The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this quarterly report and the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 2, 2009, and our Current Report on Form 8-K, filed with the SEC on May 22, 2009, which re-issued certain items of our Annual Report on Form 10-K.

Year in Review Highlights

Our results for the first nine months of 2009 included the following new and renewed agreements:

• In January 2009, we announced the signing of a multi-year agreement with HSN, an interactive lifestyle network and retail destination, to provide both co-brand and private label card services. In addition, we purchased HSN's existing private label card portfolio in December 2008, the conversion of which was completed in the first quarter of 2009.

• In February 2009, we announced that Shell Canada Products, a top-5 AIR MILES Reward Program sponsor and a manufacturer, distributor, and marketer of refined petroleum products in Canada, had signed a multi-year renewal agreement.

• In February 2009, we announced the signing of a multi-year agreement with America's Gardening Resource, a manufacturer and retailer of gardening tools, products, and supplies, for Epsilon to build and maintain its customer marketing database.

• In February 2009, we announced the signing of a long-term agreement with Haband, a multi-channel retailer of men's and women's apparel and home goods via catalog and online, to provide private label credit card services.

• In March 2009, our private label credit card banking subsidiary, World Financial Network National Bank, completed the renewal of its $550.0 million conduit facility with Barclays Capital, Royal Bank of Canada, and JP Morgan, increasing its capacity to $666.7 million.

• In April 2009, we announced the signing of a multi-year contract extension with Pacific Sunwear of California, a specialty retailer of casual apparel, accessories, and footwear, to continue providing private label credit card services.

• In April 2009, as part of the securitization program for our private label credit card banking subsidiary, World Financial Network Credit Card Master Note Trust issued $708.9 million of term asset-backed securities to investors, including those participating in the U.S. government's Term Asset-Backed Securities Loan Facility, or TALF program.

• In April 2009, we announced that Goodyear Canada, one of the original 13 AIR MILES Reward Program sponsors and retailer of automotive tires and after-market automotive products, had signed a multi-year renewal agreement.

• In May 2009, we announced that Epsilon added 19 new clients to its permission-based email and digital solutions business during the first quarter of 2009.

• In May 2009, we announced the signing of a long-term expansion and extension agreement with Tween Brands, a specialty retailer, to continue to provide private label credit card services to its Limited Too / Justice brands.

• In May 2009, we completed a new three-year term credit facility.

• In May 2009, we announced the signing of a multi-year extension agreement with National Geographic Society for Epsilon to continue providing database hosting and marketing services.

• In July 2009, we announced an expansion agreement with pharmaceutical company, Astra Zeneca, for Epsilon to provide comprehensive database and permission-based email marketing solutions.

• In July 2009, we announced BMO Bank of Montreal's initiative to enhance its AIR MILES credit card program for Canadian BMO MasterCard ® cardholders and AIR MILES reward miles collectors to provide an opportunity to substantially increase miles issued.

• In July 2009, we announced a multi-year agreement to provide private label credit card services to Big M, Inc., a multi-brand specialty retailer, and to acquire its existing private label credit card portfolio.

• In August 2009, we announced a long-term agreement with Charming Shoppes, Inc., a multi-brand apparel retailer, to assume operation of Charming Shoppes' private label credit card programs and to acquire the credit card files and service center operations associated with Charming Shoppes' branded card programs. The acquisition was completed in October 2009.

• In August 2009, as part of the securitization program for our private label credit card banking subsidiary, World Financial Network Credit Card Master Note Trust issued $949.3 million of term asset-backed securities to investors, including those participating in the U.S. government's TALF program.

• In September 2009, we announced a multi-year extension agreement with Reed Business Information US, a business-to-business information provider, for Epsilon to continue providing permission-based email marketing services.

• In September 2009, we announce a multi-year agreement with business support services provider, Pacific Dental Services to provide patient financing and marketing services via a private label credit card program for dental and orthodontic procedures performed in affiliated dental practices.

• In September 2009, our private label credit card banking subsidiary, World Financial Network National Bank, completed the renewal of its $1.3 billion conduit facility, increasing its capacity to $1.5 billion and extending its maturity and our industrial bank, World Financial Capital Bank, renewed its $167.1 million conduit facility increasing its capacity to $200.0 million and extending its maturity.

In October 2009, we announced an expansion agreement with tobacco company, R.J. Reynolds, for Epsilon to host its consumer database and support its consumer communication programs and that LoyaltyOne acquired a 29 percent interest in CBSM - Companhia Brasileira De Servicos De Marketing, operator of Brazil's dotz loyalty program.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable GAAP financial measure, plus stock compensation expense, provision for income taxes, interest expense, net, loss on the sale of assets, merger and other costs, depreciation and other amortization and amortization of purchased intangibles.

We use adjusted EBITDA as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management. Adjusted EBITDA is considered

an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets, the impact of related impairments, as well as asset sales through other financial measures, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense. Stock compensation expense is not included in the measurement of segment adjusted EBITDA provided to the chief operating decision maker for purposes of assessing segment performance and decision making with respect to resource allocations. Therefore, we believe that adjusted EBITDA provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either operating income or net income as an indicator of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA is not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The adjusted EBITDA measures presented in this Quarterly Report on Form 10-Q may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.

                                            Three Months Ended          Nine Months Ended
                                              September 30,               September 30,
                                             2009        2008           2009        2008
                                                           (In thousands)
  Income from continuing operations       $   45,796   $  58,930      $ 118,185   $ 183,578
  Stock compensation expense                  14,608      17,191         43,265      31,193
  Provision for income taxes                   9,931      37,556         55,826     114,603
  Interest expense, net                       39,044      23,325        105,226      54,370
  Loss on the sale of assets                      -           -              -        1,052
  Merger and other costs (income)(1)             878      (1,062 )        3,890       8,301
  Depreciation and other amortization         15,397      17,363         45,816      52,703
  Amortization of purchased intangibles       15,770      16,703         45,833      50,682

  Adjusted EBITDA                         $  141,424   $ 170,006      $ 418,041   $ 496,482

(1) Represents expenditures directly associated with the proposed merger of the Company with an affiliate of The Blackstone Group and compensation charges related to the departure of certain associates.

Results of Continuing Operations

Three months ended September 30, 2009 compared to the three months ended
September 30, 2008



                                                Three Months Ended
                                                  September 30,                         Change
                                             2009               2008                $               %
                                                       (In thousands, except percentages)
Revenue:
Loyalty Services                          $   177,008        $   187,657        $ (10,649 )        (5.7 )%
Epsilon Marketing Services                    131,926            130,895            1,031           0.8
Private Label Services                         96,745             94,678            2,067           2.2
Private Label Credit                          165,173            182,357          (17,184 )        (9.4 )
Corporate/Other                                 5,813              7,689           (1,876 )       (24.4 )
Eliminations                                  (93,479 )          (92,051 )         (1,428 )         1.6

Total                                     $   483,186        $   511,225        $ (28,039 )        (5.5 )%

Adjusted EBITDA(1):
Loyalty Services                          $    53,186        $    49,018        $   4,168           8.5 %
Epsilon Marketing Services                     35,196             40,097           (4,901 )       (12.2 )
Private Label Services                         27,534             30,562           (3,028 )        (9.9 )
Private Label Credit                           41,696             59,666          (17,970 )       (30.1 )
Corporate/Other                               (16,188 )           (9,337 )         (6,851 )        73.4

Total                                     $   141,424        $   170,006        $ (28,582 )       (16.8 )%

Stock compensation expense:
Loyalty Services                          $     3,847        $     3,957        $    (110 )        (2.8 )%
Epsilon Marketing Services                      1,705              3,545           (1,840 )       (51.9 )
Private Label Services                          1,468              2,292             (824 )       (36.0 )
Private Label Credit                              295                513             (218 )       (42.5 )
Corporate/Other                                 7,293              6,884              409           5.9

Total                                     $    14,608        $    17,191        $  (2,583 )       (15.0 )%

Depreciation and amortization:
Loyalty Services                          $     5,966        $     7,016        $  (1,050 )       (15.0 )%
Epsilon Marketing Services                     18,003             18,681             (678 )        (3.6 )
Private Label Services                          2,357              2,226              131           5.9
Private Label Credit                            3,346              2,955              391          13.2
Corporate/Other                                 1,495              3,188           (1,693 )       (53.1 )

Total                                     $    31,167        $    34,066        $  (2,899 )        (8.5 )%

Operating income from continuing
operations:
Loyalty Services                          $    43,373        $    38,045        $   5,328          14.0 %
Epsilon Marketing Services                     15,488             17,876           (2,388 )       (13.4 )
Private Label Services                         23,709             26,044           (2,335 )        (9.0 )
Private Label Credit                           38,055             56,198          (18,143 )       (32.3 )
Corporate/Other                               (25,854 )          (18,352 )         (7,502 )        40.9

Total                                     $    94,771        $   119,811        $ (25,040 )       (20.9 )%

Adjusted EBITDA margin(2):
Loyalty Services                                 30.0 %             26.1 %            3.9 %
Epsilon Marketing Services                       26.7               30.6             (3.9 )
Private Label Services                           28.5               32.3             (3.8 )
Private Label Credit                             25.2               32.7             (7.5 )

Total                                            29.3 %             33.3 %           (4.0 )%

Segment operating data:
Private label statements generated             31,301             30,661              640           2.1 %
Credit sales                              $ 1,921,625        $ 1,694,113        $ 227,512          13.4
Average managed receivables               $ 4,301,211        $ 3,840,184        $ 461,027          12.0
AIR MILES reward miles issued               1,169,492          1,137,673           31,819           2.8
AIR MILES reward miles redeemed               777,422            736,789           40,633           5.5 %

(1) Adjusted EBITDA is equal to income from continuing operations, plus stock compensation expense, provision for income taxes, interest expense, net, loss on the sale of assets, merger and other costs, depreciation and amortization.

(2) Adjusted EBITDA margin is adjusted EBITDA divided by revenue. Management uses adjusted EBITDA margin to analyze the operating performance of the segments and the impact revenue growth has on adjusted operating expenses. For a definition of adjusted EBITDA and a reconciliation to net income, the most directly comparable GAAP financial measure, see "Use of Non-GAAP Financial Measures" included in this report.

Revenue. Total revenue decreased $28.0 million, or 5.5%, to $483.2 million for the three months ended September 30, 2009 from $511.2 million for the comparable period in 2008. The decrease was due to the following:

• Loyalty Services. Revenue decreased $10.6 million, or 5.7%, to $177.0 million for the three months ended September 30, 2009. The decrease in revenue for the period was driven by the change in foreign currency exchange rates which negatively impacted revenue by approximately $9.4 million. In Canadian dollars, revenue was generally flat, as increases in service revenue of CAD $3.6 million and investment revenue of CAD $1.3 million were offset by a decline in database marketing fees of CAD $5.2 million.

• Epsilon Marketing Services. Revenue increased $1.0 million, or 0.8%, to $131.9 million for the three months ended September 30, 2009. Revenue was relatively flat as increases from the segment's largest service offerings (marketing database services, analytical services and digital) of $6.3 million, resulting from additional client signings, were largely offset by declines from our proprietary data services of $4.7 million, as Abacus was impacted by the weak economic environment experienced by retailers.

• Private Label Services. Revenue increased $2.1 million, or 2.2%, to $96.7 million for the three months ended September 30, 2009 as a result of an increase in servicing revenue of $1.4 million and an increase in services enhancement revenue of $0.5 million.

• Private Label Credit. Revenue decreased $17.2 million, or 9.4%, to $165.2 million for the three months ended September 30, 2009. The decrease was due to a $22.7 million decrease in securitization income and finance charges, net, resulting from increased credit losses of 240 basis points. The impact of the higher credit losses was in part mitigated by positive trends in portfolio growth of 12.0% and credit sales growth of 13.4%.

• Corporate/Other. Revenue decreased $1.9 million to $5.8 million for the three months ended September 30, 2009 from $7.7 million in the comparable period in 2008 as a result of a reduction in transition services provided to the acquirers of our merchant services and utility services businesses.

Adjusted EBITDA. For purposes of the discussion below, adjusted EBITDA is equal to income from continuing operations, plus stock compensation expense, provision for income taxes, interest expense, net, loss on the sale of assets, merger and other costs, depreciation and amortization. Total adjusted EBITDA decreased $28.6 million, or 16.8%, to $141.4 million for the three months ended September 30, 2009. Total adjusted EBITDA margin, which for purposes of the discussion below is equal to adjusted EBITDA divided by revenue, decreased to 29.3% for the three months ended September 30, 2009 from 33.3% for the comparable period in 2008. The changes in adjusted EBITDA and adjusted EBITDA margins are due to the following:

• Loyalty Services. Adjusted EBITDA increased $4.2 million, or 8.5%, to $53.2 million for the three months ended September 30, 2009. The increase was driven by reductions in operating expenses, including declines in payroll and benefits expense and data processing expense. These reductions also positively impacted our adjusted EBITDA margin, which increased to 30.0% for the three months ended September 30, 2009 as compared to 26.1% in the comparable period in 2008.

• Epsilon Marketing Services. Adjusted EBITDA decreased $4.9 million, or 12.2%, to $35.2 million and adjusted EBITDA margin decreased to 26.7% from 30.6% for the three months ended September 30, 2009. The decreases in adjusted EBITDA and adjusted EBITDA margin were driven by weakness in our data service offerings and agency business due to the recession, which resulted in a $5.6 million and a $1.3 million decline in adjusted EBITDA, respectively. This was offset in part by double digit growth in the segment's largest service offerings (marketing database services, analytical services and digital).

• Private Label Services. Adjusted EBITDA decreased by $3.0 million, or 9.9%, to $27.5 million for the three months ended September 30, 2009. Adjusted EBITDA margin decreased to 28.5% for the three months ended September 30, 2009 as compared to 32.3% in the comparable period in 2008. Adjusted EBITDA and adjusted EBITDA margin were negatively impacted by an increase in operating expenses

• Private Label Credit. Adjusted EBITDA decreased $18.0 million, or 30.1%, to $41.7 million for the three months ended September 30, 2009. Adjusted EBITDA margin decreased to 25.2% for the three months ended September 30, 2009 as compared to 32.7% in the comparable period in 2008. The decreases were the result of the increase in credit losses as previous described.

• Corporate/Other. Adjusted EBITDA decreased $6.9 million, or 73.4%, to a loss of $16.2 million for the three months ended September 30, 2009. This decrease was the result of information technology costs incurred to support the transition services provided to the acquirers of the merchant services and utility services businesses. Prior to their sale, such costs had been allocated to the respective businesses.

Stock compensation expense. Stock compensation expense decreased $2.6 million, or 15.0%, to $14.6 million for the three months ended September 30, 2009. The decrease was the result of a reduction in expense of $6.9 million related to performance-based restricted stock unit awards that are no longer expected to vest and for which no expense was recognized during the three months ended September 30, 2009. This increase was partially offset by an increase in expense of $3.1 million related to equity awards issued to associates in 2009.

Depreciation and Amortization. Depreciation and amortization decreased $2.9 million, or 8.5%, to $31.2 million for the three months ended September 30, 2009 primarily due to a $2.0 million decrease in depreciation and other amortization and a $0.9 million decrease in amortization of purchased intangibles as certain assets became fully amortized.

Merger and other costs. Merger and other costs were $0.9 million for the three months ended September 30, 2009 compared to income of $1.1 million for the comparable period in 2008. Merger and other costs for the three months ended September 30, 2009 represent compensation charges related to the severance of a certain executive. For the comparable period in 2008, amounts include the receipt of $(3.0) million for reimbursement of costs incurred by us related to the Blackstone entities' financing of the proposed merger offset by $0.9 million of expenditures directly associated with the proposed merger of us with an affiliate of The Blackstone Group and approximately $1.0 million of other non-routine costs associated with the disposition of non-core operations.

Operating Income. Operating income decreased $25.0 million, or 20.9%, to $94.8 million for the three months ended September 30, 2009 from $119.8 million for the comparable period in 2008. Operating income decreased due to the revenue and expense factors discussed above.

Interest Expense, net. Interest expense, net increased $15.7 million, or 67.4%, to $39.0 million for the three months ended September 30, 2009 from $23.3 million for the comparable period in 2008. This increase can be attributed in part to additional interest expense of $13.5 million associated with our convertible senior notes due 2013 and 2014, which were issued in July 2008 and June 2009, respectively. Interest expense on certificates of deposit also increased $4.7 million as a result of higher average balances during the three months ended September 30, 2009 than during the comparable period in 2008. Interest expense on our credit facilities and senior notes decreased $5.3 million as a result of lower interest rates and the repayment of $250.0 million aggregate principal amount of 6.00% Series A senior notes in May 2009. Interest income decreased $2.3 million due to lower average balances of our short term cash investments, as well as a decrease in the yield earned on those short term cash investments.

Taxes. Income tax expense decreased $27.7 million to $9.9 million for the three months ended September 30, 2009 from $37.6 million for the comparable period in 2008 due to a decrease in taxable income and a decrease in our effective tax rate to 17.8% for the three months ended September 30, 2009 from 38.9% for the comparable period in 2008. During the three months ended September 30, 2009, we recognized an

$11.7 million tax benefit related to previously established tax reserves to cover various uncertain tax positions, including the potential impact related to the timing of certain taxable income recognition. Based on a recent United States Tax Court decision, statute of limitations expirations, and other factors, the uncertainty around this taxable income recognition has been removed and, as such, the related reserve, primarily associated with accrued interest, is no longer required.

Discontinued Operations

In February 2009, we completed the plan to dispose of our merchant services and utility services businesses. As a result, there was no activity associated with discontinued operations in our unaudited condensed consolidated statement of income for the three months ended September 30, 2009. In the comparable period in 2008, income from discontinued operations was $5.9 million, which was the result of a tax benefit resulting from our ability to utilize previously unrealized tax benefits due to the sale of the majority of our utility services business.

Results of Continuing Operations

Nine months ended September 30, 2009 compared to the nine months ended
September 30, 2008



                                                    Nine Months Ended
                                                      September 30,                     Change
                                                  2009             2008              $             %
                                                         (In thousands, except percentages)
Revenue:
Loyalty Services                               $   504,985      $   559,490      $ (54,505 )      (9.7 )%
Epsilon Marketing Services                         372,495          361,744         10,751         3.0
Private Label Services                             280,977          285,028         (4,051 )      (1.4 )
Private Label Credit                               507,863          579,011        (71,148 )     (12.3 )
Corporate/Other                                     28,940            9,760         19,180           * *
Eliminations                                      (271,408 )       (277,348 )        5,940        (2.1 )

Total                                          $ 1,423,852      $ 1,517,685      $ (93,833 )      (6.2 )%

Adjusted EBITDA(1):
. . .