UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.      )

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

DISCOVER FINANCIAL SERVICES

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

2500 Lake Cook Road

Riverwoods, Illinois 60015

February 22, 201018, 2011

Dear Fellow Shareholder:

I cordially invite you to attend Discover Financial Services’ 20102011 Annual Meeting of Shareholders to be held at 9:00 a.m., local time, on April 8, 2010,7, 2011, at our corporate headquarters located at 2500 Lake Cook Road, Riverwoods, Illinois 60015.

This year, in accordance with rules promulgated by the Securities and Exchange Commission, we have again elected to use the Internet as our primary means of furnishing proxy materials to our shareholders. The electronic delivery of our proxy materials will significantly reduce our printing and mailing costs and the environmental impact of the proxy materials.

All shareholders of record of our outstanding shares of Common Stock at the close of business on February 10, 20107, 2011 will be entitled to vote at the Annual Meeting.

Your vote is important! Whether or not you plan to attend the Annual Meeting,please read the enclosed proxy statement and vote as soon as possible via the Internet, by telephone or, if you receive a paper proxy cardProxy Card or voting instruction form in the mail, by mailing the completed proxy cardProxy Card or voting instruction form. Using the Internet or telephone voting systems or mailing your completed proxy cardProxy Card will not prevent you from voting in person at the meeting if you are a shareholder of record and wish to do so.

Important information about the matters to be acted upon at the meeting is included in the notice of meeting and proxy statement. Our 20092010 Annual Report contains information about our companyCompany and its financial performance.

I am very much looking forward to our 20102011 Annual Meeting of Shareholders.

Very truly yours,

David W. Nelms

Chairman and Chief Executive Officer

[LOGO] 

2500 Lake Cook Road

Riverwoods, Illinois 60015

NOTICE OF 20102011 ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON APRIL 8, 2010

NOTICE IS HEREBY GIVEN that the 2010 Annual Meeting of Shareholders of Discover Financial Services, a Delaware corporation (the “Company”), will be held at 9:00 a.m., local time, on April 8, 2010, at our corporate headquarters located at 2500 Lake Cook Road, Riverwoods, Illinois 60015, for the following purposes:

Our Board of Directors recommends that you voteFOR the election of the director nominees named in Proposal 1 of the Proxy Statement,FOR approval of Discover Financial Services’ named executive officer compensation as described in Proposal 2 of the Proxy Statement andFOR the ratification of the appointment of the independent registered public accounting firm as described in Proposal 3 of the Proxy Statement.

Our shareholders of record on February 10, 2010 are entitled to notice of and to vote at the meeting and at any adjournment or postponement of the meeting. A list of shareholders entitled to vote at the meeting will be available for any shareholder to examine at the Annual Meeting and for ten days prior to the Annual Meeting at our corporate headquarters located at 2500 Lake Cook Road, Riverwoods, Illinois 60015.

This year, in accordance with rules promulgated by the Securities and Exchange Commission (“SEC”), we have again elected to use the Internet as our primary means of providing our proxy materials to our shareholders. Accordingly, most shareholders will not receive paper copies of our proxy materials. Instead, we will mail to these shareholders a Notice of Internet Availability of Proxy Materials with instructions for accessing the proxy materials, including our proxy statement and annual report, and for voting via the Internet or telephone. The Notice of Internet Availability of Proxy Materials also will provide information on how shareholders may obtain paper copies of our proxy materials free of charge, if they so choose. The electronic delivery of our proxy materials will significantly reduce our printing and mailing costs and the environmental impact of the proxy materials.

The Notice of Internet Availability of Proxy Materials also will identify the date, time and location of the Annual Meeting; the matters to be acted upon at the meeting and the Board of Directors’ recommendation with regard to each matter; a toll-free telephone number, an e-mail address, and a website where shareholders can request a paper or e-mail copy of the Proxy Statement, our annual report to shareholders and a form of proxy relating to the Annual Meeting; information on how to access the form of proxy; and information on how to obtain directions to attend the Annual Meeting and vote in person.

To gain admission to the Annual Meeting, you will need to show that you are a shareholder of the Company. All shareholders will be required to show valid, government-issued, picture identification or an employee badge issued by the Company. If your shares are registered in your name, your name will be compared to the list of

registered shareholders to verify your share ownership. If your shares are held in the name of your broker or bank, you will need to bring evidence of your share ownership, such as your most recent brokerage account statement or a legal proxy from your broker. If you do not have valid picture identification and proof that you own Company shares, you will not be admitted to the Annual Meeting. In the interest of security, all packages and bags are subject to inspection. Please arrive before the start of the Annual Meeting to allow time for identity verification. You may also listen to a live audio webcast of the Annual Meeting atwww.discoverfinancial.com.

You are cordially invited to attend the Annual Meeting, but whether or not you expect to attend in person, you are urged to mark, date and sign yourvote. Your prompt action will aid the Company in reducing the expense of proxy card and return it by mail or follow the alternative voting procedures described in the Notice of Internet Availability of Proxy Materials or the proxy card.solicitation.

By Order of the Board of Directors,

Kathryn McNamara Corley

Executive Vice President, General Counsel and Secretary

February 22, 2010

YOUR VOTE IS IMPORTANT

PLEASE PROMPTLY FOLLOW THE VOTING PROCEDURES DESCRIBED ON THE NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS OR THE PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND SO THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. YOUR PROMPT ACTION WILL AID THE COMPANY IN REDUCING THE EXPENSE OF PROXY SOLICITATION.18, 2011

Table of Contents

DISCOVER FINANCIAL SERVICES

2500 Lake Cook Road

Riverwoods, Illinois 60015

(224) 405-0900

Proxy Statement

The Board of Directors of Discover Financial Services is soliciting your proxy to vote at the Annual Meeting of Shareholders to be held on April 8, 2010,7, 2011, at 9:00 a.m., local time, and any adjournment or postponement of that meeting (the “Annual Meeting”). The Annual Meeting will be held at our corporate headquarters located at 2500 Lake Cook Road, Riverwoods, Illinois 60015. This Proxy Statement and the accompanying Proxy Card, Notice of Meeting, and Annual Report to Shareholders waswere first sent or made available on or about February 26, 2010,25, 2011 to shareholders of record as of February 10, 20107, 2011 (the “Record Date”). For those shareholders receiving a Notice of Internet Availability of Proxy Materials, the Notice of Internet Availability of Proxy Materials was first mailed on or about February 26, 2010,25, 2011 to shareholders of record as of the Record Date. The only voting securities of the Company are shares of the Company’sour Common Stock, $0.01 par value per share (the “Common Stock”), of which there were 543,705,218545,246,937 shares outstanding as of the Record Date (excluding treasury stock). We need a majority of the shares of Common Stock outstanding on the record dateRecord Date present, in person or by proxy, to hold the Annual Meeting.

In this Proxy Statement, we refer to Discover Financial Services as the “Company,” “Discover,” “we,” “our” or “us” and the Board of Directors as the “Board.” When we refer to Discover Financial Services’our fiscal year, we mean the twelve-month period ending November 30 of the stated year (for example, fiscal 20092010 is December 1, 20082009 through November 30, 2009)2010). When we refer to thethe““Spin-off,” we mean the distribution of the Company’sour Common Stock to shareholders of Morgan Stanley (“Morgan Stanley”), the Company’sour former parent company, on June 30, 2007.

The Company’sOur Annual Report to Shareholders, which contains our Annual Report on Form 10-K, including consolidated financial statements for fiscal 2009,2010, accompanies this Proxy Statement. Our Annual Report is not a part of our proxy solicitation materials. You also may obtain a copy of the Company’sour Annual Report on Form 10-K for fiscal 20092010 that was filed with the Securities and Exchange Commission (“SEC”), without charge, by writing to or telephoning our Investor Relations department at the above address or telephone number. The Company’sOur Annual Report on Form 10-K is also available in the “Investor Relations” section ofwww.discoverfinancial.com.

QUESTIONS AND ANSWERS ABOUT THE PROXY PROCESSANNUAL MEETING AND SHAREHOLDER VOTING

Why Did I Receive These Materials?

Shareholders of the Company at the close of business on the Record Date are entitled to vote at the Company’s Annual Meeting of Shareholders.Meeting. This Proxy Statement provides notice of the shareholder meeting,Annual Meeting, describes the threefive proposals presented for shareholder action and includes information required to be disclosed to shareholders. The accompanying proxy card (the “Proxy Card”) provides shareholders with a simple way to vote on the described proposals without having to attend the Annual Meeting in person.

Can I Attend The Annual Meeting?

Yes. To gain admission to the Annual Meeting, you will need to show that you are a shareholder of the Company. All shareholders will be required to show valid, government-issued, picture identification or an employee badge issued by the Company. If your shares are registered in your name, your name will be compared

to the list of registered shareholders to verify your share ownership. If your shares are held in the name of your broker or bank, you will need to bring evidence of your share ownership, such as your most recent brokerage account statement or a legal proxy from your broker. If you do not have valid picture identification and proof that you own Company shares, you will not be admitted to the Annual Meeting. In the interest of security, all packages and bags are subject to inspection. Please arrive before the start of the Annual Meeting to allow time for identity verification. You may also listen to a live audio webcast of the Annual Meeting atwww.discoverfinancial.com.

What Proposals Am I Being Asked To Vote For?On?

You are being asked to voteFOR:

3.

An advisory (nonbinding) vote on the frequency of the advisory vote to approve named executive officer compensation. (See Proposal 3 on page 50 for more information.)

How Does The Board Of Directors Recommend That I Vote?

What Does It Mean If I Receive More Than One Set Of Materials?

This means you hold shares of the Company in more than one way. For example, you may own some shares directly as a “Registered Holder”“registered holder” and other shares through a broker or you may own shares through more than one broker. In these situations you may receive multiple sets of proxy materials. In order to vote all of the shares you own, you must follow the voting procedures on each Notice of Internet Availability of Proxy Materials that you receive or sign and return all of the Proxy Cards that you receive. Each Proxy Card you received camereceive comes with its own prepaid return envelope. If you vote by mail, make sure you return each Proxy Card in the return envelope which accompanied that Proxy Card.

Does My Vote Matter?

YES! We are required to obtain shareholder approval for the election of directorsDirectors and other important matters. Each share of Common Stock is entitled to one vote and every share voted has the same weight. In order for the Company to obtain the necessary shareholder approval of proposals, a “quorum” of shareholders (i.e., a majority of the issued and outstanding shares entitled to vote, excluding treasury stock) must be represented at the Annual Meeting in person or by proxy. If a quorum is not obtained, the Company must postpone the Annual Meeting and

solicit additional proxies; this is an expensive and time-consuming process that is not in the best interests of the Company or its shareholders. Since few shareholders can spend the time or money to attend shareholder meetings in person, voting by proxy is important to obtain a quorum and complete the shareholder vote.

How Do I Vote?

You may vote using any of the following methods:

By Internet or telephone. The Internet and telephone voting procedures we established for stockholdersshareholders of record are designed to authenticate your identity, allow you to give your voting instructions and confirm that these instructions have been properly recorded. The availability of Internet and telephone voting for beneficial owners will depend on the voting processes of your broker, bank or nominee. Therefore, we recommend that you follow the voting instructions in the materials you receive.

Proxy card. Be sure to complete, sign and date the card and return it in the prepaid envelope. If you are a stockholdershareholder of record and you return your signed proxy cardProxy Card without indicating your voting preferences, the persons named in the proxy cardProxy Card will vote FOR the election of directors,Directors, FOR the advisory vote to approve named executive officer compensation, FOR the approval, on an advisory basis, of a triennial advisory vote to approve named executive officer compensation, and FOR the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal 2010.

By voting by Internet or telephone, or by returning your signed and dated Proxy Card in time to be received for the Annual Meeting, you authorize Kathryn McNamara Corley and Simon Halfin (the “Proxies“”) to act as your proxies to vote your shares of Common Stock as specified.

In person at the Annual Meeting. All stockholdersshareholders may vote in person at the Annual Meeting. If you are a beneficial owner of shares, you must obtain a legal proxy from your broker, bank or nominee and present it to the inspectors of elections with your ballot when you vote at the meeting.

How Many Votes Are Required To Approve A Proposal?

Each directorDirector will be elected by a majority of the votes cast with respect to such director.Director. A “majority of the votes cast” means that the number of votes cast “for” a given directorDirector exceeds the number of votes cast “against” that director.Director. Under Delaware law, if the directorDirector is not elected at the Annual Meeting, the directorDirector will continue to serve on the Board as a “holdover director.Director.” As required by the Company’s By-Laws, each directorDirector has submitted an irrevocable letter of resignation as directorDirector that becomes effective if he or she is not elected by shareholders and if the Board accepts the resignation. If a directorDirector is not elected, the Nominating and Governance Committee will consider the director’sDirector’s resignation and recommend to the Board whether to accept or reject the resignation. The Board will decide whether to accept or reject the resignation and publicly disclose its decision and, if it rejects the resignation, the rationale behind the decision within 90 days after the election results are certified.

The ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm, and the advisory vote to approve named executive officer compensation and the vote to approve an amendment to the Directors’ Compensation Plan each requires the affirmative vote of a majority of the shares of Common Stock represented at the Annual Meeting and entitled to vote thereon.

You may “abstain” from voting for any nominee in The advisory vote on the electionfrequency of directors, on the shareholder advisory vote to approve named executive officer compensation andwill be determined by a plurality of the votes cast.

You may “abstain” from voting on any of the proposal to ratify the appointment of Deloitte & Touche LLP as independent registered public accounting firm.proposals in this proxy statement. Shares voting “abstain” on any nominee for directorDirector will be excluded entirely from the vote and will have no effect on the election of directors.Directors. Shares voting “abstain” on the advisory vote to approve named executive officer compensation, on the

proposal to approve an amendment to the Directors’ Compensation Plan and on the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm, will be counted as present at the Annual Meeting for purposes of that proposal and your abstention will have the effect of a vote against the applicable vote or proposal. Shares voting “abstain” on the advisory vote on the frequency of the shareholder advisory vote to approve named executive compensation will be counted as present at the Annual Meeting for purposes of that proposal and your abstention will have no effect on this vote.

What Is The Effect Of Not Voting?

The effect of not voting depends on how ownership of your shares is registered and the proposal to be voted upon. If you own shares as a Registered Holder,registered holder, rather than through a broker, your unvoted shares will not be represented at the Annual Meeting and will not count toward the quorum requirement. Except as described below, assuming a quorum is obtained, your unvoted shares will not affect whether a proposal is approved or rejected.

If you own shares through a broker and do not vote, your broker may represent your shares at the Annual Meeting for purposes of obtaining a quorum. As described in the answer to the following question, in the absence of your voting instruction, your broker may or may not vote your shares.

If I Don’t Vote, Will My Broker Vote For Me?

If you own your shares through a broker and you don’t vote, your broker may vote your shares at its discretion on certain “routine matters.” The Company believes that the advisory vote to approve named executive compensation and the ratification of the appointment of Deloitte and Touche LLP as our independent registered public accounting firm areis a “routine matters”matter” on which brokers will be permitted to vote any unvoted shares. With respect to other proposals, however, your broker may not be able to vote your shares for you and the aggregate number of unvoted shares is reported as the “broker non-vote.” “Broker non-vote” shares are counted toward the quorum requirement but they do not affect the determination of whether a matter is approved.

The Company believes that the election of directors isDirectors, the advisory vote on named executive officer compensation, the advisory vote on the frequency of the advisory vote to approve named executive officer compensation and the approval of an amendment to the Directors’ Compensation Plan are not a “routine matter”matters” and brokers will not be permitted to vote any unvoted shares on the election of directors.those matters.

If I Own My Shares Through A Broker, How Is My Vote Recorded?

Brokers typically hold shares of common stockCommon Stock for many shareholders. In this situation the Registered Holderregistered holder on the Company’s stock register is the broker or its nominee. This often is referred to as holding shares in “Street Name.“street name.” The “Beneficial Owners”“beneficial owners” do not appear in the Company’s shareholder register. Therefore, for shares held in Street Name,street name, distributing the proxy materials and tabulating votes are both two-step processes. Brokers inform the Company how many of their clients are Beneficial Ownersbeneficial owners and the Company provides the broker with that number of proxy materials. Each broker then forwards the proxy materials to its clients who are Beneficial Ownersbeneficial owners to obtain their votes. When you receive proxy materials from your broker, your vote is sent to your broker. Shortly before the meeting, each broker totals the votes and submits a Proxy Card reflecting the aggregate votes of the Beneficial Ownersbeneficial owners for whom it holds shares.

If I Own My Shares In The Discover Financial Services 401(k) Plan, How Is My Vote Recorded?

The Bank of New York Mellon (“Mellon”), the trustee and custodian of the Discover 401(k) Plan, must receive your voting instructions for the Common Stock held on your behalf in this plan on or before April 5, 2010.4, 2011. If Mellon does not receive your voting instructions by that date, it will vote your shares, together with forfeited shares in the Discover 401(k) Plan, in the same proportion as the voting instructions that it receives from other Discover 401(k) Plan participants. On February 10, 2010,7, 2011, there were 3,642,2893,358,513 shares in the Discover 401(k) Plan.

IsAre My VoteVotes Confidential?

Yes. The vote of any shareholder will not be revealed to anyone other than a non-employee tabulator of votes or an independent election inspector, except (i) as necessary to meet legal requirements or to assist in the pursuit or defense of legal action; (ii) if the Company concludes in good faith that a bona fide dispute exists as to the authenticity of one or more proxies, ballots or votes, or as to the accuracy of any tabulation of such proxies, ballots or votes; (iii) in the event of a proxy, consent or other solicitation in opposition to the voting recommendation of the Board of Directors; or (iv) if you request, or consent to disclosure of your vote or if you write comments on your Proxy Card or ballot.

Can I Revoke My Proxy And Change My Vote?

Yes. You have the right to revoke your proxy at any time prior to the time your shares are voted. If you are a Registered Holder,registered holder, your proxy can be revoked in several ways: (i) by timely delivery of a written revocation delivered to the Corporate Secretary; (ii) by submitting another valid proxy bearing a later date (including by voting on the Internet or telephone or mailing a new Proxy Card); or (iii) by attending the meeting and giving notice to the Company’s inspectors of elections (the “Inspectors of Elections”) that you intend to vote your shares in person. If you are the Beneficial Ownerbeneficial owner of shares held by a broker, you must contact your broker in order to revoke your proxy.

Will Any Other Business Be Transacted At The Meeting? If So, How Will My Proxy Be Voted?

Management does not know of any business to be transacted at the Annual Meeting other than thosethe matters described in this Proxy Statement. The period specified in the Company’s By-Laws for submitting additional proposals to be considered at the meeting has passed and there are no such proposals to be considered. However, should any other matters properly come before the Annual Meeting, or any adjournments and postponements thereof, shares to which voting authority has been granted to the Proxies will be voted by the Proxies in accordance with their judgment.

Who Counts The Votes?

Votes will be counted and certified by the Inspectors of Elections, who are employees of BNY Mellon Shareowner Services, the Company’s independent Transfer Agenttransfer agent and Registrar.registrar. If you are a Registered Holder,registered holder, your executed Proxy Card is returned directly to BNY Mellon Shareowner Services for tabulation. As noted above, if you hold your shares through a broker, your broker returns one Proxy Card to BNY Mellon Shareowner Services on behalf of all its clients.

How Much Does The Proxy Solicitation Cost?

The largest expense in the proxy process is printing and mailing the proxy materials. We also reimburse brokers, fiduciaries and custodians for their costs in forwarding proxy materials to beneficial owners of our Common Stock. Proxies may be solicited on behalf of the Company by directors, officers or employees of the Company in person or by mail, telephone, over the Internet or facsimile transmission. No additional compensation will be paid to such directors, officers, or employees for soliciting proxies. The Company will bear the entire cost of solicitation of proxies, including the preparation, assembly, printing and mailing of this Proxy Statement and the accompanying Proxy Card, Notice of Annual Meeting and Annual Report to Shareholders. The Company has retained BNY Mellon Shareowner Services to assist with the solicitation of proxies from certain shareholders, for which services BNY Mellon Shareowner Services will receive a fee that is expected to be about $7,500 plus reimbursement for certain expenses.

PROPOSAL 1

Election of Directors

Our Board currently has eleven directors. The entire Board stands for election at each annual meeting of shareholders. Each director holds office until his or her successor has been duly elected and qualified or the director’s earlier resignation, death or removal. The nominees are all current directors of Discover Financial Services, and each nominee has indicated that he or she will serve if elected. We do not anticipate that any nominee will be unable or unwilling to stand for election, but if that happens, your proxy will be voted for another person nominated by the Board. The Board may also choose to reduce the number of directors to be elected, as permitted by our By-laws. Below are descriptions of the experience, qualifications, attributes and skills of each of the Company’s director nominees.

The Board recommendsbelieves that you vote “FOR”an effective board consists of a diverse group of individuals who bring a variety of complementary skills and experiences. The Nominating and Governance Committee and Board consider the election of allskills and experiences of the eleven director nominees: Jeffrey S. Aronin, Mary K. Bush, Gregory C. Case, Robert M. Devlin, Cynthia A. Glassman, Richard H. Lenny, Thomas G. Maheras, Michael H. Moskow, David W. Nelms, E. Follin Smithdirectors in the broader context of the Board’s overall composition, with a view toward constituting a board that has the best skill set and Lawrence A. Weinbach. Proxies solicited byexperience to oversee the Company’s business. As indicated below, our directors have a combined wealth of leadership experience derived from extensive service guiding large, complex organizations as executive leaders or board members, and in government and academia. They have substantive knowledge and skills applicable to our business, including in the areas of regulation, public accounting and financial reporting, finance, risk management, business development, marketing, operations, strategic planning, management development and succession, compensation, corporate governance, public policy, international, banking, and financial services. The Nominating and Governance Committee regularly reviews the composition of the Board will be voted “FOR” these nominees unless otherwise instructed.in light of our evolving business requirements and its assessment of the Board’s performance to ensure that the Board has the appropriate mix of skills and experiences needed for the broad set of challenges that it confronts.

Information Concerning Nominees for Election as Directors

Jeffrey S. Aronin, 42.43.Director since 2007. Mr. Aronin is chairman and chief executive officer of Paragon Pharmaceuticals, a global development and biopharmaceutical investment firm. Between 2000-2009,From 2000 to 2009, Mr. Aronin was president and chief executive officer of Ovation Pharmaceuticals Inc., a biopharmaceutical company he founded in 2000. In 2009, Ovation Pharmaceuticals was acquired by Lundbeck, Inc. Mr. Aronin served as president and chief executive officer of Lundbeck, Inc. in 2009 during its acquisition and integration of Ovation Pharmaceuticals. He is the former chairman and chief executive officer at MedCare Technologies Inc., a publicly held healthcare company. He serves

Mr. Aronin has experience as a directorchief executive officer leading a global pharmaceutical company. His skills include knowledge of PhRMA (The Pharmaceutical Researchstrategy and Manufacturersbusiness development, finance, and marketing. He brings valuable leadership experience and knowledge in operations and the day-to-day management of America), The Chicago Entrepreneurial Centera global corporation. Mr. Aronin also has experience in the structuring and The Museumexecution of Sciencestrategic corporate transactions, including mergers and Industry, among others.acquisitions.

Mary K. Bush, 61.62.Director since 2007. Ms. Bush has served since 1991 as the president of Bush International, which advises U.S. companiesa financial and foreign governments on international financial markets, bankingbusiness strategy advisory firm, since 1991 and economic matters. She was appointed by President Ronald Reagan as the U.S. government’s representative

on the IMF Board; was headsenior managing director of the Federal Home Loan Bank System and head of International Finance at Fannie Mae. Earlier in her career, Ms. Bush headed a team of corporate bankers at Bankers Trust Company that managed commercialBrock Capital Group, LLC, an advisory and investment banking relationships. In 2007, she served on the Department of the Treasury’s Advisory Commission on the Auditing Profession. In 2006, President Bush appointed her chairman of the HELP Commission, whose goal is to improve the effectiveness of U.S. foreign aid.firm, since 2010. Ms. Bush is a member of the board of directors of UAL Corporation, ManTech International Corporation, Marriott International and The Pioneer Family of Mutual Funds. In the past five years, she has also served as a director of UAL Corporation, Brady Corporation, Briggs & Stratton, MGIC Investment Corporation and Mortgage Guaranty Investment Corporation.

Ms. Bush brings extensive financial market, banking, government and international experience to the Board. She is the founder and president of Bush International, which advises U.S. companies and foreign governments

on international financial markets, banking and economic matters. Prior to that, she served as managing director of the Federal Housing Finance Board, where she established financial policies and oversaw management and safety and soundness for the 12 Federal Home Loan Banks. She also has acted as vice president and head of International Finance of Fannie Mae and the U.S. Alternate Executive Director of the International Monetary Fund Board. In 2007, she served on the U.S. Department of the Treasury’s Advisory Commission on the Auditing Profession. Ms. Bush brings a broad understanding of the operations and business and economic challenges of public companies and the financial services industry.

Gregory C. Case, 47.48.Director since 2007. Mr. Case has been president and chief executive officer of Aon Corporation since 2005 and is a member of the company’s Board of Directors. Prior to joining Aon, Mr. Case was with McKinsey & Company, the international management consulting firm, for 17 years, most recently serving as head of the Financial Services Practice. Prior to joining McKinsey, he worked for the investment banking firm of Piper, Jaffray and Hopwood and the Federal Reserve Bank in Kansas City.

Mr. Case has approximately 20 years experience in the insurance and financial services industries, including as the chief executive officer of Aon, a global provider of risk management services, insurance and reinsurance brokerage and through his management consulting and banking experience. He serves as a director of Children’s Memorial Hospital, the Economic Club of Chicago,brings valuable leadership experience and knowledge in business operations and the Financial Services Roundtable, among others.day-to-day management of a large global financial corporation. His skills include strategy and business development, risk management and people management.

Robert M. Devlin, 68.69.Director since 2007. Mr. Devlin is chairman of Curragh Capital Partners, a private equity and investment firm he founded in 2002. He is a principal owner and a director of Forethought Financial Group Inc., a life insurance and financial services company. He was chairman, president and chief executive officer of American General Corporation from 1996 to 2001. He also is a director of Cooper Industries and LKQ Corporation.

Mr. Devlin has expertise in marketing and finance and knowledge of consumer markets based on his experience in diversified financial service organizations. He also has significant experience in mergers and acquisitions, corporate finance and cost reduction and containment as chairman of a private equity firm. He also brings valuable leadership experience and knowledge in operations and the day-to-day management of a global corporation. Finally, with his extensive career in management, he has experience in general management with regard to people, structure and systems.

Cynthia A. Glassman, Ph.D, 6263..Director since 2009. Dr. Glassman was appointed by President Bush as Under Secretary for Economic Affairs at the U.S. Department of Commerce from 2006-20092006 to 2009 and as Commissioner of the U.S. Securities and Exchange Commission from 2002-2006. Dr. Glassman is a director of Navigant Consulting, Inc. She also is a Senior Research Scholar at the Institute for Corporate Responsibility at the George Washington University School of Business.

Dr. Glassman brings extensive regulatory, governance, risk management, financial services and banking experience to the Board. She holds a Ph.D. in economics and has spent over 35 years in the public and private sectors focusing on financial services regulatory and public policy issues, including 12 years at the Federal Reserve whereand 15 years in financial services consulting. Through her experience, she worked at the Federal Reserve Bankbrings a thorough and insightful perspective to a wide range of Philadelphiabanking, financial, risk management, regulatory, and subsequently at the Board of Governors. Dr. Glassman is a director of Navigant Consulting, Inc., a trustee of the SEC Historical Society and an Honorary Fellow of Lucy Cavendish College, University of Cambridge, England.corporate governance issues.

Richard H. Lenny, 58.59.Director since 2009. Mr. Lenny was chairman, president and chief executive officer of The Hershey Company, a manufacturer, distributor and marketer of chocolate and non-chocolate candy, snacks and candy-related grocery products, from March 2001 until his retirement in December 2007. From 1998-2001,1998 to 2001, Mr. Lenny was President of Nabisco Biscuit Company, which became a subsidiary of Kraft Foods, Inc. in 2000. Mr. Lenny is a director of McDonald’s Corporation and ConAgra Foods. In the last five years, he also served as a director of The Hershey Company and Sunoco Inc.

Mr. Lenny has experience as a chief executive officer for a global retail company that is a major consumer brand. Mr. Lenny’s skills include knowledge of strategy and business development, finance, marketing and consumer insights. He has extensive marketing experience with strong consumer brands that is of critical importance to Discover. He also brings valuable leadership experience and knowledge in operations and the day-to-day management of a large global corporation.

Thomas G. Maheras, 47.48.Director since 2008. FoundingMr. Maheras has been the founding partner of Tegean Capital Management, LLC since 2008. Mr. Maheras was chairman and co-chief executive officer of Citigroup Inc.’s Markets and Banking in 2007. From 2004-2007,2004 to 2007, Mr. Maheras was chief executive officer of global capital markets at Citigroup. Mr. Maheras was formerly chairman of the U.S. Treasury Borrowing Advisory Committee and a director of the Securities Industry and Financial Markets Association.

Mr. Maheras has extensive risk management, banking and capital markets experience, including 23 years at Citi where his responsibilities included leading the global capital markets business. He also brings valuable leadership experience and knowledge in operations and the day-to-day management of a global financial services organization. Mr. Maheras’ financial background and banking and financial services experience includes a knowledge of financial statements, corporate finance, accounting and capital markets.

Michael H. Moskow, 7273..Director since 2007. Mr. Moskow retired as president and chief executive officer of the Federal Reserve Bank of Chicago in 2007, where he had served since 1994. Mr. Moskow serves on the board of directors of Northern Trust Mutual Funds, Taylor Capital Group Inc., and Commonwealth Edison Company, a subsidiary of Exelon Corporation. In the past five years, he has also served as a director of Diamond Management and Technology Consultants.

Mr. Moskow brings extensive regulatory, financial services and banking experience to the Board and has extensive knowledge of the economy and financial markets. He is currently vice chairman & senior fellow on the global economy at The Chicago Council on Global Affairs. From 1993-1994,1993 to 1994, he was a full-time faculty member at Northwestern University (Kellogg School of Management). Prior to teaching at Northwestern, Mr. Moskow was a Deputy U.S. Trade Representative, with the rank of Ambassador, following his appointment by President George H. W. Bush in 1991. From 1969 to 1977, he held a number of senior positions with the U.S. government, including undersecretary of labor at the U.S. Department of Labor, director of the Council on Wage and Price Stability and senior staff economist with the Council of Economic Advisers. Mr. Moskow servesThrough his senior regulatory positions, particularly in the financial services arena, and service on the boardboards of directorsother financial institutions, he brings a thorough and insightful perspective to a wide range of Northern Trust Mutual Funds, Taylor Capital Group Inc.banking, financial, regulatory and Diamond Management and Technology Consultants.risk management issues.

David W. Nelms, 49.50. Director since 1998 and Chairman since 2009. Mr. Nelms has served as our chief executive officer since 2004 and was president and chief operating officer from 1998 to 2004. Mr. Nelms was also our Chairman from 2004 until the Spin-Off. Prior to joining Discover, Mr. Nelms worked at MBNA America Bank from 1991 to 1998, most recently as a vice chairman. From 1990-1991,1990 to 1991, Mr. Nelms was a senior product manager for Progressive Insurance. From 1986-1990,1986 to 1990, Mr. Nelms was a management consultant with Bain & Company.

Mr. Nelms’ deep understanding of the Company’s business and industry provides critical expertise to the Company and makes him well-qualified to serve as Chairman. Prior to his current position, Mr. Nelms served as president and chief operating officer of the Company. He also brings valuable leadership experience and knowledge in operations and the day-to-day management of a global financial corporation.

E. Follin Smith, 50.51.Director since 2007. Ms. Smith retired from Constellation Energy Group, Inc. in May 2007 where she was executive vice president, chief financial officer and chief administrative officer. Ms. Smith joined Constellation Energy Group as senior vice president, chief financial officer in June 2001 and was appointed chief administrative officer in December 2003. Before joining Constellation Energy Group, she servedShe serves on the board of directors of Ryder System, Inc.

Ms. Smith has experience as chief financial officer and chief administrative officer of public companies. She has extensive senior management experience, including through her service as senior vice president and chief financial officer of Armstrong Holdings, Inc. Prior to joining Armstrong, Ms. Smith heldand senior financial positions with General Motors, including chief financial officer for the company’s Delphi Chassis System division. She serves onMs. Smith’s strong risk management, financial and accounting background, gained through her experience as a chief financial officer includes a thorough knowledge of financial statements, corporate finance, and accounting that is of significant value to the boardCompany. Her skills also include oversight of directors of Ryder System, Inc.,human resources, risk management, legal and the board of trustees of the Darden Foundation of the University of Virginia and of Davidson College.information technology functions.

Lawrence A. Weinbach, 70.71.Director since 2007 and Lead Director since 2009. Mr. Weinbach has been chairman of Great Western Products Holdings LLC, a manufacturer and master distributor of food and nonfood concession products, since January 2009 and has been a managing director of Yankee Hill Capital Management LLC, a private equity firm, since 2006. Prior to that, he was the executive chairman of Unisys Corporation, a worldwide information services and technology company, from 2005 to 2006, and its chairman and chief executive officer from 1997 to 2004. Mr. Weinbach serves on the board of directors of Avon Products, Inc. In the last five years, he also served as a director of Quadra Realty Trust and UBS, AG.

Mr. Weinbach has experience in the financial and accounting industry and the information technology and financial services sectors. He began his career in 1961 at Arthur Andersen, ultimately serving as managing partner and chief executive of Andersen Worldwide, a global professional services organization, which included Arthur Andersen and the company known as Accenture from 1989 to 1997. Mr. Weinbach serves onWeinbach’s strong financial background, gained through his private equity, accounting, investment banking and financial services experience, includes knowledge of risk management, governance, financial statements, corporate finance, accounting and capital markets. As a former chief executive officer, he also brings valuable leadership experience and knowledge in operations and the boardday-to-day management of directors of Avon Products, Inc.a global corporation.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF ALL OF THE ELEVEN DIRECTOR NOMINEES: JEFFREY S. ARONIN, MARY K. BUSH, GREGORY C. CASE, ROBERT M. DEVLIN, CYNTHIA A. GLASSMAN, RICHARD H. LENNY, THOMAS G. MAHERAS, MICHAEL H. MOSKOW, DAVID W. NELMS, E. FOLLIN SMITH AND LAWRENCE A. WEINBACH. PROXIES SOLICITED BY OUR BOARD WILL BE VOTED “FOR” THESE NOMINEES UNLESS OTHERWISE INSTRUCTED.

CORPORATE GOVERNANCE

Director independenceIndependence

The Board of Directors has adopted our Corporate Governance Policies, which contain the director independence guidelines. The Board uses these guidelines to assist it in determining whether or not directors qualify as “independent” pursuant to the guidelines and the requirements set forth in the New York Stock Exchange’s Corporate Governance Rules (“Rules”). In each case, the Board broadly considers all relevant facts and circumstances and applies the guidelines and the Rules in determining whether or not directors qualify as “independent.” Our Corporate Governance Policies are available in the “Investor Relations” section ofwww.discoverfinancial.com and are available in print free of charge to any shareholder who requests a copy. Pursuant to our Corporate Governance Policies and the Rules, the Board reviewed the independence of all of our current directors.

During this review, the Board considered transactions and relationships between each Director or any member of his or her immediate family (or any entity of which a Director or an immediate family member is an executive officer, general partner or significant equity holder) and the Company and its subsidiaries and affiliates. The Board also considered whether there were any transactions or relationships between Directors or any member of their immediate family and members of the Company’s senior management. The purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the Director is independent.

As a result of this review, the Board affirmatively determined that Jeffrey S. Aronin, Mary K. Bush, Gregory C. Case, Dennis D. Dammerman, Robert M. Devlin, Dr. Cynthia A. Glassman, Richard H. Lenny, Thomas G. Maheras, Michael H. Moskow, E. Follin Smith and Lawrence A. Weinbach are independent of the Company and its management under the standards set forth in the Corporate Governance Policies and the Rules. Mr. Dammerman resigned as Chairman and a directorThe Board determined that one of our Company on January 12, 2009. The Board

determined that two (2) of our directors,Directors, David W. Nelms, and Michael L. Rankowitz, wereis not independent. Mr. Nelms is considered an inside Director because of his employment as our Chief Executive Officer and, therefore, is not independent. Mr. Rankowitz, who resigned as a director of our Company as of December 11, 2008, was considered a non-independent outside Director as a result of his serving as a senior advisor to Morgan Stanley, our former parent, since 2006, in which capacity he received more than $100,000 in a twelve-month period during the last three years and, thus, he was precluded from being considered independent under our Corporate Governance Policies.

In determining that each of the Directors other than Messrs.Mr. Nelms and Rankowitz is or was independent, the Board considered, among other things, the following relationships, which it determined were immaterial to the Directors’ independence. The Board considered that the Company and its subsidiaries in the ordinary course of business have, during the last three years, sold products and services to, and/or purchased products and services from, companies at which some of our Directors were officers during fiscal 2009.2010. In each case, the amount paid to or received from these companies in each of the last three years did not exceed the greater of $1,000,000 or 2% of that organization’s consolidated gross revenues, the threshold set forth in our Corporate Governance Policies and the Rules. The Board also considered that certain companies at which some of our directors serve (or served) as officers (including Messrs. Dammerman, Aronin and Case and Ms. Smith) utilized the investment banking services of Morgan Stanley, our former parent, during the relevant period. The Board determined that such relationships were arm’s-length relationships provided in the ordinary course of Morgan Stanley’s business. The Board also considered that some Directors were directors (but not officers) of the companies or institutions that we engaged in business with or that we or Morgan Stanley made charitable contributions to during the fiscal year.

In particular, the Board considered that Mr. Maheras was an employee of Citigroup Inc. (“Citi”) until 2007 and Discover has several arms length relationships with Citi, including an unsecured committed credit facility under which Citi is one of the lenders. Additionally, Citi continues to provide banking, transitional and network license services to Diners Club International (“Diners Club”), a wholly-owned subsidiary of the Company. In the aggregate, the relationships between Citi and Discover (including Discover’s affiliates) were not material under our Corporate Governance Policies or the Rules.

Board meetingsMeetings and committeesCommittees

Our Board of Directors held 10eight meetings during fiscal 2009.2010. Each directorDirector attended at least 75% or more of the total number of meetings of the Board and committees on which the directorDirector served that were held while the directorDirector was a member. Our Board of Directors has established the following committees: Audit and Risk, Compensation, and Nominating and Governance. The membership and function of each committee and the number of meetings held by each committee during fiscal 2010 is described below.

Committee		Members		Primary Responsibilities		# of Meetings
Compensation*		Mr. Case (Chair) Mr. Aronin Mr. Devlin Mr. Lenny		•    Annually review and approve the corporate goals and objectives relevant to the compensation of the Chief Executive Officer and evaluate his performance in light of these goals.   •    Determine the compensation of our executive officers and other appropriate officers.   •    Oversee risk management associated with our compensation practices. •    Administer our incentive and equity-based compensation plans.   •    Oversee plans for management development and succession.		9	7
Nominating and Governance*Governance		Mr. Weinbach (Chair) Ms. Bush Mr. Lenny		•    Identify and recommend candidates for election to our Board and each Board committee.   •    Establish procedures for oversight of the evaluation of our Board and management.   •    Recommend directorDirector compensation and benefits.   •    Review annually our corporate governance policies.Corporate Governance Policies.		5	4

Our Board has adopted a written charter for each of the Audit and Risk, Compensation and Nominating and Governance Committees setting forth the roles and responsibilities of each committee. The charters are available in the “Investor Relations” section ofwww.discoverfinancial.com.

All members of the Audit and Risk, Compensation and the Nominating and Governance Committees satisfy the standards of independence applicable to members of such committees. In addition, the Board has determined that Ms. Bush, Mr. Moskow and Ms. Smith are “audit committee financial experts” as such term is defined by the SEC rules.

Board attendanceAttendance at annual shareholder meetingAnnual Shareholder Meeting

The Company’s Corporate Governance Policies state that directorseach Director will attend annual meetings of shareholders unless he or she is unable to attend a meeting due to extenuating circumstances. All directorsDirectors attended the 20092010 Annual Meeting of Shareholders.

Nomination of directorsDirectors

The Nominating and Governance Committee is responsible for identifying, screening and recommending candidates to the Board. This Committee may consider directorDirector candidates from a wide range of sources, including shareholders, officers and directors.Directors. The Board is responsible for nominating directorsDirectors for election by the shareholders and filling any vacancies on the Board that may occur. In fiscal 2009, the Board used the services of James Drury Partners when selecting directors. The Company paid James Drury Partners approximately $110,000 for their services in fiscal 2009 in connection with the recruitment of directors.

New directors

The Nominating and Governance Committee recommends director candidates to the full Board after receiving input from all directors. The Board elected Dr. Glassman and Mr. Lenny to the Board effective February 20, 2009. Several members of the Board recommended Dr. Glassman and Mr. Lenny as director candidates to the Nominating and Governance Committee. Members of the Committee and other directors interviewed each of Dr. Glassman and Mr. Lenny to assess them as director candidates. The Committee unanimously recommended to the full Board that Dr. Glassman and Mr. Lenny be elected as directors. The Board unanimously approved the Committee’s recommendation.

Director qualificationsQualifications

The Company’s Corporate Governance Policies describe our directorDirector qualifications. The Board seeks members who combine a broad spectrum of experience and expertise with a reputation for integrity. Directors should have experience in positions with a high degree of responsibility and be leaders in the companies or institutions with which they are affiliated; theyaffiliated. Directors should be selected based upon their potential contributions to the Board and management and their ability to represent the interests of shareholders. Also, the Board will consider the diversity of a candidate’s perspectives, background and other demographics.

Lead DirectorBoard Leadership Structure

The Board currently combines the positions of CEO and Chairman, coupled with a lead independent director. The Board has designated Lawrence A. Weinbach, who is Chairman of the Nominating and Governance Committee, as the Lead Director. The Lead Director:

The Board believes that the combined position of CEO and Chairman enhances the effectiveness of the Board and, therefore, that the current Board leadership structure is optimal for the Company. Because of his position as CEO, Mr. Nelms is the director most familiar with Discover’s business and industry and best positioned to set and execute the Company’s strategic priorities. Mr. Nelms’ leadership, driven by his deep business and financial services expertise, enhances the Board’s ability to exercise its responsibilities. In addition, this model provides enhanced efficiency, effective decision-making and clear accountability. The lead independent director further strengthens the Board’s independence and autonomous oversight of our business as well as Board communication and effectiveness. The Board evaluates this structure periodically, including the appointment of the lead independent director.

Non-employee director meetingsDirector Meetings

The non-employee directors meet regularly in executive sessions without management present. The Company’s Corporate Governance Policies also require that if any non-employee directorsDirectors are not independent, then the independent directors will meet in an independent director session at least once per year. Since Mr. Rankowitz’s resignation on December 11, 2009,Currently, all non-employee directors wereare independent. The Lead Director, who is independent, presides over executive and independent director sessions.

Board Role in Risk Oversight

The Board is responsible for approving the Company’s risk management framework, which includes the Company’s Enterprise Risk Management Policy and certain additional risk management policies. The Board receives reports of material exceptions to such policies. Additionally, the Board approves the risk appetite and limits, and capital targets and thresholds of the Company. It also appoints the Corporate Risk Officer, and other risk management function leaders, as appropriate.

The Board regularly devotes time during its meetings to review and discuss the most significant risks facing the Company, and management’s responses to those risks. During these discussions, the Chief Executive Officer, the General Counsel, the Chief Financial Officer and/or the Corporate Risk Officer present management’s

assessment of risks, a description of the most significant risks facing the Company and any mitigating factors, plans or practices in place to address and monitor those risks. The Board has also delegated certain of its risk oversight responsibilities to its Committees.

Consistent with the New York Stock Exchange listing standards, to which the Company is subject, the Board has delegated to the Audit and Risk Committee responsibility for oversight of the Company’s practices with respect to risk assessment and risk management, and for discussing with management the major risk exposures facing the Company and the steps the Company has taken to monitor and control such exposures. In this regard, the charter of the Audit and Risk Committee requires it to review the Company’s framework for assessing and managing the risk exposures of the Company, including credit, market, liquidity and operational risks, and the steps management has taken to monitor and control such risk exposures. The Audit and Risk Committee also is required to review reports from management on the Company’s enterprise-wide risk management program, including the status of and changes to risk exposures, policies, procedures and practices, and the adequacy of risk parameters that have been established for each area of enterprise risk. The Audit and Risk Committee also is required to discuss with the risk management function whether it has the appropriate resources, independence and authority to fulfill its responsibilities.

The Audit and Risk Committee comprises solely independent directors. During the Audit and Risk Committee’s discussion of risk, the Company’s General Counsel, Chief Financial Officer, Corporate Risk Officer, and Internal Auditor present information and participate in discussions with the Audit and Risk Committee regarding risk and risk management. This Committee also authorizes the Company’s Risk Committee, which comprises the members of the Company’s Executive Committee and the Corporate Risk Officer. Our Risk Committee is a management-level committee, chaired by our Corporate Risk Officer, that provides a forum for key members of our executive management team to review and discuss credit, market, liquidity, operational, legal and compliance and strategic risks across the Company and for each business unit. The Committee regularly reports to the Audit and Risk Committee on risks and risk management.

While the Board’s primary oversight of risk rests with the Audit and Risk Committee, the Compensation Committee directly oversees the risk management associated with the Company’s compensation practices, including an annual review of the Company’s risk assessment of its compensation policies and practices for its employees and the Company’s succession planning process.

As noted above, the Board believes that its leadership structure is appropriate for the Company. The Board believes that the combination of the combined Chief Executive Officer and Chairman, the Lead Director and the roles of the Board and its Committees provide the appropriate leadership to help ensure effective risk oversight.

Communications with directorsDirectors

Shareholders and other interested parties may contact any member of our Board by writing to: Discover Financial Services, 2500 Lake Cook Road, Riverwoods, Illinois 60015, Attention: Secretary and General

Counsel. All communications should be accompanied by the following information: (i) if the person submitting the communication is a security holder, a statement of the type and amount of the securities of the Company that the person holds; (ii) if the person submitting the communication is not a security holder and is submitting the communication to the non-management directors as an interested party, the nature of the person’s interest in the Company; (iii) any special interest, meaning an interest not in the capacity of a shareholder of the Company, of the person in the subject matter of the communication; and (iv) the address, telephone number and e-mail address, if any, of the person submitting the communication. The Board’s Policy Regarding Communications by Shareholders and Other Interested Parties with the Board of Directors is available in the “Investor Relations” section of our website,www.discoverfinancial.com. Shareholder and interested party communications received in this manner will be handled in accordance with procedures approved by our independent directors.

Shareholder recommendationsRecommendations for director candidatesDirector Candidates

Our Nominating and Governance Committee is responsible for identifying individuals qualified to become Board members consistent with the Board qualification criteria described above and set forth in the Company’s Corporate Governance Policies which are available in the “Investor Relations” section ofwww.discoverfinancial.com. The Nominating and Governance Committee may consider director candidates recommended by shareholders. The procedures to submit recommendations are described in the Policy Regarding Director Candidates Recommended by Shareholders, available in the “Investor Relations” section ofwww.discoverfinancial.com.

Shareholders who wish to recommend a candidate for the Committee’s consideration must submit the recommendation in writing in accordance with the Board’s Policy Regarding Communications by Shareholders and Other Interested Parties with the Board of Directors discussed above. Shareholders may make recommendations at any time, but recommendations for consideration as nominees at the annual meeting of shareholders must be received not less than 120 days before the first anniversary of the date that the proxy statement was released to shareholders in connection with the previous year’s annual meeting. In fiscal 2009,2010, there were no director candidates submitted by shareholders. To submit a candidate for consideration for nomination at the 20112012 annual meeting of shareholders, shareholders must submit the recommendation, in writing, by October 29, 2010.28, 2011. The written notice must demonstrate that it is being submitted by a shareholder of record of the Company and include information about each proposed director candidate, including name, age, business address, principal occupation, principal qualifications and other relevant biographical information. In addition, the shareholder must confirm their candidates’ consent to serve as a director. Shareholders must send recommendations to Discover Financial Services, 2500 Lake Cook Road, Riverwoods, Illinois 60015, Attention: Secretary and General Counsel and they will be forwarded to the Nominating and Governance Committee.

The Nominating and Governance Committee identifies, evaluates and recommends director candidates to the Board. The Committee accepts shareholder recommendations of director candidates and evaluates such candidates in the same manner as other candidates. The Committee determines the need for additional or replacement Board members, then identifies and evaluates the director candidate under the criteria described above based on the information the Committee receives with the recommendation or which it otherwise possesses, which may be supplemented by certain inquiries. If the Committee determines, in consultation with other directors, including the Chairman of the Board, that a more comprehensive evaluation is warranted, the Committee may then obtain additional information about the director candidate’s background and experience, including by means of interviews. The Committee will then evaluate the director candidate further, again using the qualification criteria described above. The Committee receives input on such director candidates from other directors, including the Chairman of the Board, and recommends director candidates to the full Board for nomination. The Committee may engage a third party to assist in identifying director candidates or to assist in gathering information regarding a director candidate’s background and experience. If the Committee engages a third party, the Committee approves the fee that the Company pays for these services.

Shareholders may nominate director candidates by complying with our By-Law provisions discussed belowat the end of the proxy statement under the heading “Shareholder Proposals for the 20112012 Annual Meeting.”

EXECUTIVE AND DIRECTOR COMPENSATION

Executive Compensation

The Compensation Committee is responsible for the review and approval of the Company’s executive compensation program. The Compensation Committee works with its independent consultant, Semler Brossy Consulting Group,Pearl Meyer & Partners, LLC (“Pearl Meyer”), to develop recommendations for the Compensation Committee. Members of the Company’s senior management and human resources department work with the Company’s compensation consultant, Meridian Compensation Partners, LLC (“Meridian”), a 2010 spin-off from Hewitt Associates.Associates (the Company’s former compensation consultant).

Role of the Compensation Committee

The Compensation Committee is responsible for the review and approval of all aspects of the Company’s executive compensation program and makes all decisions regarding the compensation of the Company’s executive officers named in the executive compensation tables below (“NEOs”). Specific responsibilities ofSpecifically, the Compensation Committee include to:has responsibility to, among other things:

As described below under “Compensation Discussion and Analysis—2010 Decision Making Process,” the Compensation Committee consults with the Chief Executive Officer with respect to the compensation of the Chief Operating Officer and the Chief Financial Officer and consults with the Chief Operating Officer with respect to the executive officers who report directly to him.

The Compensation Committee’s charter is available in the “Investor Relations” section of the Company’s website atwww.discoverfinancial.com.

Role of the Compensation Consultants

The Compensation Committee regularly consults with its external independent compensation consultant in performing its duties. The Compensation Committee has broad authority to retain and dismiss compensation consultants, as well as to establish the scope of the consultant’s work. While the consultant reports to the Compensation Committee, the consultant also works with the Company’s human resources staff and executive management as approved by the Compensation Committee Chair. The Compensation Committee haspreviously retained Semler Brossy Consulting Group, LLC (“Semler Brossy”) as its independent executive compensation consultant. Semler BrossyIn fiscal 2010, the Compensation Committee decided to select a new consultant. On April 8, 2010, following its review of consultant candidates, the members of the Compensation Committee unanimously decided to retain Pearl Meyer as the Committee’s new independent executive compensation consultant. Pearl Meyer provides experiential guidance to the Compensation Committee on what is considered fair and competitive practice in the industry, primarily with respect to the compensation of the Chief Executive Officer, but also for other senior Company officers. Semler BrossyPearl Meyer is independent of management and other thanunder the terms of its agreement with the Compensation Committee, Pearl Meyer will provide services providedonly to the Compensation Committee, Semler Brossy providesCommittee. Other than executive compensation consulting services noted above, Pearl Meyer performs no other services tofor the Company or management.Company.

The Company has retained Hewitt Associates LLC (“Hewitt Associates”)Meridian to advise our management on executive compensation matters. Hewitt AssociatesMeridian provides competitive compensation program and policy data as well as information concerning industry practices.

Director Compensation

We have adopted the Directors’ Compensation Plan to establish our directors’ annual compensation and to further advance the interest of the Company and its shareholders by encouraging increased stockshare ownership by our non-employee directors, in order to promote long-term shareholder value. Our directors are required to retain a certain amount of stock as described in the Sectionsection below “Stock“Share Ownership Guidelines.”

Directors who also are our employees do not receive any compensation under the Directors’ Compensation Plan. The compensation under the Directors’ Compensation Plan is described below.

Cash Compensation. Each non-employee director receives the following cash compensation under the Directors’ Compensation Plan for service on our Board and committees of our Board:

Each non-employee director may elect to defer receipt of their cash compensation under the Directors’ Voluntary Nonqualified Deferred Compensation Plan until the director terminates all services for the Company. A bookkeeping account is maintained for each participant and interest is credited to the deferred amount based on 120% of the quarterly long-term applicable federal rate in affect.effect.

Equity Compensation. Pursuant to the Directors’ Compensation Plan, we may issue awards of up to a total of 500,000 shares of Common Stock to our non-employee directors. Each non-employee director receives the following equity compensation under the Directors’ Compensation Planan annual grant of $125,000 in restricted stock units (“RSUs”) for service on our Board and committees of our Board:

The number of RSUs granted is determined by dividing the dollar amount by our share closing price on the date of grant. The Initial Grant vests in two equal annual installments on each of the first two anniversaries of the dates of grant. Each grant made thereafter vests in its entirety on the first anniversary of its date of grant. Unless provided otherwise in the RSU agreement, RSUs granted to each non-employee director may become fully vested before the end of the regular restriction period if (i) such director is terminated due to disability or death or (ii) a change in control occurs. Upon vesting, the RSUs are converted into Common Stock. The Company offers non-employee directors an opportunity to defer their equity compensation. Each non-employee director may elect to defer the receipt of their equity compensation until the director terminates all services for the Company. Directors currently receive dividend payments on their RSUs. A bookkeeping account is maintained for each participant. The accountparticipant, which reflects the number of RSUs to which the participant is entitled under the terms of the Plan.

In order to continue to be able to provide equity compensation to our non-employee directors, we are seeking shareholder approval of an amendment to the Directors’ Compensation Plan to provide for an additional 500,000 shares of Common Stock to be issued under this plan. This proposal is discussed below under “Proposal 4—Approval of an Amendment to the Discover Financial Services Directors’ Compensation Plan.”

Reimbursements. Directors are reimbursed for reasonable expenses incurred in attending Board of Directors, committee and shareholder meetings, including reasonable expenses for travel, meals and lodging.

Role of the Nominating and Governance Committee

The Nominating and Governance Committee is responsible for reviewing the effectiveness of the non-employee director compensation and benefits programs in supporting the Company’s ability to attract, retain and motivate qualified directors. If appropriate, the Nominating and Governance Committee will recommend changes to the Board regarding non-employee director compensation and benefits.

Non-employee director compensation tableDirector Compensation Table. The following table contains information with respect to the compensation (including deferred compensation) of the non-employee directors during fiscal 2009 with respect to their Board service.

The table below sets forth cash and equity compensation (including deferred compensation) paid to our non-employee directors with respect to their Board service in the fiscal year ended November 30, 2009.2010.

20092010 Director Compensation

Mr. Weinbach each held 34,937; Dr. Glassman held 18,818; Mr. Lenny held 20,318; Mr. Maheras held 19,800 and Mr. Moskow held 40,693.27,860. RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Discover common stockholders. shareholders.

(2)	Mr. Dammerman resigned from the Board of Directors effective January 12, 2009. As a result, his unvested RSUs were forfeited and his fiscal 2009 fees were pro-rated for his partial-year service. The forfeiture of unvested RSUs resulted in a net expense of -$80,132.

(3)	The amounts listed in the Fees“Fees Earned or Paid in CashCash” column were deferred under the Directors’ Voluntary Nonqualified Deferred Compensation Plan.

(4)	Dr. Glassman was elected to the Board of Directors effective February 20, 2009 and her award of RSUs and fees were pro-rated for partial-year service.

(5)	Mr. Lenny was elected to the Board of Directors effective February 20, 2009 and his award of RSUs and fees were pro-rated for partial-year service.

(6)	Mr. Rankowitz resigned from the Board of Directors effective December 11, 2008. As a result, his unvested RSUs were forfeited and his fiscal 2009 fees were pro-rated for his partial-year service. The forfeiture of unvested RSUs resulted in a net expense of -$203,737.

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis (“CD&A”) focuses on the Company’s Executive Officers who are named in the tables below and who are referred to as our “named executive officers” or “NEOs.” This CD&A is organized intoWe summarize our executive compensation program and objectives and provide an overview of how and why the following sections:

Directors (the “Committee”) made specific decisions involving our NEOs. We also refer you to our Annual Report on Form 10-K for the year ended November 30, 20092010 for additional information regarding the 20092010 financial results for our Company discussed below.

Executive Summary

Our compensation programs are designed to rewardWe delivered strong financial results in fiscal 2010, exceeding our executives for generating positive Company performance2010 business plan (“2010 Plan”) and to align their interests with thoseoutperforming most of our shareholders andcompetitors despite the long-term interests of the Company.

In 2009, the financial services industry continued to face an extremely challenging economic environment, including increasing unemployment and higher consumer bankruptcies. In response toregulatory environment. Our executive compensation decisions in 2010 were greatly influenced by the economic crisis, the U.S. Treasury Department created the Troubled Asset Relief Program Capital Purchase Program (“CPP”). Under the CPP, the Treasury Department was authorized to make direct investmentsfollowing important factors, each of which is discussed below in financial institutions by purchasing preferred stock and common stock warrants. On March 13, 2009, the Treasury Department invested $1.2 billion in Discover Financial Services preferred stock and common stock warrants under the CPP. As a recipient of this CPP investment, we are subject to certain restrictions on compensation for our NEOs so long as the Treasury Department’s investment in our preferred stock remains outstanding. The current compensation program has been and will continue to be limited as necessary to comply with the restrictions including the elimination of cash bonus payments and accruals, limiting the value of equity compensation awarded, the elimination of severance payments as well as other restrictions discussed below.more detail:

Despite the exceptional challenges facing the economy and our industry, we were profitable in 2009. Our financial results, both including and excluding the impact of the settlement of the lawsuit against Visa and MasterCard, and other performance results are outlined below:Highlights

The Compensation Committee of the Board (the “Compensation Committee” or “Committee”) considered many factors when making its year-end compensation decisions affecting our NEOs, including financial performance, performance against our performance priorities, performance relative to peers and individual NEO performance. Company financial performance is the principal consideration regarding the overall funding level of the variable year-end element of our NEOs’ compensation for fiscal 2009. The Committee took into account the challenging economic and market conditions in 2009 and noted that, despite these challenges, the Company exceeded our plan for the key financial performance measures and demonstratedFactors: Very strong performance against our performance priorities, exceeding or meeting most goals, including charge-offs and sales growth; strong segment performance.performance against competitors in net charge-offs and receivable growth.

Factors Affecting Compensation Decisions

While our Committee subjectively considers a number of factors when assessing performance for purposes of making compensation decisions, in 2010 the Committee primarily considered Company net income. We use net income because it is one of the key drivers of EPS and is a representative measure that is most directly tied to

the return to our common shareholders. Net income is also a balanced measure that focuses on overall performance to ensure that the executives are focused on the overall returns of the Company and not compensated to drive one measure over another. The Committee considered ouralso considers other Company-wide financial results excluding the positivemetrics including ROE, credit performance, growth metrics, impact of legislative and regulatory changes on the Visabusiness, performance versus competitors and MasterCard settlement proceeds in making theseother factors relevant to the year.

2010 compensation decisions noting that that even withoutwere impacted by CPP restrictions. At the positive impactbeginning of the settlement the Company was profitable. However, the Committee noted that while the key financial results achieved were above plan for the year, the results excluding the settlement proceeds were lower than historical norms and long-term profit expectations.

Considering all of these factors and the CPP restrictions, in June 2009, the Committee approved a mid-year base salary increase of our NEOs, excluding our chief executive officer and in December 2009, the Committee approved variable 2009 year-end compensation for our NEOs that was between 52% and 64% lower than variable year-end compensation paid for 2008. Additionally, in light of the CPP restrictions, the Committee did not approve any cash incentive awards for our NEOs’ 2009 performance. As a result of these decisions, total compensation for our NEOs for 2009 was between 40% and 53% lower than for 2008.

In fiscal 2010, the Committee adjusted the mix between fixed and variable compensation and approved a base salary increase for our NEOs with the increase to be paid in the form of equity.Company Common Stock (“Salary Stock”). In making this decision, (which is discussedthe Committee considered CPP compensation restrictions, including limits on incentive compensation which meant that only one-third of our NEOs’ compensation could be paid in more detail below under “Base Salary”), the form of incentive compensation. The Committee also considered the need to attract, motivate and retain a talented management team and to ensure that our compensation program compares favorablyremains competitive with other companies with whomwhich we compete for senior executive talent. We expect that, evenAlthough not required under CPP restrictions, the Committee imposed a holding period requirement on shares of Salary Stock, in order to align executives’ long-term interests with this base salary adjustment,those of shareholders.

For 2010, after consideration of all the aforementioned factors, the Committee made discretionary compensation decisions for each of the NEOs, which are detailed below under “Summary of Pay Decisions.”

2011 Program Redesign

During 2010, and following our NEOs totalrepayment of the CPP investment, we conducted a comprehensive review of our executive compensation in 2010 will be below average historical levels.program and made several important changes for fiscal 2011 which further align with our pay-for-performance philosophy. The following table summarizes these key changes affecting our NEOs:

Compensation Program and Objectives

The Company’s 2009 Executive Compensation2010 executive compensation program and year-end compensation decisions were built on the following principles:

Each of these principles is discussed below.

Pay for Performance

The Company believes in a pay for performancepay-for-performance philosophy. The majority of compensation for our NEOs has historically been in the form of year-end bonus, a substantial portion of which is paid in deferred equity. The Compensation Committee focuses on three key Company performance factors in making compensation decisions for the NEOs. In evaluating Company performance and when making NEO compensation decisions, the Committee viewsconsiders financial performance as the primary factor andwell as performance priorities, relative performance and competitor comparisons as secondary.individual executive performance.

The Committee also considers the individual performance contributions of each executive.executive, as described in more detail beginning on page 25.

Competitive Market for Executive Talent

The Compensation Committee reviewed and considered market data from a peer group when approving NEO compensation. We do not engage in strict benchmarking but rather use competitive data as a reference point for elements of NEO compensation. The peer group used in the analysis consists of 23 financial services companies from which the Company might expect to draw executive talent. Management worked with Hewitt Associates, an international human resources consulting firm, to develop a suggested peer group. The peer group consists of19 financial services companies of a similar business nature and revenue size asto the Company.Company, from which the Company might expect to draw executive talent. Given that Discoverthe Company has few direct competitors of similar scope and size, the peer group is somewhat varied in nature and represents: companies that are similar in business and focus primarily on credit card operations, regional financial institutions that have significant credit card and/or loan operations, and data/transaction processing companies. Some ofIn 2010, the Committee reviewed the companies that met the foregoing criteria, and after evaluating these companies with its independent compensation consultant, approved the adjusted peer group set forth in the peer group are significantly larger than Discover, and therefore, as indicated below, are only used to benchmark compensation for Business Segment Head positions. Companies included in the compensation benchmarking analysis for the CEO, CFO, and COO have revenue net of interest expense within the range of 1/3x to 3x Discover. Management presented the peer group to the Committee and Semler Brossy, the Committee’s independent advisor, who then validated the appropriateness of the peer group.table below.

For 2009, Semler Brossy provided its perspective on the dramatic changes in compensation in the financial services industry in general. The Compensation Committee uses the peer group below for comparisons of all components of the Company’s executive compensation and benefits package. The extraordinary economic environment during 2009recent years caused such data to become less relevant and therefore the Committee reviewed but placed minimal weight on historic pay data from these peer companies. The Compensation Committee will regularly reviewreviews and adjustadjusts the peer group, as necessary.consistent with the criteria described above.

In 2009,2010, the peer group⁽¹⁾ consisted of the following companies:

Balanced Compensation Structure

The CompanyCommittee determines compensation for the NEOs on a “Total Reward” basis (aggregate of base salary, potential cash bonus and equity compensation) at year-end, based on the performance of the Company and the

individual executive performance for the year, while considering previous year’s compensation and compensation levels of other executives in similar roles. The Committee feels that a balance of these three components provides an ideal combination of risk and reward. There is no target bonus amount established for, or communicated to, the NEOs. TheFor 2010, the variable year-end bonus amounts (cash and equity) paid to the NEOs are discretionary amounts determined by the Committee based on its evaluation of the above-referenced financial performance, factors.other performance factors and the individual performance of each executive. The Committee considers peer group and market data in conjunction with the aforementioned factors before making compensation decisions and uses discretion to exercise its judgment instead of solely relying on a formulaic structure, balancing transparency and flexibility to pay appropriately for performance.

TheFor 2010, the Committee, with input from its independent consultant, believes emphasis onemphasized equity compensation for NEOs alignsto align the long-term interests of our NEOs andwith our shareholders, andshareholders. The Committee believes that the use of RSUs that generally vest ratably over a four-year period focusfocuses the executive on the Company’s long-term interests.interests without leading to imprudent risk-taking. The Committee also continues to believe that time vestedtime-vested RSUs represent an efficient method of delivering long-term equity compensation, generally using fewer shares than other types of equity vehicles andwhile having a reasonably predictable expense impact.

On March 13, 2009, we becameReview of Compensation Policies and Practices Related to Risk Management

In fiscal 2010, the Committee undertook a participantrisk review of the Company’s compensation practices in the CPP. As a participantresponse to preliminary UST executive compensation regulations applicable to companies participating in the CPP we have adopted certain requirements for executive compensation and corporate governance in accordance(the “CPP Rules”). As required by these regulations, the Committee met with the U.S. Treasury’s interim final rules implementingCompany’s senior risk officer to review employee compensation plans in which all employees (including the compensationNEOs) participate, and corporate governance requirements under the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009 as well as additional guidance issued by the U.S. Treasury from time to time following the issuance of the interim final rules. These rules were subject to a public comment periodidentify whether these arrangements had any features that has expired, but no final rule has been adopted. The rules, in part, (a) limit compensation to exclude incentives for senior executive officers to takemight encourage unnecessary and excessive risksrisk-taking that could threaten the value of the financial institution, (b) provide forCompany. The Committee considered a number of risk mitigation factors, including the recoverybalanced use of any bonus, retention award,time-vesting RSUs and cash, emphasis on overall Company performance in compensation decisions, our robust risk governance and control structure and the Company’s share ownership guidelines, and concluded that these factors provided adequate safeguards that would either prevent or discourage excessive risk taking. A more detailed description of this risk review can be found below under “Compensation Committee Report.”

The Committee also continues to monitor a separate, on-going risk assessment by senior management of the Company’s broader employee compensation practices as part of the Federal Reserve’s regulatory initiative on incentive compensation paid by bank holding companies. Under this initiative, senior Company human resources, risk management, compliance, and legal personnel compiled and analyzed extensive information about the Company’s incentive plans, including plan documents, eligibility criteria, payout formulas and payment history, and held extensive interviews with business line managers to certainunderstand how evaluation of business risk affects incentive plan performance measures and compensation decisions.

Following these risk reviews, the Company and the Committee have not identified any risks arising from our compensation policies and practices for our named executives and our employees based on statements of earnings, revenues, gains, or other criteriagenerally that are, later foundeither individually or in the aggregate, reasonably likely to be materially inaccurate, (c) prohibit any golden parachute payment tohave a senior executive officer or any ofmaterial adverse effect on the next five most highly compensated employees, and (d) prohibit the payment or accrual of any bonus, retention award, or incentive compensation to certain employees, except that any such restriction does not apply to the payment of long-term restricted stock that meets specified conditions, including a limit on value to one-third of the total amount of annual compensation of the employee receiving the stock. Under the CPP rules, the term “senior executive officer” is defined as the Chief Executive Officer, Chief Financial Officer and the three most highly compensated employees other than the Chief Executive Officer and Chief Financial Officer. The Company’s “senior executive officers” are the same individuals as the Company’s named executive officers. In 2009, each of our named executive officers signed an agreement with the Company agreeing to modify their compensation arrangements, to the extent applicable, to comply with these requirements.Company.

Components of Total Compensation

The components of the Company’s executive compensation program are shown in the table below. Each of the components and how decisions were made for each NEO are more fully discussed in the sections following the table.

The mix of compensation changed significantly in 2009 but the Committee maintained the objective of paying for performance while ensuring the Company can attract, motivate and retain executives.

Component		Description and Purpose
		Cash Bonus Historically, variableVariable cash bonus wasis designed to reward Company, Business Segment,business segment, and individual performance with a primary focus on rewarding our net income performance. While the Company participates in the CPP, cash bonuses are not included in the program for NEOs.
		Equity/Stock Variable annual equity grant is designed to reward individual contributions to the Company’s performance as well as motivate future contributions and decisions aimed at increasing shareholder value. The Company’s NEOs are required to retain a certain amount of Company Equity/Stockequity/stock as described in the section below “Stock“Other Arrangements, Policies and Practices Related to Our Executive Compensation Program—Share Ownership Guidelines.” The number of sharesunits granted is determined by dividing the dollar value of the award by the fair market value on the date of grant. One-hundred percent of the 2009 year-end bonus was granted in the form of RSUs.
Retirement and other benefitsOther Benefits		Fixed component of pay intended to protect against catastrophic expenses (health(e.g., health care, disability and life insurance) and provide opportunity to save for retirement (pension and(i.e., 401(k)). The Company offers a benefits package to all employees that is competitive with those offered by our peer group and other companies with whom we compete for talent, and our NEOs participate on the same basis.basis as our employees generally. The Company does not offer any supplemental benefits programs or deferred compensation program to our NEOs.
Post-Termination Compensation (Severance and Change in control)Control)		Severance program designed to provide protection and allow executives to focus on acting in the best interests of shareholders regardless of impact on their own employment. In September 2007, the Compensation Committee approved a Changechange in Control/ Severancecontrol/severance policy under which our NEOs participate. The benefits provided under our severance programthis policy for our NEOs arewere not available as a resultfor the portion of our participation2010 during which the Company participated in the CPP. This policy is discussed in more detail in the “Executive“Other Arrangements, Policies and Practices Related to Our Executive Compensation Program—Executive Severance and Change Inin Control Severance Policy” section below.

We continue to maintain our disciplined approach to benefits and perquisites. We do not provide any benefit plans to our NEOs which are not generally available to other employees, and generally provide only limited perquisites to our NEOs, including access to the executive pantry and the executive gym. We have also continued our practice of not entering into individual employment agreements with our NEOs.

Decision Making ProcessRole of Chief Executive Officer in Compensation Decisions

In the months leading up to the Compensation Committee meeting in December when year-end compensation decisions are approved, our chief executive officerOur Chief Executive Officer and chief operating officerChief Human Resources Officer met with the Compensation Committee and its external consultant several times to discuss preliminary compensation decisions for the NEOs and senior officers. The Committee also met with its

independent compensation consultant to discuss compensation recommendations and decisions. This allowed for ample review and consideration of the financial2010 Company, business segment and individual performance goals and priorities.resulting 2010 compensation decisions. The role of the NEOs in compensation decisions is more fully discussed below and the role of the Compensation Committee and its consultant are discussed in the Corporate Governance Section.“Executive and Director Compensation.” The decisions of the Committee for 2010 performance are reflected below in the paragraphs below.“Summary of Pay Decisions.”

Role of Chief Executive Officer and Chief Operating Officer in Compensation Decisions

Messrs.Mr. Nelms, and Hochschild, as Chief Executive Officer, and Chief Operating Officer, respectively, recommend to the Compensation Committee any compensation changes affecting the other NEOs. In 2009, Mr. Nelms discussed the performance and compensation recommendations for his direct reports, Messrs. Hochschild and Guthrie, and Mr. Hochschild discussed performance and compensation recommendations for his direct reports, Mr. Minetti and Ms. Offereins. Eacheach executive’s overall contribution to Company performance and individual responsibility for business segment, function, and/or strategic goals, were discussed in detail, and then Messrs.Mr. Nelms and Hochschild made a corresponding pay recommendation for each NEO. The recommendations also considered each NEO’s position and compensation against similar executives from the approved peer group. As noted above, the Committee used the market data solely as a reference point and not to create a strict guideline. Neither Mr. Nelms norwas assisted in this process by the Company’s Chief Human Resources Officer. For Messrs. Minetti and Talwar, Mr. Nelms discussed recommendations with Mr. Hochschild, the President and Chief Operating Officer of the Company, prior to presenting the recommendation to the Committee. Mr. Nelms was not involved in any capacity regarding theirhis own pay decisions. The Compensation Committee requested input from the Company’s top Human Resources

executivechief human resources officer and itsthe Committee’s independent external consultant regarding the compensation decisions for Mr. Nelms and met in an executive session, without any management present, when it considered and approved the compensation of Mr. Nelms. The other NEOsMessrs. Guthrie, Minetti and Talwar did not have a role in thethese compensation decisions.

2010 Decision Making Process

Overall Company and Business Segment Performance

For 2009,2010, the Committee measured financialoverall Company and business segment performance focusedby focusing primarily on revenue, provision, expenses, profitnet income and also considering return on common equity, as sufficient measurestotal revenue, total provision for loan loss, and total operating expenses. Although no set weight is assigned to each of these performance metrics, we believe that net income is the Company’s performance, eliminating the earnings per share measure. In addition, the Committee streamlined the performance priorities and relative performance measures used to simplify and focus its approach on certain core financial measures as illustrated in the tables below.

Based on the Committee’s assessmentbest measure of overall Company business segmentperformance and, individual performance,accordingly, this metric had the Committee approved year-end bonuses for NEO’s that were limited by the CPP restrictions and were between 52% and 64% lower than 2008 year-end bonuses. The Compensation Committee considered a number of factors when making its year-end compensation decisions affecting our NEOs. Fiscal 2009 Company performance is the principal consideration regardinggreatest impact on the overall funding level of incentive compensation in 2010. The Committee also considered performance priorities, relative performance measures and individual performance.

The Committee believes that the bonus element of NEOs’ compensation for fiscal 2009 within the compensation limitations imposedactions taken by the CPP regulations. As described above,Company’s Chief Executive Officer and the primary factors considered in assessing Company performance wereother NEOs throughout 2010 contributed greatly to the Company’s financial results.results and positioned the Company well to take advantage of improving economic conditions. Furthermore, throughout 2010, the Company continued to benefit from the strategic choices made by the Company’s senior management over the past few years. In addition to the Company’s longstanding rigorous credit and balance sheet management practices, the following key strategic decisions, among other things, enabled the Company to remain profitable during 2010 and placed the Company in a strong position going forward:

Financial Performance

AAs discussed above, the primary factor which our Compensation Committee considered in making 20092010 compensation decisions was the Company’s financial results. Companyresults which are summarized in the table below. The primary financial result considered for purposes of our 2010 compensation decisions was net income. In 2010 our net income was $765 million, exceeding both our 2009 revenues were higher than in 2008, and higher than anticipated levels for 2009 but loan loss provisions were above both historical norms and 2008 levels due to the economic environment. The Company also made significant reductions in expenses in 2009. The Committee considered the resultingnet income from continuing operations and return on equity, excluding the positive impact of the Visa and MasterCard$130 million (excluding after-tax antitrust litigation settlement proceeds and certain related expenses,expenses) and our 2010 Plan target of $158 million. Also material to the Compensation Committee’s decision in 2010 was the Company’s return on equity of 12% in 2010, which while above plan for

exceeded a return of 2% in 2009 (excluding after-tax antitrust litigation settlement proceeds and certain related expenses) and our 2010 Plan target of 3%. Additionally, the year, wereCompensation Committee considered the 2010 financial metrics set forth below. No set weight is assigned to any of these metrics and no single metric is material to the Compensation Committee’s determination of any individual’s compensation; rather the Compensation Committee reviews and subjectively balances these metrics in the aggregate in determining individual compensation.

Other Performance Factors

Performance Priorities

The Committee also considered the Company’s progress on core strategic performance priorities across the Company and within each segment in making overall, year-end bonus funding decisions. The Company performance priorities for fiscal 2009 are described in the table below. No set weight is assigned to any of these factors and no single performance priority is material to the Compensation Committee’s determination of individual bonuses; rather the Compensation Committee reviews and subjectively balances these priorities in the aggregate in determining individual bonuses. These performance priorities are based on our business plan for the fiscal year,2010 Plan, and are intended to be challenging but achievable.

The Committee considered the Company’s overall strong performance against performance priorities in 2009.2010. The Committee noted that thea reduction in total managedloans as a result of the CARD Act and the sale of federal student loans and totalimproved sales was consistent with management’s conservative approachresults over 2009 due to extending creditimproved consumer spending, higher gas prices and growth in the challenging economic environment and

compared favorably to more significant declines in competitor credit card loan and sales volumes.active outlets. The Committee also noted thean increase in transaction volume for the Payment Services segment which was consistent with management forecastshigher than anticipated and the Company’s strong performance with respect to 30-day active outlets and direct to consumerdirect-to-consumer deposits.

Relative Performance

AnFor additional factor considered bycontext the Committee isreviews the Company’s relative performance against our largest direct business competitors in the U.S. market in both the Direct Banking and Payment Services business.businesses. Highlights of the 2010 relative performance results considered by the Committee are described in the table below. The Committee consideredreviews competitor results through completion of the third calendar quarter since competitor information was only available through the third calendar quarter at the time of the Committee’s decision-making.

Individual Performance

The Compensation Committee considers individual performance in making final compensation decisions for each NEO.NEO, both as it relates to their specific objectives as well as their contributions to the success of the overall enterprise. The Committee believes this approach optimizes the benefit to shareholders versus an approach that focuses only on specific objectives in one area while not considering the best overall results to shareholders. Summaries of individual performance and contributions are described below.

David W. Nelms.As described above, overall Company financial performance was significantly impacted by the economic and market conditions. Mr. Nelms’Nelms led the Company to significantly exceed overall profit, revenuethe goals of the 2010 Plan during a challenging economic and expenseregulatory environment. He established a strong and positive relationship with regulators as a bank holding company and maintained open and productive dialogue on key issues. He established and communicated a new strategy (direct banking and payments) with a well grounded five-year strategic plan despite worse than expected environment and credit losses. The Company exceeded competitor results, but achieved low absolute returns (excluding lawsuit settlement proceeds). The Company’s capital, liquidity, and funding sources were enhanced. During the same period,to grow the Company becamethrough organic and inorganic channels, as demonstrated through our acquisition of The Student Loan Corporation. Under Mr. Nelms’ leadership, the Company was able to repay its CPP obligations, while strengthening its balance sheet and capital and liquidity positions. He retained a bank holding

company. Mr. Nelms showed personalkey leadership in key strategic initiativesteam and produced business results while responding successfully to numerous challenges including direct deposits,the CPP, CARD Act, response, and global network expansion. He successfully led the Company’s Board in his first year as Chairman and developed a revised strategy and three-year plan.economy.

Roy A. Guthrie.Mr. Guthrie prudently and proactively managed the Company’s capital and liquidity and oversaw the reduction of risk and the Company’s balance sheet, which allowed the Company to repay its CPP obligation and still maintain a strong balance sheet and capital and liquidity positions. He also implemented an enhanced financial planning and analysis process and played a key leadership role supporting the Company’s M&A activities, including the acquisition of The Student Loan Corporation. In addition, he managed capital market volatility effectively while continuing to developbuild out the Company’s accountingAccounting and treasury functions and capabilities. He was instrumental in helping to develop the Company’s strategic response to the financial crisis. He drove improvement inTreasury functions. Mr. Guthrie leveraged line of business planning and analysis that was criticalgroups to improving overallsignificantly enhance the strategic planning effort for the Company. In addition, Mr. Guthrie successfully led significant financial transactions to raise common equity, debt and the Company’s re-entry into the asset-backed securities market.

Roger C. Hochschild.Mr. Hochschild led the operating areas of the Companyplayed a critical role in developing plans, targets, and strategies to achieve planned results in 2009surpass most 2010 Plan metrics despite a very challenging environment. The Payments Services segment surpassed profit goals and achieved key objectives for the Diners Club integration andintegration. He led the continued expansion of merchant acceptance. The Company achieved successful growth of deposit, personal and student loan products.products with the added achievement of the acquisition of The Card segment achieved industry-leading credit loss performance and gains in market share of both loans and sales. He also led overallStudent Loan Corporation. Mr. Hochschild continued to lead companywide expense reduction efforts that reduced our expense base by $300M in 2009.

Diane E. Offereins.Ms. Offereins built strong relationships with franchisees, acquirersinitiatives, more directly drove performance of his team and other partnersimproved cross-functional goal alignment. He personally drove key strategies across a wide range of areas and was a key architect of the Payments segment. Under her leadership, Diners Club achieved all milestones for ATM access, interoperability, and growth in acquirers. Pulse continues to maintain a strong debit leadership position and growth. Discover Network results included solid growth in merchant acceptance.five-year strategic plan.

Carlos Minetti.Mr. Minetti had a very strong year including making significant progress across all banking product goals and being on track or ahead of 2010 Plan for both volumes and profitability (deposits, student loans, personal loans). He has built Discover into a “top 5” player in three direct banking products and played a significantleading role in managingThe Student Loan Corporation acquisition. He played a key role in maintaining industry-leading loss rates through rigorous management and implementation of new strategies in collections and recovery. Mr. Minetti continues to be a key player in overall firm strategy with a particular focus on issues related to risk management and finance.

Harit Talwar. Mr. Talwar made strong progress across all card volume goals, ahead on sales, and has personally driven initiatives to exceed 2010 Plan on receivables growth. Yield and revenue margin have held up well, the result of significant efforts across 2009 and 2010 to prepare for the CARD Act impact. Mr. Talwar has also made significant progress on advertising and increasing the prominence of the Company’s brand. He has had a significant impact in his two years as President—U.S. Cards reflecting his central role in driving the growth and profitability of the Company’s core card business despite a shifting regulatory environment.

CPP Compensation Restrictions

As noted in our 2009 proxy statement, we became a participant in the CPP in 2009. On April 21, 2010, we repaid the UST investment in our Company throughand ceased to be a challenging environment. He achieved strong growthparticipant in banking productsthe CPP. During the portion of fiscal 2010 that we were a participant in the CPP, we adopted certain requirements for executive compensation and governance imposed on all CPP participants. The CPP Rules included, among other requirements, that:

Following our repayment of collection activities was criticalthe CPP investment, we were generally no longer subject to the Company’s loan loss performance. The Company’s customer service and collections functions remained an important source of revenue and continued to provide a superior customer experience. Mr. Minetti was also a key participant in enhancing Company’s risk and capital framework.foregoing restrictions.

Summary of Pay Decisions

As discussed above, our 2010 compensation decisions were closely tied to our 2010 financial performance. Improvement in Company performance exceeded increases in compensation for the NEOs. The breakdown by component of NEO pay is summarized in the following table.

The table below summarizesabove incorporates the pay decisions for our NEOs as approved by the Committee for 2008 and 2009. The last column of this table reflects the decrease in total compensation for each NEO over last year’s total compensation.

This table shows that equity incentive compensation actually awarded ineach December 2009 is significantly less thanfor the recently completed fiscal years. These amounts vary from those shown in the 20092010 Summary Compensation Table on page 32,37, as the amounts shown in the 20092010 Summary Compensation Table include values for equity awarded in prior years. The differences between the table above and the 2009 Summary Compensation Table are largely attributable to the fact that the 2009 Summary Compensation Table, prepared in accordance with SEC regulations, values equity awards based principally on the treatment of compensation expense in the Company’s income statement under FASB ASC Topic 718. Generally, under FASB ASC Topic 718, the grant date fair value of an equity award (which is based on the stock price on the grant date) is expensed over the vesting period of the equity award unless the employee is eligible to retire. If the employee is eligible to retire, then the award must be expensed on the grant date or accrued over a service period prior to the grant date. Under new SEC regulations, which will become effective

for our proxy statement to be filed in 2011, the Summary Compensation Table will include values for equity awards based on the full grant-date fair value of the equity award. In addition,Specifically, because we awardgrant equity bonusesincentive awards for a given fiscal year after completion of thethat fiscal year, the equity bonus for 2008fiscal 2009 performance was granted immediately following the end of fiscal 2009 in fiscal 2010 and is thus reported in the “2009this year’s “2010 Grants of Plan-Based Awards Table” inon page 38 of this proxy statement andstatement. Similarly, the equity bonus for 20092010 performance (which is shown above) will be reported in the “Grants”“2011 Grants of Plan-Based Awards” table in our proxy statement to be filed in 2011.2012.

Variable Year-End Bonus

As one portion of our variable year-end bonus, we historically provided the opportunity for our NEOs and other executives to earn a market competitive annual cash incentive award based on performance for the year. This opportunity was provided to motivate executives to achieve our annual business goals, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar annual cash incentive awards are almost universally provided at other companies with which we compete for talent. The annual cash incentive award has been suspended from our NEO compensation program as required by the CPP compensation rules.

Our NEOs and other executives continue to be eligible to earn a long-term equity incentive award subject to the limitations imposed by the CPP compensation rules. We provide this opportunity to motivate executives to make decisions that focus on the long-term, sustainable growth of our Company and thus increase shareholder value, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar long-term equity incentives are almost universally provided at other companies with which we compete for talent.

When making year-end bonus decisions for 2009, the Compensation Committee considered overall Company, business segment, and individual performance, Company performance metrics relative to its peers, competitive market position and prior year’s “Total Reward.” A summary of Overall Company, Business Segment and individual performance is provided above.

The following table shows 2008 and 2009 year-end bonuses for each of the NEOs. The 2008 equity grants in the form of RSUs vest over four years and unvested amounts are forfeited if participants terminate employment prior to vesting under certain conditions. The 2009 equity grants in the form of RSUs vest ratably over a four-year period, but in accordance with the CPP requirements, no RSUs may vest if the executive’s employment terminates (other than due to death, disability or a change in control) prior to the two-year anniversary of the grant date. In addition, the RSUs, if vested, will convert to shares of common stock in increments of 25% for each 25% of the aggregate of the CPP financial assistance that the Company repays. The last column of this table reflects the decrease in total year-end bonus for each NEO over last year’s year-end bonus.

On January 4, 2010, a court ruling related to the on-going dispute with Morgan Stanley concerning the proceeds of the lawsuit against Visa and MasterCard resulted in the recognition of $28.9 million additional interest expense in fiscal 2009, which was reflected in other expense in the consolidated statements of income. Consistent with its decision to exclude the beneficial impact of the Visa and MasterCard settlement proceeds, the Committee decided to exclude the impact of this subsequent event in its review of the 2009 compensation decisions.

Base Salary

We provide our NEOs and other executives with a market competitive annual base salary to attract and retain an appropriate caliber of talent for the position. We generally review base salaries for the NEOs and other executives annually in November and December and determine whether to make increases or decreases based on changes in our competitive market (the peer group companies), individual performance, and experience in position.

In fiscalDecember 2009, the Compensation Committee approved a mid-year base salary increase for our NEOs, excluding our chief executive officer, effective June 1, 2009. In making this decision the Committee considered the overall competitiveness of the total compensation opportunity for the NEOs relative to that available at other companies with which we compete for talent. These base salary adjustments were part of the restructuring of compensation by the Committee to adjust the mix between fixed and variable compensation reducing the emphasis on variable compensation.

At its December 8, 2009 meeting, the Committee further adjusted the mix between fixed and variable compensation and approved an increase in the base salaries of our NEOs for fiscal 2010 with the increase to be paid in the form of Company share awards (“Shares”).Salary Stock. In making this decision, the Committee considered that, in order to attract, motivate and retain talented management with proven skills and experience, we must offer a compensation program that compares favorably with those offered by other large financial services and non-financial services companies with which we compete for a limited pool of highly qualified senior executive talent. The Committee, in consultation with its then independent compensation consultant, Semler Brossy, also considered competitive compensation data, historical total compensation levels and environmental factors, including the pay design of other CPP participants, andto set base salaries such that total compensation for our NEOs is expected to be below average historical levels.salaries. In light of these considerations, the Committee approved the use of SharesSalary Stock to pay the base salary adjustment to align the NEO’sour NEOs’ interests with the long-term interests of shareholders and the Company. Subject to the NEO’s continued employment with the Company, the Shares will beSalary Stock was paid to each NEO in installments, net of applicable tax withholdings and deductions, (each a “Net Pay Period Award”), on each of the Company’s regular pay dates (“Pay Date”Date”) beginning with the pay period ending on January 10, 2010, and continuing consistent with the Company’s established payroll schedules up to and including the pay period ending on November 28, 2010. The number of Shares awarded on each Pay Date will be determined by dividing the portion of the Net Pay Period Award that is payable in Shares (determined on a pro rata basis) by the reported closing price on the New York Stock Exchange (“NYSE”) for a share of Company stock on the Pay Date (or, if not a NYSE trading day, on the trading day immediately preceding such Pay Date). The Committee will continue to evaluate base pay design based on evolving market trends.

Although the CPP doesRules do not impose any holding period or transfer restrictions on SharesSalary Stock received, as salary, the Committee imposed transfer restrictions on the SharesSalary Stock in order to further align the interests of executives with the longer term interests of shareholders and the Company. The Shares shall beSalary Stock is subject to restrictions

on transfer that lapse upon the later of the date on which the Company repays its outstanding obligation under the CPP or the dates set forth in the following schedule: (i) June 30, 2011, with respect to SharesSalary Stock awarded on Pay Dates from January 15, 2010 to April 9, 2010; (ii) June 30, 2012, with respect to SharesSalary Stock awarded on Pay Dates from April 23, 2010 to August 13, 2010; and (iii) June 30, 2013, with respect to SharesSalary Stock awarded on Pay Dates from August 27, 2010 to December 3, 2010. The Shares, which will be provided under the Company’s Amended and Restated 2007 Omnibus Incentive Plan (“Omnibus Incentive Plan”), will includeSalary Stock included a right to receive dividend payments and, as required by the CPP compensation rules, will beRules, was fully vested on the applicable Pay Date. Payment of Salary Stock has been discontinued for fiscal 2011 and base salaries for 2011 were reduced as discussed below in “2011 Executive Compensation Program Changes and Outlook.”

Variable Year-End Bonus Award

Cash:As one portion of our variable year-end bonus, we have historically provided the opportunity for our NEOs and other executives to earn a market competitive annual cash bonus award based on financial performance, other performance factors and individual performance as discussed above in “2010 Decision Making Process.” This opportunity is provided to motivate executives to achieve our annual business goals, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar annual cash awards are almost universally provided at other companies with which we compete for talent. Annual cash bonus awards for NEOs were suspended, during our participation in the CPP, as required by the CPP Rules.

Equity: Our NEOs and other executives were eligible to earn a long-term equity incentive award subject to the limitations imposed by the CPP Rules. We provide this opportunity to motivate executives to make decisions that focus on the long-term, sustainable growth of our Company and thus increase shareholder value, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar long-term equity incentives are almost universally provided at other companies with which we compete for talent. The equity bonus for 2010 was awarded in the form of RSUs that are subject to a four-year time-based vesting requirement.

When making year-end bonus decisions for 2010, the Committee primarily considered Company financial performance and also considered business segment performance, Company performance metrics relative to its peers, competitive market data and individual performance. After a thoughtful review of this information and after consideration of CPP Rules, the Committee made a discretionary judgment on appropriate 2010 compensation for each of the NEOs. See “2010 Decision Making Process” above for more details on the factors considered by the Committee in reaching its conclusions. In compliance with the CPP Rules, the NEOs did not receive a cash bonus award for the period during which we participated in the CPP. See “2010 Decision Making Process—CPP Compensation Restrictions” above for more detail on the CPP compensation restrictions.

2011 Executive Compensation Program Changes and Outlook

On December 10, 2010, the Committee restructured the compensation program for the NEOs by reducing base salaries, and introducing performance stock units with a clawback feature. These changes were made to further reinforce the Company’s objective of more closely aligning executive compensation with Company performance, while appropriately balancing risk and reward.

As a result of these structural changes, after the above discussed grant of incentive equity and cash compensation for 2010 performance, NEO compensation for 2011 will consist of four key components—base salary, short-term incentive cash, and a long-term incentive program consisting of PSUs and RSUs—with a significant portion of total compensation (PSUs and RSUs) tied to long-term Company performance. Under the restructured compensation program, incentive equity compensation will be granted on a prospective basis at the beginning of the performance period (as opposed to being awarded following the completion of a performance period) as a way of motivating desired executive behaviors and aligning compensation with the long-term

interests of shareholders. The resultingCompany also introduced an enhanced clawback for PSUs to further align the accountability of our NEOs to shareholder interests. The key changes to our compensation program are summarized below.

Highlights

Short-Term Incentive

In 2011, we will continue to offer our NEOs the opportunity to earn a market competitive annual cash award based on financial performance, other performance factors and individual performance. Starting in 2011, we have established a target short-term incentive for the NEOs, represented as a percentage of their base salaries. These targets were communicated to the NEOs at the beginning of the 2011 fiscal year. The Committee believes establishing targets is more representative of prevalent market practice and will provide the NEOs greater clarity and motivation to achieve business goals. Net income will be the primary factor that funds the incentive pool, within a framework pre-established by the Committee. The Committee will then make a discretionary adjustment to funding after evaluation of other performance factors such as charge-offs and relative risk performance. If net income results are listed below:above or below the set framework, the Committee will maintain discretion to determine the appropriate funding level. The Committee believes this provides the right balance between transparency and flexibility to adjust for extraordinary circumstances that positively or negatively affect net income, and will ensure that pay is commensurate with performance. The short-term incentive opportunity is provided to motivate executives to achieve our annual business goals, to attract and retain an appropriate caliber of talent for the position, and to recognize that similar annual cash incentive awards are almost universally provided at other companies with which we compete for talent.

Long-Term Incentive

Starting in 2011, the Company is awarding PSUs and RSUs as part of its long-term incentive program. This shift was made to better align NEO interests with the long-term interests of the Company and of its shareholders. We have established a target long-term incentive for the NEOs, represented as a percentage of their base salaries. In addition, we have established a target PSU and RSU mix as a percent of the total long-term incentive target of each NEO. The PSU and RSU grants were made at the beginning of the 2011 fiscal year. Please see below for further details on the PSUs and the RSUs.

Performance Stock Unit Program

The PSUs were granted under the Company’s Amended and Restated 2007 Omnibus Incentive Compensation Plan and will replace a portion of the awards that were historically granted in the form of time-vested RSUs. Under this program, PSUs will generally vest and convert to shares of Company Common Stock if and to the extent the Company performs against a predetermined Company performance goal over a two year period, the executive remains employed by the Company for three years from the beginning of the performance period (with exceptions for certain termination events), and are subject to an evaluation of compliance with the Company’s risk policy at the end of the third year. The performance period begins on December 1, 2010 and ends on November 30, 2012 (the “Performance Period”). Participants will receive no portion of the award if the minimum performance threshold is not met. If the Company exceeds the target performance hurdles, the NEO can potentially earn an award in excess of the target number, up to a maximum of two times the target award. Any shares received upon conversion of these PSUs will be subject to the share ownership guidelines for senior executives.

The purpose of this grant is to further reinforce the NEO’s accountability for the Company’s future financial and strategic goals by tying a greater portion of compensation directly to the Company’s earnings per share and ultimately the Company’s stock price. The following PSUs were awarded to the NEOs:

To the extent the NEO voluntarily terminates from the Company or is terminated for cause prior to the scheduled vesting date, other than as described below, none of the PSUs will vest and the entire award will be forfeited. In certain instances of a termination of the NEO’s employment prior to the scheduled vesting date, including due to: (i) involuntary termination such as a reduction in force or (ii) a retirement, death or disability, a pro-rata portion of the PSUs will vest and convert to shares following the conclusion of the vesting period. In the event of a change in control of the Company during the first year of the Performance Period, the award will be converted to cash at target performance and paid out according to the vesting schedule or sooner in the event of a qualified termination following the change in control event. In the event of a change in control of the Company during the second year of the Performance Period, performance will be measured through the last day of the Company’s quarter preceding the change in control and the award will then be converted to cash and paid out according to the vesting schedule or sooner in the event of a qualified termination following the change in control event. The PSUs are subject to certain restrictive covenants. The awards will receive dividend equivalents in cash which will accumulate and pay out, if at all, when the underlying shares are paid to the NEOs and to the extent the shares are paid.

Restricted Stock Units

A portion of the equity grant for 2011 consists of RSUs. These RSUs generally convert ratably over a four-year period and are subject to market risk tied to the Company stock price. The RSUs are granted at the beginning of each year, but otherwise contain terms and conditions which are substantially similar to awards the Company previously granted at the end of the year for prior year performance. The Committee feels that RSUs ensure that the interests of senior executives are directly aligned with the long-term interests of the Company and its shareholders. The senior executive will forfeit the award if he or she is terminated or otherwise leaves the Company prior to the award vesting (with exceptions for certain termination events).

2011 Pay Mix

The Committee feels that emphasis on long-term equity compensation should be commensurate with level in the organization, so as to appropriately motivate the individuals with the most impact on driving the success of the organization and creating shareholder value. Therefore, for 2011, the Committee determined that 67% of the CEO’s compensation and, on average, 58% of the other NEOs’ compensation, will be in the form of long-term equity compensation.

The Committee and the Company anticipate the financial services industry will continue to face significant challenges in 2011. The Committee will continue to focus on the achievement of key financial and strategic business goals and monitor the compensation program to ensure it aligns the interests of our NEOs with those of our shareholders and our long-term goals while avoiding unreasonable risk.

Other Arrangements, PolicesPolicies and Practices Related to Our Executive Compensation Program

StockShare Ownership Guidelines

The Compensation Committee maintains share ownership guidelines for NEOs and other executives, and the Nominating and Governance Committee maintains guidelines for Directors. The guidelines recommend that the following multiples of annual cash base salary or, in the case of our Directors, annual retainer, be held at the close of each fiscal year:

Stock to be counted toward ownership targets includes actual Common Stock including stock owned in “street” accounts, unvested restricted stock units, and Common Stock held in the Company’s 401(k) plan. The guidelines provide that recommended ownership must be attained within 5five years of hire (or plan inception, if later). To monitor progress toward meeting the guidelines, the Compensation Committee reviews current executive ownership levels at each November meeting, ahead of year-end executive compensation decisions. The Nominating and Governance Committee reviews directorDirector ownership levels. Holdings will be calculated using the average stock price for the 10ten trading days prior to the November meeting. If a NEO or other executive is not on schedule to meet guidelines, the Committee may grant a larger portion of the NEO’s year-end award in equity. Share ownership levels are calculated and communicated annually to the Compensation Committee, including all stock holdings of directorsDirectors and executive officers. Under Company policy, executives are also prohibited from engaging in selling short or trading in derivatives with Company securities. These policies and guidelines tie a significant portion of our executive officers’ compensation directly to the Company’s stock price.

As of the close of the fiscal 2009,2010, using the 10-dayten-day average stock price prior to November 30, 2009,2010, the following multiples of cash base salary are held by each of our NEOs:

Retirement Benefits

The Company offers two programs to all employees, including NEOs, that are intended to provide post-retirement benefits. The programs are the active Discover 401(k) Plan and the frozen Discover Pension Plan.Plan, which was frozen effective December 31, 2008.

The Discover 401(k) Plan is structured with the intention of qualifying under Section 401(a) of the Internal Revenue Code (“IRC”IRC”). Under the Discover 401(k) Plan, the NEOs are permitted to make pre-tax deferrals, limited to 30% of eligible earnings, including base, salary, bonus and commissions, up to the IRC Section 401(a)(17) IRC compensation limit ($245,000 in 20092010 and 2010)2011) (“Eligible Earnings”Earnings”), and if age 50 or older as of December 31 of the plan year, catch-up contributions, each subject to the maximum allowable amount under the IRC, which is the same limit that applies to all participating employees.

Effective January 1, 2009, theThe 401(k) Plan was amended to beis a safe harbor plan by addingand includes the following terms:

The Discover Pension Plan is also structured with the intention to qualify under Section 401(a) of the IRC. Under this plan, benefits are determined with reference to each employee-participant’s career-average pay up to $170,000 per year. Benefits under the Discover Pension Plan for each calendar year of service generally equal:

(i) 1% of the participant’s eligible annual pay; plus (ii) 0.5% of the participant’s eligible annual pay that exceeds the participant’s Social Security covered compensation limit for that year, which is the average of the Social Security Taxable Wage Bases for the 35 years ending with the year the participant attains Social Security Normal Retirement Age. In 20092010 and 2010,2011, the Social Security Taxable Wage Base was $106,800.

Effective December 31, 2008, the Discover Pension Plan was “frozen” for all participants. Participant’sA participant’s accrued benefit amount at Normal Retirement Age will not change from December 31, 2008 but additional service will count towards vesting and retirement eligibility for any participant in the Discover Pension Plan as of December 31, 2008.

Named Executive Officers are not eligible for any supplemental retirement benefits.

Executive Severance and Change Inin Control Severance Policy

The Company provides severance protection to our NEOs and other executives under a change in control policy. This severance protection policy contains a double trigger, meaning that the NEO will only receive severance benefits in the event of an involuntary termination (without just cause or voluntary resignation for good reason or death or disability) within two years following or six months prior to a change in control. We

provide this protection to optimally align the interests of shareholders and executives, and to attract and retain an appropriate caliber of talent for the position. Further, similar change in control protections are commonly provided at other companies with which we compete for talent. In 2007, the Committee’s then independent advisor, Semler Brossy, conducted a full, comprehensive review of competitive practices with the Committee. Our Change in Control Severance Policy for executives, including our NEOs, was approved by the Compensation Committee on September 21, 2007. The policy was amended on June 23, 2008 to comply with new tax laws.

The Change in Control Severance Policy and the estimated payments for each of our NEOs under this policy are detailed in the “Payments“Potential Payments Upon a Termination or Change in Control Table” below. Our NEOs’ right to receive these severance benefits iswas subject to the CPP regulationsRules and as a result, none of our NEOs will bewere eligible to receive these severance benefits during the Company’s participation in the CPP. Following our repayment of the CPP investment to the UST, these restrictions no longer apply.

Accounting and Tax Information

Section 162(m) of the IRC generally disallows a tax deduction to public companies for compensation in excess of $1,000,000 per year paid to the chief executive officer or other employee who is a NEO for the taxable year by reason of being among the three highest compensated officers for the taxable year (other than the CEO or the CFO). Certain compensation, including “performance-based compensation,” may qualify for an exemption from the deduction limit if it satisfies various technical requirements under Section 162(m). With respect to our annual incentive awards, in February 20092010 the Compensation Committee approved an incentive pool for our executives that is designed to qualify compensation awarded thereunder as “performance-based.” The 20092010 incentive pool was 5%10% of our after-tax net income from continuing operations, with our named executive officersNEOs allocated no more than a specified percentage of the pool, as follows: Mr. Nelms – 22%Nelms—29%; Mr. Hochschild – 18%Hochschild—20%; Mr. Guthrie – 10%Guthrie—14%; Ms. Offereins – 10%Mr. Minetti—11%; and Mr. Minetti – 10%Talwar—11%. Actual amounts of the incentive awards were approved within these limits based on the factors described above.

As a result of our participation in the CPP, compensation in excess of $500,000 earned by any “senior executive officer” while the U.S. Treasury holdsUST held an equity or debt interest in the Company iswas not deductible, including “performance-based” compensation. For 2009, the $500,000 deductibility limit under the CPP has been pro-rated from the date of the U.S. Treasury’s investment in the Company.

The Compensation Committee views the tax deductibility of executive compensation as one factor to be considered in the context of its overall compensation philosophy. The Committee reviews each material element of compensation on a continuing basis and takes steps to assure deductibility if that can be accomplished without sacrificing flexibility and other important elements of the overall executive compensation program.

2010 Executive Compensation and Outlook

During 2009, the Committee, with assistance from its independent consultant, continued to monitor and review the compensation structure for the NEOs and competitive pay practices in order to continue to provide market competitive compensation and thereby retain a talented executive team while remaining compliant with the restrictions required under the CPP. As a result, in December 2009, the Committee restructured the components of compensation to provide a greater portion of our NEOs’ compensation in the form of equity. The restructuring resulted in an increase in base salaries with the increase to be paid in the form of Company shares. The ultimate value of the shares awards, which are subject to transferability restrictions, will depend upon the performance of the Company’s stock. A summary of the decisions is provided in the “Base Salary” section above.

The Committee and the Company anticipate the financial services industry will continue to face significant challenges in 2010. The Committee will continue to focus on the achievement of key financial and strategic business goals. We will continue to monitor the compensation program to ensure it aligns the interests of our NEOs with those of our shareholders and the long-term goals of the Company while avoiding unreasonable risk.

In October 2009, the Federal Reserve issued proposed supervisory guidance designed to ensure that incentive compensation practices of banking organizations are consistent with safety and soundness. The proposed guidance was subject to a public comment period which has expired, but no final guidance has been issued. We will continue to monitor our compensation program for consistency with the guidance.

COMPENSATION COMMITTEE REPORT

The Compensation Committee establishes the compensation program for the Chief Executive Officer and for the other named executive officers. The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis of the Company with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement, its Annual Report on Form 10-K and such other filings with the Securities and Exchange Commission as may be appropriate.

Risk Assessment

As noted above, the Company, as a participant in the CPP isduring part of fiscal 2010, was required to comply with certain requirements regarding executive compensation. Specifically, the Company’s Compensation

Committee iswas required to discuss, evaluate, and review at least every six months with the Company’s senior risk officer (“SRO”SRO”) (1) the Company’s senior executive officer (“SEO”SEO”) compensation plans, to ensure that those plans do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the Company; (2) the Company’s employee compensation plans, in light of the risks posed to the Company by such plans and how to limit such risks; and (3) the Company’s employee compensation plans, to ensure that those plans do not encourage the manipulation of the Company’s reported earnings to enhance the compensation of any employee. Further, the Compensation Committee must annually provide a narrative description of how the SEO compensation plans do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the Company (including how the SEO plans do not encourage behavior focused on short-term results rather than long-term value creation), the risks posed by the employee compensation plans and how these risks were limited (including how the employee compensation plans do not encourage behavior focused on short-term results rather than long-term value creation), and how the Company has ensured that the employee compensation plans do not encourage the manipulation of the Company’s reported earnings to enhance the compensation of any employee.

In compliance with these CPP requirements, the Compensation Committee met with and received reports from the Company’s SRO on multiple occasions during fiscal 20092010 to review the SEO compensation plans, including the Company’s Amended and Restated 2007 Omnibus Incentive Plan (the only equity incentive compensation plan operated by the

Company) and the Company’s 401(k) Plan. The Compensation Committee and the SRO reviewed the operation of the SEO compensation plans and the Company’s key business risk factors. Following its review, the Compensation Committee and the SRO concluded that the Company’s SEO compensation plans do not encourage unnecessary and excessive risk-taking that threatens the value of the Company. In making the foregoing determination, the Compensation Committee and the SRO considered the following:

In fiscal 2009,2010, the Compensation Committee and the SRO also reviewed the Company’s other employee compensation plans in addition to the compensation plans in which our SEOs participate. These employee compensation plans include a number of incentive compensation plans, in which our production (or call) center employees are eligible to participate, and sales plans, in which certain of our sales professionals are eligible to participate. The other employee compensation plans include the following: Strategic Relationships & National Accounts Plan, Credit Issuance—Business Development Plan, Prepaid—Business Development & Relationship Management Plan, Acquirer Relations—Acquisition plan, PULSE Sales Plan, PULSE Service Plan, Cardmember Assistance Plan, Customer Service & Engagement Plan, Discover Student Loans Plan, Discover Personal Loans Plan, Security Plan, and New Accounts Plan.

None of the Company’s executives, including the NEOs, are eligible to participate in these production center or sales compensation plans; however, certain of the Company’s non-executive employees who participate in the production center or sales compensation plans are eligible to participate in the same compensation plans as the NEOs. The Compensation Committee and the SRO reviewed the operation of these employee compensation plans and the Company’s key business risk factors. Following its review, the Compensation Committee and the SRO concluded that the Company’s other employee compensation plans do not present unnecessary risks and do not encourage the manipulation of reported earnings to enhance the compensation of any employee. In making the foregoing determination, the Compensation Committee and the SRO considered the following:

The Compensation Committee certifies that: (1) it has reviewed with the SRO the SEO compensation plans and has made all reasonable efforts to ensure that these plans do not encourage SEOs to take unnecessary and excessive risks that threaten the value of the Company; (2) it has reviewed with the SRO the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the

Company; and (3) it has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of the Company to enhance the compensation of any employee.

Submitted by the Compensation Committee of the Board of Directors:

Gregory C. Case (Chair)

Jeffrey S. Aronin

Robert M. Devlin

Richard H. Lenny*

20092010 EXECUTIVE COMPENSATION

The narrative, tabletables and footnotes below describe the total compensation paid for fiscal 20092010 to the Chief Executive Officer, Chief Financial Officer and the next three most highly compensated individuals (collectively, the “Named Executive Officers” or “NEOs”) who were serving as executive officers of Discover Financial Servicesthe Company on November 30, 2009,2010, the last day of the fiscal year.

20092010 SUMMARY COMPENSATION TABLE

The following tables containtable contains information regarding the components of total compensation of the Named Executive Officers for the Company’s fiscal years ended November 30, 2007,2008, November 30, 20082009 and November 30, 2009.2010. The information included in this table reflects compensation earned by the Named Executive Officers for services rendered to the Company during the respective periods.