SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              --------------------

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

   For the fiscal year ended                                   001-12351
    December 31, 1998                                    Commission file number
                              --------------------

                              METRIS COMPANIES INC.
             (Exact name of registrant as specified in its charter)

       Delaware                                          41-1849591
(State of Incorporation)                    (I.R.S. Employer Identification No.)

       600 South Highway 169, Suite 1800, St. Louis Park, Minnesota 55426
                    (Address of principal executive offices)

                                 (612) 525-5020
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to section 12(g) of the Act:

                          Common Stock, $.01 Par Value

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X  No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

As of February 26, 1999, 19,261,195 shares of the Registrant's Common Stock were
outstanding   and  the   aggregate   market   value  of  Common  Stock  held  by
non-affiliates  of the Registrant on that date was  approximately  $729,500,000,
based upon the closing  price on The Nasdaq Stock  Market(R) on February 26,
1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain  portions  of the  Annual  Report  to  Shareholders  for the year  ended
December 31, 1998, are incorporated by reference in Parts II and IV.

Certain  portions of the Proxy  Statement for the Annual Meeting of Shareholders
of Metris  Companies  Inc. to be held on May 11, 1999,  which will be filed with
the Securities and Exchange  Commission within 120 days after December 31, 1998,
are incorporated by reference in Part III.


<PAGE>



                                TABLE OF CONTENTS


PART I
                                                                      Page

Item 1.    Business......................................................3

Item 2.    Properties...................................................26

Item 3.    Legal Proceedings............................................26

Item 4.    Submission of Matters to a Vote of Security Holders..........27


PART II


Item 5.    Market for Registrant's Common Equity and Related
           Stockholder Matters..........................................27

Item 6.    Selected Financial Data......................................27

Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations..........................27

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk....27

Item 8.    Financial Statements and Supplementary Data..................28

Item 9.    Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure..........................61


PART III


Item 10.   Directors and Executive Officers of the Registrant...........61

Item 11.   Executive Compensation.......................................61

Item 12.   Security Ownership of Certain Beneficial
           Owners and Management........................................61

Item 13.   Certain Relationships and Related Transactions...............61


PART IV


Item 14.   Exhibits, Financial Statement Schedules
           and Reports on Form 8-K......................................61

Signatures..............................................................63

Exhibit Index...........................................................65


<PAGE>


PART I

Item 1.  Business

         Metris  Companies Inc. ("MCI" and collectively  with its  subsidiaries,
the  "Company")  is an  information-based  direct  marketer of  consumer  credit
products and fee-based  services  primarily to moderate  income  consumers.  The
Company's  consumer credit products are primarily  unsecured credit cards issued
by its  subsidiary,  Direct  Merchants  Credit Card Bank,  National  Association
("Direct  Merchants  Bank").  The  Company's  customers  and  prospects  include
individuals  for  whom  credit  bureau   information  is  available   ("External
Prospects") and existing customers of a former affiliate,  Fingerhut Corporation
("Fingerhut" or "Fingerhut  Customers") from the Fingerhut database. The Company
markets its  fee-based  services,  including  debt waiver  programs,  membership
clubs,  extended service plans,  and third party  insurance,  to its credit card
customers and customers of third parties.

         MCI was incorporated in Delaware on August 20, 1996. The Company became
a publicly  held  company in October  1996 after  completing  an initial  public
offering.  The Company's  principal  subsidiaries are Direct Merchants Bank, and
Metris Direct, Inc. Prior to its name change in August 1996, Metris Direct, Inc.
was known as Fingerhut Financial Services Corporation.  During the third quarter
of 1998,  Fingerhut  Companies,  Inc. ("FCI") received written approval from the
Internal  Revenue  Service to  distribute  its  interest in the Company to FCI's
shareholders in a tax free spin off (the "Spin Off").

Business Segments

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
the Statement of Financial  Accounting  Standards  ("SFAS") No. 131 "Disclosures
about  Segments  of an  Enterprise  and  Related  Information."  This  statement
establishes  standards for the way public  enterprises  report information about
operating  segments.  SFAS 131,  which was  adopted by the  Company for the year
ended  December 31, 1998,  requires  management  to describe the factors used to
identify the segments.

         Management  has concluded  that the Company  measures  performance  and
operates in two business segments.

o    Consumer Credit Products, which are primarily unsecured credit cards
     issued by Direct Merchants Bank; and

o    Fee-Based Services, which include debt waiver programs, membership
     clubs  and  third  party  insurance  offered  to its  credit  card
     customers and customers of third parties. In addition, the Company
     includes  within this  operating  segment the  Company's  extended
     service plans.

         The Company receives income from its consumer credit products  through:
interest charges and other finance charges  assessed on outstanding  credit card
loans; credit card fees (including annual membership,  cash advances,  overlimit
fees, and past due fees);  and  interchange  fees. The primary  expenses of this
business  are the costs of funding  the loans,  provisions  for loan  losses and
operating  expenses including employee  compensation,  account  solicitation and
marketing expenses and data processing and servicing expenses.  Profitability is
affected  by response  rates to  solicitation  efforts,  loan  growth,  interest
spreads on loans,  credit card usage,  credit quality  (delinquencies and charge
offs), card cancellations and fraud losses.

         The fee-based  services  business  derives  benefits from the Company's
consumer  credit  products  business  because the Company cross sells  fee-based
products to its credit card holders.  Nonetheless, the two business segments are
different with respect to the factors that affect  profitability,  including how
income is generated and how expenses are  incurred.  These  differences  require
management to manage their operations separately.

         The Company receives  revenue from its fee-based  services through fees
and  commissions  for such  services.  Expenses  include costs of  solicitation,
underwriting and claims servicing expenses, fees paid to third parties and other
operating  expenses.  Profitability  for this  business  is affected by response
rates to solicitation efforts,  returns or cancel rates, claims rates, and other
factors.

         The  Company  primarily  targets  moderate  income  consumers  whom the
Company  believes  are  underserved  by  traditional  providers  of  many of the
Company's products and services. The Company intends to serve this target market
using its proprietary  scoring techniques  together with information from credit
bureaus  and   Fingerhut's   database  to   determine  a  potential   customer's
creditworthiness. The Company uses sophisticated modeling techniques to evaluate
the  expected  risk,  responsiveness,  and  profitability  of  each  prospective
customer  and to offer and price the  products  and  services  it believes to be
appropriate  for each customer.  (See more detailed  discussion  following under
"Business Lines.")


Strategy

         The principal components of the Company's strategy are the following:

         Identify and solicit  additional  External  Prospects for credit cards.
The  Company  intends to  continue  adding  moderate  income  consumers  who are
currently  not  Fingerhut  Customers  through  the  use  of its  own  internally
developed risk models. The Company has developed its own proprietary credit risk
modeling system (the "Proprietary Modeling System"). By incorporating individual
credit information from the major credit bureaus into this Proprietary  Modeling
System and eliminating those individuals  contained in the Fingerhut suppression
and bad debt file  (the  "Suppress  File"),  the  Company  expects  to  generate
additional customer relationships from External Prospects.

         Use risk-based pricing. The specific pricing for an individual's credit
card offer is determined by the prospective customer's risk profile and expected
responsiveness prior to solicitation,  a practice known as "risk-based pricing."
Management  believes  the use of  risk-based  pricing  allows it to maximize the
profitability of a customer relationship.

         Pursue acquisitions of credit card portfolios or other businesses.  The
Company  expects to continue to pursue  acquisitions  of credit card  portfolios
and/or other  businesses  whose  customers fit the Company's  product and target
market profile or which otherwise strategically fit with the Company's business.

         Increase the number of Fingerhut Customers using the Company's products
and services. The Company's strategy is to continue to use its proprietary risk,
response and  profitability  models to solicit  Fingerhut  Customers  for credit
cards, and to focus its cross-selling activities in order to increase the volume
of fee-based services and extended service plans purchased by these customers.

         Cross-sell multiple products and services to each customer. The Company
intends  to  maximize  the  profitability  of  each  customer   relationship  by
cross-selling  additional  products,  thereby leveraging its account acquisition
costs and  infrastructure.  Currently  the  Company  focuses  its  cross-selling
efforts on selling fee-based services to its credit card customers and customers
of third parties.

         Access additional  customers by establishing  relationships  with third
parties.  The Company will seek to access additional customers for the Company's
products and services by establishing relationships with third parties.

         Diversify  product  offerings to our customers.  The Company intends to
segment  markets to expand  the  success of our  existing  credit and  fee-based
products.  To do so, the Company plans to maximize our information advantage and
analyze data to determine the needs of our  customers,  then  develop,  test and
effectively introduce the right products to the right people.

Spin Off

         During the third quarter of 1998, FCI received formal written  approval
from the Internal  Revenue  Service to complete the tax-free "Spin Off" of FCI's
remaining 83% interest in the Company.  The FCI Board of Directors  approved the
Spin Off and completed the  distribution  of Metris shares on September 25, 1998
to FCI shareholders.

         The Company  believes  that it will be able to pursue  expansion of its
business and operations without certain  limitations that existed as a result of
FCI's ownership of the Company,  including  limitations on the Company's ability
to issue  additional  common  equity.  As a result of the Spin Off,  the Company
believes that it will be able to more  effectively  develop  relationships  with
retailers  other than  Fingerhut  with  respect to its  extended  service  plans
because the Company will no longer be viewed as affiliated  with a competitor of
such  retailers.  In addition,  on March 12, 1999,  the  Company's  shareholders
approved an  amendment to the  Company's  Amended and  Restated  Certificate  of
Incorporation  ("The  Certificate of  Incorporation")  to eliminate the detailed
restrictions  concerning  the  business  activities  in  which  the  Company  is
permitted  to engage.  These  restrictions  were  originally  adopted to address
certain potential conflicts of interest between FCI and the Company.

         Each of the agreements  between the Company and Fingerhut or FCI, other
than the tax sharing  agreement,  remain in effect after the Spin Off.  Although
the administrative services agreement remains in effect, it is expected that the
only  continuing  administrative  services  to be provided by FCI to the Company
will be  information  systems,  and that  these  services  will  continue  to be
provided for no longer than 18 months following the Spin Off.

         Each of the  agreements  between the Company and  Fingerhut  or FCI may
terminate  early due to a Change of Control of the Company.  The Spin Off itself
did not constitute a Change of Control.  However,  now that FCI does not own the
stock of the  Company,  it is  possible  for a Change of Control to occur,  thus
causing early terminations of these agreements.

         Specifically,  the Company  has a contract  with  Fingerhut  to use the
information  in the Fingerhut  database for  marketing  its  financial  services
products,  including general purpose credit cards. This contract expires October
2003 and is renewable thereafter upon mutual agreement between Fingerhut and the
Company  unless there has been a change in control of the  Company.  A change of
control (the "Change of  Control")  shall be deemed to have  occurred if (a) any
person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act
of 1934, as in effect),  other than FCI,  shall own  beneficially  or of record,
shares  representing  more  than  25% of the  aggregate  ordinary  voting  power
represented by the issued and  outstanding  capital stock of the Company,  (b) a
majority of the seats (other than vacant seats) on the Board of Directors of the
Company  shall at anytime be occupied by persons who were neither (i)  nominated
by FCI,  or by the Board of  Directors  of the  Company  nor (ii)  appointed  by
directors  so  nominated,  or (c) any  person  or group  other  than  FCI  shall
otherwise  directly  or  indirectly  have the power to  exercise  a  controlling
influence over  management or policies of the Company.  However,  after the Spin
Off, the Company  cannot make any  predictions as to whether a change in control
might occur.

         On  November  13,  1998,  the  Company  entered  into  agreements  with
affiliates  of the Thomas H. Lee  Company  (the "Lee  Company")  to invest  $300
million  in the  Company.  The terms of the  transaction  provided  that the Lee
Company  investment  would convert into 0.8 million shares of Series C Perpetual
Convertible Preferred Stock (the "Series C Preferred") upon shareholder approval
and receipt of notice that there was no regulatory objection to the transaction.
The  Company  determined  that this  conversion  might  result  in a "Change  of
Control" as defined in certain  agreements  between  the Company and  Fingerhut,
which  would  permit  Fingerhut  to  terminate  any or  all  of the  agreements.
Therefore,  on December 8, 1998, the Company  obtained an agreement (the "Waiver
Agreement")  from  Fingerhut to waive its right to terminate the agreements if a
Change of Control occurred as a result of the conversion.

         Pursuant to the Waiver  Agreement,  the Company and  Fingerhut  amended
certain of their other agreements.  The most significant  change occurred in the
database access  agreement.  The Company's  exclusive license to use Fingerhut's
customer database to market financial service products will become non-exclusive
after October 31, 2001.

         On March 12, 1999, the Company's  shareholders  approved the conversion
of the Lee  Company  investment  into the  Series C  Preferred.  If the  Company
receives notice that there is no regulatory  objection to the  transaction,  the
conversion  will occur and the Lee  Company  will own  approximately  30% of the
Company on a diluted basis.


         Following  the Spin Off,  no  individual  holds  titles of  officer  or
director  at both  FCI and the  Company,  except  for  Theodore  Deikel,  who is
Chairman  of the Board  and Chief  Executive  Officer  of FCI and  Non-Executive
Chairman of the Board of the Company.


Business Lines

         The Company operates primarily through two businesses: consumer credit
products and fee-based services.

         Consumer credit products

         Products.   The  Company's   consumer  credit  products  are  primarily
unsecured credit cards,  including the Direct Merchants Bank  MasterCard(R)  and
Visa(R).  In the future,  the Company may offer co-branded  credit cards and may
also offer other consumer credit  products either directly or through  alliances
with other companies.  At December 31, 1998, the Company had  approximately  3.0
million  credit  card  accounts  with over $5.3  billion in managed  credit card
loans.  Fingerhut  Customers  represented  approximately 35% of the accounts and
managed loans. According to the Nilson Report, at December 31, 1998, the Company
was the 10th largest  MasterCard issuer in the United States based on the number
of cards  issued,  and the 14th largest  credit card issuer in the United States
based on managed credit card loan balances.

         The Fingerhut  Database.  One of the Company's primary sources of names
to solicit for credit  card  offers is a database  maintained  by  Fingerhut,  a
wholly owned  subsidiary  of FCI.  Fingerhut is a database  marketing  firm that
sells a broad  range of  products  and  services  via  catalogs,  telemarketing,
television,  and other media.  Substantially  all of Fingerhut's  sales are made
using closed-end and revolving credit card loans. As customers make payments and
order new products, Fingerhut enters a variety of payment, behavioral, and other
data into its database (the "Fingerhut Database"). Fingerhut uses this database,
along with sophisticated and highly automated  proprietary  modeling techniques,
to evaluate each customer's  creditworthiness.  The Fingerhut  Database contains
information on more than 31 million  individuals.  This database  contains up to
3,500 potential data items in a customer  record,  including  names,  addresses,
behavioral   characteristics,   general   demographic   information   and  other
information  provided  by  the  customer.  Fingerhut  uses  information  in  the
Fingerhut Database, along with sophisticated  proprietary credit scoring models,
to produce its proprietary credit scores (the "Fingerhut  Scores") for Fingerhut
Customers. The Fingerhut Database also includes Fingerhut's Suppress File, which
contains  information on individuals  about whom it has information  relating to
indicators  of  unacceptably  high  risk.  Fingerhut  periodically  updates  the
information  in the  Fingerhut  Database.  Fingerhut  does not report its credit
information to the credit bureaus,  which means this information is not publicly
available.

         Credit  Scoring.  The Company uses the  Fingerhut  Database to identify
potential  customers.  Fingerhut uses the information in the Fingerhut Database,
along with its proprietary  credit scoring models to create the Fingerhut Score.
The Company also  acquires  credit  bureau  information,  including  risk scores
provided by Fair, Isaac & Company ("FICO scores"),  for all Fingerhut Customers.
For  those  Fingerhut  Customers  who have FICO  scores,  the  Company  uses the
Fingerhut  Score to further  segment  Fingerhut  Customers into narrower  ranges
within  each FICO score  subsegment,  allowing  the  Company to better  evaluate
credit risk and to tailor its risk-based pricing accordingly.  Additionally, the
Fingerhut  Score  is used to  target  individuals  who  have  no  credit  bureau
information,  and  consequently  no FICO scores,  allowing the Company to target
Fingerhut  Customers  who would not  typically be solicited by other credit card
issuers.  The  Fingerhut  Score has been  effective in enhancing  the  Company's
ability to select  which  Fingerhut  customers  to solicit and in rank  ordering
Fingerhut customers according to their likelihood of delinquency.

         The Company uses internally and externally developed proprietary models
in enhancing  its  evaluation of External  Prospects.  These models help segment
External  Prospects  into  narrower  ranges  within each FICO Score  subsegment,
allowing the Company to better evaluate individual credit risk and to tailor its
risk-based  pricing  accordingly.  The Company also uses this segmentation along
with the  Suppress  File to  exclude  certain  individuals  from  its  marketing
solicitations.

         The Company generates  External  Prospects from lists obtained from the
major credit bureaus based on criteria  established by the Company.  The Company
uses  proprietary  models and  additional  analysis  in  conjunction  with files
obtained from the credit bureaus to further  segment  External  Prospects  based
upon their  likelihood of  delinquency.  The Company also  eliminates  any names
which are included in the Fingerhut  Suppress File.  The Company  currently does
not solicit External Prospects who do not have FICO Scores.

         The Company  believes that the proprietary  models in conjunction  with
additional  analysis is  effective in further  segmenting  and  evaluating  risk
within  FICO  score  bands.  However,  for  certain  campaigns  the  models  and
additional analysis were less effective in doing so than in other campaigns. The
Company  has and  continues  to use the  results  of its  analysis  of  External
Prospects to adjust the proprietary  models to determine the pricing for various
segments  and to exclude  certain  segments  from  subsequent  direct  marketing
efforts.  While the Company believes that the proprietary  models and additional
analysis are valuable tools in analyzing  relative  risks, it is not possible to
accurately  predict  which  consumers  will  default  or the  overall  level  of
defaults,  and  the  Company  cannot  assure  you as to  the  levels  of  actual
delinquencies or losses.

         The Company  believes that both the Fingerhut Score and the proprietary
models,  in conjunction with the Fingerhut  Suppress File, give it a competitive
advantage in evaluating the credit risk of moderate income consumers. Management
believes that due to the amount and type of credit information  available in the
Fingerhut  Database,  the Fingerhut  Score is currently  more effective than the
proprietary  models in  allowing  the  Company to  evaluate  the credit  risk of
prospects having lower FICO Scores.  Therefore,  the Company has been willing to
solicit  consumers  who have lower FICO Scores if they also have an  appropriate
Fingerhut  Score.  As a result,  the  Company's  Fingerhut-sourced  credit  card
customers  generally have lower initial FICO Scores than do External  Prospects.
After every  marketing  campaign,  the Company  monitors the  performance of the
proprietary  models and  continually  re-evaluates  the  effectiveness  of these
models in  segmenting  credit  risk,  resulting  in further  refinements  to its
selection criteria for External Prospects.  Over time, the Company believes that
it will capture additional credit information on the behavioral  characteristics
of External  Prospects which will allow it to further increase the effectiveness
of the proprietary models.

         Solicitation.   Prospects  for  solicitation   include  both  Fingerhut
Customers and External Prospects.  Prospects are contacted on a nationwide basis
primarily  through  pre-screened  direct mail and telephone  solicitations.  The
Company  receives  responses to its  prescreened  solicitations,  performs fraud
screening,  verifies name and address changes, and obtains any information which
may be missing from the  application.  Applications are sent to third party data
entry  providers,   which  key  the  application  information  and  process  the
applications  based on the criteria  provided by the  Company.  The Company then
makes the credit decisions and approves,  denies or begins exception processing.
The Company  processes  exceptions  for, among other things,  derogatory  credit
bureau  information and fraud  warnings.  Exception  applications  are processed
manually by credit analysts based on policies  approved by the Company's  Credit
Committee.

         Pricing.  Through  risk-based  pricing,  the Company prices credit card
offers based upon a prospect's risk profile prior to  solicitation.  The Company
evaluates a prospect to determine credit needs, credit risk, and existing credit
availability  and then  develops  a  customized  offer  that  includes  the most
appropriate  product,  brand,  pricing and credit  line.  The Company  currently
offers over 100 different pricing  structures on its credit card products,  with
annual fees ranging from $0 to $75 and annual interest rates up to 26.9%.  After
credit card accounts are opened, the Company  periodically  monitors  customers'
internal and external credit performance and periodically recalculates behavior,
revenue,  attrition and bankruptcy  predictors.  As customers evolve through the
credit  life cycle and are  regularly  rescored,  the lending  relationship  can
evolve to include more  competitive  (or more  restrictive)  pricing and product
configurations.



<PAGE>


         Age of Portfolio.  The following  table sets forth,  as of December 31,
1998, the number of total  accounts and amount of  outstanding  loans based upon
the age of the managed accounts.
<TABLE>

                                                                                  Percentage of
                                     Number      Percentage         Loans            Loans
                                  of Accounts    of Accounts     Outstanding       Outstanding
  Age Since Origination                                     (Dollars in thousands)
<S>                               <C>              <C>            <C>                  <C>
0-6 Months ...................      411,051         13.8%         $  477,384             9.0%
7-12 Months ..................      372,549         12.5%            650,758            12.2%
13-18 Months .................      389,385         13.1%            719,050            13.5%
19-24 Months .................      350,258         11.8%            650,379            12.2%
25-36 Months .................      668,870         22.5%          1,323,253            24.9%
37+ Months ...................      779,756         26.3%          1,494,218            28.2%
                                    -------         ----           ---------            ----

     Total ...................    2,971,869        100.0%         $5,315,042           100.0%
                                  =========        =====          ==========           =====
</TABLE>


         Geographic Distribution.  The Company solicits credit card customers on
a  national  basis  and,  therefore,   maintains  a  geographically  diversified
portfolio.  The following  table shows the  distribution  of total  accounts and
amount of outstanding loans by state, as of December 31, 1998.

<TABLE>
                                                                                              Percentage of
                                     Number        Percentage               Loans                 Loans
                                  of Accounts     of Accounts            Outstanding           Outstanding
  State                                                            (Dollars in thousands)
<S>        <C>                    <C>                  <C>                 <C>                     <C>
California ...................      341,314            11.5%              $  663,726               12.5%
Texas ........................      296,171            10.0%                 537,479               10.1%
Florida ......................      214,436             7.2%                 401,222                7.5%
New York .....................      208,643             7.0%                 387,829                7.3%
Ohio .........................      128,214             4.3%                 224,256                4.2%
Illinois .....................      104,422             3.5%                 189,552                3.6%
Pennsylvania .................       92,214             3.1%                 160,069                3.0%
Michigan .....................       79,947             2.7%                 144,486                2.7%
Missouri .....................       78,150             2.6%                 135,589                2.6%
Georgia ......................       76,770             2.6%                 139,817                2.6%
Virginia .....................       75,635             2.5%                 135,860                2.6%
All others (1)                    1,275,953            43.0%               2,195,157               41.3%
                                  ---------            ----                ---------               ----

     Total ...................    2,971,869           100.0%              $5,315,042              100.0%
                                  =========           =====               ==========              =====

</TABLE>

(1) No other state accounts for more than 2.5% of loans outstanding.

         Credit Lines.  Once an account is approved,  an initial  credit line is
established based on the individual's risk profile using automated screening and
credit  scoring  techniques.  This  process  results in a  portfolio  (excluding
portfolio  acquisitions)  with average  credit lines that are below the industry
average due to the higher average risk inherent in the Company's  target market.
The Company may elect,  at any time and without prior notice to the  cardholder,
to preclude or restrict further credit card use by the cardholders, usually as a
result  of  poor  payment   performance  or  the  Company's   concern  over  the
creditworthiness  of the  cardholders.  Credit  lines are  managed  based on the
results  of  the  behavioral   scoring  analysis  in  accordance  with  criteria
established by the Company. The

<PAGE>


following  table sets forth  information  with  respect to account  balance  and
credit limit ranges of the Company's managed portfolio, as of December 31, 1998.
<TABLE>


  Credit Limit Range         Number           Percentage               Loans               Percentage of
                           of Accounts        of Accounts           Outstanding          Loans Outstanding
                                                              (Dollars in thousands)
<S>                        <C>                    <C>                  <C>                      <C>
$1,000 or Less.........       279,095               9.4%               $  164,167                 3.1%
$1,001-$2,000 .........       647,278              21.8%                  817,808                15.4%
$2,001-$3,500 .........       719,134              24.2%                1,308,876                24.6%
$3,501-$5,000 .........       577,659              19.4%                1,295,052                24.4%
Over $5,000 ...........       748,703              25.2%                1,729,139                32.5%
                              -------              ----                 ---------                ----

     Total ...........     2,971,869              100.0%               $5,315,042               100.0%
                           =========              =====                ==========               =====

</TABLE>

<TABLE>

  Account Balance Range       Number           Percentage               Loans                Percentage of
                           of Accounts        of Accounts           Outstanding           Loans Outstanding
                                                                 (Dollars in thousands)
<S>                        <C>                    <C>                 <C>                       <C>
Credit Balance .......        44,720                1.5%             $     (4,743)                 (.1%)
No Balance ...........       471,135               15.9%
$1,000 or Less .......       707,600               23.8%                  321,546                 6.0%
$1,001-$2,000 ........       647,906               21.8%                  976,959                18.4%
$2,001-$3,500 ........       627,816               21.1%                1,656,469                31.2%
Over $3,500 ..........       472,692               15.9%                2,364,811                44.5%
                             -------               ----                 ---------                ----
     Total ...........     2,971,869              100.0%              $ 5,315,042               100.0%
                           =========              =====               ===========               =====
</TABLE>


         The Adaptive  Control  System.  The Company  uses First Data  Resources
Inc.'s ("FDR") adaptive control system (the "Adaptive  Control  System"),  which
uses statistical models and basic account financial information to automatically
and  regularly   assign  credit  line  increases  and  decreases  to  individual
customers,  as well as to determine the systematic  collection steps to be taken
at the various stages of  delinquency.  The Adaptive  Control System manages the
authorization of each  transaction;  in addition,  it implements the collections
strategies determined by the Company to be used for non-delinquent accounts that
have  balances  above their  assigned  credit line  (referred to as  "overlimit"
accounts).

         Delinquency,  Collections  and  Charge-offs.  The Company  considers an
account  delinquent  if a payment due is not  received by the Company  within 25
days  from  the  closing  date  of  the  statement.  Collection  activities  are
determined  by the  Adaptive  Control  System,  which  continually  monitors all
delinquent accounts.  The collections  function is handled internally.  Accounts
that become 60 days  contractually  delinquent are closed,  but not  necessarily
charged off.  Accounts are charged off and taken as a loss either within 60 days
after formal  notification of bankruptcy or at the end of the month during which
they become contractually 180 days past due. Accounts identified as fraud losses
are  immediately  reserved  for and  charged off no later than 90 days after the
last activity.  Charged-off accounts are referred to the Company's recovery unit
for  coordination  of  collection  efforts to recover  the  amounts  owed.  When
appropriate, accounts are placed with external collection agencies or attorneys.

         Servicing,   Billing  and  Payment.   The  Company  has  established  a
relationship with FDR for cardholder processing services. FDR is a subsidiary of
First Data  Corporation,  a  provider  of  information  processing  and  related
services including cardholder  processing  (services for financial  institutions
which issue credit cards to cardholders),  and merchant processing (services for
financial institutions which make arrangements with merchants for the acceptance
of credit cards as methods of payment).  FDR provides  data  processing,  credit
card reissuance,  monthly  statements,  some inbound customer service  telephone
calls and interbank  settlement  for the Company.  Effective  February 1998, the
Company  extended its processing  services  agreement with FDR for an additional
six years,  expiring 2006.  Applications  processing and back office support for
mail inquiries and fraud  management are handled  internally by the Company.  In
addition the Company handles  in-bound  customer  service  telephone calls for a
part of its customer base.

         The Company  generally  assesses periodic finance charges on an account
if the  cardholder  has not paid the balance in full from the  previous  billing
cycle.   These  finance  charges  are  based  upon  the  average  daily  balance
outstanding  on the  account  during the  monthly  billing  cycle.  Payments  by
cardholders  to the  Company on the  accounts  are  processed  by a third  party
servicer  and applied  first to any billed and unpaid  fees,  next to billed and
unpaid finance  charges and then to billed and unpaid  transactions in the order
determined by the Company. If a payment in full is not received prior to 25 days
after the statement cycle date (the "Pay by Date"),  finance charges are imposed
on all purchases from the date of the  transaction to the statement  cycle date.
Finance  charges are also imposed on each cash advance from the day such advance
is made until the advance is paid in full.  The finance charge is applied to the
average  daily  balance.  For most  cardholders,  if the  entire  balance on the
account is paid by the due date a finance charge on purchases is not imposed.

         The Company  assesses an annual fee on some credit card  accounts.  The
Company  may  waive  the  annual  membership  fees,  or a  portion  thereof,  in
connection with the  solicitation of new accounts  depending on the credit terms
offered,   which  are  determined  by  the  prospect's  risk  profile  prior  to
solicitation  or  when  the  Company  determines  a  waiver  to  be  appropriate
considering the account's overall profitability.  In addition to the annual fee,
the Company charges accounts  certain other fees including:  (i) a late fee with
respect to any  unpaid  monthly  payment if the  Company  does not  receive  the
required minimum monthly payment by the Pay by Date, (ii) a cash advance fee for
each  cash  advance,  (iii) a fee with  respect  to each  check  submitted  by a
cardholder  in payment of an account  which is not  honored by the  cardholder's
bank, and (iv) an overlimit charge if, at any time during the billing cycle, the
total amount owed exceeds the cardholder's credit line by at least $30.

         Each  cardholder  is subject to an  agreement  governing  the terms and
conditions of the accounts.  Pursuant to such  agreements,  the Company reserves
the  right to  change or  terminate  certain  terms,  conditions,  services  and
features of the account (including periodic finance charges, late fees, returned
check  charges  and any other  charges or the minimum  payment),  subject to the
conditions set forth in the account agreement.

         Monthly billing  statements are sent to cardholders by FDR on behalf of
the Company.  When an account is  established,  it is assigned a billing  cycle.
Currently,  there  are 20  billing  cycles  and each such  cycle has a  separate
monthly billing date based on the respective  business day the cycle  represents
in each calendar month.  Each month, a statement is sent to all accounts with an
outstanding  balance  greater than $1. All  cardholders  with open accounts must
make a minimum  monthly  payment  generally  of the greater of $15,  2.5% of the
outstanding  balance,  the  finance  charge or the balance of the account if the
balance is less than $15. If the minimum  payment is not collected by the Pay by
Date, the account is considered delinquent.

         Most merchant  transactions by cardholders are authorized  online.  The
remaining  transactions  generally are low dollar amounts,  typically below $50.
All authorizations are handled through the Adaptive Control System.

         Fee-Based Services

         The Company  sells or offers  fee-based  services,  including  (i) debt
waiver  protection for  unemployment,  disability,  and death,  (ii)  membership
programs  such  as  card  registration,   purchase  protection  and  other  club
memberships,  and (iii)  third-party  insurance,  directly  to its  credit  card
customers and customers of third parties. The Company currently  administers its
extended  service  plans sold through a third-party  retailer,  and the customer
pays the  retailer  directly.  In  addition,  the  Company  develops  customized
targeted  mailing  lists from  information  contained in both the  Company's and
Fingerhut's  databases for use by unaffiliated  companies in their own financial
services product solicitation efforts that do not directly compete with those of
the  Company.  In 1998,  the Company  consolidated  the  fee-based  services and
extended service plan businesses.

         The Company currently markets the following programs:

         Debt Waiver. Account Protection Plus(TM) , is a program the Company has
developed that protects  customers from interest charges on the Company's credit
cards in the event that they  become  disabled  or  unemployed.  The  customer's
account is "frozen" for six months,  with no payments  due or interest  accruing
during this time. In the event of death, the amount due, up to the credit limit,
is waived and the account is closed. Because this is an internally  administered
program,  the Company is responsible for all of the program's  associated costs.
The Company  also offers  Account  Benefit Plan which  forgives  the  customer's
balance  due in the event of death  but  offers  no  protection  in the event of
disability or unemployment.

         Extended Service Plans. The Company administers  extended service plans
sold by retailers.  Extended service plans provide warranty  coverage beyond the
manufacturer's  warranty. In general, the extended service plans administered by
the Company  provide  customers  with the right to have their covered  purchases
repaired,  replaced,  or in certain  circumstances,  the  purchase  price of the
product refunded,  within certain parameters  determined by the Company.  Within
the warranty  industry,  extended service plans are available for a wide variety
of products including consumer electronics and appliances,  furniture,  jewelry,
automotives,  and  household  mechanical  systems such as heating,  plumbing and
electrical systems. The Company currently administers extended service plans for
consumer   electronics,   appliances,   furniture  and  jewelry  purchased  from
third-party retailers.

         ServiceEdgeSM is the Company's  extended  service plan  administered by
the Company for consumer  electronics  and all other  electro-mechanical  items.
ServiceEdge  customers  have  the  right to have  their  purchases  repaired  or
replaced  in the  event of  electrical  or  mechanical  failure  or  defects  in
materials and workmanship for coverable events after the manufacturer's warranty
expires.

         Quality  Furniture Care is the Company's  extended service plan program
for furniture. The services provided to Quality Furniture Care customers include
stain  cleaning,  structural  defect or damage  repair,  or  replacement  if the
merchandise cannot be repaired.

         Quality  Jewelry Care(R) is the extended  service plan  administered by
the Company for jewelry. The services provided to Quality Jewelry Care customers
include repair,  soldering,  ring sizing,  prong re-tipping,  and cleaning.  The
Company has third-party jewelers perform such services for the Company.

         Most of the extended service plans administered by the Company continue
for two years  from the date of the  product  purchase  (three to five  years in
limited  cases).  The customer  pays the retail  company a one-time fee for this
coverage  based on the price of the  product,  the term of coverage and the loss
risk of the  product.  Customers  may also be offered the  opportunity  to renew
their coverage in one-year  extensions,  presently up to six years from the date
of purchase, upon payment of an additional fee for each renewal.

         Through  the  end of  1996,  claims  risk  and  claims  processing  for
electro-mechanical  items  were  the  responsibility  of a third  party.  At the
beginning of 1997, the Company  internalized  the claims  processing  operations
related to extended service plans for electro-mechanical  items and has incurred
the resulting claims risk for extended service plans sold on or after January 1,
1997.  The  Company is  responsible  for claims risk and claims  processing  for
furniture and jewelry.

         Purchase   Protection.   During  1997,  the  Company  developed  a  new
membership  program,  PurchaseShieldSM,  which offers various levels of purchase
protection to its members.  Eligible purchases made on members' credit cards are
protected with the following benefits: warranty extension, sale price protection
and product return guarantee.  In addition,  PurchaseShield offers its members a
household   repair  rebate  that  can  be  used  on  certain   existing  in-home
electro-mechanical  item  repairs.  Because this is an  internally  administered
program,  the Company  receives all revenues and is  responsible  for all of the
program's  associated costs. The Company currently offers purchase protection to
its credit card customers and credit card customers of third parties.

         Card Registration.  Card registration  protects members from fraudulent
charges if their credit cards are lost or stolen and provides emergency cash and
airline  tickets,  change  of  address  notification  and  lost or  stolen  card
notification,  valuable property and document registration,  a messaging service
and car rental discounts. The Company currently offers card registration service
under the name  Fraud  Alert  Services(TM)  to its  credit  card  customers  and
customers of third parties.  The Company  internalized this program in September
1996 and is responsible for all of its associated  costs and revenues.  Prior to
September  1996, the Company had an agreement with a third party vendor to offer
card registration services to its credit card customers.

         Accidental Death Insurance.  The Company earns a fee from a third-party
insurance  administrator  for the  marketing  and  billing of the  third-party's
accidental death insurance program. The Company markets the insurance program to
its credit card  customers.  Although  the  Company  markets  the  program,  the
third-party insurance company fulfills and underwrites the policies.

         Other  Membership   Clubs.   The  Company  has  cooperative   marketing
arrangements with several third parties to market the third party's  memberships
in clubs that do not compete with the Company's services or clubs. Additionally,
the Company has other  arrangements  with third  parties,  which it assumed from
acquired  credit card  portfolios,  that  provide it with  revenue  from ongoing
membership fees billed to the Company's acquired credit card holders.

         Tailored List  Development.  The Company  currently  works with several
companies to develop targeted mailing lists and earns revenue for each name that
is solicited by these  companies  from the  Company's  customer  databases.  The
Company also earns revenue from the sale of  advertising  space  included in its
monthly billing statements.


Liquidity, Funding and Capital Resources

         One of the Company's primary financial goals is to maintain an adequate
level of liquidity through active management of assets and liabilities.  Because
the pricing and maturity characteristics of the Company's assets and liabilities
change, liquidity management is a dynamic process, affected by changes in short-
and long-term interest rates. The Company uses a variety of financing sources to
manage liquidity, refunding, rollover and interest rate risks.

         The  Company  finances  the  growth of its credit  card loan  portfolio
through  cash  flow  from  operations,  asset  securitization,  bank  financing,
long-term debt issuance, and equity issuance.

Asset Securitization

         A significant  source of funding for the Company is the  securitization
of credit card loans. Securitization involves packaging and selling both current
and future  receivable  balances  of pools of credit  card card  accounts  while
retaining the servicing of such receivables.  The Company's  securitizations are
treated as sales under generally accepted  accounting  principles.  As a result,
the  securitized  receivables  are removed from the Company's  balance sheet and
treated as managed loans.

         The  Company   primarily   securitizes   receivables  by  selling  such
receivables  either to its  proprietary  trust,  the Metris Master Trust,  or to
bank-sponsored  multi-seller  conduits which purchase such assets from a variety
of issuers.

          The Metris  Master  Trust.  The Metris  Master Trust (the "Trust") was
formed in May 1995  pursuant to a pooling  and  servicing  agreement,  which was
amended on July 30, 1998. Metris Receivables, Inc., a subsidiary of the Company,
transfers  receivables  in  designated  accounts  to the Trust in  exchange  for
proceeds  and an  interest  in the  Trust.  Metris  Receivables,  Inc.  may then
exchange portions of this interest for one or more series of securities which it
may then sell publicly or privately to  third-party  investors.  The  securities
each represent  undivided  interests in all of the receivables in the Trust, and
may be split into separate  classes which have  different  terms.  The different
classes  of an  individual  series  are  structured  to obtain  specific  credit
ratings. As of December 31, 1998, seven series of securities have been issued by
the  Trust.  The  Company  currently  retains  the  most  subordinated  class of
securities in each series and sells all the other classes.

         Generally,  each  series  involves  an initial  reinvestment  period (a
"revolving period") in which principal payments on receivables allocated to such
series  are  returned  to  Metris  Receivables,   Inc.  and  reinvested  in  new
receivables arising in the accounts.  After the revolving period ends, principal
payments  allocated  to the  series are then used to repay the  investors.  This
period is referred to as the amortization period.  Currently,  the Trust has one
series which is in a controlled  amortization period. The scheduled amortization
period is set in the agreements  governing each series.  However, all the series
set  forth  certain  events  by which  amortization  can be  accelerated  (early
amortization).  Usually,  this would  occur if the  portfolio  collections  less
charge-offs for bad debt,  financing  costs and  operational  costs drop below a
minimum amount. As new receivables in designated accounts cannot be funded while
a series is in amortization,  early  amortization would accelerate the Company's
funding  requirements for new receivables in the accounts.  The Company does not
have any series that are in early amortization.

         Each  month,  each  series is  allocated  its share of  finance  charge
collections  which is used to pay  investors  interest on their  securities,  to
reimburse  them for their  share of losses due to  charge-offs  and to pay their
share of servicing fees.  Amounts remaining may be deposited in cash accounts of
the  Trust as  additional  protection  for  future  losses.  Once  each of these
obligations is fully met, any remaining finance charge collections,  if any, are
returned to the Company.

          Bank-Sponsored   Conduit   Programs.   The  Company   also   maintains
flexibility  in  its  current   securitization   program  by  negotiating   with
bank-sponsored conduits (the "Conduits"). These Conduits purchase an interest in
receivables  arising in designated  accounts.  These transactions also feature a
revolving  period in which  principal  payments on receivables  allocated to the
Conduits are returned to the Company and  reinvested in new  receivables.  These
agreements also have early amortization triggers. Finance charge collections are
used to pay  certain  obligations,  including  servicing  fees,  interest on the
principal amount of the Conduit's investment in the applicable receivables,  and
recouping   charge-offs.   After  such  allocation,   remaining  finance  charge
collections, if any, are returned to the Company.

         At December 31, 1998 and 1997, the Company had received  cumulative net
proceeds of approximately $4.6 billion and $3.1 billion, respectively from sales
of credit  card  loans to the Trust and  Conduits.  Cash  generated  from  these
transactions  was used to reduce  short-term  borrowings and to fund credit card
loan portfolio growth.  The Company relies upon the securitization of its credit
card loans to fund portfolio  growth and, to date, has completed  securitization
transactions on terms that it believes are  satisfactory.  The Company's ability
to securitize its assets depends on favorable investor demand, legal, regulatory
and tax  conditions  for  securitization  transactions,  as  well  as  continued
favorable performance of the Company's securitized portfolio of receivables. Any
adverse  change  could  force  the  Company  to rely on other  potentially  more
expensive  funding  sources  and,  in the  worst  case  scenario,  could  create
liquidity risks if other funding is unavailable.

         During  1998,  as  part  of  a  scheduled  amortization  of  previously
securitized  loans,  the  Company's  owned loan  portfolio,  increased  by $34.6
million.  The  following  table  presents the  amounts,  at December 31, 1998 of
investor  principal in securitized  receivables  scheduled to amortize in future
years. The amortization  amounts are based upon estimated  amortization  periods
which are subject to change based on Trust and Conduit performance.

(Dollars in thousands)
1999.....................................      $1,847,538
2000.....................................         608,333
2001.....................................       2,102,272
Thereafter...............................               0
                                               ----------
Total Securitized Loans at December 31, 1998   $4,558,143
                                              ===========

         The Company's lower  independent  credit ratings,  due to the Spin Off,
reduced the advance rate on a portion of the sale of  receivables  to the Trust.
This required  approximately $40 million in additional funding by the Company to
finance the unsold loans.

Bank Financing

         On June 30, 1998, the Company  executed a new $200 million,  three-year
revolving  credit  facility  and a $100  million  five-year  term loan (the "New
Credit  Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. The
New Credit Facility, which is not guaranteed by FCI, replaced the Company's $300
million,  five-year  revolving credit facility (the "Old Credit Facility").  The
New  Credit  Facility  is  secured  by  receivables  and  subsidiary  stock  and
guaranteed  by a  Company  subsidiary.  Financial  covenants  in the New  Credit
Facility include,  but are not limited to,  requirements  concerning minimum net
worth,  minimum  tangible net worth to net managed  receivables and tangible net
worth plus reserves to delinquent receivables. The minimum tangible net worth to
net  managed  receivables  ratio  requirement  increased  to 5.0%  from  4.0% on
December 24, 1998. At December 31, 1998, the Company was in compliance  with all
financial covenants under this agreement.  At December 31, 1998, the Company had
outstanding  borrowings  of $110  million  under  the New  Credit  Facility.  At
December 31, 1997, the Company had outstanding  borrowings of $144 million under
the Old Credit Facility.  As a result of the Spin Off and the removal of the FCI
guarantee,  the Company is no longer able to borrow at an investment grade rate.
The interest rate under the New Credit Facility is higher than the interest rate
under the Old Credit  Facility due to the  Company's  lower  independent  credit
rating.

Long-Term Debt and Equity Issuance

         In addition to asset securitizations and bank funding, the Company uses
long term debt and  equity  to fund  continued  credit  card  growth.  While the
Company  planned to issue common  equity shares in a public  offering  after the
Spin Off during the fourth  quarter of 1998,  volatility in the stock market and
in the Company's  stock price caused the Company to seek  alternatives to public
issuance through either private issuance of equity or public or private issuance
of  equity-like  securities.  On November  13,  1998,  after a review of several
alternatives and discussions  with several  advisors and investors,  the Company
entered into agreements with affiliates of the Thomas H. Lee Company,  (the "Lee
Company") to purchase  $200 million in Series B Perpetual  Preferred  Stock (the
"Series B  Preferred")  and $100  million in 12% Senior Notes due 2006 (the "Lee
Senior  Notes").  The Company also issued the Lee Company 3.75 million  ten-year
warrants to purchase  shares of the Company's  common stock for $30,  subject to
adjustment in certain circumstances. The Series B Preferred had a 12.5% dividend
payable  in  additional  shares  of  Series  B  Preferred  for ten  years,  then
converting  to payable in cash.  The proceeds  from the issuance of the Series B
Preferred  and  the Lee  Senior  Notes  were  used  to  fund  the PNC  portfolio
acquisition and general corporate purposes.

         On March 12, 1999,  shareholders'  approved  conversion of the Series B
Preferred  and Lee Senior  Notes into Series C Perpetual  Convertible  Preferred
stock  (the  "Series  C  Preferred").  If notice is  received  that  there is no
regulatory  objection to the conversion to the Series C Preferred,  the Series B
Preferred and the Lee Senior Notes will be converted  into 0.8 million shares of
Series C Preferred  at a  conversion  price of $37.25 and the  warrants  will be
canceled.  The Series C Preferred has a 9% dividend payable in additional shares
of Series C Preferred and will also receive any dividends  paid on the Company's
Common Stock on an as converted basis. The cumulative  payment-in-kind dividends
are effectively  guaranteed for a seven-year period.  Assuming conversion of the
Series C  Preferred  into  common  stock in the first  quarter of 1999,  the Lee
Company would own approximately 30% of the Company on a diluted basis.

         Converting  to the Series C Preferred  will cause a one-time,  non-cash
accounting  adjustment  for retiring  the Series B Preferred  and the Lee Senior
Notes.  The excess of the fair value of the Series C Preferred over the carrying
value of the  Series B  Preferred  and the Lee  Senior  Notes at the time of the
conversion  must be allocated to the Lee Senior Notes and the Series B Preferred
based upon their  initial  fair  values.  To arrive at net income  available  to
common  stockholders  in the  calculation  of  earnings  per  share,  the amount
allocated to the Lee Senior Notes would be recognized as an  extraordinary  loss
from the early  extinguishment  of debt and the amount allocated to the Series B
Preferred  would be recognized as a reduction of net income  available to common
stockholders.  The extraordinary  loss attributable to the Lee Senior Notes will
not be recorded net of taxes. These adjustments will not have an impact on total
stockholders'  equity. At the time of the printing of this annual report on Form
10-K, the fair value of the Series C Preferred was not determined.

         In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 pursuant to an exemption  under the  Securities Act of
1933, as amended.  The net proceeds were used to reduce borrowings under the Old
Credit  Facility.  In January 1998, the Company  commenced an exchange offer for
the Senior  Notes  pursuant to a  registration  statement.  The terms of the new
Senior  Notes are  identical in all  material  respects to the original  private
issue.  The  Senior  Notes are  unconditionally  guaranteed  on a senior  basis,
jointly and severally,  by Metris Direct, Inc., a subsidiary of Metris Companies
Inc.,  and all future  subsidiaries  of the Company  that  guarantee  any of the
Company's  indebtedness,  including the New Credit Facility. The guarantee is an
unsecured  obligation  of Metris  Direct,  Inc.  and ranks  pari  passu with all
existing and future unsubordinated indebtedness.


<PAGE>


General

         The Federal Reserve Act imposes various legal limitations on the extent
to which  banks that are members of the  Federal  Reserve  System can finance or
otherwise  supply funds to certain of their  affiliates.  In particular,  Direct
Merchants Bank is subject to certain restrictions on any extensions of credit to
the Company or its subsidiaries.  Additionally, Direct Merchants Bank is limited
in its ability to declare dividends to the Company.  Therefore, Direct Merchants
Bank's  investments  in federal  funds sold are  generally not available for the
general liquidity needs of the Company or its subsidiaries.  These  restrictions
were not  material to the  operations  of the  Company at December  31, 1998 and
1997.

         As the  portfolio  of  credit  card  loans  grows,  or as the Trust and
Conduit certificates amortize or are otherwise paid, the Company's funding needs
will  increase  accordingly.  The  Company  believes  that  its cash  flow  from
operations,   asset  securitization  programs,  together  with  the  New  Credit
Facility,  long term debt issuance and equity  issuance,  will provide  adequate
liquidity  to the  Company  for  meeting  anticipated  cash  needs,  although no
assurance can be given to that effect.


Competition

         As a marketer of consumer credit  products,  the Company  competes with
numerous providers of financial  services,  many of which have greater resources
than the Company.  In particular,  the Company's  credit card business  competes
with  national,  regional and local bank card  issuers as well as other  general
purpose  credit and debit card issuers.  In general,  customers are attracted to
credit  card  issuers  largely  on the  basis of price,  credit  limit and other
product features; as a result,  customer loyalty is often limited.  However, the
Company believes that its strategy of focusing on an underserved  market and its
exclusive  access to  information  from the Fingerhut  Database will allow it to
compete  effectively  in the market for moderate  income  cardholders  to market
financial services products.

         There  are  numerous  competitors  in the  fee-based  services  market,
including  insurance  companies,   financial  services  institutions  and  other
membership-based or enhancement  consumer services providers,  many of which are
larger,  better capitalized and more experienced than the Company.  However, the
Company believes that its agreements with FCI,  including its exclusive right to
use the Fingerhut  Database to market financial  services products and its right
to be the exclusive  provider of extended service plans to Fingerhut  customers,
will allow it to compete effectively in this market. As the Company continues to
expand  its  business  to market  extended  service  plans to the  customers  of
third-party  retailers,  it will  also  compete  with  manufacturers,  financial
institutions,  insurance  companies and a number of independent  administrators,
many of which have greater operating experience and financial resources than the
Company.


Regulation

         The Company and Direct Merchants Bank

         Direct  Merchants Bank is a limited  purpose credit card bank chartered
as a national banking association. It is a member of the Federal Reserve System.
Its deposits are insured by the Bank Insurance Fund which is administered by the
Federal   Deposit   Insurance   Corporation   ("FDIC")  and  it  is  subject  to
comprehensive   regulation  and  periodic  examination  by  the  Office  of  the
Comptroller of the Currency ("OCC"),  its primary regulator.  It is also subject
to  regulation by the Board of Governors of the Federal  Reserve  System and the
FDIC, as back-up  regulators.  Direct  Merchants Bank is not a "bank" as defined
under the Bank Holding  Company Act of 1956, as amended (the "BHCA")  because it
(i) engages only in credit card operations, (ii) does not accept demand deposits
or  deposits  that the  depositor  may  withdraw  by check or similar  means for
payment to third  parties or others,  (iii) does not accept any  savings or time
deposit of less than  $100,000,  except for deposits  pledged as collateral  for
extensions of credit,  (iv) maintains only one office that accepts  deposits and
(v) does not engage in the business of making commercial loans. As a result, the
Company is not a bank holding  company under the BHCA. If Direct  Merchants Bank
failed to meet the credit card bank criteria  described above,  Direct Merchants
Bank's  status  as an  insured  bank  would  make  the  Company  subject  to the
provisions  of the BHCA.  The  Company  believes  that  becoming a bank  holding
company would limit the Company's ability to pursue future opportunities.

         Exportation of Interest Rates and Fees

         Under current judicial  interpretations  of federal law, national banks
such as Direct  Merchants  Bank may charge  interest at the rate  allowed by the
laws of the state  where the bank is located  and may  "export"  those  interest
rates on loans to borrowers in other states,  without regard to the laws of such
other states.

         In 1996,  the Supreme  Court of the United  States  held that  national
banks may also impose late  payment  fees allowed by the laws of the state where
the national bank is located on borrowers in other states, without regard to the
laws of such other states.  The Supreme  Court based its opinion  largely on its
deference  to a  regulation  adopted  by the OCC  that  includes  certain  fees,
including  late  fees,  overlimit  fees,  annual  fees,  cash  advance  fees and
membership fees,  within the term "interest" under the provision of the National
Bank Act that has been  interpreted to permit  national banks to export interest
rates. As a result, national banks such as Direct Merchants Bank may export such
fees.

         Dividends and Transfers of Funds

         There are various federal law limitations on the extent to which Direct
Merchants  Bank can  finance or  otherwise  supply  funds to the Company and its
affiliates through  dividends,  loans or otherwise.  These limitations  include:
minimum regulatory capital requirements;  restrictions concerning the payment of
dividends out of net profits or surplus; and Sections 23A and 23B of the Federal
Reserve  Act  governing  transactions  between  a bank  and its  affiliates.  In
general,  Federal law  prohibits a national bank such as Direct  Merchants  Bank
from making dividend  distributions on common stock if the dividend would exceed
currently available  undistributed  profits. In addition,  Direct Merchants Bank
must get OCC prior approval for a dividend,  if such  distribution  would exceed
current  year net income  combined  with  retained  earnings  from the prior two
years.  Direct Merchants Bank cannot make a dividend if the  distribution  would
cause the bank to fail to meet applicable capital adequacy  standards.  Finally,
although not a  regulatory  restriction,  the terms of certain  debt  agreements
prohibit the payment of dividends in certain circumstances.

         Comptroller of the Currency

         Capital Adequacy. The Federal Deposit Insurance Corporation Improvement
Act of 1991  ("FDICIA"),  requires  the banking  agencies to  prescribe  certain
non-capital  standards for safety and soundness relating generally to operations
and management,  asset quality and executive compensation.  FDICIA also provides
that  regulatory  action  may be taken  against  a bank  that does not meet such
standards.

         The OCC has adopted regulations that define the five capital categories
(well  capitalized,  adequately  capitalized,  undercapitalized,   significantly
undercapitalized  and critically  undercapitalized)  identified by FDICIA, using
the total risk-based  capital,  Tier 1 risk-based  capital and leveraged capital
ratios as the relevant  capital  measures.  Such regulations  establish  various
degrees of  corrective  action to be taken  when an  institution  is  considered
undercapitalized.  Under the regulations,  a "well capitalized" institution must
have a Tier 1 capital  ratio of at least 6 percent,  a total capital ratio of at
least 10 percent  and a leverage  ratio of at least 5 percent and not be subject
to a capital directive order. An "adequately  capitalized" institution must have
a Tier 1 capital ratio of at least 4 percent,  a total capital ratio of at least
8 percent and a leverage  ratio of at least 4 percent (3 percent in some cases).
Under these guidelines, Direct Merchants Bank is considered well capitalized.

         The OCC's risk-based  capital  standards  explicitly  consider a bank's
exposure  to  declines  in the  economic  value of its capital due to changes in
interest rates when evaluating a bank's capital adequacy.  Interest rate risk is
the exposure of a bank's current and future  earnings and equity capital arising
from adverse  movements in interest rates. The evaluation will be made as a part
of the institution's regular safety and soundness examination.

         FDICIA.  FDICIA  requires the FDIC to implement a system of  risk-based
premiums  for  deposit  insurance  pursuant  to  which  the  premiums  paid by a
depository institution will be based on the probability that the FDIC will incur
a loss in  respect  of such  institution.  The FDIC has  adopted  a system  that
imposes insurance  premiums based upon a matrix that takes into account a bank's
capital level and  supervisory  rating.  Given Direct  Merchants  Bank's capital
level and  supervisory  rating,  Direct  Merchants  Bank pays the lowest rate on
deposit insurance premiums.

         Under FDICIA,  only "well  capitalized"  and  "adequately  capitalized"
banks may accept brokered deposits.  "Adequately  capitalized"  banks,  however,
must first obtain a waiver from the FDIC before accepting  brokered deposits and
such  deposits  may not pay rates  that  significantly  exceed the rates paid on
deposits of similar size and maturity  accepted  from the bank's  normal  market
area or the national rate on deposits of comparable  maturity,  as determined by
the FDIC,  for deposits  from  outside the bank's  normal  market  area.  Direct
Merchants Bank may accept brokered deposits as part of its funding;  however, it
does not presently rely on brokered deposits to fund its operations.

         Lending Activities

         Direct  Merchants  Bank's  activities  as a credit card lender are also
subject to regulation under various federal  consumer  protection laws including
the  Truth-in-Lending  Act,  the Equal Credit  Opportunity  Act, the Fair Credit
Reporting Act, the Community  Reinvestment Act (the "CRA") and the Soldiers' and
Sailors' Civil Relief Act.  Regulators  are  authorized to impose  penalties for
violations of these  statutes and, in certain cases,  to order Direct  Merchants
Bank to pay  restitution  to  injured  cardholders.  Cardholders  may also bring
actions for certain alleged  violations of such  regulations.  Federal and state
bankruptcy and debtor relief laws also affect Direct Merchants Bank's ability to
collect  outstanding  balances owed by  cardholders  who seek relief under these
statutes.

         The OCC's CRA  regulations  subject  limited  purpose banks,  including
Direct Merchants Bank, to a "community development" test for evaluating required
CRA compliance.  The community development performance of a limited purpose bank
is  evaluated  pursuant  to various  criteria  involving  community  development
lending, qualified investments and community development services.

         Legislation

         From time to time  legislation  has been  proposed in Congress to limit
interest  rates and fees  that  could be  charged  on credit  card  accounts  or
otherwise restrict practices of credit card issuers.

         If this or similar  legislation is proposed and adopted,  the Company's
ability to collect on account  balances or maintain  previous  levels of finance
charges and other fees could be adversely affected.  Additionally,  changes have
been proposed to the federal bankruptcy laws. Changes in federal bankruptcy laws
and any  changes to state  debtor  relief and  collection  laws could  adversely
affect the Company if such changes result in, among other things, accounts being
charged off as  uncollectible  and  additional  administrative  expenses.  It is
unclear at this time  whether and in what form any  legislation  will be adopted
or, if adopted,  what its impact on the Company  would be.  Congress  may in the
future consider other  legislation that would materially  affect the credit card
and related fee-based services industries.

         Consumer and Debtor Protection Laws

         Various federal and state consumer  protection laws limit the Company's
ability to offer and extend  credit.  In  addition,  the U.S.  Congress  and the
states may decide to regulate  further the credit card industry by enacting laws
or  amendments  to  existing  laws to reduce  finance  charges  or other fees or
charges  applicable to credit card and other  consumer  revolving loan accounts.
These  laws may  adversely  affect the  Company's  ability to collect on account
balances or maintain  established  levels of periodic  rate finance  charges and
other fees and charges with respect to the accounts. Similarly, Congress and the
states may decide to regulate further the Company's fee-based services.

         Certain  existing laws and regulations  permit class action lawsuits on
behalf of customers in the event of  violations,  and such class lawsuits can be
very expensive to defend, even without any violation.  The Company is a party to
various legal proceedings  resulting from its ordinary business activities.  One
proceeding,  filed in Alabama in April 1998, seeks certification as a class. The
Company  intends to defend this action  vigorously,  but if this action,  or any
other  class  action,  is  determined  adversely,  such  decision  could  have a
significant adverse economic impact on the Company.

         Investment in the Company and Direct Merchants Bank

         Certain  acquisitions  of capital  stock may be  subject to  regulatory
approval or notice under  federal law.  Investors are  responsible  for insuring
that they do not directly or indirectly  acquire  shares of capital stock of the
Company  in  excess  of the  amount  which can be  acquired  without  regulatory
approval.

         Interstate Taxation

         Several states have passed legislation which attempts to tax the income
from  interstate  financial  activities,  including  credit cards,  derived from
accounts  held  by  local  state  residents.  The  Company  believes  that  this
legislation  will not materially  affect it. The Company's  belief is based upon
the following:  current  interpretations  of the  enforceability of legislation;
prior  court  decisions;  and the volume of  business in states that have passed
legislation.

         Fair Credit Reporting Act

         The Fair Credit Reporting Act ("FCRA")  regulates  "consumer  reporting
agencies." Under the FCRA, an entity risks becoming a consumer  reporting agency
if it furnishes  "consumer  reports" to third parties.  A "consumer report" is a
communication  of  information  which  bears on a  consumer's  creditworthiness,
credit capacity,  credit standing or certain other  characteristics and which is
collected or used or expected to be used to determine the consumer's eligibility
for credit, insurance, employment or certain other purposes. The FCRA explicitly
excludes  from  the  definition  of  "consumer   report"  a  report   containing
information  solely as to transactions  or experiences  between the consumer and
the entity making the report.  An entity may share consumer  reports with any of
its  affiliates so long as that entity  provides  consumers  with an appropriate
disclosure and an opportunity to opt out of such "affiliate sharing".

         It is the  objective  of the  Company to conduct  its  operations  in a
manner which would fall outside the  definition of "consumer  reporting  agency"
under the FCRA.  If the  Company  were to become a  consumer  reporting  agency,
however,  it would be subject to a number of complex and  burdensome  regulatory
requirements  and  restrictions.  Such  restrictions  could  have a  significant
adverse economic impact on the Company.  The Company's agreements with Fingerhut
provide that neither will  provide  information  that causes  either to become a
consumer  reporting agency.  Failure to comply with this limitation could result
in termination of the agreements and have an adverse impact on the Company.


Employees

         As of December 31, 1998, the Company had over 1,900  employees  located
in Arizona, Illinois,  Maryland,  Minnesota, and Oklahoma. None of the Company's
employees are  represented  by a collective  bargaining  agreement.  The Company
considers its relations with its employees to be good.


Trademarks and Tradenames

         MCI and its subsidiaries have registered and continue to register, when
appropriate, various trademarks, tradenames and service marks used in connection
with its business and for private  label  marketing of certain of its  products.
The  Company  considers  these  trademarks  and  service  marks  to  be  readily
identifiable with, and valuable to, its business.


Executive Officers of the Registrant

         The  following  table sets forth  certain  information  concerning  the
persons who currently serve as executive officers of the Company. Each executive
officer serves at the discretion of the Board of Directors of the Company.

  Name                   Age               Position

  Ronald N. Zebeck       44     President, Chief Executive Officer and Director

  Z. Jill Barclift       41     Executive Vice President, General Counsel and
                                Secretary

  Douglas B. McCoy       51     Executive Vice President, Operations

  Douglas L. Scaliti     41     Executive Vice President, Fee-Based Products

  David D. Wesselink     56     Executive Vice President, Chief Financial
                                Officer

  Patrick J. Fox         43     Senior Vice President, Business Development

  Joseph A. Hoffman      41     Senior Vice President, Consumer Credit Marketing

  David R. Reak          40     Senior Vice President, Credit Risk

  Paul T. Runice         39     Senior Vice President, Treasurer

  Jean C. Benson         31     Vice President, Finance, Corporate Controller

         Ronald N. Zebeck has been the President and Chief Executive Officer and
a director of the Company since its incorporation in August 1996. Mr. Zebeck has
been  President  of Metris  Direct,  Inc.  since  March  1994 and has  served as
Chairman  of the Board of Direct  Merchants  Bank since  August  1995.  Prior to
joining the Company,  Mr. Zebeck was Managing  Director,  GM Card  Operations of
General Motors  Corporation  from 1991 to 1993,  Vice  President,  Marketing and
Strategic Planning of Advanta Corporation (Colonial National Bank USA) from 1987
to  1991,  Director  of  Strategic  Planning  of TSO  Financial  (later  Advanta
Corporation)  from 1986 to 1987 and held various credit card and  credit-related
positions at Citibank affiliates from 1976 to 1986.

         Z. Jill Barclift has been Executive Vice President, General Counsel and
Secretary of the Company since November  1998.  Ms.  Barclift was appointed Vice
President,  General  Counsel in December  1996 and served as  Assistant  General
Counsel  from April 1996 to December  1996.  Prior to joining the  Company,  Ms.
Barclift held various positions at Household  International,  Inc. and Household
Credit  Services,  Inc.  from  October  1989 to April  1996,  most  recently  as
Associate General Counsel.  Prior to that, she was Senior Counsel at Dean Witter
Financial Services, Inc. from January 1984 to October 1989.

         Douglas B. McCoy has been Executive Vice  President,  Operations of the
Company since  November  1998.  Mr. McCoy was appointed  Senior Vice  President,
Operations  of the  Company  in  December  1996 and  served  as Vice  President,
Operations  of Metris  Direct,  Inc.  from  January  1995 to November  1996.  In
addition, Mr. McCoy has been President of Direct Merchants Bank since July 1995.
Prior to joining the Company,  he was Vice President,  Credit  Administration of
USAA Federal  Savings Bank from September  1984 to January 1995,  Assistant Vice
President, Credit Administration of Bank of Oklahoma from July 1984 to September
1984, Assistant Vice President,  Operations of First National Bank of Tulsa from
May 1982 to July 1984 and Assistant Vice President, Credit Card Marketing of The
Bank of New Orleans from April 1978 to April 1982.

         Douglas  L.  Scaliti  has  been  Executive  Vice  President,  Fee-Based
Products of the Company since November 1998.  Mr.  Scaliti  previously  held the
position Senior Vice President, Fee-Based Services since March 1998. Mr. Scaliti
was appointed  Senior Vice President,  Marketing of the Company in December 1996
and served as Vice  President,  Marketing  of the  Company  from  August 1996 to
November 1996 and held that same position at Metris Direct, Inc. since September
1994.  Prior to  joining  the  Company,  he held  several  positions  at Advanta
Corporation in its marketing and operations  area,  including  Senior  Marketing
Manager,  Credit  Cards  from  1987  to  1994,  Operations  Consultant,   Profit
Improvement from 1985 to 1987 and Credit  Operations  Manager from 1982 to 1985.
Mr. Scaliti also serves on the First Data Resources Market Area Advisory Group.

         David D. Wesselink has been Executive Vice President, Chief Financial
Officer of the Company since December 1998.  Prior to joining the Company, Mr.
Wesselink was Senior Vice President and Chief Financial Officer of Advanta
Corporation since 1993. Prior to Advanta Corporation, he held several positions
at Household Finance Corp. and Household International, Inc. from 1971 to 1993,
including Senior Vice President from 1986 to 1993 and Chief Financial Officer
from 1982 to 1993.

         Patrick J. Fox has been Senior  Vice  President,  Business  Development
since March 1998. Prior to joining the Company, Mr. Fox held executive positions
in the credit card group of Bank of America from  September  1994 to March 1998.
Most  recently  he  was  the  Director  of  Product   Management   and  Business
Development.  Previous to Bank of America,  Mr. Fox held various  marketing  and
sales management positions with Bank One, which he joined in 1990, Comerica Bank
and Citibank.

         Joseph A.  Hoffman  has been  Senior Vice  President,  Consumer  Credit
Marketing since April 1998.  Prior to joining the Company,  Mr. Hoffman was Vice
President  of  Marketing  at Advanta  Corporation  from June 1994 to April 1998,
where he held a variety of positions including Directors of Brand Management and
Affinity and Co-Brand  Marketing.  Before that, Mr. Hoffman was Vice  President,
Area Director, in Citibank's Card Product Group, which he joined in 1980. During
his fourteen-year tenure with Citibank,  Mr. Hoffman held a variety of Marketing
and Operations positions with Citibank's Bankcard and Private Label businesses.

         David R.  Reak has  been  Senior  Vice  President,  Credit  Risk of the
Company since November 1998. Mr. Reak was appointed Vice President,  Credit Risk
of the Company in October 1996 and previously served as Senior Director,  Credit
Risk of Metris Direct, Inc. from December 1995 to October 1996. Prior to joining
the  Company,  he had several  positions  at  American  Express  Travel  Related
Services  Company,  including Senior Manager,  Credit Risk Management Europe and
Middle East from 1994 to December 1995,  Senior Manager,  Credit Risk Management
U.S.  Consulting Group from 1992 to 1994, and Project  Manager,  Credit Research
and Analysis from 1990 to 1992.

         Paul T. Runice has been Senior Vice President, Treasurer of the Company
since November 1998.  Mr. Runice previously was Vice President, Treasurer of the
Company from January 1998 to October 1998.  Prior to joining the Company, Mr.
Runice was with the Bank of America for nine years, most recently as Vice
President in the U.S. Corporate Finance Group. Prior to Bank of America, he was
employed by Grand Metropolitan, Inc. and The Pillsbury Company as Manager of
Treasury Operations, as well as in corporate development and financial analysis
roles.

         Jean C. Benson has been Vice President,  Finance,  Corporate Controller
of the Company  since May 1998 and has been  Corporate  Controller  since August
1996. In addition,  Ms. Benson held various finance positions at the Company and
FCI since October 1994. Prior to that, she held various  positions at Deloitte &
Touche LLP (public accounting),  specializing in the financial services industry
from 1990 to 1994.

         Officers of the Company are elected by, and hold office at the will of,
the Board of Directors and do not serve a "term of office" as such.


Risk Factors

         This  annual  report  on Form  10-K  contains  certain  forward-looking
statements and information relating to the Company that are based on the beliefs
of  management  as  well as  assumptions  made  by,  and  information  currently
available to,  management.  These  forward-looking  statements involve risks and
uncertainties that could cause our actual results to differ materially from such
statements.  You  should  not  place  undue  reliance  on these  forward-looking
statements  as they  speak  only  of the  Company's  views  as of the  date  the
statement was made and are not a guarantee of future performance.

         Forward-looking statements include statements and information as to our
strategies  and  objectives,  growth in  earnings  per share,  return on equity,
growth in our managed loan  portfolio,  net  interest  margins,  funding  costs,
operating  costs and  marketing  expenses,  delinquencies  and  charge  offs and
industry   comparisons  or  projections.   Forward-looking   statements  may  be
identified by the use of terminology  such as "may," "will,"  "believes,"  "does
not  believe,"   "no  reason  to  believe,"   "expects,"   "plans,"   "intends,"
"estimates,"  "anticipated," or "anticipates" and similar  expressions,  as they
relate to the Company or our management.  These statements reflect  management's
current  views with respect to future  events and are subject to certain  risks,
uncertainties and assumptions.

         The  factors  discussed  below,  among  others,  could cause our actual
results  to  differ  materially  from  those  expressed  in any  forward-looking
statements.  Though the  Company has  attempted  to list  comprehensively  these
important factors, the Company cautions you that other factors may in the future
prove to be important in affecting  the  Company's  results of  operations.  New
factors  emerge  from  time to time and it is not  possible  for  management  to
predict all of such factors, nor can it assess the impact of each such factor on
the business or the extent to which any factor,  or combination of factors,  may
cause  actual  results  to  differ   materially  from  those  contained  in  any
forward-looking statement.

         Risks Related to Higher Default and Bankruptcy Rates of the Target
Market for  Consumer Credit Products

         The primary risk associated  with unsecured  lending to moderate income
consumers is higher  default or  bankruptcy  rates than other income  classes of
consumers,  resulting in more accounts being  charged-off as  uncollectible.  In
addition, general economic factors, such as the rate of inflation,  unemployment
levels and interest rates may result in greater  delinquencies and credit losses
among  moderate  income  consumers than among other income classes of consumers.
The Company cannot assure you that it will be able to successfully  identify and
evaluate the  creditworthiness  of its target customers to minimize the expected
higher  delinquencies  and losses.  The Company also cannot  assure you that its
risk-based  pricing system can offset the negative impact on profitability  that
the expected greater delinquencies and losses may have.

         Lack of Seasoning of Credit Card Portfolio Creates a Risk of Increasing
Loss Levels

         The Company's  growth strategy is likely to produce a continued flow of
unseasoned  accounts into the Company's  portfolio.  The average age of a credit
card issuer's portfolio of accounts generally affects the level and stability of
delinquency  and  loss  rates  of  that  portfolio.  For  example,  a  portfolio
containing mostly older accounts generally behaves more predictably than a newly
originated  portfolio.  At December 31, 1998,  74% of the Company's  credit card
accounts  were less than 36 months old and 14% of its credit card  accounts were
less than six months old. At December 31, 1998,  7.4% of the  Company's  managed
credit card loans were 30 days or more delinquent,  compared to 7.1% at December
31, 1997 and 5.5% at December  31, 1996.  For the year ended  December 31, 1998,
the Company had annualized net  charge-offs of 10.8%,  compared to 9.3% and 6.2%
for the years ended December 31, 1997 and 1996, respectively. As a result, until
the accounts become more seasoned,  the Company expects the delinquency and loss
levels  of the  Company's  portfolio  to  continue  to  increase.  Any  material
increases in delinquencies  and losses beyond the Company's  expectations  could
have a material  adverse impact on the Company and the value of its net retained
interests in loans securitized.

         Limited Operating History as a Stand-Alone Entity Makes Predicting
Future Performance Difficult

         In connection with the Spin Off in September 1998 described  above, the
Company  significantly  changed its  funding  sources to  stand-alone  financing
without guarantees from FCI. See "Business - Liquidity and Funding." The Company
expects higher  borrowing  expense under its New Credit Facility  because of the
Company's lower independent  credit rating.  Our relatively short existence as a
stand-alone company makes it difficult to apply historical operating results and
trends to assess our future performance.


         No Assurance Can be Given of the Company's Ability to Sustain and
Manage Growth

         In  order  to meet  its  strategic  objectives,  the  Company  plans to
continue to expand its credit card loan portfolio. Continued growth in this area
depends largely on:

o   the Company's ability to attract new cardholders;

o   growth in both existing and new account balances;

o   the degree to which the Company loses accounts and account balances to
    competing card issuers;

o   levels of delinquencies and losses;

o   the availability of funding, including securitizations, on favorable terms;

o   general economic and other factors such as the rate of inflation,
    unemployment levels and interest rates, which are beyond the Company's
    control; and

o   the Company's ability to acquire and integrate portfolios; and

o   stability and growth in management.

         The  Company's  continued  growth also depends on its ability to manage
such  growth   effectively.   Factors  that  affect  the  Company's  ability  to
successfully  manage  growth  include:   retaining  and  recruiting  experienced
management   personnel,   finding  and   adequately   training  new   employees,
cost-effectively  expanding its facilities,  growing and updating its management
systems and obtaining capital when needed. The Company cannot give assurances as
to the future  growth in its loan  portfolio  or its  ability to manage any such
growth.

         Successful Integration of Portfolio Acquisitions Depends on Limited or
Unreliable Historical Information

         As previously  mentioned,  the Company's  growth depends in part on its
ability to acquire and  successfully  integrate  new  portfolios  of credit card
customers.  Since the Company's risk-based pricing system depends on information
regarding customers,  limited or unreliable historical  information on customers
within an acquired  portfolio may impact the Company's  ability to  successfully
and profitably  integrate that portfolio.  The Company's success also depends on
whether the desirable  customers of an acquired  portfolio  close their accounts
after transfer of the portfolio.  A large attrition rate would result in a lower
borrowing base upon which to assess fees,  higher costs for the Company relating
to closing  accounts and less  potential for marketing  fee-based  services.  In
addition,  if customers  reduce their borrowings after the transfer of accounts,
the acquired portfolio may be less profitable than originally expected. To date,
the Company's portfolio acquisitions have experienced attrition rates consistent
with the rate estimated at the time of acquisition.

         Risks Related to Fee-Based Services Include the Uncertainty of
Successful Marketing Efforts and Signing Additional Marketing Alliances

         The Company targets its fee-based services to its credit card customers
and customers of third  parties.  Because of the variety of offers  provided and
the diversity of the customers targeted, the Company is uncertain about how many
customers will respond to the Company's offers for these fee-based services. The
Company may  experience  higher than  anticipated  costs in connection  with the
internal  administration  and underwriting of these fee-based services and lower
than anticipated response or retention rates.

         Furthermore,  the  Company  may  not be able to  expand  the  fee-based
services business or maintain historical growth and stability levels if:

o  the Company cannot successfully market credit cards to new customers;

o  existing credit card customers close accounts voluntarily or involuntarily;

o  existing fee-based services customers cancel their services;

o  the Company cannot form marketing alliances with other third parties; or

o  new or restrictive state regulations limit the Company's ability to market or
   sell fee-based services.

         The Unavailability or Increased Cost of Funding Could Negatively
Affect the Company's Profitability and Ability to Grow

         The Company depends on cash flow from operations, asset securitization,
and the issuance of long-term debt and equity to fund its  operations.  The loss
of any of these sources of funding could adversely affect the Company's  ability
to operate.  If the Company  breaches any of its covenants in the long-term debt
indenture or under its credit facility,  including various financial  covenants,
the lenders may terminate the  facility.  In addition,  because of the Company's
limited  operating  history  and  relatively  unseasoned  loan  portfolio,   FCI
historically  guaranteed  the  Company's  credit  facility,  as well as  several
letters of credit and two  interest  rate swap  transactions.  Prior to the Spin
Off,  however,  the Company  refinanced all funding and derivative  transactions
without a guarantee from FCI. Absent FCI's guarantee,  the Company's stand-alone
financing is significantly  more expensive and subject to more restrictive terms
and conditions. Any material increase in the Company's costs of financing beyond
the Company's expectations could have a negative impact on the Company.

         The Company also depends heavily upon the  securitization of its credit
card loans to fund its  operations  and, to date,  has completed  securitization
transactions  on terms that it believes  are  satisfactory.  The Company  cannot
assure  you that the  securitization  market  will  continue  to offer  suitable
funding  alternatives.  Furthermore,  the Company's  ability to  securitize  its
assets depends on the continued availability of credit enhancement on acceptable
terms  and  the  continued  favorable  legal,  regulatory,  accounting  and  tax
environment for securitization transactions.  Any adverse change could force the
Company to rely on other potentially more expensive funding sources.

         In addition,  poor  performance  of the Company's  securitized  assets,
including increased delinquencies and credit losses, could result in a downgrade
or  withdrawal  of the  ratings  on the  outstanding  securities  issued  in the
Company's  securitization   transactions,   cause  early  amortization  of  such
securities or result in higher required credit  enhancement  levels.  This could
jeopardize the Company's ability to complete other  securitization  transactions
on acceptable terms,  decrease the Company's  liquidity and force the Company to
rely  on  other  potentially  more  expensive  funding  sources  to  the  extent
available.

         The Company  plans to continue to expand its credit card  portfolio  by
soliciting  customers  directly and by purchasing  credit card  portfolios  from
third  parties.  The Company  will depend on  securitization  and other  funding
sources to finance the  portfolio's  acquisitions.  At times it may be necessary
for the  Company  to issue  debt or  equity  to fund the new  loan  growth.  The
Company's  ability  to  secure  favorable  financing  depends  on third  parties
willingness  to lend to the Company.  There can be no assurance that the Company
will be able to secure funds to support its growth on terms as favorable as past
transactions.  Any  adverse  change in the funding  sources  used by the Company
could  force the Company to rely on other  potentially  more  expensive  funding
sources.

         Interest Rate Fluctuations Impact the Yield on Company Assets and
Funding Expense

         A  reduction  in  market  interest  rates may  reduce  the yield on the
Company's  assets while fixed rate funding  expenses stay flat,  compressing the
interest  spread on which the Company  profits.  A rise in market interest rates
will directly  increase  floating rate funding expense and may indirectly impact
the payment performance of the Company's customers. Management tries to minimize
the impact of changes in market interest rates on the Company's cash flow, asset
value and net income  primarily by funding  variable  rate assets with  variable
rate funding  sources and by using interest rate  derivatives to match asset and
liability  repricings.  However,  changes  in market  interest  rates may have a
negative impact on the Company.

         Current and Proposed Regulation and Legislation Limits the Company's
Business Activities, Product Offerings and Fees Charged

         Various federal and state laws and regulations  significantly limit the
activities  in which the  Company and Direct  Merchants  Bank are  permitted  to
engage. Such laws and regulations,  among other things, limit the fees and other
charges that the Company is allowed to charge,  limit or prescribe certain other
terms of the Company's products and services,  require specified  disclosures to
consumers,  govern the sale and terms of products  and  services  offered by the
Company and require that the Company maintain certain licenses,  qualifications,
or capital  requirements  (see  "Business -  Regulations").  In some cases,  the
precise application of these statutes and regulations is not clear. In addition,
the  regulatory  framework at the state and federal level  regarding some of the
Company's fee-based products is evolving.  The regulatory framework,  as well as
changes in legal interpretation which may result from the Spin Off, could affect
the design or profitability  of such products and the Company's  ability to sell
certain products. In addition, numerous legislative and regulatory proposals are
advanced  each year which,  if adopted,  could  adversely  affect the  Company's
profitability  or further  restrict the manner in which the Company conducts its
activities.  The  failure  to comply  with,  or  adverse  changes in the laws or
regulations to which the Company's  business is subject,  or adverse  changes in
the  interpretation  thereof,  could adversely  affect the Company's  ability to
collect its receivables and generate fees on the receivables  which could have a
material adverse effect on the Company's business.

         Other Industry Risks Related to Consumer Credit Products and Fee-Based
Services Could Negatively Impact the Company

         The Company faces the risk of fraud by  cardholders  and third parties,
as well as the risk that  increased  criticism  from consumer  advocates and the
media could hurt consumer  acceptance  of its products.  There is also a risk of
litigation, including class action litigation, challenging the Company's product
terms,  rates,  disclosures,  collections  or other  practices,  under state and
federal   consumer   protection   statutes  and  other  laws  (see  "Business  -
Regulation").

         As a Result of Intense Competition in the Company's Consumer Credit
Products and Fee-Based Services Businesses, There is no Assurance that the
Company Can Compete Successfully

         The Company  faces  intense and  increasing  competition  from numerous
financial  services  providers,  many of which have greater  resources  than the
Company.  In  particular,  the  Company's  credit card  business  competes  with
national, regional and local bank card issuers, as well as other general purpose
and private  label  credit  card  issuers.  There has been a recent  increase in
solicitations to moderate income  consumers,  as competitors  have  increasingly
focused on this market.  Customers are attracted to credit card issuers  largely
on the basis of price,  credit limit and other  product  features;  as a result,
customer  loyalty  is often  limited.  According  to  published  reports,  as of
December 1998, the 20 largest issuers  accounted for approximately 90% (based on
receivables outstanding) of the market for general purpose credit cards. Many of
these  issuers  are  substantially   larger,  have  more  seasoned  credit  card
portfolios  than the Company and often compete for  customers by offering  lower
interest rates and/or fee levels than the Company. The Company cannot assure you
that it will be able to compete successfully in this environment.

         The Company also faces  competition  from numerous  fee-based  services
providers,  including insurance companies,  financial services  institutions and
other membership-based or consumer services providers, many of which are larger,
better  capitalized  and more  experienced  than  the  Company.  As the  Company
continues  to expand its  extended  service  plan  business to the  customers of
third-party retailers,  it competes with manufacturers,  financial institutions,
insurance  companies and a number of independent  administrators,  many of which
have greater operating experience and financial resources than the Company.

         Changes in the Relationship With FCI Could Materially Impact the
Company's Business

          Upon a Change of Control of the Company, Fingerhut can Terminate the
Company's Access to the Vital Database and Repurchase Credit Cards Bearing the
Fingerhut Name and Logo


         The  Company  and  FCI or  Fingerhut  have  entered  into a  number  of
agreements  for the purpose of defining the ongoing  relationship  between them,
some of which are material to the Company's business.  As previously  discussed,
the  Company  relies on its  access to the  Fingerhut  Database,  including  the
Fingerhut Suppress File, to market financial  services products.  As of December
31, 1998,  Fingerhut customers in the Fingerhut Database  represented 35% of the
Company's  credit  card  accounts  and all of the  purchasers  of the  Company's
extended service plans. Until the Company develops its own significant  database
and extended  service plan marketing  relationships  with other  companies,  its
success will depend largely on its exclusive rights to the Fingerhut Database to
market such service plans and its right to be the exclusive  provider of certain
financial services products to Fingerhut customers.  Fingerhut can terminate the
Company's  contractual rights to this access in the event a third party acquires
control of the Company and, upon termination of the agreement, Fingerhut has the
right to repurchase any  then-outstanding  general  purpose credit cards bearing
the  Fingerhut  name and logo.  Any  denial or delay of this  access or any such
repurchase could have a significant economic impact on the Company.

         Recent Acquisition of Fingerhut Could Negatively Impact the Company

         On February 11, 1999,  FCI announced  that it had agreed to be acquired
by Federated Department Stores, Inc. This transaction was completed on March 18,
1999, and the separate corporate existence of FCI ceased. Although the Company's
agreements  with FCI and Fingerhut  will not be terminated by this  transaction,
the  Company  cannot  predict  how this  change in status for FCI may impact the
relationship of the Company with FCI and Fingerhut.


          No Assurance that Conflicts of Interest Between the Company and FCI
will be Resolved in Favor of the Company

         Conflicts of interest  may arise in the future  between the Company and
FCI due to the continuing  contractual  relationship between the Company and FCI
and the overlap of the Company's  Non-Executive  Chairman of the Board, Theodore
Deikel,  who is also the  Chairman of the Board and Chief  Executive  Officer of
FCI. The Company has not  instituted  any formal plan or  arrangement to address
such potential conflicts of interest.  Although the directors intend to exercise
reasonable  judgment  and take  such  steps as they  deem  necessary  under  the
circumstances  in resolving  any  conflict  that may occur,  the Company  cannot
assure you that any conflicts will be resolved in favor of the Company.

         Risks Relating to Year 2000 Compliance

         The "Year  2000  Problem"  is a result of  computer  systems  using two
digits rather than four digits to define the applicable year. The Company,  like
all database marketing  companies and financial services  institutions,  depends
heavily  upon  computer  systems for all phases of its  operations.  The Company
processes data through its own systems and obtains data and processing  services
from various vendors. The Company,  therefore, must concern itself not only with
its own systems,  but also with the status of Year 2000  compliance with respect
to those vendors that provide data and processing services to the Company.

         Most of the Company's existing  information systems are less than three
years  old and were  originally  designed  for Year  2000  compliance,  but as a
cautionary measure, the Company has begun testing such internal systems for Year
2000  compliance.  The Company also depends on databases  maintained  by FCI and
card and  statement  generation,  among other  services,  provided  by FDR.  The
Company has created a Year 2000 project  team to  identify,  address and monitor
internal  systems and vendor issues related to Year 2000  problems.  The project
team  meets  monthly  with  systems  experts at FCI and works  closely  with the
Company's identified material vendors, including FDR, to determine the impact on
the  Company's  and the vendors'  plans for becoming  Year 2000  compliant.  The
project team is striving to obtain test results showing compliance by vendors by
the end of the first  quarter of 1999 and has developed  high-level  contingency
plans to address  non-compliance  by its  material  vendors,  which may  include
replacing  vendors.  The  Company  may have  difficulty  identifying  acceptable
alternative  vendors,  many of which  may be  overburdened  with  requests  from
similarly situated  companies.  If the Company is unable to identify  acceptable
and available  alternative  vendors,  the transition of services to such vendors
may be time consuming and costly.

         Although the Company cannot ensure  compliance by all of its vendors on
a timely  basis,  the Company  believes that it is taking  appropriate  steps to
identify  exposure to Year 2000  problems and to address them on a timely basis.
In addition, the Company believes that it has adequate resources to achieve Year
2000  compliance  for its systems which  currently may not be compliant and that
the costs of Year 2000  compliance  will not be  material  to the  Company.  If,
however,  compliance with Year 2000 issues is not completed on a timely basis or
is not fully effective,  the most reasonably likely worst case scenario that may
impact the Company's results of operations, financial condition and prospects is
the failure of FDR,  Visa and  MasterCard  to provide  services.  The  Company's
cardholders  would be unable to use their credit cards or otherwise access their
accounts. Due to several unknown contributing factors, and the scope of the Year
2000 issue,  the impact  this worst case  scenario  would have on the  Company's
results of operations, financial condition and prospects, is an uncertainty. The
scenarios will be analyzed and addressed in the Company's contingency plans.

         The risks relating to the "Year 2000 Problem" are more fully  discussed
in "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations" on pages 32 to 34 of the 1998 Annual Report.

         Potential Volatility of Stock Price

         The Company  which began as a subsidiary  of FCI, was  incorporated  in
1996 and prior to the Spin Off was 83% owned by FCI.  Factors  such as actual or
anticipated   fluctuations  in  the  Company's  operating  results,   regulatory
developments,  conditions and trends in the consumer  credit  industry,  general
market   conditions  and  other  factors   beyond  the  Company's   control  may
significantly  affect the market price of the Common  Stock.  In  addition,  the
market  has,  from  time to  time,  experienced  significant  price  and  volume
fluctuations  that often have been  unrelated to the  operating  performance  of
particular  companies.  These broad fluctuations may adversely affect the market
price of the Common Stock.


Item 2.  Properties

         The Company  currently  leases its principal  executive office space in
St. Louis Park,  Minnesota,  consisting of leases for  approximately  75,000 and
18,000 square feet. These leases expire on November 30, 2000 and April 30, 2001,
respectively.  Direct  Merchants  Bank leases office space in Phoenix,  Arizona,
consisting of  approximately  26,000 square feet. This lease expires on June 30,
2004, and may be terminated by the Company after June 30, 2001. In addition, the
Company  leases  facilities  in Tulsa,  Oklahoma,  White  Marsh,  Maryland,  and
Champaign,  Illinois,  consisting  of 62,000,  100,000,  and 9,000  square feet,
respectively.  These leases expire on December 31, 1999, September 30, 2007, and
November  30,  2002,  respectively.  The Company has  extended  the lease on its
current  facility in Oklahoma  through  1999 and entered into leases for its new
Oklahoma and Jacksonville  operations centers.  These leases commence January 1,
2000 and June 1, 1999 and consist of  approximately  100,000 and 150,000  square
feet,   respectively.   The  leased  properties  in  Oklahoma,   Maryland,   and
Jacksonville support the Company's collections, customer service and back office
operations.  The Company  believes its facilities are suitable to its businesses
and that it will be able to lease or purchase additional facilities as needed.


Item 3.  Legal Proceedings

         The Company is a party to various legal proceedings  resulting from the
ordinary business activities  relating to its operations.  On February 25, 1998,
the Company  announced that the claims against it in the  shareholders  lawsuits
filed in October 1998 in the United States District Court, District of Minnesota
have been dismissed with prejudice.  The Complaints had alleged securities fraud
and other claims related to a decline in the Company's stock price. The lawsuits
were dismissed  through a Stipulation  and Order entered into by counsel for the
plaintiffs  and  defendants,  and ordered by the Federal  District  Court.  This
dismissal was agreed to and ordered prior to the case having been certified as a
class action and without payment to the named plaintiffs or their counsel.

         Certain  existing laws and regulations  permit class action lawsuits on
  behalf of customers in the event of violations, and such class lawsuits can be
  very expensive to defend, even without any violation. One of these actions, an
  Alabama action in the Circuit Court of Greene County  [(Preston Davis, Sr. et.
  al. v. Direct  Merchants  Credit Card Bank,  N.A.,  et. al.  (Civil Action No.
  CV98-012)],  seeks  damages in an  unascertained  amount and  purports to be a
  class action,  although no class has been  certified.  During the past several
  years, the press has widely reported certain  industry-related  concerns which
  may  impact  the  Company.  Some of these  involve  the  amount of  litigation
  instituted against financial services and insurance companies operating in the
  state of Alabama and the large  punitive  awards  obtained from juries in that
  state.  The  Alabama  case,  instituted  in April  1998,  generally  alleges a
  fraudulent sale of credit protection  insurance without consent.  Compensatory
  damages are sought.  The judicial  climate in Alabama is such that the outcome
  of this  case is  unpredictable.  The  Company's  subsidiary  believes  it has
  substantive  legal  defenses to this claim and is prepared to defend this case
  vigorously. Due to the uncertainties in litigation and other factors, there is
  no assurance that the Company's subsidiary will ultimately prevail. Should the
  Company's  subsidiary's case settle or otherwise be resolved,  it believes the
  amount, in the aggregate,  will not be material to the Company's  consolidated
  financial  condition.  However,  if  this  action,  or any  class  action,  is
  determined  adversely,  such decision can have a significant  adverse economic
  impact on the Company.


Item 4.  Submission of Matters to a Vote of Security Holders

         No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1998.


PART II


Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters

         The information  required by Item 201 of Regulation S-K is set forth in
the "Summary of Consolidated  Quarterly Financial Information and Stock Data" on
page 61 of the Company's  Annual Report to  Shareholders  as of and for the year
ended December 31, 1998 (the "1998 Annual Report") and is incorporated herein by
reference.

         During the period covered by this report,  the Company sold  securities
that were not registered under the Securities Act of 1933, as amended (the "1933
Act"),  in  reliance  on  Section  4(2) of the 1933 Act.  The  Company  received
aggregate proceeds of $300 million and paid underwriting discounts,  commissions
and related fees of $30 million.  The  additional  information  required by this
item is set forth in "Note 6 - Private Equity  Placement" on page 48 of the 1998
Annual Report and is incorporated herein by reference.


Item 6.   Selected Financial Data

         The  information  required  by this item is set forth under the caption
"Selected  Financial  Data"  on  page  18 of  the  1998  Annual  Report  and  is
incorporated herein by reference.


Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

         The  information  required by this item is set forth under the captions
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and  "Forward  Looking  Statements"  on  pages 19 to 35 of the 1998
Annual Report and is incorporated herein by reference.


Item 7a.  Quantitative And Qualitative Disclosures About Market Risk

         The  information  required by this item is set forth under the captions
"Management's  Discussion  and  Analysis-Market  Risk" on pages 29 and 30 of the
1998 Annual Report and is incorporated herein by reference.

<PAGE>


Item 8.  Financial Statements and Supplementary Data

                     METRIS COMPANIES INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                  (Dollars in thousands, except per share data)

<TABLE>


                                                                    December 31,
                                                                 1998         1997
                                                                 ----         ----

Assets:
<S>                                                            <C>        <C>
Cash and due from banks ....................................   $ 22,114   $ 21,006
Federal funds sold .........................................     15,060     27,089
Short-term investments .....................................        173        128
                                                               --------   --------
   Cash and cash equivalents ...............................     37,347     48,223
                                                               --------   --------
Retained interests in loans securitized ....................    753,469    471,831
   Less: Allowance for loan losses .........................    393,283    244,084
                                                               --------   --------
Net retained interests in loans securitized ................    360,186    227,747
                                                               --------   --------
Loans held for securitization ..............................      3,430      8,795
Property and equipment, net ................................     21,982     15,464
Accrued interest and fees receivable .......................      6,009      4,310
Prepaid expenses and deferred charges ......................     59,104     18,473
Deferred income taxes ......................................    153,021     80,787
Customer base intangible ...................................     81,892     36,752
Other receivables due from credit card securitizations, net     185,935     77,486
Other assets ...............................................     36,813     20,625
                                                               --------   --------
      Total assets .........................................   $945,719   $538,662
                                                               ========   ========

Liabilities:
Debt .......................................................   $310,896   $244,000
Accounts payable ...........................................     19,091     35,356
Current income taxes payable ...............................     31,783      9,701
Deferred income ............................................    124,892     49,204
Accrued expenses and other liabilities .....................     26,075     24,363
                                                               --------   --------
   Total liabilities .......................................   $512,737   $362,624
                                                               --------   --------
Stockholders' Equity:
Preferred stock, par value $.01 per share; 10,000,000 shares
   authorized, 539,866 shares issued and outstanding .......   $201,100
Common stock, par value $.01 per share; 100,000,000 shares
   authorized, 19,259,750 and 19,225,000 shares issued and
   outstanding, respectively ...............................        193   $    192
Paid-in capital ............................................    107,615    107,059
Retained earnings ..........................................    124,074     68,787
                                                               --------   --------
   Total stockholders' equity ..............................   $432,982   $176,038
                                                               --------   --------
   Total liabilities and stockholders' equity ..............   $945,719   $538,662
                                                               ========   ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

<PAGE>
<TABLE>


                     METRIS COMPANIES INC. AND SUBSIDIARIES
                        Consolidated Statements of Income
                  (Dollars in thousands, except per share data)

                                                                                      Year Ended December 31,
                                                                                   1998        1997        1996
                                                                                   ----        ----        ----
Interest Income:
<S>                                                                                <C>        <C>        <C>
Credit card loans and retained interests in loans securitized..................  $ 111,118   $ 66,695   $ 29,028
Federal funds sold ............................................................      1,065      1,636        867
Other .........................................................................      1,028        863        299
                                                                                  --------   --------   --------
   Total interest income ......................................................    113,211     69,194     30,194
Interest expense ..............................................................     30,513     11,951      4,106
                                                                                  --------   --------   --------
Net Interest Income ...........................................................     82,698     57,243     26,088
Provision for loan losses .....................................................     77,770     43,989     18,477
                                                                                  --------   --------   --------
Net interest income after provision for loan losses                                  4,928     13,254      7,611
                                                                                  --------   --------   --------
Other Operating Income:
Net securitization and credit card servicing income............................    138,221     79,533     49,921
Credit card fees, interchange and other credit card income.....................     68,136     43,731     26,028
Fee-based services revenues ...................................................    106,601     63,413     50,273
                                                                                  --------   --------   --------
                                                                                   312,958    186,677    126,222
                                                                                  --------   --------   --------
Other Operating Expense:
Credit card account and other product solicitation and
   marketing expenses .........................................................     40,949     30,503     29,297
Employee compensation .........................................................     62,627     35,200     23,068
Data processing services and communications ...................................     35,445     20,087     12,757
Third-party servicing expense .................................................     11,074     12,711      9,207
Warranty and debt waiver underwriting and claims servicing
   expense ....................................................................     12,279      6,053     10,024
Credit card fraud losses ......................................................      4,436      3,240      2,276
Other .........................................................................     57,828     30,254     14,658
                                                                                  --------   --------   --------
                                                                                   224,638    138,048    101,287
                                                                                  --------   --------   --------
Income Before Income Taxes ....................................................     93,248     61,883     32,546
Income taxes ..................................................................     35,900     23,825     12,530
                                                                                  --------   --------   --------
Net Income ....................................................................   $ 57,348   $ 38,058  $  20,016
Preferred stock dividends .....................................................      1,100         --         --
                                                                                  --------   --------   --------
Net Income Available to Common Stockholders ...................................   $ 56,248   $ 38,058  $  20,016
                                                                                  ========   ========   ========

Earnings Per Share:
Basic .........................................................................   $   2.92   $   1.98  $    1.21
Diluted .......................................................................   $   2.82   $   1.88  $    1.17

Shares used to compute earnings per share (000's)
Basic .........................................................................     19,232     19,225     16,572
Diluted .......................................................................     19,968     20,238     17,129
</TABLE>


                 See accompanying Notes to Consolidated Financial Statements.



<PAGE>

<TABLE>

                     METRIS COMPANIES INC. AND SUBSIDIARIES
           Consolidated Statements of Changes in Stockholders' Equity
                             (Dollars in thousands)


                                                                                                   Total
                                                Preferred   Common     Paid-In      Retained   Stockholders'
                                                  Stock     Stock      Capital      Earnings      Equity
<S>                                        <C>          <C>           <C>          <C>          <C>
BALANCE, DECEMBER 31, 1995 ...............  $            $             $  60,028    $  11,290   $   71,318
   Net income ............................                                             20,016       20,016
   Company reorganization ................                      160         (160)
   Issuance of common stock ..............                       32       47,352                    47,384
                                             ---------    ---------    ---------    ---------    ---------
BALANCE, DECEMBER 31, 1996 ...............  $            $      192    $ 107,220    $  31,306    $ 138,718
   Net income ............................                                             38,058       38,058
   Common stock dividends and other - cash                                  (161)        (577)        (738)
                                             ---------    ---------    ---------    ---------    ---------
BALANCE, DECEMBER 31, 1997 ...............  $            $      192    $ 107,059    $  68,787    $ 176,038
   Net income ............................                                             57,348       57,348
   Issuance of preferred stock ...........     200,000                                             200,000
   Common stock dividends and
         other - cash ....................                                               (961)        (961)
   Preferred stock dividends -
         in kind .........................       1,100                                 (1,100)
   Exercised stock options ...............                        1          556                       557
                                             ---------    ---------    ---------    ---------    ---------
BALANCE, DECEMBER 31, 1998 ...............  $  201,100   $     193     $ 107,615    $ 124,074    $ 432,982
                                            ==========   =========     =========    =========    =========
</TABLE>


                See accompanying Notes to Consolidated Financial Statements.



<PAGE>
<TABLE>


                     METRIS COMPANIES INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)

                                                                             Year Ended December 31,
                                                                       1998         1997            1996
                                                                       ----         ----            ----
Operating Activities:
<S>                                                               <C>            <C>              <C>
Net income ..................................................   $    57,348    $    38,058    $    20,016
Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation and amortization ............................        48,678         15,942          7,329
   Change in allowance for loan losses ......................       149,199        148,415         73,450
 Changes in operating assets and liabilities:
      Accrued interest and fees receivable ..................        (1,699)        (1,368)          (719)
      Prepaid expenses and deferred charges .................       (61,163)       (23,150)        (6,045)
      Deferred income taxes .................................       (72,234)       (49,259)             0
      Accounts payable and accrued expenses .................       (14,553)        28,246          8,110
      Other receivables due from credit card securitizations,      (112,170)       (31,911)         3,436
        net
      Current income taxes payable ..........................        22,082          8,241         (3,718)
      Deferred income .......................................        75,688         26,021         13,096
      Other .................................................       (26,264)       (16,022)       (31,302)
                                                                -----------    -----------    -----------
Net cash provided by operating activities ...................        64,912        143,213         83,653
                                                                -----------    -----------    -----------
Investing Activities:
Proceeds from sales of loans ................................     1,491,832      1,665,700        952,055
Net loans originated or collected ...........................      (901,740)    (1,231,223)    (1,072,321)
Credit card portfolio acquisitions ..........................      (921,558)      (738,104)
Additions to property and equipment .........................       (10,814)       (11,705)        (4,113)
                                                                -----------    -----------    -----------
Net cash used in investing activities .......................      (342,280)      (315,332)      (124,379)
                                                                -----------    -----------    -----------
Financing Activities:
Net increase (decrease)  in debt ............................        66,896        188,837         (9,319)
Net proceeds from issuance of common stock ..................           557                        47,384
Cash dividends paid .........................................          (961)          (577)
Net proceeds from issuance of preferred stock ...............       200,000
                                                                -----------    -----------    -----------
Net cash provided by financing activities ...................       266,492        188,260         38,065
                                                                -----------    -----------    -----------
Net (decrease) increase in cash and cash equivalents ........       (10,876)        16,141         (2,661)
Cash and cash equivalents at beginning of year ..............        48,223         32,082         34,743
                                                                -----------    -----------    -----------
Cash and cash equivalents at end of year ....................   $    37,347    $    48,223    $    32,082
                                                                ===========    ===========    ===========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


<PAGE>



                     METRIS COMPANIES INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                     (Dollars in thousands, except as noted)

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

         The consolidated  financial  statements  include the accounts of Metris
Companies  Inc.  ("MCI")  and its  subsidiaries  (collectively,  the  "Company")
including Direct Merchants Credit Card Bank, N.A. ("Direct Merchants Bank"). The
Company is an information-based  direct marketer of consumer credit products and
fee-based services primarily to moderate-income consumers.

         Prior to September  1996,  Metris  Direct,  Inc.  (previously  known as
Fingerhut Financial Services Corporation),  a direct subsidiary of MCI, operated
as a division of Fingerhut Companies,  Inc. ("FCI").  During September 1996, FCI
reorganized  the  business  through  the  formation  of MCI.  The  stock of some
subsidiaries,  in  addition  to the  assets,  liabilities  and equity of certain
portions of the extended  service plan business,  was contributed to the Company
from FCI and its subsidiaries. In October 1996, the Company completed an initial
public  offering of its common  stock (see Note 7). On September  25, 1998,  FCI
distributed the remaining  shares of the Company to shareholders of FCI in a tax
free distribution (the "Spin Off").

         The  consolidated  financial  statements  also include an allocation of
expenses for certain data processing and information systems, audit, accounting,
treasury,  legal,  human resources,  customer  service and other  administrative
support historically  provided by FCI and its subsidiaries to the Company.  Such
expenses  were based on the actual use of such  services  or were based on other
allocation  methods that, in the opinion of management,  are reasonable.  During
1996, FCI and the Company entered into an administrative services agreement that
covers such  expense  allocations  and the  provision of future  services  using
similar  rates and  allocation  methods for various  terms,  the latest of which
expired at the end of 1998. The consolidated  financial  statements also reflect
the  retroactive  effects of  agreements  entered  into during  1996,  including
co-brand credit card,  database  access,  data sharing and extended service plan
agreements  with Fingerhut  Corporation,  and a tax sharing  agreement with FCI.
These  agreements  have original  terms  ranging up to seven years,  expiring no
later than October 2003.

         All  significant  intercompany  balances  and  transactions  have  been
eliminated in  consolidation.  Certain prior year amounts have been reclassified
to conform with the current year's presentation.

Pervasiveness of Estimates

         The consolidated  financial statements have been prepared in accordance
with generally accepted accounting principles,  which require management to make
estimates  and  assumptions  that  affect  the  reported  amount of  assets  and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the consolidated financial statements as well as the reported amount of revenues
and expenses  during the  reporting  periods.  Actual  results could differ from
these estimates.


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

         The following is a summary of the significant  accounting and reporting
policies used in preparing the consolidated financial statements.


Federal Funds Sold

         Federal funds sold are short-term loans made to banks through the
Federal Reserve System. It is the Company's policy to make such loans only to
banks that are considered to be in compliance with their regulatory capital
requirements.

Loans Held for Securitization

         Loans held for securitization are credit card loans the Company intends
to  securitize,  generally no later than three months from  origination  and are
recorded at the lower of aggregate cost or market value.


Securitization, Retained Interests in Loans Securitized and Securitization
Income

         The Company  securitizes and sells a significant  portion of its credit
card loans to both public and private  investors through the Metris Master Trust
(the "Trust") and third party bank sponsored,  multi-seller receivables conduits
(the "Conduits"). The Company retains participating interests in the credit card
loans  under  "Retained  interests  in loans  securitized"  on the  consolidated
balance  sheets.  The  Company's  retained  interests in loans  securitized  are
subordinate  to the interests of investors in the Trust and Conduit  portfolios.
Although the Company  continues to service the securitized  credit card accounts
and  maintains the customer  relationships,  these  transactions  are treated as
sales  for  financial  reporting  purposes  and  the  associated  loans  are not
reflected on the consolidated balance sheets.

         Beginning  in 1997,  the sales of these  loans  have been  recorded  in
accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities."  The adoption of SFAS 125 did not have a material effect on the
Company's  consolidated  financial  statements.  Upon sale, the sold credit card
loans are removed from the balance sheet and the related financial and servicing
assets controlled and liabilities incurred are initially measured at fair value,
if practicable.  SFAS 125 also requires that servicing assets and other retained
interests  in the  transferred  assets be measured by  allocating  the  previous
carrying amount between the assets sold, if any, and retained interests, if any,
based on their relative fair values at the date of the transfer.

         Prior to January 1, 1997,  the sales of these  loans were  recorded  in
accordance  with  SFAS No.  77,  "Reporting  by  Transferors  for  Transfers  of
Receivables  with  Recourse." Upon sale, the loans were removed from the balance
sheet, and a gain on sale was recognized for the difference between the carrying
value of the loans and the adjusted sales proceeds.  The adjusted sales proceeds
are based on a present  value  estimate of future cash flows to be received over
the life of the loans, net of certain funding and servicing costs. The resulting
gain was further  reduced for estimated loan losses over the life of the related
loans under the limited recourse provisions.

         The  securitization and sale of credit card loans changes the Company's
interest in such loans from lender to servicer,  with a corresponding  change in
how revenue is reported in the statements of income.  For  securitized  and sold
credit card loans,  amounts that otherwise  would have been recorded as interest
income,  interest expense,  fee income and provision for loan losses are instead
reported  in other  operating  income as "Net  securitization  and  credit  card
servicing  income."  The  Company  has  various  receivables  from the  Trust or
Conduits  and  other  assets  as a result of  securitizations,  which  primarily
consists of amounts  deposited in investor reserve accounts held by the Trust or
Conduits for the benefit of the Trust's and Conduit's  security  holders.  Other
components  include  amounts  due from  interest  rate caps,  swaps and  floors;
accrued  interest and fees on the  securitized  receivables;  and various  other
receivables.  These amounts are reported as "other  receivables  due from credit
card securitizations, net" on the consolidated balance sheets. The provision for
loan losses  reflected on the  statements of income in "Net  securitization  and
credit card servicing income" was $456 million,  $275 million,  and $118 million
for the years ended December 31, 1998, 1997, and 1996, respectively.

         Provisions  for loan losses are made in amounts  necessary  to maintain
the allowance at a level  estimated to be sufficient to absorb  probable  future
losses of principal  and earned  interest,  net of  recoveries,  inherent in the
existing loan portfolio,  effectively  reducing the Company's retained interests
in loans securitized to fair value.

         The Company securitized  approximately $1.5 billion and $1.7 billion of
credit card loans in 1998 and 1997,  respectively.  At December  31,  1998,  the
Company had  approximately  $4.6 billion of investors'  interests in securitized
loans, with expected maturities from 1999 to 2001.


Allowance for Loan Losses

         Provisions  for loan losses are made in amounts  necessary  to maintain
the allowance at a level  estimated to be sufficient to absorb  probable  future
losses of principal  and earned  interest,  net of  recoveries,  inherent in the
existing managed loan portfolio. In evaluating the adequacy of the allowance for
loan  losses,  management  considers  several  factors,  including:   historical
charge-off and recovery activity by age (vintage) of each loan portfolio (noting
any particular  trends over recent periods);  recent  delinquency and collection
trends by vintage;  current  economic  conditions and the impact such conditions
might have on  borrowers'  ability  to repay;  the risk  characteristics  of the
portfolios; and other factors. Significant changes in these factors could affect
the  adequacy of the  allowance  for loan  losses in the near term.  Credit card
accounts are generally charged off at the end of the month during which the loan
becomes  contractually  180 days  past  due,  with  the  exception  of  bankrupt
accounts,  which  are  charged  off  immediately  upon  formal  notification  of
bankruptcy,   and  accounts  of  deceased   cardholders   without  a  surviving,
contractually  liable  individual,  or an estate large enough to pay the debt in
full, which are also charged off immediately upon notification.


Property and Equipment

         Property and equipment,  and computer  hardware and software are stated
at cost and depreciated on a straight-line  basis over their estimated  economic
useful  lives (three to ten years for  furniture  and  equipment,  three to five
years for computer hardware, up to five years for software; and over the shorter
of  the  estimated   useful  life  or  the  term  of  the  lease  for  leasehold
improvements).  The Company capitalizes software developed for internal use that
represents  major  enhancements  or  replacements  of operating  and  management
information  systems.  Amortization of such capitalized software begins when the
systems  are  fully  developed  and  ready  for   implementation.   Repairs  and
maintenance are charged to expense as incurred.


Customer Base Intangible

         The customer base intangible  represents the excess of amounts paid for
portfolio  acquisitions  over the  related  credit  card  loan  balances  net of
reserves and discounts.  The intangible  assets are amortized over the estimated
periods of  benefit,  generally  5 to 7 years,  in  proportion  to the  expected
benefits to be  recognized.  The amount  amortized for 1998,  1997 and 1996 were
$10.1 million, $2.5 million, and $0.3 million, respectively.


Interest Income on Credit Card Loans

         Interest income on credit card loans is accrued and earned based on the
principal  amount of the loans  outstanding  using the  effective-yield  method.
Accrued  interest  which has been billed to the customer but not yet received is
classified  on the  balance  sheet with the related  credit card loans.  Accrued
interest  which  has not yet  been  billed  to the  customer  is  estimated  and
classified on the balance sheet separate from the loan balance.  Interest income
is generally  recognized  until a loan is charged off. At that time, the accrued
interest  portion of the charged off balance is  deducted  from  current  period
interest income.


Fee-Based Services

         Debt Waiver Products

         Direct Merchants Bank offers various debt waiver products to its credit
card  customers for which it retains the claims risk.  Revenue for such products
is  recognized  ratably  over the  coverage  period,  generally  one month,  and
reserves  are  provided  for pending  claims  based on Direct  Merchants  Bank's
historical experience with settlement of such claims. Revenues recorded for debt
waiver  products are  included in the  consolidated  statements  of income under
"Fee-based  services  revenues" and were $73.8 million,  $47.6 million and $25.5
million for the years ended  December  31,  1998,  1997 and 1996,  respectively.
Unearned   revenues  and  reserves  for  pending  claims  are  recorded  in  the
consolidated  balance  sheets in "Deferred  revenues" and "Accrued  expenses and
other  liabilities" and amounted to $4.8 million and $4.0 million as of December
31, 1998 and 1997, respectively.

         Membership Programs

         During the quarter ended  September 30, 1998,  the Company  changed its
method  of  recognizing  revenue  for  certain  fee-based  services  for which a
cancellation  period  with a full  refund  exists.  This  change  was made to be
consistent with recent revenue  recognition policy changes made by others in the
Company's  industry.  Previously,  the Company had  recognized  a portion of the
revenue,  net of estimated  cancellations,  associated with such services during
the refund period.  The Company now defers the  recognition of revenue until the
expiration of the  cancellation  period,  at which time revenue  relating to the
full refund period is recognized.  The remaining  revenue is recognized over the
remaining  term of the  membership.  The Company  continues to defer  qualifying
direct-response  advertising costs and amortizes these expenses in proportion to
revenue  recognized.  This change resulted in a cumulative one-time reduction in
revenues of approximately $3.0 million and a corresponding reduction in expenses
of  approximately  $3.1  million,  or a $68,000  increase  in net  income.  This
cumulative  impact is reflected in the consolidated  statement of income for the
year ended December 31, 1998.

         Membership fees are generally  billed through  financial  institutions,
including Direct Merchants Bank, and other cardholder based institutions and are
recorded as  deferred  membership  income  upon  acceptance  of  membership  and
pro-rated  over  the  membership   period   beginning   after  the   contractual
cancellation period is complete.

         In  accordance  with the  provisions  of  Statement  of Position  93-7,
"Reporting on Advertising  Costs," qualifying  membership  acquisition costs are
deferred and charged to expense as membership fees are recognized.  These costs,
which relate directly to membership  solicitations  (direct response advertising
costs),  principally include:  postage,  printing,  mailings,  and telemarketing
costs.  Such  costs are  amortized  on a  straight-line  basis as  revenues  are
realized over the  membership  period.  Amortization  of membership  acquisition
costs  amounted to $8.9 million,  $2.3  million,  and $0.1 million for the years
ended December 31, 1998, 1997, and 1996,  respectively.  If deferred  membership
acquisition  costs were to exceed the membership fee, an appropriate  adjustment
would be made for impairment.  Deferred membership acquisition costs amounted to
$22.4 million and $11.1 million as of December 31, 1998 and 1997, respectively.

         Extended Service Plans

         The Company coordinates the marketing  activities for Fingerhut's sales
of extended service plans. The Company began performing  administrative services
and  retained the claims risk for all  extended  service  plans sold on or after
January 1, 1997. As a result, extended service plan revenues and the incremental
direct  acquisition  costs are deferred and recognized on a straight-line  basis
over the life of the related extended service plan contracts beginning after the
expiration of any manufacturers'  warranty  coverage.  The provision for service
contract returns charged against revenues for the years ended December 31, 1998,
1997  and  1996  amounted  to $4.8  million,  $4.6  million  and  $4.5  million,
respectively. Additionally, the Company reimburses Fingerhut for the cost of its
marketing  media and other  services  utilized in the sales of extended  service
plans,  based on contracts sold and on media  utilization  costs as agreed to by
the Company and Fingerhut.

         Prior to January 1, 1997,  the Company  contracted  with a  third-party
underwriter and claims  administrator to service and absorb the risk of loss for
most claims.  These claims servicing contract costs were expensed as the service
contracts  were sold, net of the related cost of  anticipated  service  contract
returns.  In  addition,  the  revenues  related  to these  contract  sales  were
recognized immediately.


Credit Card Fees and Origination Costs

         Credit card fees include annual  membership,  late payment,  overlimit,
returned  check,  and cash  advance  transaction  fees.  These fees are assessed
according to the terms of the related cardholder agreements.

         The Company defers direct credit card origination costs associated with
successful  credit  card  solicitations  that it  incurs  in  transactions  with
independent third parties,  and certain other costs that it incurs in connection
with loan  underwriting  and the  preparation  and processing of loan documents.
These  deferred  credit card  origination  costs are netted  against the related
credit card annual fee, if any, and amortized on a straight-line  basis over the
cardholder's privilege period,  generally 12 months. Net deferred fees were $9.6
million and $9.2 million as of December 31, 1998 and 1997, respectively.


Solicitation Expenses

         Credit card account costs,  including  printing,  credit bureaus,  list
processing costs,  telemarketing and postage, are generally expensed as incurred
over the two to three month period  during  which the related  responses to such
solicitation are received.


Credit Card Fraud Losses

         The Company  experiences credit card fraud losses from the unauthorized
use of credit cards. These fraudulent transactions are expensed when identified,
through the  establishment of a reserve for the full amount of the transactions.
These  amounts are charged off after 90 days,  after all attempts to recover the
amounts from such  transactions,  including  chargebacks to merchants and claims
against cardholders, are exhausted.


Interest Rate Risk Management Contracts

         The nature and composition of the Company's  assets and liabilities and
securitized  loans expose the Company to interest rate risk.  The Company enters
into a variety of interest rate risk management  contracts such as interest rate
swap,  floor,  and cap agreements with highly rated  counterparties  in order to
hedge its interest rate exposure.  The monthly interest rate  differential to be
paid  or  received  on  these   contracts   is  accrued  and  included  in  "Net
securitization and credit card servicing income" on the consolidated  statements
of income.  Premiums paid for such contracts and the related interest payable or
receivable under such contracts are classified under "Other receivables due from
credit card securitization,  net," on the consolidated balance sheets.  Premiums
paid for  interest  rate  contracts  are  recorded  at cost and  amortized  on a
straight-line  basis over the life of the  contract.  During  1998,  the Company
terminated  swaps and used the proceeds to purchase  new  interest  rate floors.
After  purchasing  these  floors,  the  Company  terminated  one of  the  floors
resulting in $43.4  million of proceeds.  The  resulting  $34.1  million gain is
being  amortized  into  income  over the  shorter  of the  contract  life or the
remaining life of the securities it was hedging (see Note 16).


Debt Issuance Costs

         Debt  issuance  costs  are  the  costs  related  to  issuing  new  debt
securities and establishing new securitizations under the Trust or Conduits. The
costs are  capitalized as incurred and amortized to expense over the term of the
new debt security.


Income Taxes

         The  Company   determines   deferred   taxes  based  on  the  temporary
differences  between  the  financial  statement  and the tax bases of assets and
liabilities  that will  result in future  taxable  or  deductible  amounts.  The
deferred  taxes are based on the enacted rate that is expected to apply when the
temporary  differences  reverse.  For periods prior to the Spin Off, the Company
was included in the consolidated federal and certain state income tax returns of
FCI. Based on a tax sharing agreement between the Company and FCI, the provision
and deferred  income taxes are computed  based only on the  Company's  financial
results as if the Company filed its own federal and state tax returns.

Statements of Cash Flows

         The Company  prepares its  consolidated  statements of cash flows using
the indirect method,  which requires a reconciliation  of net income to net cash
from operating activities.  In addition,  the Company nets certain cash receipts
and cash payments from credit card loans made to customers,  including principal
collections on those loans. For purposes of the consolidated  statements of cash
flows, cash and cash equivalents include cash and due from banks,  federal funds
sold, short-term  investments,  (mainly money market funds) and all other highly
liquid investments with original maturities of three months or less.

         Cash paid for interest  during the years ended December 31, 1998,  1997
and 1996 was $28.4 million,  $9.4 million and $4.1 million,  respectively.  Cash
paid for income taxes for the same periods was $86.1 million,  $64.8 million and
$41.6 million, respectively.


Earnings Per Share

         Basic earnings per share ("EPS")  excludes  dilution and is computed by
dividing net income  available to common  stockholders  by the weighted  average
number of common  shares  outstanding  for the period.  Diluted EPS reflects the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were exercised or converted into common stock.  The following table
presents the  computation of basic and diluted  weighted  average shares used in
the per share calculations:


                                                          Year Ended
                                                          December 31,

                                                 1998       1997      1996
                                                 ----       ----      ----
(In thousands, except EPS)
Net income ..................................   $57,348   $38,058   $20,016
Preferred dividends .........................     1,100
                                                -------   -------   -------
Net income available to common stockholders .   $56,248   $38,058   $20,016
                                                =======   =======   =======
Weighted average common shares outstanding ..    19,232    19,225    16,572
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options       736     1,013       557
                                                -------   -------   -------
Diluted common shares .......................    19,968    20,238    17,129

Basic EPS ...................................   $  2.92   $  1.98   $  1.21
Diluted EPS .................................      2.82      1.88      1.17


Comprehensive Income

         During 1998,  the Company  adopted SFAS 130,  "Reporting  Comprehensive
Income."  This  statement  does not  apply to the  Company's  current  financial
results and therefore, net income equals comprehensive income.


NOTE 3 - ALLOWANCE FOR LOAN LOSSES

         The activity in the allowance for loan losses is as follows:

                                                  Year Ended December 31,
                                               1998      1997       1996
                                               ----      ----       ----

Balance at beginning of year ............   $244,084   $ 95,669   $ 22,219
Allowance related to assets acquired, net     20,152     20,246
Provision for loan losses ...............     77,770     43,989     18,477
Provision for loan losses (1) ...........    456,354    275,310    117,827
Loans charged off .......................    420,875    195,535     64,083
Recoveries ..............................     15,798      4,405      1,229
                                            --------   --------   --------
Net loan charge-offs ....................    405,077    191,130     62,854
                                            --------   --------   --------
Balance at end of year ..................   $393,283   $244,084   $ 95,669
                                            ========   ========   ========

(1) Amounts are included in "Net securitizations and credit servicing income."


NOTE 4 - PROPERTY AND EQUIPMENT

         The carrying value of property and equipment is as follows:

                                                     December 31,
                                                    1998      1997
                                                    ----      ----

Furniture and equipment .......................   $10,974   $ 6,346
Computer software and equipment ...............     9,077     3,733
Construction in progress ......................     2,013     4,937
Leasehold improvements ........................     6,204     2,439
                                                  -------   -------
Total .........................................   $28,268   $17,455
Less: Accumulated depreciation and amortization     6,286     1,991
                                                  -------   -------
Balance at end of year ........................   $21,982   $15,464
                                                  =======   =======

         Depreciation and amortization  expense for the years ended December 31,
1998,  1997  and  1996  was  $4.4  million,  $1.4  million,  and  $0.4  million,
respectively.


NOTE 5 - PORTFOLIO ACQUISITIONS

         In December  1998,  the  Company  acquired a $800  million  credit card
portfolio from PNC Bank Corp. representing loans from customers outside of PNC's
normal banking  relationship.  A portion of these credit card  receivables  were
securitized  and sold to  investors  through a conduit.  The Company  retains an
interest  in the  receivables  which is financed  by  borrowings  under a credit
facility and proceeds  from the Thomas H. Lee Company  investments  discussed in
Note 6.

         In September  1997,  the Company  acquired a $317  million  credit card
portfolio from Key Bank USA, National Association. These credit card receivables
were securitized and sold to investors through a conduit. The Company retains an
interest  in the  receivables  which is financed  by  borrowings  under a credit
facility.

         In October  1997,  the  Company  acquired a $405  million  credit  card
portfolio from  Mercantile  Bank National  Association.  This portfolio was also
securitized  and sold through a conduit.  The Company retains an interest in the
receivables which is financed by borrowings under a credit facility.


NOTE 6 - PRIVATE EQUITY PLACEMENT

         On  November  13,  1998,  the  Company  entered  into  agreements  with
affiliates of the Thomas H. Lee Company,  a private equity firm,  (together with
its affiliates,  the "Lee Company") to make a total private equity investment of
$300 million in the Company.  The Lee Company has agreed to purchase 0.8 million
shares  of  Series C  Perpetual  Convertible  Preferred  Stock  (the  "Series  C
Preferred")  which will be convertible  into common shares at a conversion price
of $37.25 per common share subject to adjustment in certain  circumstances.  The
Series C Preferred has a 9% dividend  payable in  additional  shares of Series C
Preferred and will also receive any dividends paid on the Company's common stock
on  an  as  converted  basis.  The  cumulative   payment-in-kind  dividends  are
effectively  guaranteed  for a seven year  period.  Assuming  conversion  of the
Series C  Preferred  into common  stock,  the Lee Company  would  initially  own
approximately  30% of the Company on a diluted  basis.  The  Company's  Board of
Directors  will be  expanded to a total of 11 members and the Series C Preferred
will entitle the holders to elect four members subject to approval of the Office
of the  Comptroller of the Currency  ("OCC").  The Company  determined  that the
conversion  to the Series C  Preferred  will  result in a "change in control" in
certain  of the  Company's  agreements  with  FCI and the New  Credit  Facility.
Therefore,  the Company was  required to either  increase  the change in control
ownership  percentage from 30 to 35 or otherwise exempt the Lee Company from the
change in control provision.

         In  order  to  provide  the  Company  funding  for  the  PNC  portfolio
acquisition  (see Note 5) as well as for  general  corporate  purposes  prior to
shareholders'  approval  and the receipt of notice that there was no  regulatory
objection to the transaction, the Lee Company agreed to purchase $200 million in
Series B Perpetual  Preferred  Stock (the "Series B Preferred") and $100 million
in 12% Senior Notes due 2006 (the "Lee Senior  Notes").  The Company also issued
the Lee  Company  3.75  million  ten-year  warrants  to  purchase  shares of the
Company's  common stock for $30 subject to adjustment in certain  circumstances.
The Series B Preferred  has a 12.5%  dividend  payable in  additional  shares of
Series B Preferred for ten years, then converting to a dividend payable in cash.

         On March 12, 1999,  shareholders' approved the conversion of the Series
B Preferred and Lee Senior Notes into Series C Preferred.  If notice is received
that  there  is no  regulatory  objection  to the  conversion  to the  Series  C
Preferred,  the Series B Preferred and the Lee Senior Notes will be retired, and
the  warrants  will  be  canceled  causing  a  one-time,   non-cash   accounting
adjustment.  The  excess of the fair value of the  Series C  Preferred  over the
carrying value of the Series B Preferred and the Lee Senior Notes at the time of
the  conversion  must be  allocated  to the Lee  Senior  Notes and the  Series B
Preferred  based  upon  their  initial  fair  values.  To arrive  at net  income
available to common  stockholders in the calculation of earnings per share,  the
amount allocated to the Lee Senior Notes would be recognized as an extraordinary
loss from the  early  extinguishment  of debt and the  amount  allocated  to the
Series B Preferred would be recognized as a reduction of net income available to
common stockholders. The extraordinary loss attributable to the Lee Senior Notes
will not be recorded net of taxes.  These adjustments will not have an impact on
total  stockholders'  equity. At the time of the printing of this annual report,
the fair value of the Series C Preferred was not determined.


NOTE 7 - INITIAL PUBLIC OFFERING

         In October,  1996, the Company  completed an initial public offering of
3,258,333  shares  of its  common  stock  at $16 a  share.  At  that  time,  the
transaction  reduced FCI's  ownership  interest in the Company to  approximately
83%. The Company realized net cash proceeds of approximately  $47.2 million from
the sale of such shares after underwriting  discounts,  commissions and expenses
of the offering.


NOTE 8 - STOCK OPTIONS

         In  connection  with the initial  public  offering of the Company,  the
Company adopted the Metris Companies Inc.  Long-Term  Incentive and Stock Option
Plan (the "Stock Option Plan"),  which permits a variety of  stock-based  grants
and  awards  and  gives the  Company  flexibility  in  tailoring  its  long-term
compensation  programs.  In 1998,  the  Company's  Board of Directors  adopted a
proposal to increase the number of shares from 1,860,000  shares of common stock
to  4,000,000  shares  of  common  stock,   subject  to  adjustment  in  certain
circumstances,  to be available for awards of stock options or other stock-based
awards.  This  increase was approved by the Company's  Stockholders  at the 1998
annual meeting. As of December 31, 1998 and 1997,  1,495,675 and 303,925 shares,
respectively, were available for grant.

         The Compensation  Committee has the authority to determine the exercise
prices,  vesting  dates or  conditions,  expiration  dates  and  other  material
conditions upon which options or awards may be exercised, except that the option
price for Incentive Stock Options ("ISOs") may not be less than 100% of the fair
market value of the common stock on the date of grant (and not less than 110% of
the fair market value in the case of an ISO granted to any employee  owning more
than 10% of the common  stock) and the terms of  nonqualified  stock options may
not  exceed 15 years from the date of grant (not more than 10 years for ISOs and
five years for ISOs granted to any  employee  owning more than 10% of the common
stock). Full or part-time employees,  consultants or independent  contractors to
the Company are eligible to receive  nonqualified  options and awards. Only full
or part-time employees are eligible to receive ISOs.

         Effective March 1994, FCI granted the Company's Chief Executive Officer
("CEO") a tandem  option (the "Tandem  Option") for either (a) 55,000  shares of
FCI's  common  stock at an exercise  price of $15 per share or (b) a 3.3% equity
interest in the portion of the Company that exceeds two times the estimated fair
value of the  Company in March  1994.  In  connection  with the  initial  public
offering, the 3.3% equity interest was converted into options for 656,075 shares
of the Company's  common stock with an exercise price of $2.76 per share,  which
vests over five years from the effective date. This option was granted  pursuant
to the  Company's  Stock Option Plan.  Compensation  expense of $0.7 million and
$7.8 million  related to these options was recorded for the years ended December
31, 1997 and 1996, respectively.

         During  1998 and  1997,  the  Company  granted  1,055,500  and  318,500
options,  respectively, to officers and employees of the Company. At the time of
the initial public  offering,  the Company granted officers and employees of the
Company,  Fingerhut,  and others  options to  purchase an  aggregate  of 742,625
shares of common stock.  Of these,  646,500  options were granted at an exercise
price of $16 and the balance were granted at a  below-market  exercise price per
share,  for which  expense  of $1.2  million  was  recorded  for the year  ended
December 31, 1996. All options granted to current  officers and employees of the
Company and Fingerhut were at the initial offering price.

         The  Company  also  adopted  the  Metris  Companies  Inc.  Non-Employee
Director  Stock  Option  Plan  (the  "Director  Plan").  Originally,  such  plan
permitted up to 20,000 shares of common stock for awards of options,  subject to
certain  adjustments in certain  circumstances.  In 1997, the Board of Directors
amended the plan to provide up to 100,000  shares of common  stock for awards of
options, subject to adjustments in certain circumstances. This Director Plan was
approved by the Company's  stockholders at the 1998 annual meeting.  During 1998
and 1997, the Company  granted 25,000 and 20,000 options,  respectively,  and at
the time of the initial public offering the Company  granted 10,000 options.  At
December  31,  1998 and 1997,  45,000  and  70,000  shares,  respectively,  were
available for grant.

         The Company has adopted the disclosure-only  provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, the Company continues to
account  for  stock-based   compensation  under  the  provisions  of  Accounting
Principles  Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees."
Under the guidelines of Opinion 25,  compensation cost for stock-based  employee
compensation  plans is recognized  based on the difference,  if any, between the
quoted market price of the stock on the date of grant and the amount an employee
must pay to  acquire  the  stock.  Had  compensation  cost for these  plans been
determined based on the fair value methodology prescribed by


SFAS 123,  the  Company's  net  earnings  and earnings per share would have been
reduced to the pro forma amounts indicated below:

                                                  Year Ended December 31,
                                             1998          1997        1996
                                             ----          ----        ----

Net income as reported ...............   $   57,348   $   38,058   $   20,016
Net income pro forma .................   $   47,264   $   36,819   $   17,395
Diluted earnings per share as reported   $     2.82   $     1.88   $     1.17
Diluted earnings per share pro forma .   $     2.37   $     1.82   $     1.02

        The above pro forma amounts may not be  representative of the effects on
reported net earnings for future  years.  The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model. The
following  weighted-average  assumptions  were used for grants in 1998, 1997 and
1996,  respectively:   dividend  yield  of  0.10%,  0.11%  and  0.17%;  expected
volatility of 71.3%,  68.2% and 25.1%;  risk-free  interest rate of 4.72%, 6.34%
and 6.48%; and expected lives of 7 years, 7 years, and 6.5 years, respectively.


         Information  regarding the Company's  stock option plans for 1998, 1997
and 1996 is as follows:
<TABLE>

                                                    Year Ended December 31,
                                       1998                 1997                1996
                                       ----                 ----                ----
                                          Weighted-            Weighted-            Weighted-
                                           Average              Average              Average
                                          Exercise             Exercise              Exercise
                                 Shares     Price     Shares    Price       Shares    Price
<S>                            <C>          <C>     <C>          <C>     <C>           <C>
Options outstanding,
   beginning of year .......   1,682,200   $15.03   1,408,700   $ 8.93     656,075   $ 2.76
Options exercised ..........      34,750    16.00
Options granted ............   1,080,500    43.55     338,500    40.58     752,625    14.31
Options canceled/forfeited .     107,250    41.75      65,000    16.00
                               ---------    -----   ---------    -----   ---------     ----
Options outstanding, end of
   year ....................   2,620,700    25.68   1,682,200    15.03   1,408,700     8.93
Weighted-average fair value
   of options granted during
   the year ................                32.32                28.29                11.54
</TABLE>


         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1998:
<TABLE>

                                                Options Outstanding                        Options Exercisable
                         Number       Weighted-Average
                     Outstanding at       Remaining       Weighted-Average    Number Exercisable    Weighted Average
  Exercise Price        12/31/98       Contractual Life     Exercise Price        at 12/31/98        Exercise Price
<S>                   <C>                    <C>                <C>                 <C>                 <C>
$        2.76            752,200              5.6            $    2.76               730,864          $   2.76
$16.00-$36.50          1,046,000              8.8                22.58               423,000             16.19
$36.51-$55.50            352,500              8.8                41.12                15,000             44.50
$55.51-$69.38            470,000              9.4                57.67                30,000             56.33
</TABLE>


NOTE 9 - EMPLOYEE BENEFIT PLANS

         In January 1997, the Company adopted a defined  contribution  plan that
is intended to qualify  under section  401(k) of the Internal  Revenue Code (the
401(k)  Plan").  The 401(k)  Plan  provides  retirement  benefits  for  eligible
employees.  During 1997 and 1998, the Company's  employees  participated  in the
401(k) Plan,  which provides  savings and investment  opportunities.  The 401(k)
Plan  stipulates  that eligible  employees may elect to contribute to the 401(k)
Plan.  The  Company  matches  a  portion  of  employee  contributions  and makes
discretionary contributions based upon the Company's financial performance.  For
the years ended December 31, 1998 and 1997, the Company contributed $0.9 million
to the 401(k) for both periods.

         Prior to 1997,  employees of Direct  Merchants Bank  participated  in a
defined  contribution  plan  maintained  by Direct  Merchants  Bank that covered
substantially  all of its  employees.  This  plan was  merged  with and into the
401(k) Plan and the funds  transferred to the 401(k) Plan  respective  accounts.
Direct  Merchants Bank employees were eligible to participate in the 401(k) Plan
as of January 1, 1997.

         In 1998, the Company adopted a Non-Qualified Deferred Compensation Plan
to a select group of management or highly compensated employees. These employees
were excluded from  participating  in the 401(k) plan. This plan provided saving
and investment opportunities to those individuals who elected to defer a portion
of their salary. The Company matches a portion of the employee  contribution and
makes discretionary  contributions based on the Company's financial performance.
For the year ended  December 31, 1998, the Company  contributed  $0.2 million to
the Plan.


NOTE 10 - INCOME TAXES

         The  components  of the  provision  for income  taxes  consisted of the
following:

                  Year Ended December 31,
               1998        1997        1996
               ----        ----        ----

Current:
   Federal   $ 98,428    $ 66,496    $ 38,914
   State .      8,355       4,663       4,035
Deferred .    (70,883)    (47,334)    (30,419)
             --------    --------    --------
             $ 35,900    $ 23,825    $ 12,530
             ========    ========    ========


          A reconciliation  of the Company's  effective income tax rate compared
to the statutory federal income tax rate is as follows:

                                                     Year Ended December 31,
                                                      1998    1997     1996
                                                      ----    ----     ----

Statutory federal income tax rate .............       35.0    35.0    35.0%
State income taxes, net of federal benefit ....        3.2     3.2     3.2%
Other, net ....................................        0.3     0.3     0.3%
                                                       ---     ---     ---
Effective income tax rate .....................       38.5    38.5    38.5%
                                                      ====    ====    ====






         The Company's deferred tax assets and liabilities are as follows:
<TABLE>

                                                                                              December 31,
                                                                                           1998          1997

Deferred  income  tax  assets resulting deductible temporary differences:
<S>                                                                                          <C>        <C>
   Allowance for loan losses .............................................................   $119,518   $ 71,240
   Deferred revenues .....................................................................     32,334     16,140
   Other .................................................................................     18,199      9,344
                                                                                             --------   --------
Total deferred tax assets ................................................................   $170,051   $ 96,724


Deferred  income  tax  liabilities resulting from future taxable temporary differences:
   Deferred costs ........................................................................   $ 10,672   $  6,360
   Accrued interest on credit card loans .................................................      5,048      8,577
   Accelerated depreciation ..............................................................      1,310         31
   Other .................................................................................                   969
                                                                                             --------   --------
Total deferred tax liabilities ...........................................................   $ 17,030   $ 15,937
                                                                                             --------   --------
Net deferred tax assets ..................................................................   $153,021   $ 80,787
                                                                                             ========   ========
</TABLE>


         Management  believes,  based  on the  Company's  history  of  operating
earnings,  expectations for operating  earnings in the future,  and the expected
reversal of taxable temporary differences,  earnings will be sufficient to fully
utilize the deferred tax assets.


NOTE 11 - RELATED PARTY TRANSACTIONS

         Prior to September 1998, FCI owned approximately 83% of the outstanding
common shares of the Company.  In September  1998, FCI distributed the remaining
shares of the Company to shareholders of FCI in a tax free distribution.

         FCI and its various  subsidiaries have historically  provided financial
and operational  support to the Company.  Direct expenses incurred by FCI and/or
its subsidiaries for the Company, and other expenses, have been allocated to the
Company using various  methods  (headcount,  actual or estimated  usage,  etc.).
Since the Company has not historically operated as a separate stand-alone entity
for all periods  presented,  these allocations do not necessarily  represent the
expenses and costs that would have been incurred  directly by the Company had it
operated on a stand-alone basis.  However,  management believes such allocations
reasonably  approximate market rates for the services performed.  The direct and
allocated  expenses  represent  charges for services such as data processing and
information  systems,  audit,  certain  accounting and other similar  functions,
treasury,  legal,  human  resources,  certain  customer  service  and  marketing
analysis  functions,  certain  executive  time,  and  space and  property  usage
allocations.  In  addition,  the Company has  historically  managed the sales of
credit insurance products for Fingerhut.  In accordance  therewith,  the Company
has allocated back to Fingerhut  certain direct and other expenses using methods
similar to those mentioned above.  The historical  expenses and cost allocations
have been agreed to by the management of both FCI and the Company,  the terms of
which are summarized in an ongoing administrative services agreement between FCI
and the Company.  This  agreement  provides for similar  future  services  using
similar rates and cost allocation methods for various terms.

         The  financial  statements  also include an  allocation of FCI interest
expense for the net borrowings of the Company from FCI, or a net interest credit
for the net cash flows of the Company loaned to FCI in 1996.  These  allocations
of  interest  expense  or income  for 1996 were  based on the net loans  made or
borrowings  received  between the Company and FCI,  plus or minus the effects of
intercompany  balances  outstanding  during  1996.  The  interest  rate  used to
calculate such expense or credit during 1996 was based on the average short-term
borrowing rates of FCI during 1996.

         The  Company  and  Fingerhut  have  also  entered  into  several  other
agreements that detail further business arrangements between the companies.  The
retroactive  effects  of  these  additional  business   arrangements  have  been
reflected  in  the  consolidated   financial  statements  of  the  Company.  The
agreements  entered into  include a co-brand  credit card  agreement  and a data
sharing  agreement,  which provides for payment for every  Fingerhut  co-branded
credit card account booked,  as defined,  and a payment based on card usage from
such accounts.  The parties have also entered into a database access  agreement,
which  provides  the  Company  with the  exclusive  right to access  and  market
financial services products, as defined, to Fingerhut customers, in exchange for
a license  fee.  The  agreement  also calls for a  solicitation  fee per product
mailed to a Fingerhut  customer,  and a suppress file fee for each consumer name
obtained  from a third party and matched to the  Fingerhut  suppress file before
its solicitation.

         The Company and  Fingerhut  have also entered into an extended  service
plan  agreement,  which provides the company with the exclusive right to provide
and  coordinate  the  marketing of extended  service  plans to the  customers of
Fingerhut. Revenues are received from Fingerhut from such sales, and the Company
reimburses  Fingerhut  and/or its  subsidiaries  for  certain  marketing  costs.
Additionally, the Company and FCI have entered into a tax sharing agreement (see
Note 2) and a card registration agreement.

         The  following  table  summarizes  the amounts of these direct  expense
charges and cost allocations (including net interest income or expense), and the
costs to the Company of the agreements  mentioned  above,  for each of the years
reflected in the financial statements of the Company:
<TABLE>

                                                                       Year Ended December 31,
                                                                     1998      1997      1996
                                                                     ----      ----      ----

Revenues:
<S>                                                                <C>       <C>       <C>
Fee-based services .............................................   $12,937   $ 7,911   $20,420
Expenses:
Interest expense ...............................................                         3,178
Credit card account and other product solicitation and marketing
   expenses ....................................................     8,274     8,432     9,335
Data processing services and communications ....................     2,344     1,837     1,324
Other ..........................................................       659     1,336       950
</TABLE>

         In the ordinary course of business,  executive  officers of the Company
or FCI may have  credit  card  loans  issued  by the  Company.  Pursuant  to the
Company's policy, such loans are issued on the same terms as those prevailing at
the time for  comparable  loans with  unrelated  persons and do not involve more
than the normal risk of collectibility.

         On November 13, 1998, the Company  entered into agreements with the Lee
Company to invest  $300  million in the  Company  (see Note 6). The terms of the
transaction  provided  that the Lee Company  investment  would  convert into 0.8
million  shares of Series C Preferred upon  shareholder  approval and receipt of
notice that there was no regulatory  objection to the  transaction.  The Company
determined that this conversion might result in a "Change of Control" as defined
in certain  agreements  between the Company and  Fingerhut,  which would  permit
Fingerhut to terminate any or all of the agreements.  Therefore,  on December 8,
1998, the Company obtained an agreement (the "Waiver  Agreement") from Fingerhut
to waive its right to terminate the  agreements if a Change of Control  occurred
as a result of the conversion.

          Pursuant to the Waiver  Agreement,  the Company and Fingerhut  amended
certain of their other agreements.  The most significant  change was made in the
database access  agreement.  The Company's  exclusive license to use Fingerhut's
customer   database  to  market  financial  service  products  will  now  become
non-exclusive after October 31, 2001.

         On March 12, 1999, shareholders approved the conversion into the Series
C Preferred.  If notice is received that there is no regulatory objection to the
conversion to the Series C Preferred, the Lee Company will own approximately 30%
of the Company on a diluted basis, assuming conversion of the Series C Preferred
into common stock.


NOTE 12 - COMMITMENTS AND CONTINGENCIES

         Commitments to extend credit to consumers  represents the unused credit
limits on open credit card accounts.  These commitments amounted to $5.9 billion
and $4.1  billion as of December  31, 1998 and 1997,  respectively.  While these
amounts  represent  the  total  lines  of  credit  available  to  the  Company's
customers,  the Company has not  experienced  and does not anticipate all of its
customers will exercise their entire  available line at any given point in time.
The Company also has the right to increase,  reduce,  cancel, alter or amend the
terms of these available lines of credit at any time.

         The Company  leases  certain  office  facilities  and  equipment  under
various  cancelable and  non-cancelable  operating lease agreements that provide
for the payment of a proportionate share of property taxes,  insurance and other
maintenance expenses. These leases also may include scheduled rent increases and
renewal  options.  Rental expense for such operating  leases for the years ended
December  31,  1998,  1997  and 1996 was $6.4  million,  $3.9  million  and $1.1
million, respectively.

         Future minimum lease  commitments at December 31, 1998 under cancelable
and non-cancelable operating leases are as follows:


1999                             $  7,884
2000                                6,146
2001                                3,371
2002                                1,421
2003                                1,127
Thereafter                          4,485
                                    -----
   Total minimum lease payments   $24,434
                                  =======


NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTED PAYMENTS

         In the normal course of business,  the Company enters into  agreements,
or is subject to regulatory requirements, that result in cash, debt and dividend
or other capital restrictions.

         The Federal Reserve Act imposes various legal limitations on the extent
to which  banks can  finance  or  otherwise  supply  funds to  certain  of their
affiliates.  In  particular,   Direct  Merchants  Bank  is  subject  to  certain
restrictions on any extensions of credit to or other covered transactions,  such
as  certain  purchases  of assets,  with the  Company  or its  affiliates.  Such
restrictions  limit Direct  Merchants  Bank's ability to lend to the Company and
its affiliates. Additionally, Direct Merchants Bank is limited in its ability to
declare  dividends to the Company in accordance  with the national bank dividend
provisions.

         Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At December 31, 1998 and 1997,  Direct Merchants Bank's Tier
1 risk-based  capital ratio,  risk-based total capital ratio and Tier 1 leverage
ratio exceeded the minimum  required  capital levels,  and Direct Merchants Bank
was considered a "well capitalized"  depository institution under regulations of
the OCC.

         The  Company is also bound by  restrictions  set forth in an  indenture
related to the Senior Notes dated November 7, 1997 and the Lee Senior Notes (see
Note 6).  Pursuant  to  those  indentures,  the  Company  may not make  dividend
payments  in the event of a default  or if all such  restricted  payments  would
exceed 25% of the aggregate cumulative net income of the Company.


NOTE 14 - CONCENTRATIONS OF CREDIT RISK

         A  concentration  of  credit  risk is  defined  as  significant  credit
exposure with an  individual or group engaged in similar  activities or affected
similarly by economic  conditions.  The Company is active in originating  credit
card  loans  throughout  the United  States,  and no  individual  or group had a
significant  concentration  of credit  risk at December  31,  1998 or 1997.  The
following table details the geographic  distribution of the Company's  retained,
sold and managed credit card loans:


                                      Retained      Sold       Managed

December 31, 1998
California .....................   $   94,521   $  569,205   $  663,726
Texas ..........................       76,542      460,937      537,479
Florida ........................       57,138      344,084      401,222
New York .......................       55,231      332,598      387,829
Ohio ...........................       31,936      192,320      224,256
Illinois .......................       26,994      162,558      189,552
Pennsylvania ...................       22,795      137,274      160,069
All others .....................      391,742    2,359,167    2,750,909
                                      -------    ---------    ---------
      Total ....................   $  756,899   $4,558,143   $5,315,042
                                   ==========   ==========   ==========


                                      Retained       Sold      Managed

December 31, 1997
Texas ..........................   $   61,844   $  394,571   $  456,415
California .....................       58,098      370,652      428,750
Florida ........................       35,654      227,477      263,131
New York .......................       29,246      186,589      215,835
Ohio ...........................       17,961      114,589      132,550
Illinois .......................       15,914      101,533      117,447
Pennsylvania ...................       15,681      100,048      115,729
All others .....................      246,228    1,570,851    1,817,079
                                      -------    ---------    ---------
   Total .......................   $  480,626   $3,066,310   $3,546,936
                                   ==========   ==========   ==========



         The Company targets its consumer credit products  primarily to moderate
income consumers.  Primary risks associated with lending to this market are that
they may be more sensitive to future economic downturn, which may make them more
likely to default on their obligations.

         At December 31, 1998 and 1997,  the majority of federal funds sold were
made to one  bank,  which  represents  a  concentration  of  credit  risk to the
Company. The Company is able to monitor and mitigate this risk since all federal
funds are sold on a daily  origination  and repayment basis and therefore may be
recalled quickly should the credit risk of the counterparty  bank increase above
certain limits set by the Company.


NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS

         The Company has estimated  the fair value of its financial  instruments
in  accordance  with SFAS No. 107,  "Disclosures  About Fair Value of  Financial
Instruments." Financial instruments include both assets and liabilities, whether
or not recognized in the Company's  consolidated balance sheets, for which it is
practicable  to estimate fair value.  Additionally,  certain  intangible  assets
recorded on the  consolidated  balance  sheets,  such as  purchased  credit card
relationships,  and other  intangible  assets not  recorded on the  consolidated
balance  sheets  (such  as  the  value  of the  credit  card  relationships  for
originated  loans and the  franchise  values of the  Company's  various lines of
business) are not considered  financial  instruments and,  accordingly,  are not
valued for  purposes  of this  disclosure.  The Company  believes  that there is
substantial   value  associated  with  these  assets  based  on  current  market
conditions,  including  the purchase and sale of such assets.  Accordingly,  the
aggregate  estimated  fair value  amounts  presented do not represent the entire
underlying value of the Company.

         Quoted  market  prices  generally  are  not  available  for  all of the
Company's  financial  instruments.  Accordingly,  in cases where  quoted  market
prices are not  available,  fair values were  estimated  using present value and
other valuation  techniques that are  significantly  affected by the assumptions
used,  including  the  discount  rate and  estimated  future  cash  flows.  Such
assumptions  are based on historical  experience and  assessments  regarding the
ultimate collectibility of assets and related interest, and estimates of product
lives  and  repricing  characteristics  used  in the  Company's  asset/liability
management  process.  These  assumptions  involve  uncertainties  and matters of
judgment, and therefore,  cannot be determined with precision.  Thus, changes in
these assumptions could significantly affect the fair-value estimates.

         A description of the methods and assumptions  used to estimate the fair
value of each class of the Company's financial instruments is as follows:

Cash and cash equivalents and accrued interest and fees receivable

         The  carrying  amounts  approximate  fair  value due to the  short-term
nature of these instruments.

Net retained interests in loans securitized and loans held for securitizations

         Currently,  credit card loans are  originated  with  variable  rates of
interest that adjust with changing market interest rates. Thus,  carrying value,
which is net of the allowance for loan losses, approximates fair value. However,
this  valuation  does not include the value that relates to estimated cash flows
generated from new loans from existing customers over the life of the cardholder
relationship.  Accordingly,  the  aggregate  fair value of the credit card loans
does  not  represent  the  underlying   value  of  the  established   cardholder
relationships.

Other receivables due from credit card securitizations, net

         The following components of this net asset are as follows:

Interest-only strip

         The fair value of the  interest-only  strip is estimated by discounting
the expected  future cash flows from the Trust and each of the Conduits at rates
which  management  believes to be consistent with those that would be used by an
independent  third party.  However,  because there is no active market for this,
the fair values  presented may not be  indicative of the value  negotiated in an
actual sale. The future cash flows used to estimate fair value is limited to the
securitized  receivables  that exist at year end and does not  reflect the value
associated  with  future  receivables  generated  by  cardholder  activity.  The
significant assumptions used to estimate fair value include: (i) discount rates;
(ii) customer payment rates; and (iii) anticipated  charge-offs over the life of
the loans are summarized as follows:

                December 31,
               1998      1997
Discount rate   10%       10%
Payment rate     6%        5%
Default rate    16%       14%

Interest rate cap, swap, and floor agreements

         The fair values of interest rate cap, swap, and floor  agreements  were
obtained  from dealer  quoted  prices.  These  values  generally  represent  the
estimated  amounts the Company would receive or pay to terminate the  agreements
at the reporting dates, taking into consideration current interest rates and the
current creditworthiness of the counterparties.

Other amounts

         For the other  components  of other  receivables  due from  credit card
securitizations,  net, the carrying amount is a reasonable  estimate of the fair
value.

Debt

         Short-term  borrowings  are made with  variable  rates of interest that
adjust with changing market interest rates.  Thus,  carrying value  approximates
fair value.

         The fair  value of  long-term  debt was  obtained  from  quoted  market
prices, when available.

         The estimated fair values of the Company's  financial  instruments  are
summarized as follows:

<TABLE>

                                                           December 31,
                                                 1998                   1997
                                          Carrying   Estimated   Carrying  Estimated
                                           Amount   Fair Value    Amount  Fair Value

<S>                                       <C>        <C>        <C>        <C>
Cash and cash equivalents .............   $ 37,347   $ 37,347   $ 48,223   $ 48,223
Retained interest in loans securitized,    360,186    360,186    227,747    227,747
   net
Loans held for securitization .........      3,430      3,430      8,795      8,795
Other receivables due from credit card
   securitizations, net:
   Interest-only strip ................                            2,449      2,449
   Interest rate swap agreements ......                                      21,667
   Interest rate cap agreements .......      2,912      2,925      3,497        170
   Interest rate floor agreements .....        187      3,233
   Other amounts ......................    182,836    182,836     71,540     71,540
Debt ..................................    310,896    317,666    244,000    245,750
</TABLE>



NOTE 16 - DERIVATIVE FINANCIAL INSTRUMENTS

         Prior to the Spin Off, the Company had entered into  interest  rate cap
and swap  agreements to hedge the cash flow and earnings  impact of  fluctuating
market interest rates on the spread between the floating rate loans owned by the
Trust and the floating and fixed rate securities issued by the Trust to fund the
loans.  In connection with the issuance of term  asset-backed  securities by the
Trust in 1998, the Company  entered into term interest rate cap agreements  with
highly-rated  bank  counterparties  in a total  notional  amount of $1.8 billion
effectively capping the potentially negative impact to the Trust of increases in
the floating  interest  rate of the  securities  at  approximately  9.2%.  These
interest rate cap  agreements  are for terms ranging from six to eight years and
will  terminate  between  October 2004 and April 2006.  The Company also entered
into a term interest  rate cap  agreement in  connection  with the PNC portfolio
acquisition with highly-rated bank  counterparties in a total notional amount of
$640 million,  effectively capping the potentially  negative impact of increases
in market  interest rate of the securities at 7.35% through May 2002. Due to the
Spin Off, the Company terminated interest rate swap agreements guaranteed by FCI
related  to two trust  series  fixed  rate  asset-backed  securities  issuances.
Proceeds  were  utilized  to  purchase   interest  rate  floor   contracts  from
highly-rated  counterparties  which did not require a FCI  guaranty.  The floors
were in the same  notional  amounts,  fixed  interest  rate  strike  rates,  and
maturities as the previous  swaps in order to hedge the potential  impact on the
Company's  cash flow and earnings of a low market  interest rate  environment in
which the yield on the Trust's  floating  rate loans might  decline  causing the
margin over the fixed rate funding to compress. During October 1998, the Company
terminated the interest rate floors related to one of the trust series. The gain
of  approximately  $34.1 million on this  termination  is being  amortized  into
income  over  the  remaining  life  of the  securities.  The  cash  proceeds  of
approximately  $43.4 million were used to reduce borrowings under the New Credit
Facility.

         Interest rate risk  management  contracts  are  generally  expressed in
notional  principal  or contract  amounts  that are much larger than the amounts
potentially at risk for nonpayment by counterparties. Therefore, in the event of
nonperformance by the  counterparties,  the Company's credit exposure is limited
to the  uncollected  interest and contract market value related to the contracts
that have become favorable to the Company. Although the Company does not require
collateral  from  counterparties  on its existing  agreements,  the Company does
control the credit risk of such contracts through  established credit approvals,
risk  control  limits,  and the  ongoing  monitoring  of the  credit  ratings of
counterparties. The Company currently has no reason to anticipate nonperformance
by the counterparties.


NOTE 17 - SEGMENTS

         The Company is organized  based on the  products  and services  that it
offers.  Under  this  organizational  structure,  the  Company  operates  in two
principal areas: consumer credit products and fee-based services.  The Company's
primary  consumer  credit  products are unsecured  credit  cards,  including the
Direct  Merchants Bank  MasterCard and Visa. The Company's  credit card accounts
include customers  obtained from the Fingerhut  Database and other customers for
whom general credit bureau information is available.

         The Company markets its fee-based  services,  including (i) debt waiver
protection for unemployment,  disability,  and death,  (ii) membership  programs
such as card registration,  purchase protection and other club memberships,  and
(iii) third-party insurance, directly to its credit card customers and customers
of third parties.  The Company currently  administers its extended service plans
sold  through  a  third-party  retailer,  and the  customer  pays  the  retailer
directly.  In addition,  the Company develops  customized targeted mailing lists
from  information  contained in the Company's  databases for use by unaffiliated
companies in their own financial services product  solicitation  efforts that do
not directly compete with those of the Company.

         The  information  in the  following  tables is  derived  directly  from
internal segment reporting used for management  purposes.  The expenses,  assets
and  liabilities  attributable  to corporate  functions are not allocated to the
operating segments. There were no operating assets located outside of the United
States for the years presented.

         The segment information reported below is presented on a managed basis.
Management  uses this basis to review segment  performance and to make operating
decisions.  To do so, the income  statement  and balance  sheet are  adjusted to
reverse the effects of  securitizations.  Presentation on a managed basis is not
in conformity with generally accepted accounting principles.  The reconciliation
column in the segment tables includes  adjustments to present the information on
an  owned  basis  in the  consolidated  column  as  reported  in  the  financial
statements of this annual report.

         Employee  compensation,  data processing  services and  communications,
third  party  servicing  expenses,  and  other  expenses  including:  occupancy,
depreciation   and   amortization,   professional   fees,   other   general  and
administrative  expenses,  and  income  taxes  have  not been  allocated  to the
operating  segments and are included in the  reconciliation of the income before
income taxes for the reported  segments to the  consolidated  total. The Company
does not allocate capital expenditures for leasehold  improvements,  capitalized
software and property and equipment to operating segments.

         The  fee-based  services  operating  segment pays a  commission  to the
consumer  credit  products  segment  for  successful  marketing  efforts  to the
consumer credit products  segment's  cardholders at a rate similar to those paid
to the Company's  other third parties.  The fee-based  services  segment reports
interest  income and the  consumer  credit  products  segment  reports  interest
expense at the Company's  weighted  average  borrowing  rate for the excess cash
flow generated by the fee-based services segment and used by the consumer credit
products segment to fund the growth of cardholder balances.

<TABLE>



                                                         1998

                         Consumer Credit   Fee-Based
                           Products        Services   Reconciliation (a)      Consolidated
<S>                      <C>            <C>            <C>                   <C>
Interest income ......   $  740,768      $    2,754   $    (630,311) (b)      $  113,211
Interest expense .....      237,710                        (207,197) (c)          30,513
                            -------         -------        --------              -------

  Net interest income       503,058           2,754        (423,114)              82,698

Other operating income      239,597         106,601         (33,240)             312,958
Total revenue ........      980,365         109,355        (663,551)             426,169

Income before income
   taxes .............      188,148 (d)      73,279 (d)    (168,179) (e)          93,248
Income taxes .........                                       35,900               35,900

Total assets .........   $5,375,925     $    58,052    $ (4,488,258) (f)     $   945,719


                                                         1997

                          Consumer Credit  Fee-Based
                            Products       Services    Reconciliation (a)     Consolidated

Interest income ......   $  435,833     $     2,484    $   (369,123) (b)    $     69,194
Interest expense .....      131,956                        (120,005) (c)          11,951
                         ----------    ------------     -----------        -------------
  Net interest income       303,877           2,484        (249,118)              57,243

Other operating income      148,869          64,000         (26,192)             186,677
Total revenue ........      584,702          66,484        (395,315)             255,871
Income before income
  taxes ..............      110,973 (d)      49,162 (d)     (98,252) (e)          61,883
Income taxes .........                                       23,825               23,825

Total assets .........   $3,505,165    $     30,488     $(2,996,991) (f)   $     538,662


                                                        1996

                         Consumer Credit    Fee-Based
                           Products         Services    Reconciliation (a)    Consolidated

Interest income ......   $  198,633   $       1,213     $  (169,652) (b)  $       30,194
Interest expense .....       56,355                         (52,249) (c)           4,106
                         ----------   -------------     -----------       --------------
  Net interest income       142,278           1,213        (117,403)              26,088

Other operating income       77,952          48,695            (425)             126,222
Total revenue ........      276,585          49,908        (170,077)             156,416

Income before income
  taxes ..............       61,503          30,733         (59,690) (e)          32,546
Income taxes .........                                       12,530               12,530

Total assets .........   $1,612,234   $       1,057     $(1,363,293) (f)  $      249,998
</TABLE>

(a) The reconciliation column includes:  intercompany eliminations;  amounts not
allocated  to segments;  and  adjustments  to the amounts  reported on a managed
basis to reflect the effects of securitization.

(b) The  reconciliation  to  consolidated  owned  interest  income  includes the
elimination  of $2.8  million,  $2.5 million,  and $1.2 million of  intercompany
interest  received by the fee based  services  segment from the consumer  credit
products segment for 1998, 1997, and 1996, respectively.

(c) The  reconciliation  to  consolidated  owned interest  expense  includes the
elimination  of $2.8  million,  $2.5 million,  and $1.2 million of  intercompany
interest paid by the consumer credit products segment to the fee-based  services
segment for 1998, 1997, and 1996, respectively.

(d) Income before income taxes  includes  intercompany  commissions  paid by the
fee-based   services  segment  to  the  consumer  credit  products  segment  for
successful  marketing  efforts to consumer credit  products  cardholders of $3.3
million, and $4.4 million for 1998, and 1997, respectively.

(e) The  reconciliation  to the  owned  income  before  income  taxes  includes:
unallocated  costs  related  to  employee  compensation;   data  processing  and
communications; third party servicing expenses; and other expenses. The majority
of these  expenses,  although not allocated for the internal  segment  reporting
used by management, relate to the consumer credit product segment.

(f) Total assets  include the assets  attributable  to corporate  functions  not
allocated  to  operating  segments  and the  removal of  investors'  interest in
securitized loans to present total assets on an owned basis.


NOTE 18 - DEBT

     On June 30,  1998,  the  Company  executed a new $200  million,  three-year
revolving  credit  facility  and a $100  million  five-year  term loan (the "New
Credit  Facility") with a syndicate of banks and money market mutual funds. This
agreement became effective upon the Spin Off from FCI on September 25, 1998. The
New Credit  Facility  which is not guaranteed by FCI replaced the Company's $300
million,  five-year  revolving credit facility (the "Old Credit Facility").  The
New  Credit  Facility  is  secured  by  receivables  and  subsidiary  stock  and
guaranteed  by a  Company  subsidiary.  Financial  covenants  in the New  Credit
Facility include,  but are not limited to,  requirements  concerning minimum net
worth,  minimum  tangible net worth to net managed  receivables and tangible net
worth plus reserves to delinquent receivables. At December 31, 1998, the Company
was in compliance with all financial covenants under this agreement. At December
31, 1998, the Company had  outstanding  borrowings of $110 million under the New
Credit Facility. At December 31, 1997, the Company had outstanding borrowings of
$144 million under the Old Credit Facility.  The weighted average interest rates
on  the  borrowings  at  December  31,  1998  and  1997,  were  7.9%  and  6.5%,
respectively.

         In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 (the "Senior  Notes")  pursuant to an exemption  under
the Securities Act of 1933, as amended.  In January 1998, the Company  commenced
an exchange offer for the Senior Notes pursuant to a registration statement. The
terms of the new Senior  Notes are  identical  in all  material  respects to the
original  private  issue.  The net proceeds of $97 million were used to pay down
borrowings under the Old Credit Facility.  The Senior Notes are  unconditionally
guaranteed on a senior basis, jointly and severally, by Metris Direct, Inc. (the
"Guarantor"),  and all future  subsidiaries of the Company that guarantee any of
the Company's indebtedness,  including the New Credit Facility. The guarantee is
an unsecured  obligation of the Guarantor and ranks pari passu with all existing
and future unsubordinated  indebtedness.  As part of the Lee Company investment,
the  Company  issued the Lee Senior  Notes (see Note 6) which are similar in all
material respects to the Senior Notes. The Company also has  approximately  $0.9
million of debt with local governments to support growth in those areas.

  Metris Direct, Inc. has various subsidiaries which have not guaranteed the
Senior Notes.  The following condensed consolidating financial statements of the
Company, the Guarantor subsidiary and the non-guarantor subsidiaries are
presented for purposes of complying with SEC reporting requirements.  Separate
financial statements of Metris Direct, Inc. and the non-guaranteeing
subsidiaries are not presented because management has determined that the
subsidiaries financial statements would not be material to investors.

<TABLE>


                              METRIS COMPANIES INC.
                    Supplemental Consolidating Balance Sheets
                                December 31, 1998
                             (Dollars in thousands)


                                          Metris          Guarantor   Non-Guarantor
                                      Companies Inc.    Subsidiaries  Subsidiaries  Eliminations    Consolidated
Assets:
<S>                                     <C>            <C>            <C>            <C>            <C>
Cash and due from banks .............   $    (5,010)   $      (156)   $    27,280   $               $    22,114
Federal funds sold ..................                                      15,060                        15,060
Short-term investments ..............             3                           170                           173
                                            -------        -------        -------                       -------
Cash and cash equivalents ...........        (5,007)          (156)        42,510                        37,347
                                            -------        -------        -------                       -------
Retained interests in loans securitized                                   753,469                       753,469

Less: Allowance for loan losses .....            97                       393,186                       393,283
                                            -------        -------        -------                       -------
Net retained interests in loans securitized    (97)                      360,283                       360,186
                                            -------        -------        -------                       -------
Loans held for securitization .......         1,876                         1,554                         3,430
Property and equipment, net .........                       18,243          3,739                        21,982
Accrued interest and fees receivable            (11)                        6,020                         6,009
Prepaid expenses and deferred charges        30,487         17,833         10,784                        59,104
Deferred income taxes ...............         1,049         19,427        132,545                       153,021
Customer base intangible ............                                      81,892                        81,892
Other receivables due from credit
   card securitizations, net ........                                     185,935                       185,935
Other assets ........................         6,000          6,989         23,824                        36,813
Investment in subsidiaries ..........       756,455        774,986                    (1,531,441)
                                            -------        -------        -------     ----------        -------
Total assets ........................   $   790,752    $   837,322    $   849,086    $(1,531,441)   $   945,719
                                        ===========    ===========    ===========    ===========    ===========

Liabilities:
Interest-bearing deposit from .......   $    (1,000)   $              $     1,000    $              $
   affiliate
Debt ................................       318,298         15,021        (22,423)                      310,896
Accounts payable ....................         3,140          3,786         12,165                        19,091
Current income taxes payable to
     (receivable from) FCI ..........         3,722         (5,692)        33,753                        31,783
Deferred income .....................        31,753         47,515         45,624                       124,892
Accrued expenses and other liabilities        1,857         20,237          3,981                        26,075
                                            -------        -------        -------                       -------
Total liabilities ...................       357,770         80,867         74,100                       512,737
                                            -------        -------        -------                       -------
Stockholders' Equity:
Preferred stock .....................       201,100                                                     201,100
Common Stock ........................           193          1,002          1,052         (2,054)           193
Paid-in capital .....................       107,615        651,863        628,339     (1,280,202)       107,615
Retained earnings ...................       124,074        103,590        145,595       (249,185)       124,074
                                            -------        -------        -------     ----------        -------
Total stockholders' equity ..........       432,982        756,455        774,986     (1,531,441)       432,982
                                            -------        -------        -------     ----------        -------
Total liabilities and stockholders'
    equity                              $   790,752    $   837,322    $   849,086    $(1,531,441)   $   945,719
                                        ===========    ===========    ===========    ===========    ===========
</TABLE>



<PAGE>
<TABLE>



                                                              METRIS COMPANIES INC.
                                                    Supplemental Consolidating Balance Sheets
                                                                December 31, 1997
                                                              (Dollars in thousands)

                                         Metris       Guarantor    Non-Guarantor
                                     Companies Inc.  Subsidiaries  Subsidiaries     Eliminations    Consolidated

Assets:
<S>                                    <C>          <C>          <C>              <C>              <C>
Cash and due from banks ............   $     320    $     390    $  20,296          $               $  21,006
Federal funds sold .................                                27,089                             27,089
Short-term investments                        16                       112                               128
                                         -------      -------      -------                           -------
Cash and cash equivalents...........         336          390       47,497                            48,223
                                         -------      -------      -------                           -------
Credit card loans:
Retained interests in loans
   securitized......................                               471,831                           471,831
Less: Allowance for loan losses.....         611                   243,473                           244,084
                                         -------      -------      -------                           -------
Net credit card loans...............        (611)                  228,358                           227,747
                                         -------      -------      -------                           -------
Loans held for securitization ......       8,140                       655                             8,795
Premises and equipment, net ........                   13,899        1,565                            15,464
Accrued interest and fees receivable           9                     4,301                             4,310
Prepaid expenses and deferred ......         138       15,075        3,260                            18,473
   charges
Deferred income taxes ..............         682       12,638       67,467                            80,787
Customer base intangible ...........       1,567                    35,185                            36,752
Other assets .......................       3,489        6,983       10,153                            20,625
Other receivables due from credit
   card securitizations, net .......          66                    77,420                            77,486
Investment in subsidiaries .........     349,731      366,977                      (716,708)
                                         -------      -------      -------         --------          -------
Total assets .......................   $ 363,547    $ 415,962    $ 475,861        $(716,708)       $ 538,662
                                       =========    =========    =========        =========        =========

Liabilities:
Debt ...............................   $ 276,598    $   7,975    $ (40,573)       $                $ 244,000
Accounts payable ...................      (1,086)       7,975       28,467                            35,356
Current income taxes payable to
   (receivable from) FCI ...........     (90,003)        (486)     100,190                             9,701
Deferred income ....................          33       35,044       14,127                            49,204
Accrued expenses and other
   liabilities......................       1,967       15,723        6,673                            24,363
                                         -------      -------      -------                           -------
Total liabilities ..................     187,509       66,231      108,884                           362,624
                                         -------      -------      -------                           -------
Stockholders' Equity:
Common stock .......................         192        1,002        1,002           (2,004)             192
Paid-in capital ....................     107,059      279,842      279,815         (559,657)         107,059
Retained earnings ..................      68,787       68,887       86,160         (155,047)          68,787
                                         -------      -------      -------         --------          -------
Total stockholders' equity .........     176,038      349,731      366,977         (716,708)         176,038
                                         -------      -------      -------         --------          -------
Total liabilities and stockholders'
   equity ..........................   $ 363,547    $ 415,962    $ 475,861        $(716,708)       $ 538,662
                                       =========    =========    =========        =========        =========

</TABLE>


<TABLE>


                                                                  METRIS COMPANIES INC.
                                                     Supplemental Consolidating Statements of Income
                                                              Year Ended December 31, 1998
                                                                 (Dollars in thousands)

                                                             Non-
                                              Metris      Guarantor    Guarantor
                                           Companies Inc. Subsidiaries Subsidiaries    Eliminations     Consolidated

Interest Income:
<S>                                         <C>          <C>          <C>                    <C>         <C>
Credit card loans and retained
   interests in loans  securitized ......   $   1,957     $           $   109,161      $                  $  111,118
Federal funds sold ......................                                   1,065                              1,065
Other ...................................         215                         813                              1,028
                                                  ---       ------         ------                             ------
     Total interest income ..............       2,172                     111,039                            113,211
Interest expense ........................       8,725       24,444         (2,656)                            30,513
                                                -----       ------         ------                             ------

Net Interest Income/(Expense) ...........      (6,553)     (24,444)       113,695                             82,698
Provision for loan losses ...............         532                      77,238                             77,770
                                                -----       ------         ------                             ------
Net interest income/(expense) after
   provision for loan losses ............      (7,085)     (24,444)        36,457                              4,928
Other Operating Income:
Net securitization and credit card
   servicing income .....................       9,668          (20)       128,573                            138,221
Credit card fees, interchange and
   other credit card income .............         636                      67,500                             68,136
Fee-based services revenues                                 28,425         78,176                            106,601
                                                  ---       ------         ------                             ------
                                               10,304       28,405        274,249                            312,958
Other Operating Expense:
Credit card account and other
   product solicitation and
   marketing expenses ...................                   14,992         25,957                             40,949
Employee compensation ...................                   55,980          6,647                             62,627
Data processing services and
   communications .......................                    5,276         30,169                             35,445
Third-party servicing expense ...........                  (51,565)        62,639                             11,074
Warranty and debt waiver
   underwriting and claims
   servicing expense ....................                    1,875         10,404                             12,279
Credit card fraud losses ................          18                       4,418                              4,436
Other ...................................         529       18,899         38,400                             57,828
                                                -----       ------         ------                             ------
                                                  547       45,457        178,634                            224,638
                                                -----       ------         ------                             ------
Income/(Loss) Before Income Taxes
   and Equity in Income of
   Subsidiaries .........................       2,672      (41,496)       132,072                             93,248
Income taxes ............................       1,028      (16,768)        51,640                             35,900
Equity in income of subsidiaries ........      55,704       80,432                             (136,136)
                                                -----       ------         ------              --------       ------
Net Income/(Loss) .......................   $  57,348    $  55,704    $    80,432            $ (136,136) $    57,348
                                            =========    =========    ===========            ==========  ===========
</TABLE>




<PAGE>


<TABLE>


                                                    METRIS COMPANIES INC.
                                       Supplemental Consolidating Statements of Income
                                                 Year Ended December 31, 1997
                                                    (Dollars in thousands)


                                                      Metris      Guarantor    Non-Guarantor
                                                 Companies Inc.  Subsidiaries  Subsidiaries    Eliminations   Consolidated

Interest Income:
<S>                                                  <C>          <C>          <C>         <C>                 <C>
Credit card loans ................................   $   1,063   $               $65,632       $               $  66,695
Federal funds sold ...............................                                 1,636                           1,636
Other ............................................         184                       679                             863
                                                        ------        -----       ------                          ------
    Total interest income ........................       1,247                    67,947                          69,194
Interest expense .................................      13,937          432       (2,418)                         11,951
                                                        ------        -----       ------                          ------

Net interest income/(expense) ....................     (12,690)        (432)      70,365                          57,243
Provision for loan losses ........................         682                    43,307                          43,989
                                                        ------        -----       ------                          ------
Net interest income/(expense)
   after provision for loan losses ...............     (13,372)        (432)      27,058                          13,254
Other Operating Income:
Net securitization and credit card
   servicing income ..............................      10,653                    68,880                          79,533
Credit card fees, interchange and
   other credit card income ......................         478          (21)      43,274                          43,731
Fee-based services revenues ......................                    8,536       54,877                          63,413
                                                        ------        -----       ------                          ------
                                                        11,131        8,515      167,031                         186,677
Other Operating Expense:
Credit card account and other
   product solicitation and
   marketing expenses ............................                    1,783       28,720                          30,503
Employee compensation ............................                   32,735        2,465                          35,200
Data processing services and
   communications ................................                    2,883       17,204                          20,087
Third-party servicing expense ....................          51      (20,396)      33,056                          12,711
Warranty and debt waiver
   underwriting and claims
   servicing expense .............................                      549        5,504                           6,053
Credit card fraud losses .........................          27                     3,213                           3,240
Other ............................................         382       12,644       17,228                          30,254
                                                        ------       ------       ------                          ------
                                                           460       30,198      107,390                         138,048
                                                        ------       ------       ------                          ------
Income/(Loss) Before Income Taxes
   and Equity in Income of
   Subsidiaries ..................................      (2,701)     (22,115)      86,699                          61,883
Income taxes .....................................      (1,040)      (8,475)      33,340                          23,825
Equity in income of subsidiaries .................      39,719       53,359                      (93,078)
                                                        ------       ------      -------         --------      ---------

Net Income/(Loss) ................................   $  38,058    $  39,719    $  53,359       $ (93,078)      $  38,058
                                                     =========    =========    =========       =========       =========
</TABLE>



<TABLE>


                              METRIS COMPANIES INC.
                 Supplemental Consolidating Statements of Income
                          Year Ended December 31, 1996
                             (Dollars in thousands)


                                             Metris      Guarantor     Non-Guarantor
                                          Companies Inc. Subsidiaries  Subsidiaries    Eliminations     Consolidated

     Interest Income:
<S>                                       <C>          <C>              <C>                  <C>         <C>
Credit card loans .....................   $     199      $              $  28,829      $                 $  29,028
Federal funds sold ....................                                       867                              867
Other .................................         105                           194                              299
                                              -----       ------          -------                          -------
      Total interest income ...........         304                        29,890                           30,194
Interest expense ......................       7,272       (2,575)            (591)                           4,106
                                              -----       ------          -------                          -------
Net Interest Income/(Expense) .........      (6,968)       2,575           30,481                           26,088
Provision for loan losses .............          83                        18,394                           18,477
                                              -----       ------          -------                          -------
Net interest income/(expense) after
   provision for loan losses ..........      (7,051)       2,575           12,087                            7,611
Other Operating Income:
Net securitization and credit card
   servicing income ...................       3,859                        46,062                           49,921
Credit card fees, interchange and other
   credit card income .................          49          107           25,872                           26,028
Fee-based services revenues ...........                   22,000           28,273                           50,273
                                              -----       ------          -------                          -------
                                              3,908       22,107          100,207                          126,222
Other Operating Expense:
Credit card account and other product
   solicitation and marketing expenses        5,805        9,563           13,929                           29,297
Employee compensation .................                   22,076              992                           23,068
Data processing services and
   communications .....................                    1,600           11,157                           12,757
Third-party servicing expense .........           3       (6,757)          15,961                            9,207
Warranty and debt waiver underwriting
   and claims servicing expense .......                    6,463            3,561                           10,024
Credit card fraud losses ..............          10                         2,266                            2,276
Other .................................           1        9,900            4,757                           14,658
                                              -----       ------          -------                          -------
                                              5,819       42,845           52,623                          101,287
                                              -----       ------          -------                          -------
Income/(Loss) Before Income Taxes
   and Equity in Income of Subsidiaries      (8,962)     (18,163)          59,671                           32,546
Income taxes ..........................      (3,450)      (6,993)          22,973                           12,530
Equity in income of subsidiaries ......      25,528       36,698                               (62,226)
                                              -----       ------          -------              --------    -------

Net Income/(Loss) .....................   $  20,016    $  25,528        $  36,698            $ (62,226)  $   20,016
                                          =========    =========        =========            =========   ==========

</TABLE>





<PAGE>

<TABLE>

                                                                  METRIS COMPANIES INC.
                                          Supplemental Condensed Consolidating Statements of Cash Flows
                                                                 Year Ended December 31
                                                                  (Dollars in thousands)

1998
                                                              Metris             Guarantor        Non-Guarantor
                                                           Companies Inc.       Subsidiaries      Subsidiaries      Consolidated

Operating Activities:
<S>                                                        <C>                  <C>              <C>                 <C>
Net cash provided by (used in) operating activities ....   $    97,274          $     (22,625)     $      (9,737)    $    64,912
                                                           -----------          -------------      -------------     -----------

Investing Activities:
Proceeds from sales of loans ...........................                                               1,491,832       1,491,832
Net loans originated or collected ......................         8,106                                  (909,846)       (901,740)
Credit card portfolio acquisition ......................                                                (921,558)       (921,558)
Additions to premises and equipment ....................                               (8,414)            (2,400)        (10,814)
                                                           -----------          -------------      -------------     -----------
Net cash provided by (used in) investing activities ....         8,106                 (8,414)          (341,972)       (342,280)
Financing Activities:
Net increase (decrease) in debt ........................        40,700                  7,046             19,150          66,896
Net proceeds from issuance of common stock .............      (371,464)                23,447            348,574             557
Cash dividends paid ....................................        20,039                                   (21,000)           (961)
Net proceeds from issuance of preferred stock                  200,000                                                   200,000
                                                           -----------          -------------      -------------     -----------
Net cash provided by (used in) financing activities ....      (110,725)                30,493            346,724         266,492
                                                           -----------          -------------      -------------     -----------
Net increase in cash and cash equivalents ..............        (5,345)                  (546)            (4,985)        (10,876)
Cash and cash equivalents at beginning of year .........           336                    390             47,497          48,223
                                                           -----------          -------------      -------------     -----------
Cash and cash equivalents at end of year ...............   $    (5,009)         $        (156)   $        42,512     $    37,347
                                                           ===========          =============    ===============     ===========

</TABLE>


<TABLE>

1997
                                                           Metris                Guarantor        Non-Guarantor
                                                        Companies Inc.          Subsidiaries      Subsidiaries     Consolidated

Operating Activities:
<S>                                                    <C>                      <C>               <C>              <C>
Net cash provided by (used in) operating activities    $   (51,357)             $      (526)      $   195,096    $   143,213
                                                       -----------               -----------      -----------    -----------
Investing Activities:
Proceeds from sales of loans .......................                                                1,665,700      1,665,700
Net loans originated or collected ..................         3,357                                 (1,234,580)    (1,231,223)
Credit card portfolio acquisition ..................                                                 (738,104)      (738,104)
Additions to premises and equipment                                                 (10,515)           (1,190)       (11,705)
                                                       -----------               -----------       -----------    -----------
Net cash provided by (used in) investing activities          3,357                  (10,515)         (308,174)      (315,332)
                                                       -----------               -----------       -----------    -----------
Financing Activities:
Decrease in interest bearing deposit ...............        (1,000)                                                   (1,000)
Net (decrease) increase in short-term borrowings ...       127,425                   11,348           (48,936)        89,837
Issuance of senior notes ...........................       100,000                                                   100,000
Cash dividends paid ................................        15,350                                    (15,927)          (577)
Capital contributions ..............................      (197,814)                                   197,814
                                                       -----------              -----------       -----------     -----------
Net cash provided by financing activities                   43,961                   11,348           132,951        188,260
                                                       -----------              -----------       -----------    -----------
Net (decrease) increase in cash and cash equivalents        (4,039)                     307            19,873         16,141
Cash and cash equivalents at beginning of year               4,375                       83            27,624         32,082
                                                       -----------              -----------       -----------    -----------
Cash and cash equivalents at end of year ...........   $       336              $       390       $    47,497    $    48,223
                                                       ===========              ===========       ===========    ===========
</TABLE>


<PAGE>
<TABLE>


                              METRIS COMPANIES INC.
          Supplemental Condensed Consolidating Statements of Cash Flows
                          Year Ended December 31, 1996
                             (Dollars in thousands)


                                                            Metris       Guarantor    Non-Guarantor
                                                        Companies Inc.  Subsidiaries  Subsidiaries   Consolidated
Operating Activities:
<S>                                                     <C>           <C>             <C>            <C>
Net cash provided by (used in) operating activities .   $   (40,549)   $    (4,991) $    129,193 $        83,653
                                                        -----------    -----------  ------------ ---------------
Investing Activities:
Proceeds from sales of loans ........................                                    952,055        952,055
Net loans originated or collected ...................       (14,105)                  (1,058,216)    (1,072,321)
Additions to premises and equipment                                         (3,782)         (331)        (4,113)
                                                        -----------    -----------  ------------ ---------------
Net cash (used in) investing activities .............       (14,105)        (3,782)     (106,492)      (124,379)
                                                        -----------    -----------  ------------ ---------------
Financing Activities:
Net (decrease) increase in short-term borrowings ....        50,172          8,856        (68,347)        (9,319)
Net proceeds from issuance of common stock ..........        47,384                                       47,384
Capital contributions                                       (38,527)                       38,527
                                                        -----------    -----------  ------------ ---------------
Net cash provided by (used in) financing activities .        59,029          8,856        (29,820)        38,065
                                                        -----------    -----------  ------------ ---------------
Net increase (decrease)  in cash and cash equivalents         4,375             83         (7,119)        (2,661)
Cash and cash equivalents at beginning of year                                             34,743         34,743
                                                        -----------    -----------  ------------ ---------------
Cash and cash equivalents at end of year ............   $     4,375   $         83    $    27,624    $    32,082
                                                        ===========   ============    ===========    ===========
</TABLE>




<PAGE>


INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Metris Companies Inc.:

         We have audited the accompanying  consolidated balance sheets of Metris
Companies  Inc.  and  subsidiaries  as of December  31,  1998 and 1997,  and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows for each of the years in the  three-year  period  ended  December 31,
1998. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all material  respects,  the  financial  position of Metris
Companies  Inc.  and  subsidiaries  as of December  31,  1998 and 1997,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.


/s/ KPMG Peat Marwick LLP


KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 20, 1999, except for the last paragraph of Note 6 and the last paragraph
of Note 11 which are as of March 12, 1999


<PAGE>


Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

         None


PART III


Item 10.  Directors and Executive Officers of the Registrant

         The information  required by this item with respect to directors is set
forth under  "Proposal  One:  Election of  Directors,"  in the  Company's  proxy
statement  for the annual  meeting of  shareholders  to be held on May 11, 1999,
which will be filed within 120 days of December 31, 1998 (the "Proxy Statement")
and is incorporated herein by reference.  The information  required by this item
with respect to executive  officers is, pursuant to instruction 3 of Item 401(b)
of  Regulation  S-K,  set  forth in Part I of this Form  10-K  under  "Executive
Officers of the Registrant." The information  required by this item with respect
to reports  required to be filed under Section 16(a) of the Securities  Exchange
Act of 1934 is set forth under "Section  16(a)  Beneficial  Ownership  Reporting
Compliance" in the Proxy Statement and is incorporated herein by reference.

Item 11.  Executive Compensation

         The information  required by this item is set forth under "Compensation
Tables and  Compensation  Matters" in the Proxy  Statement  and is  incorporated
herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The information required by this item is set forth under "Company Stock
Owned by Officers and Directors"  and "Persons  Owning More Than Five Percent of
Company  Common Stock " in the Proxy  Statement  and is  incorporated  herein by
reference.

Item 13.  Certain Relationships and Related Transactions

         The  information  required by this item is set forth  under  "Corporate
Governance" in the Proxy Statement and is incorporated herein by reference.

         With the  exception  of the  information  incorporated  by reference in
Items 10-13 above, the Proxy Statement is not to be deemed filed as part of this
Form 10-K.


PART IV


Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

         (a) The following documents are made part of this report:


                  1.  Consolidated Financial Statements  - See Item 8 above.

                  2.  Financial Statement Schedules

                      All  schedules to the  consolidated  financial  statements
                      normally  required by Form 10-K are omitted since they are
                      either not applicable or the required information is shown
                      in the financial statements or the notes thereto.

         (b)      Reports on Form 8-K:
                      On December 22, 1998, the Company filed a Current Report
                      on Form 8-K to report the  purchase of approximately
                      500,000   credit  card accounts form PNC National  Bank.
                      The Company  also  reported  the issue and sale to the
                      Thomas H. Lee  Company of $200   million   of  12.5%
                      Series  B Preferred    Stock, $100 million aggregate
                      principal  amount  of  12% Senior  Notes due 2006 and
                      warrants to purchase   3,750,000   shares  of  the
                      Company's  Common Stock at an exercise price of $30
                      per share.

         (c) Exhibits: See Exhibit Index on page 65 of this Report.


<PAGE>


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the  undersigned,  thereunto duly authorized on the 26th day of March,
1999.


                                          METRIS COMPANIES INC.
                                                        (Registrant)


                                           By /s/ Ronald N. Zebeck
                                              -------------------------------
                                              Ronald N. Zebeck
                                              President and
                                              Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed  below by the  following  persons on behalf of Metris  Companies
Inc., the Registrant, and in the capacities and on the dates indicated.


Signature                        Title                       Date

Principal executive              President,                  March 26, 1999
officer and director:            Chief Executive Officer
                                 and Director

/s/ Ronald N. Zebeck
-------------------------------
Ronald N. Zebeck


Principal financial officer:     Executive Vice President,   March 26, 1999
                                 Chief Financial Officer


/s/ David D. Wesselink
-------------------------------
David D. Wesselink


Principal accounting officer:    Vice President, Finance,    March 26, 1999
                                 Corporate Controller

/s/ Jean C. Benson
-------------------------------
Jean C. Benson





<PAGE>


Directors:



/s/ Theodore Deikel                      Director         March 26, 1999
-------------------------------
Theodore Deikel


/s/ Dudley C. Mecum                      Director         March 26, 1999
-------------------------------
Dudley C. Mecum


/s/ Frank D. Trestman                    Director         March 26, 1999
-------------------------------
Frank D. Trestman


/s/ Lee R. Anderson, Sr.                 Director         March 26, 1999
-------------------------------
Lee R. Anderson, Sr.


/s/ Derek V. Smith                       Director         March 26, 1999
--------------------------------
Derek V. Smith


/s/ John A. Cleary                       Director         March 26, 1999
--------------------------------
John A. Cleary




<PAGE>


                                  EXHIBIT INDEX

Exhibit
Number   Description of Exhibit

Charter Documents:

3.1      Amended and Restated Certificate of Incorporation of the Company
         (incorporated by reference to Exhibit 3.1 to the
         Company's Registration Statement on Form S-1 (File No. 333-10831)).

3.2      Amended and Restated Bylaws of the Company.

Instruments Defining Rights:

4.1     Indenture, dated as of November 7, 1997, among the Company, Metris
        Direct, Inc. as the Guarantor, and the First National Bank of Chicago,
        as Trustee, including form of 10% Senior Note due 2004 and form of
        Guarantee by Metris Direct, Inc. (incorporated by reference to Exhibit
        4.a to the Company's Registration Statement on Form S-4 (File No.
        333-43771)).

4.2     Certificate of Designation of Series B Perpetual Preferred Stock
        (incorporated by reference to Exhibit 4.1 of the Company's
        Current Report on Form 8-K dated December 22, 1998 (File No. 1-12351)).

4.3     Certificate of Designation of Series C Perpetual Preferred Stock
        (incorporated by reference to Exhibit 4.2 of the
        Company's Current Report on Form 8-K dated December 22, 1998
        (File No. 1-12351)).

4.4     Certificate of  Designation  of Series D Junior  Participating
        Convertible  Preferred  Stock  (incorporated  by  reference to
        Exhibit 4.3 of the Company's  Current Report on Form 8-K dated
        December 22, 1998 (File No. 1-12351)).

4.5     Securities Purchase Agreement, dated as of November 13, 1998, among the
        Company, the Thomas H. Lee Equity Fund IV, L.P. (the "Lee Fund") and
        certain affiliates of the Lee Fund (incorporated by reference to Exhibit
        10.2 to the Company's Current Report on Form 8-K dated December 22, 1998
        (File No. 1-12351)).

4.6     Indenture, dated as of December 9, 1998, among the Company, the
        Guarantors named therein and The Bank of New York,
        as Trustee (incorporated by reference to Exhibit 4.4 to the Company's
        Current Report on Form 8-K dated December 22, 1998 (File No. 1-12351)).

4.7     Registration Rights Agreement, dated as of December 9, 1998, between the
        Company and the Investors named therein (incorporated by reference to
        Exhibit 10.3 to the Company's Current Report on Form 8-K dated December
        22, 1998 (File No. 1-12351)).

4.8     Warrant  Agreement,  dated as of December 9, 1998, between the
        Company and the  Purchasers  named  therein  (incorporated  by
        reference to Exhibit 4.5 to the  Company's  Current  Report on
        Form 8-K dated December 22, 1998 (File No. 1-12351)).

Material Contracts

10.1      Amended and Restated Pooling and Servicing Agreement, dated as
          of July 30, 1998, among Metris  Receivables,  Inc. ("MRI"), as
          Transferor,   Direct  Merchants  Credit  Card  Bank,  National
          Association  ("DMCCB"),  as Servicer, and The Bank of New York
          (Delaware),  as Trustee  (incorporated by reference to Exhibit
          4(a) to MRI's  Registration  Statement  on Form S-3  (File No.
          333-61343)).

10.2      Amended and  Restated  Bank  Receivables  Purchase  Agreement,
          dated as of July  30,  1998,  between  DMCCB  and the  Company
          (incorporated   by   reference   to  Exhibit   4(c)  to  MRI's
          Registration Statement on Form S-3 (File No. 333-61343)).

10.3      Amended and  Restated  Bank  Receivables  Purchase  Agreement,
          dated  as of  July  30,  1998,  between  the  Company  and MRI
          (incorporated   by   reference   to  Exhibit   4(d)  to  MRI's
          Registration Statement on Form S-3 (File No. 333-61343)).

10.4      Owner Trust  Agreement,  dated as of July 30, 1998,  among MRI
          and  Wilmington  Trust Company  (incorporated  by reference to
          Exhibit  10.1(ii) to the  Company's  Quarterly  Report on Form
          10-Q for the period ended September 30, 1998 (File No.
          1-12351)).

10.5      Liquidity Agreements, each dated July 30, 1998, among Metris Owner
          Trust, the Lenders thereto and the Administrative
          Agent (pursuant to Instruction 2 to Item 601, only one such agreement
          has been filed) (incorporated by reference to Exhibit 10.1(iii) to the
          Company's Quarterly Report on Form 10-Q for the period ended
          September 30, 1998 (File No.1-12351)).

10.6*     Stock Option and Valuation Rights Agreement, dated as of March 21,
          1994, between Fingerhut Companies, Inc. and Ronald N. Zebeck
          (incorporated by reference to Exhibit 10.l to Fingerhut Companies,
          Inc.'s Annual Report on Form 10-K  for the fiscal year ended
          December 29, 1995 (File No. 1-8668)).

          (i)*     Amendment,  dated October 25, 1996  (incorporated  by
                   reference to Exhibit 10.4(i) to the Company's  Annual
                   Report on Form 10-K for the year ended  December  31,
                   1997 (File No. 1-12351)).

          (ii)*    Non-Qualified  Stock  Option  Agreement  pursuant  to
                   Metris Companies Long-Term Incentive and Stock Option
                   Plan,  dated as of October 25,  1996,  by and between
                   the  Company and Ronald N.  Zebeck  (incorporated  by
                   reference to Exhibit 10.4(ii) to the Company's Annual
                   Report on Form 10-K for the year ended  December  31,
                   1997 (File No. 1-12351)).

10.7      Change of Control Agreement,  dated as of May 15, 1998, by and
          between  the  Company  and Ronald  Zebeck  and a  schedule  of
          executive   officers  of  the  Company  also  having  such  an
          agreement with the Company,  indicating the  differences  from
          the form of agreement  filed (as permitted by Instruction 2 to
          Item 601 of  regulation  S-K)  (incorporated  by  reference to
          Exhibit 10.2 to the  Company's  Quarterly  Report on Form 10-Q
          for the quarter ended September 30, 1998 (File No.
          1-12351)).

          (i)      Amendment to Change in Control Severance Agreement,  dated
                   as of December 9, 1998.

         (ii)      Amended Schedule of Officers with Change of Control.

10.8*      Metris  Companies  Inc.  Long-Term  Incentive and Stock Option
           Plan, as amended  (incorporated by reference to Exhibit 4.3 to
           the Company's Registration Statement on Form S-8 filed May 14,
           1998 (File No. 333-52627)).

           (i)*     Form of Non-Qualified Stock Option Agreement.

10.9*      Metris Companies Inc. Non-Employee Director Stock Option Plan,
           including form of option agreement  (incorporated by reference
           to Exhibit 10.9 to the  Company's  Annual  Report on Form 10-K
           for the year ended December 31, 1997 (File No.
           1-12351)).

10.10*     Metris Companies Inc. Annual Incentive Plan for Designated
           Corporate Officers.

10.11      Co-Brand Credit Card Agreement,  dated as of October 31, 1996,
           between  the  Company,   Fingerhut  Corporation,   and  Direct
           Merchants Credit Card Bank, N.A. (incorporated by reference to
           Exhibit 10.11 to the Company's  Annual Report on Form 10-K for
           the year ended December 31, 1997 (File No. 1-12351)).

10.12      Extended Service Plan Agreement, dated as of October 31, 1996,
           between the Company, Fingerhut Corporation, and InfoChoice USA, Inc.
           (incorporated by reference to Exhibit 10.12 to the Company's Annual
           Report on Form 10-K for the year ended December 31, 1997
           (File No. 1-12351)).

10.13      Database Access Agreement, dated as of October 31, 1996, between the
           Company and Fingerhut Corporation (incorporated by reference to
           Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
           year ended December 31, 1997 (File No. 1-12351)).

10.14      Tax Sharing Agreement, dated as of October 31, 1996, between the
           Company and Fingerhut Companies, Inc. (incorporated by reference to
           Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
           year ended December 31, 1997 (File No. 1-12351)).

           (i)      Amendment to Tax Sharing Agreement, dated January 1, 1998,
                    between the Company and Fingerhut Companies, Inc.

10.15      Waiver Agreement, dated as of December 8, 1998, between Fingerhut
           Corporation, Infochoice USA, Inc., Metris Direct, Inc., DMCCB and
           Metris Direct Services, Inc. (incorporated by reference to Exhibit
           10.4 to the Company's Current Report on Form 8-K dated December 22,
           1998 (File No. 1-12351)).

10.16      Data Sharing Agreement, dated as of October 31, 1996, between
           Fingerhut Corporation and DMCCB (incorporated by reference to Exhibit
           10.17 to the Company's Annual Report on Form 10-K for the year ended
           December 31, 1997 (File No. 1-12351)).

10.17      Amended and Restated Credit Agreement, dated as of June 30, 1998
           among the Company and the lenders named therein
           (incorporated by reference to Exhibit 10.18(a) to the Company's
           Quarterly Report on Form 10-Q for the period ended
           June 30, 1998 (File No. 1-12351)).

           (i)      Amendment,  dated  as of  December  3,  1998,  to the
                    Amended and Restated  Credit  Agreement,  dated as of
                    June 30, 1998,  among the Company,  the lenders named
                    therein,  NationsBank,  N.A., as  syndication  agent,
                    Deutsche  Bank,  as  documentation  agent,  U.S. Bank
                    National   Association,   as   documentation   agent,
                    Barclays  Bank  PLC,  as  co-agent,  Bank of  America
                    National Trust and Savings Association,  as co-agent,
                    and The Chase Manhattan Bank, as administrative agent
                    (incorporated  by  reference  to Exhibit  10.5 to the
                    Company's  Current  Report on Form 8-K dated December
                    22, 1998 (File No. 1-12351)).

           (ii)     Amendment,  dated  as of  December  7,  1998,  to the
                    Amended and Restated  Credit  Agreement,  dated as of
                    June 30, 1998,  among the Company,  the lenders named
                    therein,  NationsBank,  N.A., as  syndication  agent,
                    Deutsche  Bank,  as  documentation  agent,  U.S. Bank
                    National   Association,   as   documentation   agent,
                    Barclays  Bank  PLC,  as  co-agent,  Bank of  America
                    National Trust and Savings Association,  as co-agent,
                    and  The  Chase  Manhattan  Bank,  as  administrative
                    agent.


10.18      Transfer and Administration Agreement, dated as of October 23,
           1997,  among Kitty Hawk Funding  Corporation,  Metris  Funding
           Co.,  as  Transferor,   Direct  Merchants  Credit  Card  Bank,
           National  Association as Collection  Agent,  and  NationsBank,
           N.A., as Agent and Bank Investor (incorporated by reference to
           Exhibit  10.18(a) to the  Company's  Quarterly  Report on Form
           10-Q  for the  period  ended  September  30,  1998  (File  No.
           1-12351)).

10.19      Transfer and Administration Agreement, dated as of October 23,
           1997,  among Kitty Hawk Funding  Corporation,  Metris  Funding
           Co.,  as  Transferor,   DMCCB,   as  Collection   Agent,   and
           NationsBank,  N.A. as Agent and Bank Investor (incorporated by
           reference to Exhibit 10.c to the Company's Quarterly Report on
           Form 10-Q for the period  ended  September  30, 1997 (File No.
           1-12351)).

             (i)     Amendment  No. 4, dated  October  22,  1998,  to the
                     Transfer and Administration  Agreement,  dated as of
                     October  23,   1997,   among   Kitty  Hawk   Funding
                     Corporation,  Metris  Funding  Co.,  as  Transferor,
                     Direct   Merchants   Credit   Card  Bank,   National
                     Association as Collection  Agent,  and  NationsBank,
                     N.A., as Agent and Bank Investor.

10.20      Lease Agreement, dated as of March 28, 1997, between Nottingham
           Village, Inc. and Metris Direct, Inc. (incorporated
           by reference to Exhibit 10.21 to the Company's Annual Report on Form
           10-K for the year ended December 31, 1997 (File No. 1-12351)).

           (i)      Guaranty of Lease, dated as of March 31, 1997, between
                    Nottingham Village, Inc. and Metris Direct, Inc.
                    (incorporated by reference to Exhibit 10.21(i) to the
                    Company's Annual Report on Form 10-K for the year
                    ended December 31, 1997 (File No. 1-12351)).

           (ii)     First  Amendment  and  Lease  Agreement,  dated as of
                    October 15, 1997,  among Nottingham  Village,  Metris
                    Direct,  Inc.,  and  the  Company   (incorporated  by
                    reference  to  Exhibit  10.21(ii)  to  the  Company's
                    Annual  Report  on  Form  10-K  for  the  year  ended
                    December 31, 1997 (File No. 1-12351)).

           (iii)    Subordination,    Non-Disturbance    and   Attornment
                    Agreement,  dated as of March 17, 1998  (incorporated
                    by reference to Exhibit  10.21(iii)  to the Company's
                    Quarterly  Report on Form 10-Q for the  period  ended
                    March 31, 1998 (File No. 1-12351)).

           (iv)     Tenant  Estoppel  Certificate,  dated  as of March 3,
                    1998,   to  State   Farm   Life   Insurance   Company
                    (incorporated  by reference  to Exhibit  10.21(iv) to
                    the Company's  Quarterly  Report on Form 10-Q for the
                    period ended March 31, 1998 (File No. 1-12351)).

10.21      Lease Agreement, dated August 11, 1995, between The Equitable Life
           Assurance Society of the United States and Fingerhut Financial
           Services Corporation (incorporated by reference to Exhibit 10.22 to
           the Company's Annual Report on Form 10-K for the year ended December
           31, 1997 (File No. 1-12351)).

           (i)      Amendment Number One to Lease Agreement, dated August
                    1, 1996, between The Equitable Life Assurance Society
                    of the United States and Fingerhut Financial Services
                    Corporation  (incorporated  by  reference  to Exhibit
                    10.22(i) to the Company's  Annual Report on Form 10-K
                    for the year ended December 31, 1997 (File No.
                    1-12351)).

           (ii)     Amendment  Number  Two  to  Lease  Agreement,   dated
                    January 16, 1997,  between WHIOP Real Estate  Limited
                    Partnership and Metris Direct, Inc.  (incorporated by
                    reference  to  Exhibit  10.22(ii)  to  the  Company's
                    Annual  Report  on  Form  10-K  for  the  year  ended
                    December 31, 1997 (File No. 1-12351)).

           (iii)    Amendment  Number  Three  to Lease  Agreement,  dated
                    December 4, 1997,  between WHIOP Real Estate  Limited
                    Partnership and Metris Direct, Inc.  (incorporated by
                    reference  to  Exhibit  10.22(iii)  to the  Company's
                    Annual  Report  on  Form  10-K  for  the  year  ended
                    December 31, 1997 (File No. 1-12351)).

           (iv)     Amendment  Number  Four  to  Lease  Agreement,  dated
                    January 29, 1997,  between WHIOP Real Estate  Limited
                    Partnership and Metris Direct, Inc.  (incorporated by
                    reference  to  Exhibit  10.22(iv)  to  the  Company's
                    Annual  Report  on  Form  10-K  for  the  year  ended
                    December 31, 1997 (File No. 1-12351)).

           (v)      Tenant Estoppel Certificate to WCB Properties Limited
                    Partnership  (incorporated  by  reference  to Exhibit
                    10.22(v) to the Company's  Annual Report on Form 10-K
                    for the year ended December 31, 1997 (File No.
                    1-12351)).

10.22      Lease  Agreement,  dated  October 31, 1995,  between  Exchange
           Limited   Partnership   and   Fingerhut   Financial   Services
           Corporation (incorporated by reference to Exhibit 10.23 to the
           Company's  Annual  Report  on Form  10-K  for the  year  ended
           December 31, 1997 (File No. 1-12351)).

           (i)      Addendum to Lease Agreement,  dated October 31, 1995,
                    between  1991  Exchange   Limited   Partnership   and
                    Fingerhut     Financial     Services      Corporation
                    (incorporated by reference to Exhibit 10.23(i) to the
                    Company's  Annual  Report  on Form  10-K for the year
                    ended December 31, 1997 (File No. 1-12351)).

           (ii)     Corporate  Guaranty of Lease, dated October 31, 1995,
                    between  1991  Exchange   Limited   Partnership   and
                    Fingerhut     Financial     Services      Corporation
                    (incorporated  by reference  to Exhibit  10.23(ii) to
                    the Company's Annual Report on Form 10-K for the year
                    ended December 31, 1997 (File No. 1-12351)).

           (iii)    First  Amendment to Lease,  dated  February 14, 1996,
                    between  1991  Exchange   Limited   Partnership   and
                    Fingerhut     Financial     Services      Corporation
                    (incorporated  by reference to Exhibit  10.23(iii) to
                    the Company's Annual Report on Form 10-K for the year
                    ended December 31, 1997 (File No. 1-12351)).

           (iv)     Tenant  Estoppel  Certificate  to  Eagle  Investments
                    Limited  Liability  Company,  Bank One, Oklahoma City
                    and 1991 Exchange Limited Partnership, dated January,
                    1996, from Fingerhut  Financial Services  Corporation
                    (incorporated  by reference  to Exhibit  10.23(iv) to
                    the Company's Annual Report on Form 10-K for the year
                    ended December 31, 1997 (File No. 1-12351)).

           (v)      Third Amendment to Lease, dated December 22, 1998, between
                    Exchange Center, L.L.C. and Fingerhut Financial
                    Services Corporation.


10.23      Lease Agreement, dated December 11, 1996, between Koger Equity, Inc.
           and Metris Direct, Inc. (incorporated by reference to Exhibit 10.24
           to the Company's Annual Report on Form 10-K for the year ended
           December 31, 1997 (File No. 1-12351)).

           (i)      Lease Amendment, dated June 27, 1997, between Koger Equity,
                    Inc. and Metris Direct, Inc. (incorporated by
                    reference to Exhibit 10.24(i) to the Company's Annual Report
                    on Form 10-K for the year ended December 31,
                    1997 (File No. 1-12351)).

           (ii)     Lease Amendment, dated October 15,1997, between Koger
                    Equity, Inc. and Metris Direct, Inc. (incorporated
                    by reference to Exhibit 10.24(ii) to the Company's Annual
                    Report on Form 10-K for the year ended December
                    31, 1997 (File No. 1-12351)).

           (iii)    Lease Amendment, dated July 10, 1998, between Koger Equity,
                    Inc. and Metris Direct, Inc.

10.24      Transfer and Administration Agreement, dated December 9, 1998,
           among Enterprise Funding Corporation,  Park Avenue Receivables
           Corporation,  Sheffield Receivables Corporation,  Metris Asset
           Funding  Co.,  Direct  Merchants  Credit  Card Bank,  National
           Association, N.A.

10.25      Receivables Purchase Agreement, dated December 9, 1998, between the
           Company and Metris Asset Funding Co.

Other Exhibits

11                Computation of Earnings Per Share.

12(a)             Computation of Ratio of Earnings to Fixed Charges.

12(b)             Computation of Ratio of Earnings to Fixed Charges and
                  Preferred Dividends.

13                Pages 18 to 62 of the 1998 Annual Report to Shareholders.  The
                  1998 Annual Report shall not be deemed to be filed
                  with the Commission except to the extent that information is
                  specifically incorporated herein by reference.

21                Subsidiaries of the Company.

23                Independent Auditors' Consent.

27                Financial Data Schedule.

* Management  contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.