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 six 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 June 2009, we completed an offering of $345.0 million aggregate principal amount of convertible senior notes due 2014, which included the exercise of an over-allotment option of $45.0 million.

Additionally, in July 2009, we announced an expansion agreement with pharmaceutical company, Astra Zeneca, to provide comprehensive database and permission-based email marketing solutions; 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; and BMO Bank of Montreal's initiative to enhance its AIR MILES credit card program for Canadian BMO MasterCardฎ cardholders and AIR MILES reward miles collectors to provide an opportunity to substantially increase miles issued.

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 performance measures 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       Six Months Ended
                                                  June 30,                June 30,
                                              2009        2008        2009        2008
                                                           (In thousands)
   Income from continuing operations       $   29,436   $  61,946   $  72,389   $ 124,648
   Stock compensation expense                  10,698       7,726      28,657      14,002
   Provision for income taxes                  18,662      38,289      45,895      77,047
   Interest expense, net                       34,575      13,942      66,182      31,045
   Loss on the sale of assets                      -           -           -        1,052
   Merger and other costs(1)                       64       5,692       3,012       9,363
   Depreciation and other amortization         15,333      17,578      30,419      35,340
   Amortization of purchased intangibles       15,815      16,792      30,063      33,979

   Adjusted EBITDA                         $  124,583   $ 161,965   $ 276,617   $ 326,476

(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 June 30, 2009 compared to the three months ended June 30,
2008



                                                Three Months Ended
                                                     June 30,                           Change
                                             2009               2008                $               %
                                                       (In thousands, except percentages)
Revenue:
Loyalty Services                          $   167,346        $   200,027        $ (32,681 )       (16.3 )%
Epsilon Marketing Services                    123,003            115,371            7,632           6.6
Private Label Services                         85,844             95,801           (9,957 )       (10.4 )
Private Label Credit                          156,228            187,570          (31,342 )       (16.7 )
Corporate/Other                                10,690              1,613            9,077            **
Eliminations                                  (82,701 )          (93,172 )         10,471         (11.2 )

Total                                     $   460,410        $   507,210        $ (46,800 )        (9.2 )%

Adjusted EBITDA:
Loyalty Services                          $    38,334        $    53,398        $ (15,064 )       (28.2 )%
Epsilon Marketing Services                     30,383             26,449            3,934          14.9
Private Label Services                         24,610             29,979           (5,369 )       (17.9 )
Private Label Credit                           38,567             63,617          (25,050 )       (39.4 )
Corporate/Other                                (7,311 )          (11,478 )          4,167         (36.3 )

Total                                     $   124,583        $   161,965        $ (37,382 )       (23.1 )%

Stock compensation expense:
Loyalty Services                          $     2,257        $     2,998        $    (741 )       (24.7 )%
Epsilon Marketing Services                      1,901                673            1,228         182.5
Private Label Services                          1,323              1,228               95           7.7
Private Label Credit                              291                384              (93 )       (24.2 )
Corporate/Other                                 4,926              2,443            2,483         101.6

Total                                     $    10,698        $     7,726        $   2,972          38.5 %

Depreciation and amortization:
Loyalty Services                          $     4,957        $     8,099        $  (3,142 )       (38.8 )%
Epsilon Marketing Services                     17,825             18,917           (1,092 )        (5.8 )
Private Label Services                          2,316              2,225               91           4.1
Private Label Credit                            3,458              2,841              617          21.7
Corporate/Other                                 2,592              2,288              304          13.3

Total                                     $    31,148        $    34,370        $  (3,222 )        (9.4 )%

Adjusted operating expenses(1):
Loyalty Services                          $   129,012        $   146,629        $ (17,617 )       (12.0 )%
Epsilon Marketing Services                     92,620             88,922            3,698           4.2
Private Label Services                         61,234             65,822           (4,588 )        (7.0 )
Private Label Credit                          117,661            123,953           (6,292 )        (5.1 )
Corporate/Other                                18,001             13,091            4,910          37.5
Eliminations                                  (82,701 )          (93,172 )         10,471         (11.2 )

Total                                     $   335,827        $   345,245        $  (9,418 )        (2.7 )%

Operating income from continuing
operations:
Loyalty Services                          $    31,120        $    42,301        $ (11,181 )       (26.4 )%
Epsilon Marketing Services                     10,657              4,221            6,436         152.5
Private Label Services                         20,971             25,886           (4,915 )       (19.0 )
Private Label Credit                           34,818             60,392          (25,574 )       (42.3 )
Corporate/Other                               (14,893 )          (18,623 )          3,730         (20.0 )

Total                                     $    82,673        $   114,177        $ (31,504 )       (27.6 )%

Adjusted EBITDA margin(2):
Loyalty Services                                 22.9 %             26.7 %           (3.8 )%
Epsilon Marketing Services                       24.7               22.9              1.8
Private Label Services                           28.7               31.3             (2.6 )
Private Label Credit                             24.7               33.9             (9.2 )

Total                                            27.1 %             31.9 %           (4.8 )%

Segment operating data:
Private label statements generated             31,378             30,845              533           1.7 %
Credit sales                              $ 1,976,929        $ 1,863,821        $ 113,108           6.1
Average managed receivables               $ 4,207,669        $ 3,831,367        $ 376,302           9.8
AIR MILES reward miles issued               1,122,576          1,139,923          (17,347 )        (1.5 )
AIR MILES reward miles redeemed               756,933            786,259          (29,326 )        (3.7 )%

(1) Adjusted operating expenses excludes stock compensation expense, depreciation, amortization expense, loss on sale of assets, and merger and other costs.

(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.

** Not meaningful.

Revenue. Total revenue decreased $46.8 million, or 9.2%, to $460.4 million for the three months ended June 30, 2009 from $507.2 million for the comparable period in 2008. The decrease was due to the following:

• Loyalty Services. Revenue decreased $32.7 million, or 16.3%, to $167.3 million for the three months ended June 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 $22.0 million and a decline in database marketing fees of $12.6 million.

• Epsilon Marketing Services. Revenue increased $7.6 million, or 6.6%, to $123.0 million for the three months ended June 30, 2009. Revenue from the segment's largest service offerings (marketing database services, analytical services and interactive communications) increased as compared to the three months ended June 30, 2008 by 7.3%, or $5.2 million, resulting from additional client signings and our large clients maintaining their commitments to their significant loyalty platforms. Revenue from our proprietary data services also increased by $7.1 million including a $9.9 million increase in targeted and survey response database marketing fees, offset by a decline of $2.9 million from data services provided by Abacus where retail client bankruptcies led to lower volumes. These increases in revenue were offset by a decline of $4.6 million in our agency business.

• Private Label Services. Revenue decreased $10.0 million, or 10.4%, to $85.8 million for the three months ended June 30, 2009 as a result of a decrease in servicing revenue of $10.5 million.

• Private Label Credit. Revenue decreased $31.3 million, or 16.7%, to $156.2 million for the three months ended June 30, 2009. The decline was primarily due to a $35.8 million decrease in securitization income and finance charges, net, resulting from higher credit losses of approximately $39.4 million or 310 basis points. The impact of the higher credit losses was in part mitigated by positive trends in portfolio growth of 9.8%, credit sales growth of 6.1%, and an improvement in our cost of funds of 40 basis points.

• Corporate/Other. Revenue increased $9.1 million to $10.7 million from $1.6 million in the comparable period in 2008 as a result of transition services provided to the acquirers of our merchant services and utility services businesses.

Adjusted Operating Expenses. For purposes of the discussion below, total adjusted operating expenses excludes stock compensation expense, depreciation expense, amortization expense, loss on sale of assets, and merger and other costs. Total adjusted operating expenses, as defined, decreased $9.4 million, or 2.7%, to $335.8 million for the three months ended June 30, 2009. Total adjusted EBITDA margin decreased to 27.1% for the three months ended June 30, 2009 from 31.9% for the comparable period in 2008. The decrease in adjusted operating expenses and decrease in adjusted EBITDA margins are due to the following:

• Loyalty Services. Adjusted operating expenses, as defined, decreased $17.6 million, or 12.0%, to $129.0 million for the three months ended June 30, 2009. The decrease was driven by the change in foreign currency exchange rates which had a $17.4 million positive impact on adjusted operating expenses, as defined. Additionally, with the decline in database marketing fees, associated costs were also reduced. These declines were offset in part by foreign currency exchange losses of approximately $15.0 million associated with certain U.S. dollar denominated investments held in Canada. The foreign currency exchange losses also negatively impacted our adjusted EBITDA margin which decreased to 22.9% for the three months ended June 30, 2009 as compared to 26.7% in the comparable period in 2008.

• Epsilon Marketing Services. Adjusted operating expenses, as defined, increased $3.7 million, or 4.2%, to $92.6 million for the three months ended June 30, 2009. The increase was the result of additional adjusted operating costs associated with growth in both our largest services offerings, as discussed above, and our proprietary data services of $2.9 million and $5.9 million, respectively, for the three months ended June 30, 2009. This increase was offset in part by a reduction in adjusted operating expenses, as defined, in our agency business of $5.0 million related to cost reductions resulting from this division's decline in revenue. Adjusted EBITDA margin increased to 24.7% for the three months

• Private Label Services. Adjusted operating expenses, as defined, decreased by $4.6 million, or 7.0%, to $61.2 million for the three months ended June 30, 2009. The decrease was the result of a decrease in salaries and benefits expense of $5.3 million. Adjusted EBITDA margin decreased to 28.7% for the three months ended June 30, 2009 as compared to 31.3% in the comparable period in 2008. Our adjusted EBITDA margin was negatively impacted by the decrease in revenue as previously described.

• Private Label Credit. Adjusted operating expenses, as defined, decreased $6.3 million, or 5.1%, to $117.7 million for the three months ended June 30, 2009. The decrease was primarily related to lower servicing costs charged by our Private Label Services segment of $10.5 million offset in part by increased securitization fees of $1.8 million and customer care expenses of $2.0 million. Adjusted EBITDA margin decreased to 24.7% for the three months ended June 30, 2009 as compared to 33.9% in the comparable period in 2008. Our adjusted EBITDA margin was negatively impacted by the decline in revenue as previously described.

• Corporate/Other. Adjusted operating expenses, as defined, increased $4.9 million, or 37.5%, to $18.0 million for the three months ended June 30, 2009. This increase 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. Subsequent to the sale of the merchant services and utility services businesses, this segment includes both the revenue and expenses associated with the transition services agreements.

Stock compensation expense. Stock compensation expense increased $3.0 million, or 38.5%, to $10.7 million for the three months ended June 30, 2009. Stock compensation expense in the comparable period in 2008 was impacted by the reversal of $4.8 million of expense related to awards that were no longer expected to vest. This impact was offset in part by a reduction in stock compensation expense from certain awards which had fully amortized prior to June 30, 2009.

Depreciation and Amortization. Depreciation and amortization decreased $3.2 million, or 9.4%, to $31.1 million for the three months ended June 30, 2009 primarily due to a $2.2 million decrease in depreciation and other amortization and a $1.0 million decrease in amortization of purchased intangibles as certain assets became fully amortized.

Merger and other costs. Merger and other costs were $0.1 million for the three months ended June 30, 2009 which represented legal costs associated with the termination of our merger with an affiliate of The Blackstone Group.

Operating Income. Operating income decreased $31.5 million, or 27.6%, to $82.7 million for the three months ended June 30, 2009 from $114.2 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 $20.6 million, or 148.0%, to $34.6 million for the three months ended June 30, 2009 from $13.9 million for the comparable period in 2008. This increase can be attributed in part to interest expense of $16.7 million in the current period, 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 increased $4.1 million primarily as a result of higher average balances during the three months ended June 30, 2009 than during the comparable period in 2008. Interest expense on our credit facilities decreased $3.0 million as a result of lower interest rates. Interest income decreased $2.9 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 $19.6 million to $18.7 million for the three months ended June 30, 2009 from $38.3 million for the comparable period in 2008 due to a decrease in taxable income partially offset by an increase in our effective tax rate to 38.8% for the three months ended June 30, 2009 from 38.2% for the comparable period in 2008.

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 June 30, 2009. In the comparable period in 2008, the loss from discontinued operations was $15.0 million comprised of impairment charges within our utility services business of $45.4 million offset in part by a pre-tax gain of $29.4 million from the sale of our merchant services business in May 2008.

Results of Continuing Operations

Six months ended June 30, 2009 compared to the six months ended June 30, 2008



                                                 Six Months Ended
                                                     June 30,                           Change
                                             2009               2008                $               %
                                                       (In thousands, except percentages)
Revenue:
Loyalty Services                          $   327,977        $   371,833        $ (43,856 )       (11.8 )%
Epsilon Marketing Services                    240,569            230,849            9,720           4.2
Private Label Services                        184,232            190,350           (6,118 )        (3.2 )
Private Label Credit                          342,690            396,654          (53,964 )       (13.6 )
Corporate/Other                                23,127              2,071           21,056            **
Eliminations                                 (177,929 )         (185,297 )          7,368          (4.0 )

Total                                     $   940,666        $ 1,006,460        $ (65,794 )        (6.5 )%

Adjusted EBITDA:
Loyalty Services                          $    93,233        $    94,295        $  (1,062 )        (1.1 )%
Epsilon Marketing Services                     52,521             50,092            2,429           4.8
Private Label Services                         54,466             56,813           (2,347 )        (4.1 )
Private Label Credit                           96,430            150,710          (54,280 )       (36.0 )
Corporate/Other                               (20,033 )          (25,434 )          5,401         (21.2 )

Total                                     $   276,617        $   326,476        $ (49,859 )       (15.3 )%

Stock compensation expense:
Loyalty Services                          $     6,281        $     4,429        $   1,852          41.8 %
Epsilon Marketing Services                      5,225              1,546            3,679         238.0
Private Label Services                          3,661              1,985            1,676          84.4
Private Label Credit                              970                761              209          27.5
Corporate/Other                                12,520              5,281            7,239         137.1

Total                                     $    28,657        $    14,002        $  14,655         104.7 %

Depreciation and amortization:
Loyalty Services                          $     9,911        $    16,665        $  (6,754 )       (40.5 )%
Epsilon Marketing Services                     33,832             38,059           (4,227 )       (11.1 )
Private Label Services                          4,610              4,499              111           2.5
. . .