The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated and combined financial statements and related notes included elsewhere in this annual report on Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this annual report on Form 10-K particularly under "Special Note Regarding Forward-Looking Statements" and "Risk Factors."

Unless otherwise specified, references to Notes to the consolidated and combined financial statements are to the Notes to our audited consolidated and combined financial statements as of November 30, 2008 and 2007 and for the three-year period ended November 30, 2008.

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 provision, cardmember rewards, and expenses incurred to grow, manage and service our loan receivables.

Our business activities are funded primarily through the process of asset securitization, the raising of consumer deposits, 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 and combined 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 and combined 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 and combined 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."

2008 Highlights

• The consumer credit environment continues to be challenging. For the year ended November 30, 2008, the managed charge-off rate was 5.01% compared to 3.83% for the year ended November 30, 2007 and as of November 30, 2008, the managed over 30 days delinquency rate was 4.56%, up from 3.58% as of November 30, 2007. As a result, we have increased our reserve rate to 5.45% as of November 30, 2008 compared to 3.65% as of November 30, 2007.

• During 2008, there were significant disruptions in the capital markets. Throughout the year, issuance capacity in the credit card securitization markets became increasingly constrained and was unavailable in the fourth quarter. As a result, our on-balance sheet credit card loans have grown during the period and we have recorded a reserve for loan losses on those loans. In order to finance these additional receivables, we have increased our deposit funding. Additionally, in response to the disruptions in the capital markets, we have increased our contingent liquidity reserve to $9.4 billion at November 30, 2008, up from $8.3 billion at November 30, 2007.

• Market interest rates were highly volatile, but generally declined during the year. As a result, we had a lower cost of funds which positively impacted pretax income as maturing deposits were replaced with new deposits issued at lower interest rates. In addition, our securitization income was favorably impacted by lower interest expense on outstanding securitizations. While the declining interest rate environment also adversely impacted interest income earned on our floating rate assets, we sought to mitigate this impact by reducing new promotional rate balance transfer activity and offering new loans at fixed rates.

Beginning in the fourth quarter of 2007 and through much of 2008, the relationship between the Federal Funds rate (which impacts the prime rate, the rate to which our floating rate credit card receivables are benchmarked) and the London Interbank Offered Rate ("LIBOR," the rate to which our securitization borrowings are benchmarked) widened in response to disruptions in the capital markets with LIBOR often remaining significantly higher than the Federal Funds rate. As a result, at various times in 2008, our securitization income was negatively impacted by a higher LIBOR. Also in 2008, asset-backed commercial paper rates rose.

• In 2008, we settled our antitrust litigation with Visa and MasterCard for $2.75 billion. In the fourth quarter 2008, we received an $862.5 million payment from MasterCard as payment in full of its portion of the settlement, which we recorded in other income in the U.S. Card segment. In 2009, we expect to earn the remaining amount in four quarterly payments of up to $472 million each from Visa. 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 "Item 3. Legal Proceedings."

• On June 30, 2008, we acquired Diners Club International ("Diners Club") for $168 million. The Diners Club network has 49 network licensees that issue Diners Club cards and that maintain an acceptance network in 185 countries and territories. Results of the Diners Club business since the acquisition are reflected in our Third-Party Payments segment.

• During the year, we had strong transaction volume in our Third-Party Payments segment in comparison to 2007. Transaction volume in this segment increased 36% over the prior year to $125.1 billion, including a $12.7 billion volume contribution from Diners Club.

• We sold our U.K. credit card business ("Goldfish") to Barclays Bank PLC on March 31, 2008. This business represented substantially all of our International Card segment, which is presented in discontinued operations in this report.

2007 and 2006 Highlights

• On June 30, 2007, we spun off from Morgan Stanley through the distribution of shares of our common stock to holders of Morgan Stanley common stock (the "Distribution"). Our results of operations for the year ended November 30, 2007 include costs incurred as a result of the Distribution of approximately $34 million, including costs that were allocated to the International Card segment, reported as discontinued operations in this report.

• In 2006, market interest rates trended upward and remained stable throughout most of 2007 and the relationship between the Federal Funds rate and LIBOR also remained stable during most of the period. However, during the fourth quarter of 2007, the relationship between the Federal Funds rate and LIBOR changed materially, with LIBOR often remaining significantly higher than the Federal Funds rate.

• Leading up to October 2005, when new U.S. bankruptcy legislation became effective, we experienced a surge in bankruptcy receipts, with receipts peaking in October 2005. In 2006, we experienced a dramatic decline in bankruptcy receipts, which benefited our 2006 financial results. Bankruptcy levels rose from the 2006 level in 2007 and 2008.

Outlook

Our financial results continue to be adversely impacted by the challenging economic environment. We believe that rising unemployment levels, declining housing prices and restricted availability of credit to consumers have contributed to higher overall industry delinquency and charge-off rates. We expect to continue to operate in a difficult environment in 2009.

We recorded higher provision for loan losses this year as a result of higher charge-offs and owned loan growth and in anticipation of higher future charge-offs. We have been experiencing a trend of a greater percent of delinquent accounts flowing into later stages of delinquency and eventually into charge-off. Our underwriting and portfolio management strategies and geographic diversification are designed to manage exposure to credit losses. However, the continued challenges in the consumer credit environment are likely to lead to increasingly higher charge-off rates in 2009.

Disruptions in the capital markets, which have caused financial institutions to seek additional capital, merge with larger financial institutions and, in some cases, fail, have caused market participants to be concerned about the stability of financial markets generally, the strength of counterparties and extending credit. Due to these disruptions, we did not enter into an asset-backed securitization transaction in the fourth quarter of 2008. Our last public asset-backed securitization transaction was on June 18, 2008, and our last private asset-backed conduit securitization transaction closed on August 28, 2008. It is difficult to predict if or when securitization markets will return to historical capacity and pricing levels. In November 2008, the Federal Reserve announced the introduction of the Term Asset-Backed Securities Loan Facility (the "TALF") in an effort to facilitate the issuance of asset-backed securities and improve the market conditions for asset-backed securities. It is unclear at this time what impact the TALF program will have on returning the credit card securitization market to historical capacity and pricing levels.

We have approximately $5.1 billion in asset-backed securities maturing during 2009, of which $3.1 billion will mature in the first quarter of 2009, and $10.3 billion in asset-backed securities maturing during 2010. As the downturn in execution levels in the capital markets is expected to continue, we anticipate that all of the 2009 maturities will be funded with deposits, as was done in the fourth quarter of 2008. This shift will result in higher levels of owned loan receivables with related increases in the allowance for loan losses and a reduction in the size of the interest-only strip receivable.

We obtain deposits through the brokered deposit market, in which third-party securities brokers offer our certificates of deposit to their customers, and through the direct-to-consumer deposit market, in which we offer our deposit products directly to consumers. As of November 30, 2008, we had total deposits of $28.5 billion. In

2009, we expect to increase our direct-to-consumer deposit business significantly. Although we believe that we can meet all of our funding needs in 2009 with deposits, competition in deposit markets may increase due to the current disruption in the capital markets. We cannot predict how an increase in competition will affect deposit renewal rates, costs or availability.

Our priorities in 2009 include continuing to grow merchant acceptance in the United States and enhancing our global payments business. Our payments business grew its transaction volume this year, which we expect to continue throughout 2009, as this business continues to benefit from new and existing relationships with financial institutions. We will seek to accelerate our growth in third-party network volume through signing additional third-party issuers and through marketing programs with both our domestic third-party issuers and global Diners Club network licensees. Over approximately the next two years, we expect to achieve interoperability between the Diners Club network and the Discover Network, which will allow Discover Network cardholders to use their cards at merchant and ATM locations that accept Diners Club cards around the world, and Diners Club cardholders to use their cards on the Discover Network in North America. We also expect to achieve interoperability between the Diners Club network and the PULSE Network to allow Diners Club cardholders to access cash through the PULSE Network.

In 2009, we anticipate receiving significant benefits from the remaining payments from the settlement of our antitrust litigation with Visa and MasterCard, expected to be $472 million per quarter. We expect the proceeds will strengthen our capital base during this period of economic uncertainty and intend to use a portion of the settlement proceeds to invest in growing our business.

U.S. Treasury Capital Purchase Program

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. Under EESA, the U.S. Department of the Treasury (the "U.S. Treasury") has the authority to, among other things, invest in financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to this authority, the U.S. Treasury announced its Troubled Asset Relief Program ("TARP") Capital Purchase Program ("CPP"), under which it 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.

We are seeking to participate in the CPP for additional capital to support our consumer lending operations and other businesses. On January 14, 2009, we received preliminary approval from the U.S. Treasury to participate in the CPP, subject to standard closing conditions. We expect to issue and sell to the U.S. Treasury shares of senior preferred stock and warrants to purchase shares of our common stock in accordance with the terms of the CPP for an aggregate purchase price of approximately $1.2 billion. There can be no assurance, however, that the U.S Treasury will grant final approval of our application or, if approved, what the size of any investment by the U.S Treasury ultimately will be.

The senior preferred stock would qualify as Tier 1 capital and would pay 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 would be 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 would be redeemable after three years with the approval of the appropriate federal banking agency. Prior to the end of three years, the senior preferred stock may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock resulting in proceeds of not less than 25 percent of the issue price of the senior preferred stock. The U.S. Treasury may also transfer the senior preferred stock to a third party at any time. Participation in the CPP would restrict 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. In conjunction with the purchase of senior preferred stock, the U.S. Treasury would receive warrants to purchase a number of shares of common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants would be the market price of our common stock, calculated on a 20-trading day trailing average.

Participation in the CPP would also require us 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. These standards generally apply to the chief executive officer, chief financial officer, plus the three most highly compensated executive officers. In addition, we would be required to agree not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

In addition, we expect that participation in the CPP would subject us to increased oversight by the U.S. Treasury, regulators and Congress. Under the terms of the CPP, the U.S. Treasury would have 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 regulator. In addition, the U.S. Treasury would have the right to appoint two directors to our board if we missed dividend payments for six dividend periods, whether or not consecutive, on the preferred stock.

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. Although it is unclear whether this 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 CPP or changing lending practices that legislators believe led to the current economic situation. Such provisions could restrict or require changes to our lending or governance practices or increase governmental oversight of our businesses. See "Item 1. Business-Supervision and Regulation" and "Item 1A. Risk Factors-The impact on us of recently enacted legislation and government programs to stabilize the financial markets cannot be predicted at this time."

In connection with participating in the CPP, we would become a bank holding company under the Bank Holding Company Act of 1956 and a financial holding company under the Gramm-Leach-Bliley Act. Our application to become a bank holding company was approved by the U.S. Federal Reserve on December 19, 2008. Registration as a bank holding company would subject us to new legal and regulatory requirements, including minimum capital requirements, and would subject us to oversight, regulation and examination by the Federal Reserve. See "Item 1A. Risk Factors-Our business, financial condition and results of operations could be adversely affected by new regulations to which we are and will become subject as a result of becoming a bank holding company."

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 may 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 November 30, 2008, would require us to add approximately $24 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 "Item 1A. Risk Factors-Changes to the accounting treatment of securitization transactions could materially adversely affect our financial condition, reserve requirements, capital requirements, liquidity, cost of funds and operations."

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 our report for the quarter ending February 28, 2009.

Legislative and Regulatory Developments

The Federal Reserve Board has adopted significant amendments to regulations that limit or modify certain credit card practices, including, but not limited to, restrictions on applying rate increases to existing and new balances, payment allocation, default pricing, notice periods and two-cycle billing. The amendments become effective July 1, 2010 and will significantly impact many of our business practices. For example, we currently have the ability to increase rates on existing balances to respond to market conditions and consumer behavior. The amendments will restrict our ability to manage market and credit risk in this manner. While we anticipate making changes to our pricing, credit and marketing practices that are designed to lessen the impact of these changes, there is no assurance that we will be successful. If we are not able to lessen the impact of these changes, they will have a material adverse effect on our results of operations. Legislation introduced in Congress in 2009 would accelerate the effective date of certain of these requirements. See "Item 1A. Risk Factors-The Federal Reserve Board's amendments to certain rules will significantly impact our business practices and may have a material adverse effect on our results of operations."

* * *

The remaining discussion provides a summary of our results of operations for the years ended November 30, 2008, 2007 and 2006, as well as our financial condition at November 30, 2008 and 2007. 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):

                                                                                                                GAAP
                                                      Managed Basis                                             Basis
                                                       Third-Party                     Securitization
For the Years Ended November 30,        U.S. Card      Payments(1)        Total        Adjustment(2)            Total

2008
Interest income                        $ 6,542,664    $       3,165    $ 6,545,829    $     (3,853,266 )     $ 2,692,563
Interest expense                         2,356,836               83      2,356,919          (1,068,915 )       1,288,004
. . .