On March 13, 2009, Discover Financial Services (the "Company") entered into a Letter Agreement, which includes the Securities Purchase Agreement - Standard Terms (the "Purchase Agreement"), and related side letter (the "Side Letter"), with the United States Department of the Treasury ("Treasury"), pursuant to which the Company issued and sold (i) 1,224,558 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock") and (ii) a warrant (the "Warrant") to purchase 20,500,413 shares of the Company's Common Stock, par value $0.01 per share (the "Common Stock"), for an aggregate purchase price of $1,224,558,000 in cash. The Purchase Agreement and the Side Letter are attached as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference. The following description of the Series A Preferred Stock and the Warrant are qualified in their entirety by reference to the Certificate of Designations (as defined below) and Warrant, which are attached as Exhibits 3.1 and 4.1, respectively, and are incorporated herein by reference.

The Series A Preferred Stock will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Certificate of Designations provides that the Company may not redeem the Series A Preferred Stock during the first three years except with the proceeds from a "Qualified Equity Offering" (as defined in the Certificate of Designations filed as Exhibit 3.1 hereto). After three years, the Company may, at its option, redeem the Series A Preferred Stock at the liquidation amount plus accrued and unpaid dividends. Notwithstanding the foregoing, the Side Letter provides that the Company shall be permitted to repay the Series A Preferred Stock in accordance with the American Recovery and Reinvestment Act of 2009, as amended, and any rules and regulations thereunder. The Side Letter further provides that, when the Series A Preferred Stock is repaid, Treasury shall liquidate warrants associated with such Series A Preferred Stock. The Series A Preferred Stock is generally non-voting, except for class voting rights on matters that would adversely affect the rights of the holders of the Series A Preferred Stock.

Prior to March 13, 2012, unless the Company has redeemed the Series A Preferred Stock or Treasury has transferred the Series A Preferred Stock to a third party, the consent of Treasury will be required for the Company to (1) declare or pay any dividend or make any distribution on its shares of Common Stock (other than regular quarterly cash dividends of not more than $0.06 per share of Common Stock) or (2) redeem, purchase or acquire any shares of its Common Stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement. In addition, under the Certificate of Designations, the Company's ability to declare or pay dividends or repurchase its shares of Common Stock or other equity or capital securities will be subject to restrictions in the event that it fails to declare and pay (or set aside for payment) full dividends on the Series A Preferred Stock. The restrictions on redemption are further set forth in the Certificate of Designations described in Item 5.03 below.

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $8.96 per share of the Common Stock. If the Company receives aggregate gross cash proceeds of not less than $1,224,558,000 from Qualified Equity Offerings on or prior to December 31, 2009, the number of shares of Common Stock issuable pursuant to Treasury's exercise of the Warrant will be reduced by one half of the original number of shares, taking into account all adjustments, underlying the Warrant. . . .

The information set forth under "Item 1.01. Entry Into a Material Definitive Agreement" is incorporated by reference into this Item 3.02.

The information concerning restrictions on the Company's ability to declare or pay dividends and to redeem, purchase or acquire the Company's shares of Common Stock or other equity or capital securities is set forth under "Item 1.01. Entry Into a Material Definitive Agreement" and is incorporated by reference into this Item 3.03.

The information concerning executive compensation set forth under "Item 1.01. Entry Into a Material Definitive Agreement" is incorporated by reference into this Item 5.02.

On March 11, 2009, the Company filed a Certificate of Designations (the "Certificate of Designations") with the Delaware Secretary of State for the purpose of amending its Certificate of Incorporation to fix the designations, preferences, limitations and relative rights of the Series A Preferred Stock. The Series A Preferred Stock has a liquidation preference of $1,000 per share. The Certificate of Designations is attached as Exhibit 3.1 and is incorporated herein by reference.

Immediately prior to the issuance of the Series A Preferred Stock and the Warrant to 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.

Additionally, on March 13, 2009, the Company issued a press release announcing the consummation of the transactions described above under "Item 1.01. Entry Into a Material Definitive Agreement." A copy of the press release is attached as Exhibit 99.1 and is incorporated herein by reference.

(d) Exhibits

Exhibit No.   Description
 3.1          Certificate of Designations for the Series A Preferred Stock

 4.1          Form of Certificate for the Series A Preferred Stock

 4.2          Warrant for Purchase of Shares of Common Stock

10.1          Letter Agreement, dated March 13, 2009, between the Company and United
              States Department of the Treasury, with respect to the issuance and sale
              of the Series A Preferred Stock and the Warrant

10.2          Side Letter, dated March 13, 2009, between the Company and the United
              States Department of the Treasury

10.3          Form of Waiver, executed by each of the Company's senior executive
              officers and certain other employees

99.1          Press Release dated March 13, 2009