to such amendment or repeal; and provided further that no Preferred Stock Designation shall be amended after the issuance of any share of the series of Preferred Stock created thereby, except in accordance with the terms of such Preferred Stock Designation and the requirements of applicable law.

Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of the holders of at least

80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with paragraph 1 of Article 5 or this second paragraph of this Article 10. For the purposes of this Certificate of Incorporation, “ Voting Stock ” shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors.

The effective time and date of this filing is June 30, 2007, at 12:01 a.m. Eastern Time.

IN WITNESS WHEREOF, Discover Financial Services has caused this Certificate to be signed on this 28th day of June, 2007 in its name.


DISCOVER FINANCIAL SERVICES

By:		/s/ Kathryn McNamara Corley
Name:		Kathryn McNamara Corley
Title:		Senior Vice President, General Counsel and Secretary

Appendix A

CERTIFICATE OF DESIGNATIONS

FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A

DISCOVER FINANCIAL SERVICES

Discover Financial Services, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), in accordance with the provisions of Section 151(g) of the General Corporation Law thereof, does hereby certify:

The board of directors of the Corporation (the “ Board of Directors ”) or an applicable committee of the Board of Directors, in accordance with the certificate of incorporation and bylaws of the Corporation and applicable law, adopted the following resolution on December 15, 2008 and March 4, 2009 creating a series of 1,224,588 shares of Preferred Stock of the Corporation designated as “ Fixed Rate Cumulative Perpetual Preferred Stock, Series A ”.

RESOLVED , that pursuant to the provisions of the certificate of incorporation and the bylaws of the Corporation and applicable law, a series of Preferred Stock, par value $0.01 per share, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Designation and Number of Shares . There is hereby created out of the authorized and unissued shares of preferred stock of the Corporation a series of preferred stock designated as the “Fixed Rate Cumulative Perpetual Preferred Stock, Series A” (the “ Designated Preferred Stock ”). The authorized number of shares of Designated Preferred Stock shall be 1,224,588.

Standard Provisions . The Standard Provisions contained in Annex A attached hereto are incorporated herein by reference in their entirety and shall be deemed to be a part of this Certificate of Designations to the same extent as if such provisions had been set forth in full herein.

Definitions . The following terms are used in this Certificate of Designations (including the Standard Provisions in Annex A hereto) as defined below:

“ Common Stock ” means the common stock, par value $0.01 per share, of the Corporation.

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“ Dividend Payment Date ” means February 15, May 15, August 15 and November 15 of each year.

“ Junior Stock ” means the Common Stock and any other class or series of stock of the Corporation the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Corporation.

“ Liquidation Amount ” means $1,000 per share of Designated Preferred Stock.

“ Minimum Amount ” means $306,147,000.

“ Parity Stock ” means any class or series of stock of the Corporation (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Corporation (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

“ Signing Date ” means March 13, 2009.

Certain Voting Matters . Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent.

[ Remainder of Page Intentionally Left Blank ]

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IN WITNESS WHEREOF, Discover Financial Services has caused this Certificate of Designations to be signed by Roy A. Guthrie, its Executive Vice President and Chief Financial Officer, this 11th day of March, 2009.


DISCOVER FINANCIAL SERVICES

By:		/s/ Roy A. Guthrie
Name:		Roy A. Guthrie
Title:		Executive Vice President and Chief Financial Officer

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ANNEX A

STANDARD PROVISIONS

General Matters . Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Corporation.

Standard Definitions . As used herein with respect to Designated Preferred Stock:

“ Applicable Dividend Rate ” means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum.

“ Appropriate Federal Banking Agency ” means the “appropriate Federal banking agency” with respect to the Corporation as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.

“ Business Combination ” means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Corporation’s stockholders.

“ Business Day ” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

“ Bylaws ” means the bylaws of the Corporation, as they may be amended from time to time.

“ Certificate of Designations ” means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.

“ Charter ” means the Corporation’s certificate or articles of incorporation, articles of association, or similar organizational document.

“ Dividend Period ” has the meaning set forth in Section 3(a).

“ Dividend Record Date ” has the meaning set forth in Section 3(a).

“ Liquidation Preference ” has the meaning set forth in Section 4(a).

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“ Original Issue Date ” means the date on which shares of Designated Preferred Stock are first issued.

“ Preferred Director ” has the meaning set forth in Section 7(b).

“ Preferred Stock ” means any and all series of preferred stock of the Corporation, including the Designated Preferred Stock.

“ Qualified Equity Offering ” means the sale and issuance for cash by the Corporation to persons other than the Corporation or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Corporation at the time of issuance under the applicable risk-based capital guidelines of the Corporation’s Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to October 13, 2008).

“ Share Dilution Amount ” has the meaning set forth in Section 3(b).

“ Standard Provisions ” mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.

“ Successor Preferred Stock ” has the meaning set forth in Section 5(a).

“ Voting Parity Stock ” means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.

Dividends .

Rate . Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a rate per annum equal to the Applicable Dividend Rate on (i) the Liquidation Amount per share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date ( i.e. , no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but

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excluding, the next Dividend Payment Date is a “ Dividend Period ”, provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date.

Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month.

Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Corporation on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a “ Dividend Record Date ”). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day.

Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).

Priority of Dividends . So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock, and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased, redeemed or otherwise acquired for consideration by the Corporation or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business (including purchases to offset the Share Dilution Amount (as defined below) pursuant to a publicly announced repurchase plan) and consistent with past practice, provided that any purchases to offset the Share Dilution Amount shall in no event exceed the Share Dilution Amount; (ii) purchases or other acquisitions by a broker-dealer subsidiary of the Corporation solely for the purpose of market-making, stabilization or customer facilitation transactions in Junior Stock or Parity Stock in the ordinary course of its business; (iii) purchases by a broker-dealer subsidiary of the Corporation of capital stock of the Corporation for resale pursuant to an offering by the Corporation of such capital stock underwritten by such broker-dealer subsidiary; (iv) any dividends or distributions of rights or Junior Stock in connection with a stockholders’

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rights plan or any redemption or repurchase of rights pursuant to any stockholders’ rights plan; (v) the acquisition by the Corporation or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Corporation or any of its subsidiaries), including as trustees or custodians; and (vi) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case, solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock. “ Share Dilution Amount ” means the increase in the number of diluted shares outstanding (determined in accordance with generally accepted accounting principles in the United States, and as measured from the date of the Corporation’s consolidated financial statements most recently filed with the Securities and Exchange Commission prior to the Original Issue Date) resulting from the grant, vesting or exercise of equity-based compensation to employees and equitably adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other. If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date.

Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.

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Liquidation Rights .

Voluntary or Involuntary Liquidation . In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Corporation or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Corporation, subject to the rights of any creditors of the Corporation, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Corporation ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the “ Liquidation Preference ”).

Partial Payment . If in any distribution described in Section 4(a) above the assets of the Corporation or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.

Residual Distributions . If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as to such distribution has been paid in full, the holders of other stock of the Corporation shall be entitled to receive all remaining assets of the Corporation (or proceeds thereof) according to their respective rights and preferences.

Merger, Consolidation and Sale of Assets Not Liquidation . For purposes of this Section 4, the merger or consolidation of the Corporation with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Corporation, shall not constitute a liquidation, dissolution or winding up of the Corporation.

Redemption .

Optional Redemption . Except as provided below, the Designated Preferred Stock may not be redeemed prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date. On or after the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, out of funds legally available therefor, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as

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otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption.

Notwithstanding the foregoing, prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption; provided that (x) the Corporation (or any successor by Business Combination) has received aggregate gross proceeds of not less than the Minimum Amount (plus the “Minimum Amount” as defined in the relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the “ Successor Preferred Stock ”) in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Corporation (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor).

The redemption price for any shares of Designated Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Corporation or its agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the Dividend Record Date for a Dividend Period shall not be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3 above.

No Sinking Fund . The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.

Notice of Redemption . Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Corporation. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any other similar facility, notice of redemption

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may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility. Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.

Partial Redemption . In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.

Effectiveness of Redemption . If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Corporation, in trust for the pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

Status of Redeemed Shares . Shares of Designated Preferred Stock that are redeemed, repurchased or otherwise acquired by the Corporation shall revert to authorized but unissued shares of Preferred Stock ( provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).

Conversion . Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.

Voting Rights .

General . The holders of Designated Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by law.

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Preferred Stock Directors . Whenever, at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly Dividend Periods or more, whether or not consecutive, the authorized number of directors of the Corporation shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (hereinafter the “ Preferred Directors ” and each a “ Preferred Director ”) to fill such newly created directorships at the Corporation’s next annual meeting of stockholders (or at a special meeting called for that purpose prior to such next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been declared and paid in full at which time such right shall terminate with respect to the Designated Preferred Stock, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned; provided that it shall be a qualification for election for any Preferred Director that the election of such Preferred Director shall not cause the Corporation to violate any corporate governance requirements of any securities exchange or other trading facility on which securities of the Corporation may then be listed or traded that listed or traded companies must have a majority of independent directors. Upon any termination of the right of the holders of shares of Designated Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the Preferred Directors shall cease to be qualified as directors, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the holders a majority of the shares of Designated Preferred Stock at the time outstanding voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.

Class Voting Rights as to Particular Matters . So long as any shares of Designated Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the vote or consent of the holders of at least 66 ² / 3 % of the shares of Designated Preferred Stock at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:

Authorization of Senior Stock . Any amendment or alteration of the Certificate of Designations for the Designated Preferred Stock or the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Corporation ranking senior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Corporation;

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Amendment of Designated Preferred Stock . Any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter (including, unless no vote on such merger or consolidation is required by Section 7(c)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Designated Preferred Stock; or

Share Exchanges, Reclassifications, Mergers and Consolidations . Any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the Corporation with another corporation or other entity, unless in each case (x) the shares of Designated Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Designated Preferred Stock immediately prior to such consummation, taken as a whole;

provided, however , that for all purposes of this Section 7(c), any increase in the amount of the authorized Preferred Stock, including any increase in the authorized amount of Designated Preferred Stock necessary to satisfy preemptive or similar rights granted by the Corporation to other persons prior to the Signing Date, or the creation and issuance, or an increase in the authorized or issued amount, whether pursuant to preemptive or similar rights or otherwise, of any other series of Preferred Stock, or any securities convertible into or exchangeable or exercisable for any other series of Preferred Stock, ranking equally with and/or junior to Designated Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and the distribution of assets upon liquidation, dissolution or winding up of the Corporation will not be deemed to adversely affect the rights, preferences, privileges or voting powers, and shall not require the affirmative vote or consent of, the holders of outstanding shares of the Designated Preferred Stock.

Changes after Provision for Redemption . No vote or consent of the holders of Designated Preferred Stock shall be required pursuant to Section 7(c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of the Designated Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5 above.

Procedures for Voting and Consents . The rules and procedures for calling and conducting any meeting of the holders of Designated Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to

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time, which rules and procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which Designated Preferred Stock is listed or traded at the time.

Record Holders . To the fullest extent permitted by applicable law, the Corporation and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor such transfer agent shall be affected by any notice to the contrary.

Notices . All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.

No Preemptive Rights . No share of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Corporation, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.

Replacement Certificates . The Corporation shall replace any mutilated certificate at the holder’s expense upon surrender of that certificate to the Corporation. The Corporation shall replace certificates that become destroyed, stolen or lost at the holder’s expense upon delivery to the Corporation of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Corporation.

Other Rights . The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.

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Exhibit 10.4

EXECUTIVE COMPENSATION AGREEMENT

This Executive Compensation Agreement (the “ Agreement ”) is made and entered into effective as of March 13, 2009, by and between Discover Financial Services, a Delaware corporation (the “ Company ”), and the executive name below (the “ Executive ”).

WHEREAS , the Company, through the Compensation Committee of its Board of Directors (the “ Committee ”), has adopted the Discover Financial Services Change in Control Severance Policy (“ Policy ”) effective September 21, 2007, as amended; and

WHEREAS , the Company, through the Committee, also has made certain equity-based compensation awards to the Executive (the “ Discover Awards ”), and provides compensation and benefits through other plans, programs and arrangements (such plans, programs and arrangements are herein referred to collectively as the “ Discover Plans ”); and

WHEREAS , Morgan Stanley also has made certain equity-based compensation awards to the Executive, which were converted to Company equity-based awards in connection with the Company’s spin-off from Morgan Stanley (the “ Morgan Stanley Awards ” and together with the Discover Awards are referred to herein as the “ Awards ”), and provides compensation and benefits through other plans, programs and arrangements (such plans, programs and arrangements are herein referred to collectively as the “ Morgan Stanley Plans ” and together with the Discover Plans are referred to herein as the “ Plans ”); and

WHEREAS , the United States Department of the Treasury (the “ UST ”) has implemented and will implement various capital access programs for financial institutions under the Troubled Asset Relief Program (“TARP”) established by the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009 (“EESA”); and

WHEREAS , EESA imposes certain requirements and conditions for institutions that wish to participate in the TARP, including the imposition of certain restrictions on executive compensation; and

WHEREAS , the UST has promulgated regulations on the application of these restrictions, and the UST retains the right to and may promulgate additional requirements and guidelines for institutions that wish to participate in the TARP; and

WHEREAS , the Company and the Executive believe that it is in the best interests of the Company to participate in the TARP in order to utilize a potential new source of capital that will provide the Company with economic benefits; and

WHEREAS , the Company and the Executive now consider it desirable to amend the Policy, Plans and Awards by this Agreement to qualify for participation in the TARP;

NOW THEREFORE , in consideration of the mutual promises herein made and for the benefits the Executive will receive as a result of the Company’s participation in the TARP, the

sufficiency of which are expressly acknowledged, the Company and the Executive agree as follows:

1. During any period in which any obligation arising from financial assistance provided under the TARP remains outstanding, not including any period during which the Federal Government only holds warrants to purchase common stock of the Company (the “TARP Obligation Period”), notwithstanding any other provision of the Policy, Plans or Awards, to the contrary, the limitations and restrictions of Section 111 of EESA will apply to the Company and the Executive, and the Policy, Plans and Awards are hereby deemed amended by this Agreement.

2. During any TARP Obligation Period, the Executive hereby agrees and consents to take such actions as are necessary and appropriate to establish modifications, conditions, or other restrictions on the Executive’s compensation, including, without limitations, amendments of the Policy, Plans and Awards, in order to comply with Section 111 of EESA, its conforming regulations, and any other relevant requirements of EESA and the TARP (the “ EESA Requirements ”), including, without limitation, termination of the Policy, Plans, Awards, or other compensation arrangements, to the extent such action may reasonably be deemed necessary by the Company, in the opinion of its counsel, in order to so comply. Without limiting the application of the preceding sentence, the Executive hereby consents to the amendment of the Policy, Plans, and Awards, as they relate to the Executive, and the Executive formally waives any claims the Executive may otherwise have against the Company, its subsidiaries, affiliates, assigns or successors (including any officer or director thereof) relating to the amendment or any termination of the Policy, Plans, Awards, and other compensation arrangements.

3. The Executive hereby voluntarily waives any claim against the Company for any changes to the Executive’s compensation or benefits that are required to comply with the EESA Requirements. The Executive acknowledges that the EESA Requirements may impose modification of the compensation, bonus, incentive and other benefit plans, arrangements, policies and agreements (including so-called “golden parachute” agreements) that the Executive has with the Company or in which the Executive participates as they relate to the TARP Obligation Period.

4. If the Executive is required to reimburse, or the Company is required to withhold or “claw-back,” any bonus, retention award, or other compensation paid or payable to the Executive in order to comply with Section 111 of EESA, the Company will indemnify the Executive for reasonable legal fees incurred in connection with any challenge to the UST’s claims and will reimburse the Executive’s reasonable expenses incurred in the filing of amended or other tax returns as may be necessary in connection with such reimbursement, withholding or claw-back, in each case subject to the same terms and conditions for the indemnification of officers as apply under the Company’s by-laws; in each case, provided that the specific provisions of the financial statements, statements of earnings, revenues, gains, or other performance metrics or criteria that resulted in the clawback requirement was not caused, directly or indirectly, by the Executive’s misconduct or gross negligence.

5. Any deemed amendment of the Policy, Plans and Awards will only apply to the Executive during a TARP Obligation Period, will only apply to the minimum extent necessary to comply with the EESA Requirements, and will automatically lapse as to the Executive and the Company on the close of business on the day on which any obligation arising from financial assistance provided under the TARP ceases to be outstanding.

6. If any portion of this Agreement is found to be invalid or unenforceable, the remainder of the Agreement shall remain in full force and effect. This Agreement shall constitute the entire agreement between the Company and the Executive with respect to the subject matter hereof and supersedes all prior or contemporaneous representations and agreements related thereto.

7. This Agreement will be governed by Illinois law.

IN WITNESS WHEREOF , the Company and the Executive have executed this Agreement as of the date indicated above.


DISCOVER FINANCIAL SERVICES						EXECUTIVE

By:						By:

Its:						Print Name:

Exhibit 10.6

EXECUTION COPY

AMENDMENT NO. 2, dated as of March 11, 2009, to the Credit Agreement referred to below, among DISCOVER FINANCIAL SERVICES, a Delaware corporation, DISCOVER BANK, a Delaware banking corporation, the SUBSIDIARY BORROWERS party from time to time thereto, the LENDERS party thereto and JPMORGAN CHASE BANK, N.A., as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “ Administrative Agent ”).

The Borrowers, the Lenders and the Administrative Agent are parties to a Credit Agreement dated as of June 6, 2007 (as amended by Amendment No. 1 dated as of February 29, 2008 and as modified and supplemented and in effect from time to time, the “ Credit Agreement ”), providing, subject to the terms and conditions thereof, for extensions of credit to be made by or on behalf of said Lenders to the Borrowers in an aggregate principal amount not to exceed $2,500,000,000. The Borrowers, the Lenders and the Administrative Agent wish to amend the Credit Agreement in certain respects and, accordingly, the parties hereto hereby agree as follows:

Section 1. Definitions . Except as otherwise defined in this Amendment No. 2, terms defined in the Credit Agreement (as amended hereby) are used herein as defined therein.

Section 2. Amendments . Effective as of the date hereof as provided in Section 4 of this Amendment No. 2, the Credit Agreement is hereby amended as follows:

2.01. References in the Credit Agreement to “this Agreement” (and indirect references such as “hereunder”, “hereby”, “herein” and “hereof”) shall be deemed to be references to the Credit Agreement as amended hereby.

2.02. Defined Terms . Section 1.01 of the Credit Agreement is hereby amended by adding the following new definitions:

“ Department of Education Loan Participation Program ” means a program pursuant to which the United States Department of Education purchases participation interests in eligible student loans that have been transferred to a custodian by a Company or Subsidiary.

2.03. Liens .

(a) Section 6.02 of the Credit Agreement is hereby amended by deleting the word “and” at the end of clause (i) thereof.

(b) Section 6.02 of the Credit Agreement is hereby amended by deleting the existing clause (j) and adding a new clause (j) to read in its entirety as follows:

“(j) Liens in favor of a custodian for the benefit of the United States Department of Education to secure advances (or future advances) made (or to be made) to, or participation interests purchased from, such Company or Subsidiary in connection with a Department of Education Loan Participation Program; and”

(c) Section 6.02 of the Credit Agreement is hereby amended by adding a new clause (k) to read in its entirety as follows:

“(k) other Liens securing obligations in an aggregate amount not to exceed $100,000,000 at any time outstanding.”

2.04. Mergers, Consolidations, Sales of Assets, Etc. Section 6.03(a) of the Credit Agreement is hereby amended by replacing the words “(other than dispositions of assets pursuant to a Permitted Securitization)” therein with the words “(other than dispositions of assets pursuant to a Permitted Securitization or in connection with participation in a Department of Education Loan Participation Program)”.

2.05. Restrictive Agreements . Section 6.07 of the Credit Agreement is hereby amended by replacing the words “without reference to Section 6.02(g)” therein with the words “without reference to Section 6.02(k)”.

Section 3. Representations and Warranties . Each Borrower hereby represents and warrants to the Administrative Agent and the Lenders that (i) the representations and warranties of such Borrower set forth in Article III of the Credit Agreement are, on the date hereof, true and complete as if made on the date hereof (and after giving effect to this Amendment No. 2) and as if each reference in said Article III to “this Agreement” includes reference to this Amendment No. 2 and (ii) both immediately before and after giving effect to the amendments under Section 2 hereof, no Default has occurred and is continuing.

Section 4. Conditions Precedent . The amendments to the Credit Agreement set forth in Section 2 of this Amendment No. 2 shall become effective, as of the date hereof, upon the satisfaction of each of the following conditions precedent:

(i) receipt by the Administrative Agent of one or more counterparts of this Amendment No. 2 duly executed and delivered by each of the Borrowers and the Required Lenders; and

(ii) payment by the Companies to the Administrative Agent of all fees and other amounts due and payable on or prior to the date this Amendment No. 2 becomes effective, including amounts, to the extent invoiced, for the reimbursement or payment of all out-of-pocket expenses required to be reimbursed by the Companies.

Section 5. Miscellaneous . Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect and is hereby ratified and confirmed. This Amendment No. 2 may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement and any of the parties hereto may execute this Amendment No. 2 by signing any such counterpart. This Amendment No. 2 shall be governed by, and construed in accordance with, the laws of the State of New York.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed and delivered as of the day and year first above written.


DISCOVER FINANCIAL SERVICES

By:		/s/ Stephen R. Etherington
Name: Title:		Stephen R. Etherington Senior Vice President and Treasurer
U.S. Federal Tax Identification No.: 36-2517428


DISCOVER BANK

By:		/s/ Michael F. Rickert
Name: Title:		Michael F. Rickert Vice President, Chief Financial Officer and Treasurer
U.S. Federal Tax Identification No.: 51-0020270


JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent,

By:		/s/ Henry E. Steuart
Name: Title:		Henry E. Steuart Executive Director


LENDERS BARCLAYS BANK PLC

By:		/s/ David Barton
Name: Title:		David Barton Director


LENDERS THE BANK OF TOKYO-MITSUBISHI UJF, LTD., NEW YORK BRANCH

By:		/s/ Chimie T. Pemba
Name: Title:		Chimie T. Pemba Authorized Signatory


LENDERS CREDIT SUISSE, CAYMEN ISLANDS BRANCH

By:		/s/ Jay Chall
Name: Title:		Jay Chall Director



By:		/s/ Karl Studer
Name: Title:		Karl Studer Director


LENDERS GREENWICH CAPITAL MARKETS, INC., AS AGENT FOR THE ROYAL BANK OF SCOTLAND PLC

By:		/s/ Fergus Smail
Name: Title:		Fergus Smail Senior Vice President


LENDERS THE BANK OF NEW YORK MELLON

By:		/s/ Jean Earley
Name: Title:		Jean Earley Vice President


LENDERS U.S. BANK NATIONAL ASSOCIATION

By:		/s/ Jeffrey S. Johnson
Name: Title:		Jeffrey S. Johnson Vice President


LENDERS WILLIAM STREET CREDIT CORPORATION

By:		/s/ Mark Walton
Name: Title:		Mark Walton Assistant Vice President


LENDERS BANK OF AMERICA

By:		/s/ Stefanie Brown
Name: Title:		Stefanie Brown Vice President


LENDERS WELLS FARGO BANK, NATIONAL ASSOCIATION

By:		/s/ Elizabeth S. Collins
Name: Title:		Elizabeth S. Collins Senior Vice President


LENDERS MERRILL LYNCH BANK USA

By:		/s/ Louis Alder
Name: Title:		Louis Alder First Vice President


LENDERS SOCIÉTÉ GÉNÉRALE

By:		/s/ Shelley Yu
Name: Title:		Shelley Yu Director


LENDERS WACHOVIA BANK, NATIONAL ASSOCIATION

By:		/s/ Grainne M. Pergolini
Name: Title:		Grainne M. Pergolini Director


LENDERS HSBC BANK USA, NATIONAL ASSOCIATION

By:		/s/ Jimmy Tse
Name: Title:		Jimmy Tse Vice President


LENDERS FIRST COMMERCIAL BANK, LOS ANGELES BRANCH

By:		/s/ Wen-Han Wu
Name: Title:		Wen-Han Wu Deputy General Manager

Exhibit 31.1

CERTIFICATION

I, David W. Nelms, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 8, 2009

/s/ D AVID W. N ELMS

David W. Nelms

Chairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Roy A. Guthrie, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Discover Financial Services (the “registrant”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 8, 2009

/s/ R OY A. G UTHRIE

Roy A. Guthrie

Executive Vice President and

Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Discover Financial Services (the “Company”) on Form 10-Q for the period ended February 28, 2009, as filed with the Securities and Exchange Commission (the “Report”), each of David W. Nelms, Chairman and Chief Executive Officer of the Company, and Roy A. Guthrie, Executive Vice President and Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 8, 2009

/s/ D AVID W. N ELMS

David W. Nelms

Chairman and Chief Executive Officer

Date: April 8, 2009

/s/ R OY A. G UTHRIE

Roy A. Guthrie

Executive Vice President and
Chief Financial Officer