<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                             ---------------------

                                  FORM 10-K/A

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

<Table>
<S>                                            <C>
          FOR THE FISCAL YEAR ENDED                              001-12351
              DECEMBER 31, 2003                            COMMISSION FILE NUMBER
</Table>

                             ---------------------

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

<Table>
<S>                                            <C>
                   DELAWARE                                      41-1849591
           (State of Incorporation)                 (I.R.S. Employer Identification No.)
</Table>

           10900 WAYZATA BOULEVARD, MINNETONKA, MINNESOTA 55305-1534
                    (Address of principal executive offices)

                                 (952) 525-5020
                        (REGISTRANT'S TELEPHONE NUMBER)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
         Common Stock, $.01 Par Value                  New York Stock Exchange, Inc.
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE

     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. [ ]

     Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).  Yes [X]     No [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 30, 2003 was approximately $321,494,140 based upon the
closing price of $5.55 on the New York Stock Exchange on that date.

     As of March 31, 2004, 57,908,052 shares of the Registrant's Common Stock
were outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                               PAGE
                                                                               ----
<S>              <C>                                                           <C>
                                      PART I
Item 1.          Business....................................................     2
Item 2.          Properties..................................................    31
Item 3.          Legal Proceedings...........................................    31
Item 4.          Submission of Matters to a Vote of Security Holders.........    32

                                      PART II
Item 5.          Market for Registrant's Common Equity and Related
                 Stockholder Matters.........................................    32
Item 6.          Selected Financial Data.....................................    33
Item 7.          Management's Discussion and Analysis of Financial Condition
                 and Results of Operations...................................    35
Item 7a.         Quantitative and Qualitative Disclosures About Market
                 Risk........................................................    61
Item 8.          Financial Statements and Supplementary Data.................    62
Item 9.          Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure....................................   104
Item 9a.         Controls and Procedures.....................................   104

                                     PART III
Item 10.         Directors and Executive Officers of the Registrant..........   104
Item 11.         Executive Compensation......................................   107
Item 12.         Security Ownership of Certain Beneficial Owners and
                 Management and Related Stockholder Matters..................   115
Item 13.         Certain Relationships and Related Transactions..............   124
Item 14.         Principal Accountant Fees and Services......................   125

                                      PART IV
Item 15.         Exhibits, Financial Statement Schedules and Reports on Form
                 8-K.........................................................   126
Signatures...................................................................   127
Exhibit Index................................................................   129
</Table>

                                EXPLANATORY NOTE

     This Amendment No. 1 on Form 10-K/A amends the Company's 2003 Annual Report
on Form 10-K, as filed by the Company on April 12, 2004, and is being filed
solely to provide information required by Part III, Item 10 through Item 14, in
lieu of incorporating such information by reference from the Company's Proxy
Statement for the 2004 Annual Meeting of Stockholders. In addition, pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, we are including with
this Amendment No. 1 certain currently dated certifications. Except as described
above, no other information contained in the original Annual Report has been
amended or updated by this Amendment No. 1.

                                        1
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

     Metris Companies Inc. ("MCI") and its subsidiaries provide financial
products and services throughout the United States. MCI was incorporated in
Delaware on August 20, 1996, and completed an initial public offering in October
1996. MCI's principal subsidiaries are Direct Merchants Credit Card Bank,
National Association ("Direct Merchants Bank" or the "Bank"), Metris Direct,
Inc. and Metris Receivables, Inc. MCI and its subsidiaries are referred to in
this Report as "we," "us," "our," and the "Company."

     We are listed on the New York Stock Exchange under the symbol MXT. All of
our public company filings can be found on our website at
www.metriscompanies.com, including our proxy statements, annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to these filings. Filings will be available on our website as soon as
reasonably practicable after we electronically file them with, or furnish them
to, the Securities and Exchange Commission.

     In the third quarter of 2003, we sold our membership club and warranty
business. As a result, our primary line of business is our credit card business.
Our credit card products are primarily unsecured credit cards issued through
Direct Merchants Bank. These credit cards generate consumer loans, which in turn
generate income and cash flow from principal, interest and fee payments. The
sales of our other consumer financial products, such as credit protection
products, generate additional cash flow. We target primarily middle market
customers. Direct Merchants Bank obtains information about prospective customers
in the middle market from credit bureau information as well as from other
third-party sources including other companies' customer lists and databases.

     Our business requires a high degree of liquidity. Thus, ensuring adequate
liquidity is, and will continue to be, at the forefront of our business
objectives. We rely heavily on the securitization of our credit card loans for
funding, primarily by selling these loans to our proprietary trust, the Metris
Master Trust. We also fund our business through corporate debt issuances.

     Because our target market is particularly susceptible to changes in the
economy, the recent economic recession has challenged the Company and reduced
our access to funding. In addition, in 2001 we implemented a program to increase
the credit lines of a large portion of our customers, which put increased
payment pressure on those customers. The delinquency rate on our credit card
loans and the rate at which credit card loans were charged off as uncollectible
increased significantly during 2002 and 2003. Poor performance of loans that had
been securitized resulted in higher required enhancement levels in our
securitizations, which diverted significant amounts of cash that otherwise would
have been available to us. As a result of these factors, our corporate debt
ratings, the Metris Master Trust's debt ratings, and the debt ratings of Direct
Merchants Bank were downgraded. This deterioration in our asset quality, and the
accompanying downgrades in our credit ratings, reduced our access to funding and
resulted in higher funding costs and less favorable transaction terms than
previously were available to us.

     During 2003, we took a number of significant actions designed to address
our asset quality issues, ensure appropriate liquidity, and return the Company
to profitability, including:

     - Sales of Portfolio Receivables.  We significantly reduced the size of our
       managed receivables portfolio in 2003. This was done using a combination
       of decreased marketing efforts, higher account attrition and the sale of
       approximately $1.1 billion of credit card receivables in September and
       November of 2003. This reduction in the size of our portfolio has
       significantly reduced our need for additional bank conduit financing or
       the issuance of new asset-backed securities.

     - Sale of Membership Club and Warranty Service Business.  In July 2003, we
       sold our membership club and warranty service business for $45 million in
       cash, further focusing our resources on our core consumer lending
       business.

                                        2
<PAGE>

     - Expense Reduction Efforts.  We took steps to match our workforce needs
       with the size of our managed receivables portfolio by eliminating
       approximately 1,025 positions in 2003. As a result of this and other
       expense reduction efforts, the Company reduced ongoing operating expenses
       by $191 million during 2003 as compared to the prior year.

     - Efforts to Improve Asset Quality.  We took several actions during 2003 to
       improve the quality of our receivables. These include strengthening
       credit line management strategies, limiting marketing efforts to higher
       credit quality consumers, tightening credit authorization criteria, and
       enhancing collection strategies.

     - Funding Transactions.  During the year we obtained funding to replace
       $1.775 billion of maturing bank conduit financings and warehouse facility
       financings that were in existence as of December 31, 2002. On March 17,
       2003, we obtained a $425 million extension through March 2004 of an $850
       million conduit financing which was scheduled to mature in June 2003. We
       also secured a $425 million conduit financing through March 2004, which
       replaced conduits and warehouse facilities that matured during March
       through May 2003. These conduits also provided for the financing of a
       term asset-backed securitization that matured in July 2003. Finally, as
       required under one of the conduit facilities, we obtained an amortizing
       term series financing of $622.2 million maturing March 2004 to provide
       for the payment of a $610 million term asset-backed securitization that
       began an accumulation period on November 1, 2003. We also obtained a $125
       million senior secured loan under our Amended and Restated Senior Secured
       Credit Agreement, the proceeds of which were used primarily to pay off a
       $100 million term loan that matured in June 2003.

     - Efforts to Improve Collections.  In early 2003 we reviewed our
       collections operations to determine whether the collections function was
       operating effectively. We determined that overall performance of the
       collections function could be improved, and as a result, we made
       significant changes in the operation. We replaced a substantial portion
       of the senior management team, updated the technology used by the
       operation, and initiated new training programs for all levels of
       collections personnel. We also implemented a new collections paradigm
       that incorporates specific requirements for staffing, dialer strategies,
       and a new collections call model. In addition, reporting and performance
       standards were enhanced to ensure management accountability.

     As of December 31, 2003 our funding needs for 2004 included $3.1 billion in
maturing asset-backed and conduit financing in the Metris Master Trust, $95.3
million outstanding on our $125 million term loan due in June 2004, and $100
million of our 10% Senior Notes due in November 2004. We had obtained and set
aside the funds to repay a $500 million asset-backed securitization scheduled to
mature in June 2004 from the Metris Master Trust by entering into a new conduit
financing scheduled to mature in May 2004. Furthermore, we have received a $1.7
billion, two-year commitment from MBIA Insurance Corporation ("MBIA") to provide
financial guaranty insurance policies to refinance maturing MBIA-guaranteed
series from the Metris Master Trust. MBIA has committed to guarantee three
series issued from the Metris Master Trust totaling $1.7 billion with maturity
dates of June 2004, May 2005, and November 2005. We intend to meet our remaining
funding needs in 2004 through a combination of portfolio attrition (projected to
be $1.4 billion in 2004), the renewal or replacement of some of bank conduit
financings, new securitizations, and the sale of receivables, as necessary.

     As mentioned above, downgrades in our credit ratings and the historical
deterioration in our asset quality have reduced our access to funding and have
resulted in higher funding costs and less favorable transaction terms than
previously were available to us. Any future downgrades in our debt ratings or
those of Direct Merchants Bank, or further deterioration in our asset quality,
could further negatively impact our funding capabilities.

     We target customers across the broad middle market segments, focusing
primarily on creditworthy middle market customers who are underserved and
undermarketed by many large, prime and super prime oriented credit card issuers.
We originate new loans by selectively recruiting higher quality customers from
the most attractive parts of each market segment. We believe we can leverage
distinctive competencies in

                                        3
<PAGE>

marketing, underwriting, and servicing to better meet our customers' needs and
be competitive in each market segment.

     To acquire new customers, we use proprietary targeting and analytics to
identify the most attractive credit card prospects and match them with the most
compelling and profitable product offering. Currently we utilize prescreened
direct mail and telemarketing as the primary new customer acquisition channels,
augmented by partnership and invitation-to-apply direct mail programs. In the
future, we anticipate prudently and deliberately diversifying our distribution
channels to achieve better market penetration within each of the market segments
we serve.

OUR BUSINESS

     Our credit card products are primarily unsecured credit cards, including
the Direct Merchants Bank MasterCard(R) and Visa(R). We also offer co-branded
credit cards through partnerships with other companies. At December 31, 2003, we
had approximately 2.8 million credit card accounts with approximately $8.1
billion in managed credit card receivables. Our products also include credit
protection and insurance products.

     When we refer to "managed" loans or other "managed" data, we are using
information that includes securitized loan balances, delinquencies and credit
losses related to those loans, and related finance charge and fee income, even
though those balances, delinquencies, losses, charges and income are not on our
financial statements as a result of the way in which we treat securitizations
under accounting principles generally accepted in the United States ("GAAP").
Although securitized loans have been removed from our balance sheet, we retain
interests in them that affect our financial performance. Therefore, we use
managed financial information, which is not GAAP compliant, to supplement our
GAAP information in analyzing our business. For more information regarding
managed financial information, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Selected Operating
Data-Managed Basis" at pages 58-60.

     We generate income from our consumer lending products through:

     - servicing fees and excess spread on credit card loans sold to the Metris
       Master Trust;

     - interest and other finance charges assessed on outstanding credit card
       loans;

     - interchange fees (fees paid by the merchant's bank in connection with
       credit card transactions) and credit card fees (including annual
       membership, cash advance, overlimit and late fees) on outstanding credit
       card loans;

     - premiums on credit protection products; and

     - commissions from third parties for marketing of their products to our
       cardholders.

     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, marketing, and data processing expenses.

     Profitability is affected by:

     - credit quality, including delinquencies, bankruptcies and charge-offs;

     - net interest income on loans;

     - cost of funds, including enhancement levels on securitizations of loans
       sold;

     - response and approval rates to solicitation efforts;

                                        4
<PAGE>

     - the size of our managed loan portfolio;

     - credit card usage;

     - credit card cancellations;

     - fraud losses;

     - cardholder servicing expenses; and

     - operating expenses.

TARGET MARKET

     We primarily target middle market consumers. We target and evaluate
prospective customers in this market by using our proprietary scoring
techniques, together with information obtained from credit bureaus and other
third-party customer lists and databases, to determine a potential customer's
creditworthiness. We also use modeling techniques to evaluate the expected risk,
responsiveness and profitability of each prospective customer, and to offer and
price the products and services we believe to be appropriate for each customer.

  PROSPECTS

     Our primary sources of prospects for credit card offers are credit bureau
queries and third-party customer lists and databases. Other lists of
non-prescreened names are purchased as well.

  CREDIT SCORING

     We use internally and externally developed models to supplement our
evaluation of customers. These models help segment prospects into narrower
ranges within each risk score provided by Fair, Isaac Corporation ("FICO"),
allowing us to better evaluate individual credit risk and to tailor our
risk-based pricing accordingly. We also use this segmentation to exclude certain
individuals from our marketing solicitations.

     We believe our methods are effective in further segmenting and evaluating
risk within the FICO risk score bands. We continue to use the results of our
analysis of prospects to adjust the proprietary models to determine the pricing
for various segments and to exclude certain segments from subsequent direct
marketing efforts.

  SOLICITATION

     We believe that our proprietary models give us a competitive advantage in
evaluating the credit risk of middle market consumers. We monitor the
performance of the proprietary models and continually re-evaluate the
effectiveness of these models in segmenting credit risk, resulting in further
refinements to our selection criteria for prospects. Over time, we believe that
we will capture additional credit information on the behavioral characteristics
of prospects, which will allow us to further increase the effectiveness of our
proprietary models.

     Our credit analysts process applications based on policies approved by the
Bank's credit policy committee. We solicit prospects on a nationwide basis
primarily through pre-screened direct mail and telephone solicitations and
direct mail invitations to apply. We receive responses to our solicitations,
obtain new credit bureau reports, perform fraud screening, verify name and
address changes, and obtain any information which may be missing from the
application. We then make the credit decisions and approve, deny or begin
exception processing. We process exceptions for, among other things, missing
credit bureau information and fraud warnings.

                                        5
<PAGE>

  PRICING

     Through risk-based pricing, we price credit card offers based on a
prospect's risk profile. We evaluate a prospect to determine credit needs,
credit risk and existing credit availability, and then develop a customized
offer that includes the most appropriate product, brand, pricing and credit
line. We have numerous pricing structures on our credit card products. After
credit card accounts are opened, we frequently monitor customers' internal and
external credit performance and recalculate delinquency, profitability and
attrition predictors.

  AGE OF PORTFOLIO

     The average age of our credit card portfolio affects the stability of
delinquency and loss rates. Older portfolios are typically more stable. The
following tables set forth, as of December 31, 2003 and 2002, the number of
credit card accounts and the amount of outstanding loans based on the age of the
OWNED accounts(those accounts held by us). (Accounts in acquired portfolios are
presented based on when the account was originated with the previous issuer.)

<Table>
<Caption>
                                                                                   PERCENTAGE OF
                                           NUMBER      PERCENTAGE       LOANS          LOANS
AGE SINCE ORIGINATION                    OF ACCOUNTS   OF ACCOUNTS   OUTSTANDING    OUTSTANDING
---------------------                    -----------   -----------   -----------   -------------
                                                         (DOLLARS IN THOUSANDS)
<S>                                      <C>           <C>           <C>           <C>
2003
0-6 months.............................     41,194         23.7%      $ 25,636          20.0%
7-12 months............................      5,795          3.4%         1,771           1.4%
13-18 months...........................     39,843         22.9%        18,286          14.2%
19-24 months...........................     10,267          5.9%         6,180           4.8%
25-36 months...........................     16,001          9.2%        12,760           9.9%
37+ months.............................     60,707         34.9%        63,982          49.7%
                                           -------        -----       --------         -----
  Total................................    173,807        100.0%      $128,615         100.0%
                                           =======        =====       ========         =====
2002
0-6 months.............................    258,100         31.1%      $239,761          28.3%
7-12 months............................    114,749         13.8%       145,096          17.1%
13-18 months...........................     45,250          5.4%        19,000           2.3%
19-24 months...........................     29,304          3.5%        23,489           2.8%
25-36 months...........................    135,971         16.4%       140,789          16.6%
37+ months.............................    247,163         29.8%       278,282          32.9%
                                           -------        -----       --------         -----
  Total................................    830,537        100.0%      $846,417         100.0%
                                           =======        =====       ========         =====
</Table>

     The following tables set forth, as of December 31, 2003 and 2002, the
number of credit card accounts and the amount of outstanding loans based on the
age of the MANAGED accounts (includes owned

                                        6
<PAGE>

accounts and accounts representing investors' interests in securitized loans).
(Accounts in acquired portfolios are presented based on when the account was
originated with the previous issuer.)

<Table>
<Caption>
                                                                                 PERCENTAGE OF
                                         NUMBER      PERCENTAGE       LOANS          LOANS
AGE SINCE ORIGINATION                  OF ACCOUNTS   OF ACCOUNTS   OUTSTANDING    OUTSTANDING
---------------------                  -----------   -----------   -----------   -------------
                                                       (DOLLARS IN THOUSANDS)
<S>                                    <C>           <C>           <C>           <C>
2003
0-6 months...........................     235,335         8.3%     $   314,477         3.9%
7-12 months..........................     104,151         3.7%         166,422         2.0%
13-18 months.........................     196,759         6.9%         381,924         4.7%
19-24 months.........................     192,573         6.8%         462,675         5.7%
25-36 months.........................     434,974        15.3%       1,141,664        14.0%
37+ months...........................   1,673,414        59.0%       5,664,669        69.7%
                                        ---------       -----      -----------       -----
  Total..............................   2,837,206       100.0%     $ 8,131,831       100.0%
                                        =========       =====      ===========       =====
2002
0-6 months...........................     327,959         8.4%     $   363,949         3.2%
7-12 months..........................     323,314         8.2%         569,547         5.0%
13-18 months.........................     336,137         8.6%         797,340         7.0%
19-24 months.........................     310,517         7.9%         779,608         6.8%
25-36 months.........................     724,112        18.4%       1,850,716        16.2%
37+ months...........................   1,906,512        48.5%       7,059,026        61.8%
                                        ---------       -----      -----------       -----
  Total..............................   3,928,551       100.0%     $11,420,186       100.0%
                                        =========       =====      ===========       =====
</Table>

     Historically, we have distributed most internally originated customer
accounts between the owned portfolio and accounts included in the Metris Master
Trust on a random basis. Acquired portfolios were generally included in the
owned credit card portfolio until they could be securitized. Certificates of
deposit served as a primary funding source of owned receivables. Effective with
the sale of deposits out of the Bank, at the end of the third quarter of 2003,
we began assigning the majority of all new accounts to the Metris Master Trust
shortly after the time of origination. Also, during 2003, we sold approximately
$675.3 million of credit card loans from Direct Merchants Bank to the Metris
Master Trust. As of December 31, 2003, the percentage of accounts and percentage
of outstanding balances greater than two years were 44.1% and 59.6% on an owned
basis, versus 74.3% and 83.7% on a MANAGED basis. As of December 31, 2002, the
percentage of accounts and percentage of outstanding balances with an age since
origination of greater than two years were 46.2% and 49.5% on an owned basis,
versus 66.9% and 78.0% on a MANAGED basis.

                                        7
<PAGE>

  GEOGRAPHIC DISTRIBUTION

     We solicit credit card customers on a national basis and, therefore,
maintain a geographically diversified portfolio. The following tables show the
distribution of MANAGED accounts and amount of managed outstanding loans by
state as of December 31, 2003 and 2002.

<Table>
<Caption>
                                                                                 PERCENTAGE OF
                                         NUMBER      PERCENTAGE       LOANS          LOANS
STATE                                  OF ACCOUNTS   OF ACCOUNTS   OUTSTANDING    OUTSTANDING
-----                                  -----------   -----------   -----------   -------------
                                                       (DOLLARS IN THOUSANDS)
<S>                                    <C>           <C>           <C>           <C>
2003
California...........................     406,436        14.3%     $ 1,037,537        12.8%
New York.............................     259,235         9.1%         704,018         8.7%
Texas................................     230,989         8.1%         670,729         8.2%
Florida..............................     215,004         7.6%         585,629         7.2%
Illinois.............................     116,644         4.1%         328,431         4.0%
New Jersey...........................     103,925         3.7%         263,471         3.2%
Ohio.................................     100,731         3.6%         315,606         3.9%
Pennsylvania.........................      96,250         3.4%         283,187         3.5%
Michigan.............................      73,717         2.6%         224,097         2.8%
Georgia..............................      70,902         2.5%         225,409         2.8%
Virginia.............................      70,272         2.5%         211,446         2.6%
All others(1)........................   1,093,101        38.5%       3,282,271        40.3%
                                        ---------       -----      -----------       -----
  Total..............................   2,837,206       100.0%     $ 8,131,831       100.0%
                                        =========       =====      ===========       =====

2002
California...........................     558,353        14.2%     $ 1,420,177        12.4%
New York.............................     354,041         9.0%         957,252         8.4%
Texas................................     335,975         8.5%         937,857         8.2%
Florida..............................     297,946         7.6%         821,109         7.2%
Illinois.............................     168,325         4.3%         458,095         4.0%
Ohio.................................     149,153         3.8%         444,954         3.9%
Pennsylvania.........................     138,433         3.5%         395,338         3.5%
New Jersey...........................     137,238         3.5%         353,093         3.1%
Michigan.............................     112,358         2.9%         328,084         2.9%
Georgia..............................     100,817         2.6%         308,870         2.7%
Virginia.............................      99,682         2.5%         296,237         2.6%
All others(1)........................   1,476,230        37.6%       4,699,120        41.1%
                                        ---------       -----      -----------       -----
  Total..............................   3,928,551       100.0%     $11,420,186       100.0%
                                        =========       =====      ===========       =====
</Table>

---------------

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

  CREDIT LINES

     When we approve a credit card application, we use automated screening,
modeling and credit-scoring techniques to establish an initial credit line based
on the individual's risk profile. We may, at any time and without prior notice
to a cardholder, prevent or restrict further credit card use by the cardholder,
usually as a result of poor payment performance or our concern over the
creditworthiness of the cardholder. We manage credit lines based on the results
of the behavioral scoring analysis, and in accordance with our internally
established criteria. These analytic models automatically and regularly assign
credit line increases

                                        8
<PAGE>

and decreases to individual customers, as well as determine the systematic
collection steps to be taken at the various stages of delinquency. We use these
models to manage the authorization of each transaction, as well as the
collections strategies used for non-delinquent accounts with balances above
their assigned credit lines.

     The following tables set forth information with respect to credit limit and
account balance ranges of our OWNED credit card loan portfolio as of December
31, 2003 and 2002.

<Table>
<Caption>
                                                         PERCENTAGE
                               NUMBER OF      LOANS       OF LOANS                   PERCENTAGE
CREDIT LIMIT RANGE             ACCOUNTS    OUTSTANDING   OUTSTANDING   OPEN TO BUY    UTILIZED
------------------             ---------   -----------   -----------   -----------   ----------
                                                    (DOLLARS IN THOUSANDS)
<S>                            <C>         <C>           <C>           <C>           <C>
2003
$1,000 or less...............    43,411     $ 11,145          8.7%     $   11,607       49.0%
$1,001-$2,000................    23,329       14,881         11.6%         21,980       40.4%
$2,001-$3,500................    35,187       30,219         23.5%         70,157       30.1%
$3,501-$5,000................    32,824       30,890         24.0%        117,522       20.8%
$5,001-$10,000...............    33,658       34,401         26.7%        216,446       13.7%
Over $10,000.................     5,398        7,079          5.5%         63,736       10.0%
                                -------     --------        -----      ----------
  Total......................   173,807     $128,615        100.0%     $  501,448       20.4%
                                =======     ========        =====      ==========

2002
$1,000 or less...............   139,884     $ 47,140          5.6%     $   34,572       57.7%
$1,001-$2,000................   113,501       78,056          9.2%        104,949       42.7%
$2,001-$3,500................   157,637      144,377         17.1%        312,052       31.6%
$3,501-$5,000................   145,540      165,726         19.6%        493,234       25.1%
$5,001-$10,000...............   223,726      333,843         39.4%      1,385,217       19.4%
Over $10,000.................    50,249       77,275          9.1%        582,431       11.7%
                                -------     --------        -----      ----------
  Total......................   830,537     $846,417        100.0%     $2,912,455       22.5%
                                =======     ========        =====      ==========
</Table>

<Table>
<Caption>
                                                         PERCENTAGE
                               NUMBER OF      LOANS       OF LOANS                   PERCENTAGE
ACCOUNT BALANCE RANGE          ACCOUNTS    OUTSTANDING   OUTSTANDING   OPEN TO BUY    UTILIZED
---------------------          ---------   -----------   -----------   -----------   ----------
                                                    (DOLLARS IN THOUSANDS)
<S>                            <C>         <C>           <C>           <C>           <C>
2003
Credit balance...............     3,958     $   (261)        (0.2)%    $   13,323       (2.0)%
No balance...................    78,170           --           --         341,258
$1,000 or less...............    52,745       19,477         15.1%         99,856       16.3%
$1,001-$2,000................    16,275       23,793         18.5%         24,148       49.6%
$2,001-$3,500................    12,872       34,427         26.8%         14,424       70.5%
$3,501-$5,000................     5,927       24,898         19.4%          5,365       82.3%
$5,001-$10,000...............     3,585       22,993         17.9%          2,772       89.2%
Over $10,000.................       275        3,288          2.5%            302       91.6%
                                -------     --------        -----      ----------
  Total......................   173,807     $128,615        100.0%     $  501,448       20.4%
                                =======     ========        =====      ==========
</Table>

                                        9
<PAGE>

<Table>
<Caption>
                                                         PERCENTAGE
                               NUMBER OF      LOANS       OF LOANS                   PERCENTAGE
ACCOUNT BALANCE RANGE          ACCOUNTS    OUTSTANDING   OUTSTANDING   OPEN TO BUY    UTILIZED
---------------------          ---------   -----------   -----------   -----------   ----------
                                                    (DOLLARS IN THOUSANDS)
<S>                            <C>         <C>           <C>           <C>           <C>
2002
Credit balance...............    12,188     $ (1,532)        (0.2)%    $   36,696       (4.4)%
No balance...................   361,513           --           --       1,869,805         --
$1,000 or less...............   217,083       92,536         10.9%        583,589       13.7%
$1,001-$2,000................    92,070      133,958         15.8%        179,495       42.7%
$2,001-$3,500................    73,462      196,383         23.2%        129,697       60.2%
$3,501-$5,000................    37,669      158,952         18.8%         60,824       72.3%
$5,001-$10,000...............    33,734      232,683         27.5%         48,743       82.7%
Over $10,000.................     2,818       33,437          4.0%          3,606       90.3%
                                -------     --------        -----      ----------
  Total......................   830,537     $846,417        100.0%     $2,912,455       22.5%
                                =======     ========        =====      ==========
</Table>

     The following tables set forth information with respect to credit limit and
account balance ranges of our MANAGED loan portfolio (includes investors'
interests in loans securitized) as of December 31, 2003 and 2002.

<Table>
<Caption>
                                                      PERCENTAGE
                            NUMBER OF      LOANS       OF LOANS                   PERCENTAGE
CREDIT LIMIT RANGE          ACCOUNTS    OUTSTANDING   OUTSTANDING   OPEN TO BUY    UTILIZED
------------------          ---------   -----------   -----------   -----------   ----------
                                                 (DOLLARS IN THOUSANDS)
<S>                         <C>         <C>           <C>           <C>           <C>
2003
$1,000 or less............    266,970   $   106,692        1.3%     $    52,579      67.0%
$1,001-$2,000.............    275,182       292,810        3.6%         139,425      67.8%
$2,001-$3,500.............    436,683       767,557        9.5%         494,834      60.8%
$3,501-$5,000.............    486,939     1,098,121       13.5%       1,053,179      51.1%
$5,001-$10,000............    989,272     3,604,763       44.3%       3,787,552      48.8%
Over $10,000..............    382,160     2,261,888       27.8%       2,459,181      47.9%
                            ---------   -----------      -----      -----------
  Total...................  2,837,206   $ 8,131,831      100.0%     $ 7,986,750      50.5%
                            =========   ===========      =====      ===========

2002
$1,000 or less............    332,583   $   135,528        1.2%     $    63,716      68.0%
$1,001-$2,000.............    396,278       412,759        3.6%         238,865      63.3%
$2,001-$3,500.............    597,545     1,015,252        8.9%         744,739      57.7%
$3,501-$5,000.............    635,676     1,412,084       12.4%       1,457,913      49.2%
$5,001-$10,000............  1,385,836     4,915,617       43.0%       5,671,671      46.4%
Over $10,000..............    580,633     3,528,946       30.9%       3,832,989      47.9%
                            ---------   -----------      -----      -----------
  Total...................  3,928,551   $11,420,186      100.0%     $12,009,893      48.7%
                            =========   ===========      =====      ===========
</Table>

                                        10
<PAGE>

<Table>
<Caption>
                                                      PERCENTAGE
                            NUMBER OF      LOANS       OF LOANS                   PERCENTAGE
ACCOUNT BALANCE RANGE       ACCOUNTS    OUTSTANDING   OUTSTANDING   OPEN TO BUY    UTILIZED
---------------------       ---------   -----------   -----------   -----------   ----------
                                                 (DOLLARS IN THOUSANDS)
<S>                         <C>         <C>           <C>           <C>           <C>
2003
Credit balance............     43,712   $    (3,605)        --      $   196,440      (1.9)%
No balance................    481,296            --         --        2,678,839        --
$1,000 or less............    619,267       263,923        3.2%       2,325,692      10.2%
$1,001-$2,000.............    359,726       537,368        6.6%         856,014      38.6%
$2,001-$3,500.............    413,461     1,134,320       14.0%         794,397      58.8%
$3,501-$5,000.............    309,349     1,317,428       16.2%         484,164      73.1%
$5,001-$10,000............    489,840     3,457,371       42.5%         589,546      85.4%
Over $10,000..............    120,555     1,425,026       17.5%          61,658      95.9%
                            ---------   -----------      -----      -----------
  Total...................  2,837,206   $ 8,131,831      100.0%     $ 7,986,750      50.5%
                            =========   ===========      =====      ===========

2002
Credit balance............     55,177   $    (5,608)      (0.1)%    $   239,405      (2.4)%
No balance................    799,403            --         --        4,537,646        --
$1,000 or less............    810,656       346,158        3.1%       3,122,676      10.0%
$1,001-$2,000.............    489,361       743,566        6.5%       1,185,350      38.5%
$2,001-$3,500.............    557,843     1,567,766       13.7%       1,142,500      57.8%
$3,501-$5,000.............    406,831     1,796,085       15.7%         739,220      70.8%
$5,001-$10,000............    647,042     4,840,182       42.4%         941,960      83.7%
Over $10,000..............    162,238     2,132,037       18.7%         101,136      95.5%
                            ---------   -----------      -----      -----------
  Total...................  3,928,551   $11,420,186      100.0%     $12,009,893      48.7%
                            =========   ===========      =====      ===========
</Table>

     In February 2001, the Company initiated a targeted credit line increase
program to a portion of its existing portfolio. The decision to implement the
program was made based upon the following:

     - Competitive credit line pressures and the risk of high attrition from the
       core customer group; and

     - A decision to focus growth and investment on our existing customers as
       opposed to prospective customers due to an uncertain external economic
       environment and other indicators.

     In total, this program generated 1.6 million credit line increases from
February 2001 through September 2001, generating over $5.1 billion in additional
available credit. At its peak in February 2002, approximately $2.0 billion in
additional loan balances were generated from the program. The credit line
increase program was changed in the fourth quarter of 2001, and as of December
31, 2003, $133.9 million of additional loan balances generated remained.

     In part because of the slow economic recovery, the credit line increase
program implemented in 2001 to our existing cardholders contributed to our
increased delinquencies and losses during 2002 and 2003. This program resulted
in higher average balances per account as customers utilized the additional
credit line provided. These increased balances per account also resulted in
higher balances per delinquent and charged-off account, causing our charge-offs
and delinquencies to rise during 2002 and stay at or above those levels for much
of 2003. The average balance per charged-off account in 2003 was $5,600,
compared to $4,700 in 2002 and $3,000 in 2001. As a result, significant programs
have been implemented across the managed receivables portfolio that have reduced
the available credit over $6.8 billion during the past two years, including:

     - the elimination of lines by closing inactive credit card accounts and
       reducing credit lines on high risk accounts;

                                        11
<PAGE>

     - the limitation of overlimit authorization expansion to only the lowest
       risk customers;

     - the limitation on issuance of new credit cards and account access to high
       risk customers; and

     - the implementation of new credit line management strategies across the
       portfolio for both credit line increases and decreases.

     In addition, the Company has made changes within our collection operation,
including high-level changes to management. In early 2003 we reviewed our
collections operations to determine whether the collections function was
operating effectively. We determined that overall performance of the collections
function could be improved, and as a result we made significant changes in the
operation. We replaced a substantial portion of the senior management team,
updated the technology used by the operation, and initiated new training
programs for all levels of collections personnel. We also implemented a new
collections paradigm that incorporates specific requirements for staffing,
dialer strategies, and a new collections call model. In addition, reporting and
performance standards were enhanced to ensure that management is accountable for
performance in the future. During 2003, we also engaged specialized consultants
to help us create further improvements and efficiencies in recovering delinquent
dollars and reducing credit losses.

     As of December 31, 2003, on an OWNED basis, 5.5% of the outstanding
receivable balance relates to cardholders with credit limits in excess of
$10,000, compared to 27.8% on a MANAGED basis. On an OWNED basis, 32.2% was
outstanding to cardholders with credit limits in excess of $5,000, compared to
72.1% on a MANAGED basis. As of December 31, 2002, on an OWNED basis, 9.1% of
the outstanding receivable balance relates to cardholders with credit limits in
excess of $10,000, compared to 30.9% on a MANAGED basis. On an OWNED basis,
48.5% was outstanding to cardholders with credit limits in excess of $5,000,
compared to 73.9% on a MANAGED basis. The difference in the above distributions
between the owned and managed credit card portfolios primarily reflects the
generally younger accounts that are in the owned credit card portfolio, as well
as the fact that the owned credit card portfolio contains the secured card
accounts which generally have lower credit levels.

     The FFIEC has issued guidelines to further segregate a credit card issuer's
loan portfolio between subprime loans (loans to consumers who have a FICO score
of 660 or less) and prime loans (loans to consumers with FICO scores in excess
of 660). The banking regulators deem subprime loans to have higher credit risk
and, therefore, require higher levels of capital and allowance for loan losses.
Subprime receivables on an OWNED basis were $83.5 million or 65.7% of the owned
credit card portfolio as of December 31, 2003, compared to $447.3 million or
52.9% of the owned credit card portfolio as of December 31, 2002. The amount of
subprime receivables on a MANAGED basis was $4.9 billion or 61.2% of the managed
credit card portfolio as of December 31, 2003, compared to $7.1 billion or 62.3%
of the managed credit card portfolio as of December 31, 2002.

     Overall, as of December 31, 2003, the Company believes that the credit
quality in the OWNED credit card portfolio is generally worse than the credit
quality of the MANAGED credit card portfolio. Delinquent loans for the OWNED
credit card portfolio were 15.8% and 0.9% as of December 31, 2003 and 2002,
versus 11.1% and 11.0% on a MANAGED basis. Net principal charge-offs in the
OWNED credit card portfolio were 26.4% and 24.9% for the years ended December
31, 2003 and 2002, versus 20.2% and 15.5% respectively on a MANAGED basis.

  SERVICING, BILLING AND PAYMENT

     We have established a relationship with First Data Resources, Inc. ("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 that issue
credit cards to consumers), and merchant processing (services for financial
institutions that make arrangements

                                        12
<PAGE>

with merchants for the acceptance of credit cards as methods of payment). FDR
provides the following services to us:

     - data processing;

     - credit card reissuance;

     - monthly statements;

     - interbank settlement; and

     - after hours and overflow fraud management.

     We handle the following functions internally:

     - applications processing; and

     - back office support for mail inquiries and most fraud management.

     We handle most inbound customer service telephone calls for our customer
base. For a portion of 2003, we outsourced overflow customer service calls to
FDR during peak operation periods. In addition, we process a portion of our
customer payments, including all payments with exceptions. All other payments
are processed by Household Credit Services ("Household").

     We generally assess periodic finance charges on an account if the
cardholder has not paid the balance in full from the previous billing cycle. We
base these finance charges on the average daily balance outstanding on the
account during the monthly billing cycle.

     We do not impose a finance charge on purchases if cardholders pay the
entire balance on the account by the due date. If we are not paid in full prior
to the due date, which is generally 20 to 25 days after the statement cycle date
and applicable grace period, we impose finance charges on all purchases from the
date the transaction posted to the cardholder's account to the statement cycle
date. We also impose finance charges on each cash advance from the day we make
the advance until the cardholder pays the advance in full.

     We assess an annual fee on approximately 25% of the credit card accounts.
We may waive the annual fee, or a portion thereof, depending on the credit terms
offered, which we determine based on the prospect's risk profile prior to
solicitation, or when we determine a waiver to be appropriate considering the
account's overall profitability. In addition to the annual fee, we charge other
fees, including:

     - a late fee with respect to any unpaid monthly balance if we do not
       receive the required minimum monthly payment by the due date and the
       account is less than 120 days contractually past due;

     - a cash advance fee for most cash advances;

     - a fee with respect to each check submitted by a cardholder in payment of
       an account, which the cardholder's bank does not honor; and

     - an overlimit charge consistent with the cardholder agreement if, at any
       time during the billing cycle, the total amount owed exceeds the
       cardholder's credit limit and the account was less than 120 days
       contractually past due.

     Each cardholder is subject to an agreement governing the terms and
conditions of his or her account. Pursuant to the agreement, we reserve 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, and the minimum payment, subject to the
conditions set forth in the cardholder agreement.

     FDR sends monthly billing statements to cardholders on our behalf. When we
establish an account, we assign a billing cycle to that account. Each of these
cycles has a separate monthly billing date based on the business day of the
calendar month on which the cycle begins. Each month, we send a statement to all

                                        13
<PAGE>

cardholders whose accounts have an outstanding balance greater than $1. The
majority of non charged-off cardholders must make a minimum monthly payment,
which is generally 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;

plus, in each case, any past due amount.

     If we do not receive the minimum payment by the due date, we consider the
account delinquent.

     Most merchant transactions by cardholders are authorized online. All
authorizations are handled through FDR's adaptive control and fraud detection
systems.

     To monitor accounts and authorizations for potential fraudulent activity,
we utilize the Falcon(R) fraud detection neural net system. This product scores
authorizations and allows for development of rules-based strategies to queue
decision authorizations based on a calculated fraud risk. Accounts suspected of
fraud via the scoring model, or rules-based queues, are blocked or referred
until the activity can be verified with the cardholder. This process targets all
main types of fraud, including lost/stolen, non-receipt, fraudulent application,
counterfeit, account takeover, cardholder not present, and check kiting fraud.

  DELINQUENCY, COLLECTIONS AND CHARGE-OFFS

     We consider an account delinquent if we do not receive the minimum payment
by the payment due date. Past due accounts are re-aged to current status only
after we receive at least three minimum payments or the equivalent cumulative
amount. Accounts can only be re-aged to current status once every twelve months
and two times every five years. Accounts entering long-term fixed payment
forbearance programs ("workout re-age") may receive a workout re-age upon
entering the debt management program. Workout re-ages can only occur after
receipt of at least three consecutive minimum monthly payments, or the
equivalent cumulative amount as defined by the debt management program. Workout
re-ages can only occur once in five years.

     We handle substantially all collections internally, and we determine the
appropriate collection action to take by using FDR's adaptive control system,
which continually monitors all delinquent accounts. We close accounts that
become 60 days contractually delinquent. We charge-off and take accounts as a
loss either:

     - within 60 days of formal notification of bankruptcy;

     - at the end of the month during which most unsecured accounts become
       contractually 180 days past due;

     - at the end of the month during which unsecured accounts that have entered
       into a credit counseling or other similar program become contractually
       120 days past due;

     - at the end of the month during which secured accounts become
       contractually 120 days past due; or

     - when identified as fraud losses no later than 90 days from discovery.

     We enter into agreements with third parties for the sale of receivables on
a majority of our charged-off accounts. When appropriate, we place delinquent
accounts with external collection agencies or attorneys.

     As part of our overall portfolio management, we periodically sell
portfolios of delinquent credit card accounts. These transactions have a direct
effect on our charge-off dollars and rates as any reduction in the loan's value
is reflected as a charge-off.

                                        14
<PAGE>

  CREDIT PROTECTION PRODUCTS

     In addition to credit cards, we offer credit protection and insurance
products. These products are sold exclusively to Direct Merchants Bank credit
cardholders and include:

     Account Protection Plus(SM) is a program that will waive the balance of a
customer's Direct Merchants Bank credit card account (up to the credit limit) in
the event of the cardholder's death. It further protects the credit card account
holder in the event of involuntary unemployment, disability or the need to take
an employer approved leave-of-absence. In these situations, the customer's
account is "frozen" with no payments due or interest accruing up to the maximum
period of time permissible for each event.

     Account Benefit Plan is a program that will waive the balance of a
customer's Direct Merchants Bank credit card account (up to the credit limit) in
the event of the cardholder's death.

     Credit Life Insurance offers our credit cardholders traditional life
insurance benefits that will pay the balance of the Direct Merchants Bank credit
card account in the event of the cardholder's death. Additional coverage may be
available on a state-by-state basis that will pay the minimum payment due on the
covered credit card account in the event of unemployment or disability. The
insurance benefits are offered by insurance companies that re-insure those
policies with ICOM Limited, our captive insurance subsidiary.

     Third-Party Insurance Products.  We cooperate with a variety of insurance
companies to sell their regulated products to Direct Merchants Bank customers.
Our arrangements with these insurance companies generally follow one of two
formats:

     - The insurance company pays us a fee for access to a select list of our
       cardholders. We provide support during the solicitation and billing
       process.

     - Our licensed insurance subsidiary, MES Insurance Agency, LLC, manages the
       solicitation of customers for the third-party insurance products and pays
       the expenses of that solicitation in exchange for a commission.

With lower-risk products, our captive insurance subsidiary, ICOM Limited, may
re-insurance all or a portion of the risk of the third-party insurance policies
that are sold. In that situation, we bear the administrative costs of servicing
the policies.

     List Syndication.  We cooperate with a variety of third-party partners to
sell their products to Direct Merchants Bank customers. These transactions may
follow different terms. Generally, the partner pays us a fee for access to a
select list of cardholders and the opportunity to leverage Direct Merchants
Bank's name during solicitation and billing processes that we support.

  ASSET SECURITIZATIONS AND OTHER FUNDING VEHICLES

     We securitize credit card loans in order to manage our total cost of funds.
Our securitizations involve packaging and selling pools of both current and
future receivable balances on credit card accounts, in which we retain the
servicing of such receivables. In accordance with GAAP, our securitizations are
generally treated as sales or, in certain circumstances, as collateralized
borrowing transactions. The securitized receivables accounted for as sales are
removed from our balance sheet.

     We securitize receivables by selling the receivables to the Metris Master
Trust. The Metris Master Trust issues securities through public asset-backed
securitizations or to multi-seller commercial paper conduits.

  METRIS MASTER TRUST

     The Metris Master Trust was formed in May 1995 pursuant to a pooling and
servicing agreement, as amended. Metris Receivables, Inc. ("MRI"), one of our
special purpose entity subsidiaries, transfers receivables in designated
accounts to the Metris Master Trust. The Metris Master Trust may, and does from
time to time, issue securities that represent undivided interests in the
receivables in the Metris
                                        15
<PAGE>

Master Trust. These securities are issued by series and each series typically
has multiple classes of securities. Each series or class within a series may
have different terms. The different classes of an individual series are
structured to obtain specific debt ratings. As of December 31, 2003, 11 series
of publicly issued securities were outstanding. MRI currently retains the most
subordinated class of securities in each series and all other classes are issued
to nonaffiliated third parties. These securities are interests in the Metris
Master Trust only and are not obligations of MRI, MCI, Direct Merchants Bank, or
any other subsidiary of the Company. The interest in the Metris Master Trust not
represented by any series of securities issued by the Metris Master Trust also
belongs to MRI and is known as the transferor interest.

     Generally, each series involves an initial reinvestment period, referred to
as the "revolving period," in which principal payments on receivables allocated
to such series are returned to MRI and reinvested in new principal receivables
arising in the accounts. After the revolving period ends, principal payments
allocated to the series are then accumulated and used to repay the investors.
This period is referred to as the "accumulation period," and is followed by a
"controlled amortization period" wherein investors are repaid their invested
amount. The scheduled accumulation and amortization periods are set forth in the
agreements governing each series. Currently, the Metris Master Trust does not
have any series in an accumulation period or controlled amortization period.
However, all series set forth certain events by which amortization can be
accelerated, referred to as "early amortization." Reasons an early amortization
could occur include:

     - the one or three-month average of portfolio collections, less principal
       and finance charge charge-offs, financing costs and servicing costs
       ("excess spread") drops below certain levels, currently no higher than
       1%;

     - the existence of negative excess transferors interest within the Metris
       Master Trust; or

     - the failure to obtain funding prior to an accumulation period for a
       maturing term asset-backed securitization.

     New receivables in designated accounts cannot be funded from a series that
is in early amortization. We currently do not have any series that is in early
amortization.

     In addition, there are various provisions within our securitization
agreements that restrict the release of cash to us from the Metris Master Trust.
This restricted cash provides additional security to the investors in the Metris
Master Trust. We reflect cash restricted from release in the Metris Master Trust
as "Retained interests in loans securitized" in the consolidated balance sheet.
The extent to which cash is restricted usually relates to the performance of the
Metris Master Trust, specifically the average net excess spread over a one to
three-month period.

     On a monthly basis, each series of securities is allocated its share of
finance charge collections, which is used to pay interest on the series'
securities, pay the series' share of servicing fees and reimburse investors for
the applicable series' share of losses due to charge-offs. Amounts remaining may
be deposited in cash accounts of the Metris Master Trust as additional
protection for future losses. Once each of these obligations is fully met,
remaining finance charge collections, if any, are returned to us.

  BANK-SPONSORED CONDUIT PROGRAMS

     We maintain flexibility in our current funding program by using primarily
bank-sponsored commercial paper conduits within the Metris Master Trust. 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 us and reinvested in
new receivables. These agreements also have early amortization provisions. (See
the above discussion under "Metris Master Trust"). Finance charge collections
are used to pay certain obligations, including servicing fees, interest on the
principal amount of the conduits' investment in the applicable receivables and
recouping charge-offs. After such allocation, remaining finance charge
collections, if any, are returned to us.

                                        16
<PAGE>

     Additional information regarding asset securitization is set forth under
"Liquidity, Funding, and Capital Resources" on pages 50-56 of this Report.

COMPETITION

     We face intense and increasing competition from numerous financial services
providers, many of which have greater resources and name recognition than we do.
Our credit card business competes with national, regional and local bankcard
issuers, as well as other general purpose and private label credit card issuers.
Some of these issuers are substantially larger, have more seasoned credit card
portfolios and often compete for customers by offering lower interest rates
and/or fee levels than we do. There has been continued focus on solicitations to
middle market consumers, as competitors target 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 often is limited. However,
we believe that our strategy of focusing on the middle market sector and our
proprietary prospect database, proprietary models and internal credit scores
allow us to compete effectively for middle market cardholders.

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 FDIC, as a back-up regulator. Direct Merchants Bank is not
a "bank" as defined under the Bank Holding Company Act of 1956 ("BHCA"), as
amended, because it:

     - engages only in credit card operations;

     - does not accept demand deposits or deposits that the depositor may
       withdraw by check or similar means for payment to third parties or
       others;

     - does not accept any savings or time deposits of less than $100,000,
       except for deposits pledged as collateral for extensions of credit;

     - maintains only one office that accepts deposits; and

     - does not engage in the business of making commercial loans.

     If Direct Merchants Bank failed to meet the credit card bank criteria
described above, its status as an insured bank would make us subject to the
provisions of the BHCA.

     The OCC establishes operating guidelines for national banks, to which
Direct Merchants Bank is subject. On January 31, 2001, the OCC, Federal Reserve
Board, FDIC and Office of Thrift Supervision jointly issued their "Expanded
Guidance for Subprime Lending Programs," which subjects subprime lending
institutions to closer examination scrutiny in order to ensure that their
programs have appropriate risk management controls and capital support. Under
the expanded guidance, the allowance for loan losses required for subprime loans
must be sufficient to absorb at least all estimated credit losses on outstanding
balances over the current operating cycle. Each lender is responsible for
quantifying the amount of capital needed to offset the additional risk inherent
in subprime lending activities, and for fully documenting the methodology and
analysis supporting the amounts specified. As described below, the Bank is
required to maintain capital levels in accordance with the Modified Operating
Agreement that it and MCI have entered into with the OCC.

     In January 2003, the Federal Financial Institutions Examination Council
("FFIEC") issued guidance with respect to account management, risk management,
and loss allowance practices for institutions engaged in credit card lending.
The guidance provides requirements for certain operational and accounting

                                        17
<PAGE>

policies which are designed to bring consistency in practice between
institutions. Many aspects of the guidance have been implemented by the Bank
with no material impact to our financial statements. We continue testing
alternative approaches to comply with the minimum payment and negative
amortization provisions of the guidance, the results of which are not expected
until the second half of 2004. At this time we are unable to provide assurance
that adoption of the guidance will not have a material adverse effect on our
financial condition.

     On March 18, 2003, the Bank and MCI entered into an Operating Agreement
with the OCC. The terms of the Operating Agreement required the Bank and MCI to
enter into a Capital Assurance and Liquidity Maintenance Agreement ("CALMA")
also executed on March 18, 2003. The CALMA requires MCI to make such capital
infusions or provide the Bank with financial assistance so as to permit the Bank
to meet its liquidity requirements.

     The Operating Agreement also required Direct Merchants Bank to enter into a
Liquidity Reserve Deposit Agreement under which the Bank has established
restricted deposits with third-party depository banks for the purpose of
supporting Direct Merchants Bank's funding needs. These deposits are invested in
short term liquid investments and are classified on the balance sheets as the
"Liquidity reserve deposit." As of December 31, 2003, the balance of the
liquidity reserve deposit was $80 million.

     The Operating Agreement was terminated and replaced with a Modified
Operating Agreement effective December 11, 2003. Both the CALMA and the
Liquidity Reserve Deposit Agreement remain in effect. The Modified Operating
Agreement requires, among other things, that:

     - The Bank must maintain capital at the dollar amount reported on its
       September 30, 2003 Call Report, unless otherwise approved by the OCC. The
       Bank may continue to pay dividends in accordance with applicable
       statutory and regulatory requirements, provided capital remains at the
       required level.

     - The Bank must maintain, at a minimum, liquid assets of not less than $35
       million or 100% of the average highest daily funding requirement for
       managed receivables.

     - The Bank must comply with the terms of the Liquidity Reserve Deposit
       Agreement and the CALMA.

     - MCI must comply with the terms of the CALMA.

     If the OCC were to conclude that the Bank failed to adhere to any
provisions of the Modified Operating Agreement, the OCC could pursue various
enforcement options. If any of these options were to be pursued by the OCC, it
could have a material adverse effect on our operations or capital position.

     In July 2003, the OCC requested and Direct Merchants Bank agreed to
eliminate the jumbo certificates of deposit ("CDs") issued by the Bank, and the
risk thereof to the FDIC, by September 30, 2003. The Bank sold $559.3 million of
CDs on September 30, 2003, utilizing a combination of cash on hand, cash
generated through the sale of assets to a third-party, and sales of assets to
MCI.

  EXPORTATION OF INTEREST RATES AND FEES

     Under current 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.

     The United States Supreme Court has held that national banks may also
impose late payment fees, overlimit fees, annual fees, cash advance fees and
membership 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 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.

                                        18
<PAGE>

  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 MCI 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 obtain OCC approval prior to declaring and paying 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 it to fail to meet applicable capital adequacy
standards. Finally, although not a regulatory restriction, the terms of certain
of our debt agreements prohibit the payment of dividends in certain
circumstances. See Note 17 to the Consolidated Financial Statements on pages
85-86.

  CAPITAL ADEQUACY

     The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators 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 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%, a total capital
ratio of at least 10%, a leverage ratio of at least 5%, and not be subject to a
capital directive order. Under these guidelines, Direct Merchants Bank is
considered well-capitalized. The Modified Operating Agreement, which is
discussed on page 18, prescribes minimum capital levels as well.

     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
with respect to such institution. The FDIC has adopted a system that imposes
insurance premiums based on a matrix that takes into account a bank's capital
level and supervisory rating.

     Under FDICIA, only "well-capitalized" and "adequately-capitalized" banks
may accept brokered deposits. In July 2003, the OCC requested and Direct
Merchants Bank agreed to eliminate federally-insured CDs at the Bank, and the
risk thereof to the FDIC, by September 30, 2003. The Bank sold $559.3 million of
CDs on September 30, 2003, utilizing a combination of cash on hand, cash
generated through the sale of assets to a third-party, and sales of assets to
MCI, in order to fully comply with the OCC's request. We do not anticipate
issuing certificates of deposit in the foreseeable future.

  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 ("CRA") and the Service Member
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
                                        19
<PAGE>

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 those 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; CONSUMER AND DEBTOR PROTECTION LAWS

     Congress has passed a financial services law that requires us to disclose
our practices for collection and sharing of non-public customer information.
Changes to this law, or enactment of new laws, could require us to limit or
substantially modify our credit card marketing activities and practices in way
that could adversely affect us if these changes result in additional limits on
sharing information. There is such legislation currently pending or under
consideration at the federal and state level.

     Additionally, Congress is considering legislation that would amend the
federal bankruptcy laws. Prior legislation, which failed to be signed into law,
was generally considered to be favorable to the credit card industry. However,
any changes to state debtor relief and collection laws could adversely affect us
if such changes result in, among other things, accounts being charged-off as
uncollectible and increased administrative expenses. Congress and the states may
in the future consider other legislation that would materially affect the credit
card and related enhancement services industries.

     Various federal and state consumer protection laws limit our 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 new 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 our 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.

  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 our capital stock in excess of the
amount that can be acquired without regulatory approval.

  INTERSTATE TAXATION

     Several states have enacted legislation taxing the income from interstate
financial activities, including credit cards, derived from accounts held by
their residents. We believe this legislation will not materially affect us. Our
belief is based upon current interpretations of the enforceability of this
legislation, prior court decisions and the volume of our business in states that
have passed such legislation.

  LICENSING REQUIREMENTS

     Our captive insurance subsidiary, ICOM Limited, is licensed in Bermuda
under The Insurance Act of 1978 as a Class 2 Insurer. We are restricted from
writing any long-term policies or pursuing any unrelated business in excess of
certain limits under Bermuda law.

  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.
                                        20
<PAGE>

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
appropriate disclosure and an opportunity to opt out of such affiliate sharing.

     Our objective is to conduct our operations in a manner that would fall
outside the definition of a consumer reporting agency under the FCRA. If we were
to become a consumer-reporting agency, we would be subject to a number of
complex and burdensome regulatory requirements and restrictions. Such
restrictions could have a material adverse effect on our results of operations,
financial condition and ability to operate.

REGULATORY INVESTIGATIONS

     On August 5, 2003, we received notification from the SEC that we are the
subject of a formal, nonpublic investigation. We believe that this investigation
initially related primarily to our treatment of the "Allowance for loan losses"
in 2001 and subsequent years, our 2001 credit line increase program, and other
related matters. On December 9, 2003, we received notification that the scope of
the investigation was expanded to include matters related to our valuation of
"Retained interests in loans securitized". The Company subsequently has received
additional SEC subpoenas and requests for information on related and other
financial accounting issues, as well as the above matters. The SEC has advised
us that this is a fact-finding inquiry and that it has not reached any
conclusions related to this matter. We are responding fully to the SEC in its
investigation. The SEC has informed us that it is reviewing the information and
documents that we have submitted. We anticipate that we will provide additional
information and documents to the SEC in the future. The SEC also may depose
certain of our executive officers and directors in connection with its
investigation. At this time, we cannot predict how long the SEC investigation
will last or what the results of the investigation will be. If the SEC
determines that we or our officers and directors have violated federal
securities laws or the SEC's rules and regulations, we could be subject to SEC
enforcement action, including potential fines and penalties, which could
materially adversely affect our results of operations or financial condition. We
cannot assure you the resolution of the SEC investigation will not necessitate
further amendments or restatements to our previously filed reports. We do not
believe, however, that we or our officers or directors have violated any such
laws, rules or regulations.

     On August 2, 2003, we received from the OCC correspondence indicating that
we were the subject of an investigation, together with a subpoena requiring us
to produce certain documents. In October 2003, the OCC informally requested
additional documents. On April 1, 2004 we received a second subpoena requiring
us to produce additional documents related primarily to executive compensation
and reimbursement. We do not believe that the OCC's investigation concerns any
of the activities of our current executives.

EMPLOYEES

     We have approximately 2,900 employees located in Arizona, Florida,
Maryland, Minnesota and Oklahoma. None of our employees are represented by a
collective bargaining agreement.

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

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

                                        21
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

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

<Table>
<Caption>
NAME                                        AGE                    POSITION
----                                        ---                    --------
<S>                                         <C>   <C>
David D. Wesselink........................  61    Chairman and Chief Executive Officer
Richard G. Evans..........................  55    Executive Vice President, General Counsel
                                                  and Secretary
Matthew S. Melius.........................  38    Executive Vice President, Credit Risk
                                                  Management; President of Direct Merchants
                                                  Bank
Dan N. Piteleski..........................  53    Executive Vice President, Chief Information
                                                  Officer
John A. Witham............................  52    Executive Vice President, Chief Financial
                                                  Officer
Scott R. Fjellman.........................  38    Senior Vice President, Treasurer
Mark P. Wagener...........................  43    Senior Vice President, Controller
</Table>

     David D. Wesselink has been Chairman and Chief Executive Officer of the
Company since December 2002. Mr. Wesselink previously was Vice Chairman of the
Company from September 2000 to December 2002, and Executive Vice President,
Chief Financial Officer of the Company from December 1998 to August 2000. Prior
to joining us, Mr. Wesselink was Senior Vice President and Chief Financial
Officer of Advanta Corporation since 1993. Prior to Advanta Corporation, Mr.
Wesselink 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. Mr. Wesselink is also a
director of MasterCard Incorporated (U.S. Region Board), Saxon Capital, Inc. and
CFC International, Inc.

     Richard G. Evans has been Executive Vice President, General Counsel and
Secretary of the Company since June 2001. Prior to joining us, Mr. Evans was
Executive Vice President, General Counsel and Director of Green Tree Financial
Corporation from 1985 to 1999. Prior to Green Tree, Mr. Evans served as Special
Assistant Attorney General for the State of Minnesota from 1974 to 1984.

     Matthew S. Melius has been Executive Vice President, Credit Risk Management
of the Company since January 2001. Mr. Melius previously was Executive Vice
President, E-Commerce of the Company from September 2000 to December 2000;
Senior Vice President, E-Commerce from January 2000 to August 2000; Senior Vice
President, Portfolio Marketing from January 1998 to December 1999; and Vice
President, Marketing from September 1995 to December 1997. Prior to that, Mr.
Melius served seven years in the credit card division of the First National Bank
of Omaha, where he advanced from a management trainee to manager of the
portfolio management department, where he directed the account retention and
portfolio profitability operations.

     Dan N. Piteleski has been Executive Vice President and Chief Information
Officer of the Company since May 2002. Mr. Piteleski previously was Senior Vice
President, Chief Information Officer of the Company from May 2001 to April 2002.
Prior to joining us, Mr. Piteleski was Vice President, Chief Information Officer
of H.B. Fuller Company for six years. Prior to H.B. Fuller, Mr. Piteleski served
as Vice President, Information Systems at Zenith Data Systems for two and
one-half years. Before Zenith, Mr. Piteleski was Manager, Information Systems
and Technology at Apple Computer for four years. Mr. Piteleski also has worked
in information systems at Equitable Resources Energy Company, Inc., and American
Standard.

     John A. Witham has been Executive Vice President and Chief Financial
Officer of the Company since November 2002. Mr. Witham previously was Senior
Vice President, Finance of the Company from June 2002 to October 2002. Prior to
joining us, Mr. Witham was Executive Vice President, Chief Financial Officer of
Bracknell Corp. from November 2000 to October 2001. (In November 2001, Adesta

                                        22
<PAGE>

Communications Inc., a wholly-owned subsidiary of Bracknell Corp. voluntarily
commenced a case under Chapter 11 of the United States Code in the United States
Bankruptcy Court, District of Nebraska. In January 2002, State Group LTD, a
wholly-owned subsidiary of Bracknell Corp., filed bankruptcy in Toronto, Ontario
CANADA.) Before Bracknell Corp., Mr. Witham was Executive Vice President and
Chief Financial Officer for Arcadia Financial Ltd. from February 1994 to June
2000.

     Scott R. Fjellman has been Senior Vice President and Treasurer of the
Company since January 2003. Mr. Fjellman previously was Vice President,
Assistant Treasurer of the Company from April 2000 to December 2002. Prior to
joining us, Mr. Fjellman was with Arcadia Financial Ltd. for eight years, most
recently as Vice President of Securitization and Investor Relations. Before
joining Arcadia Financial, Mr. Fjellman spent three years as an auditor with
KPMG LLP.

     Mark P. Wagener has been Senior Vice President and Controller of the
Company since October 2001. Mr. Wagener previously was Vice President, Assistant
Controller of the Company from June 2000 to September 2001. Prior to joining us,
Mr. Wagener served for 13 years at Norwest Corporation (now Wells Fargo &
Company), most recently as Director of Corporate Planning and Analysis. Mr.
Wagener began his career with Arthur Andersen & Co. where he worked for five
years as an auditor.

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

RISK FACTORS

     The factors discussed below, among others, could cause our actual results
to differ materially from those expressed in any forward-looking statements that
we make in this Annual Report on From 10-K. See "Forward Looking Statements"
under Item 7 on pages 60-61. Although we have attempted to list comprehensively
these important factors, we caution you that other factors may in the future
prove to be important in affecting our results of operations. New factors emerge
from time to time and it is not possible for us to predict all of these factors,
nor can we 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.

  WE REQUIRE A HIGH DEGREE OF LIQUIDITY TO OPERATE OUR BUSINESS, AND AN
  INABILITY TO ACCESS FUNDING AT THE TIMES AND IN THE AMOUNTS THAT WE NEED COULD
  ADVERSELY AFFECT OUR ABILITY TO OPERATE OR OUR FINANCIAL RESULTS.

     Key elements of our strategy depend on us having adequate available cash,
and we therefore require a high degree of liquidity to operate our business. See
"Management's Discussion and Analysis of Operations -- Liquidity and Capital
Resources" for a more detailed discussion of liquidity. Activities for which we
need cash include:

     - funding new receivables;

     - making interest and principal payments under our credit agreement,
       existing senior notes and other indebtedness;

     - refinancing maturing series of asset-backed securities issued by the
       Metris Master Trust;

     - providing credit enhancement with respect to asset-back securities issued
       by the Metris Master Trust;

     - covering fees and expenses incurred in connection with the securitization
       of receivables; and

     - meeting other operating expenses.

                                        23
<PAGE>

     We anticipate that we will need to enter into financing transactions on a
regular basis, including the securitization of credit card receivables, to
provide cash for these uses. In particular, during the remainder of 2004, we
will need to obtain funding to meet the following maturing obligations:

     - $1.75 billion in outstanding term asset-backed securities and $280
       million in outstanding bank conduit financing issued by the Metris Master
       Trust;

     - $95.3 million outstanding under our term loan that is due in June 2004;
       and

     - $100 million in senior notes that mature in November 2004.

     Since the fourth quarter of 2002, as a result of a deterioration in the
performance of our assets and downgrades in the ratings assigned to our debt
securities, our access to funding has been reduced and the cost and other terms
of the funding that is available to us have been less favorable than had
previously been the case. For example, our securitization transactions completed
in 2003 contained terms that were less favorable than those contained in prior
securitization transactions, including increased subordination levels and
reserve requirements and additional early amortization events. Future downgrades
in our debt ratings or those of Direct Merchants Bank, or resumed deterioration
in our asset quality could result in additional negative impacts on our ability
to access the funding we need and the price of that funding to us. Disruptions
or unfavorable conditions related to one of our financing sources, such as
securitizations, may have similar effects with respect to other financing
sources. In addition, the agreements governing our existing debt financing
contain restrictions that may adversely affect our ability to obtain future
financing. Economic, legal, regulatory, accounting and tax changes could also
make securitization and other sources of funding more difficult, less efficient,
more expensive or unavailable. Finally, many of our competitors have more
capital and higher debt ratings than we do, which may enhance their ability to
obtain funding and reduce their cost of funding compared to ours.

     In the past, the sale of brokered certificates of deposit, or CDs, by
Direct Merchants Bank represented a significant source of funding for us.
However, in July 2003, the OCC requested that Direct Merchants Bank eliminate
its federally-insured deposits, or the risk of those deposits to the FDIC, by
September 30, 2003. In response, Direct Merchants Bank sold its insured
certificates of deposit on September 30, 2003. We do not anticipate issuing
certificates of deposit as a source of funding in the foreseeable future, which
may contribute to increased funding costs.

     If we are unable to access funding at the times and in the amounts that we
need, we would be required to scale back our business operations, may be unable
to refinance maturing series of asset-backed securities issued by the Metris
Master Trust, and may be unable to pay amounts due with respect to our credit
agreement or our existing senior notes. Either an inability to refinance
maturing series of securities issued by the Metris Master Trust or a default in
payment when due of any amounts under our credit agreement or our existing
senior notes could ultimately result in both an early amortization of the asset-
backed securities issued by the Metris Master Trust and an acceleration of all
amounts due under our credit agreement and our existing senior notes. Any such
event could also prevent us from paying our other obligations when due. Even if
we are successful in obtaining the funding that we need, an increase in the cost
of that funding would negatively impact our financial results.

  OUR TARGET CONSUMERS GENERALLY HAVE HIGHER DEFAULT RATES AND ARE IMPACTED MORE
  BY GENERAL ECONOMIC AND SOCIAL FACTORS THAN HIGHER INCOME CONSUMERS.

     The primary risk associated with secured and unsecured lending to middle
market consumers is that default rates for these consumers are higher than those
for higher income consumers. This results in more accounts being charged off as
uncollectable than would be the case with higher income consumers. If we are not
successful in evaluating the creditworthiness of our target customers or in
applying our risk-based pricing system, we could experience greater levels of
delinquencies and losses. In addition, general economic and social factors, such
as the rate of inflation, unemployment levels, interest rates and the effects of
periods of war may have a greater impact on consumers in our target market than
on those with

                                        24
<PAGE>

higher incomes. Accordingly, any general worsening of economic or social
conditions may have a disproportionate effect on our target consumers and, thus,
on our delinquency and charge-off rates.

  THE OCCURRENCE OF CERTAIN EVENTS COULD RESULT IN EARLY AMORTIZATION (REQUIRED
  REPAYMENT) OF THE SECURITIES ISSUED BY THE METRIS MASTER TRUST AND ALSO CAUSE
  ALL AMOUNTS OUTSTANDING UNDER OUR CREDIT AGREEMENT AND OUR EXISTING SENIOR
  NOTES TO BECOME DUE AND PAYABLE.

     Certain events, such as a deterioration in the performance of our
securitized receivables, deterioration in our financial condition, breaches of
representations, warranties or covenants that we make in the documentation
relating to our securitizations or defaults under our other credit arrangements,
including our credit agreement, could result in early amortization (required
repayment) of the principal amount of the securities issued by the Metris Master
Trust. Early amortization would also cause a default under our credit agreement
which could, in turn, lead to a default with respect to our existing senior
notes, potentially resulting in all amounts due under those arrangements also
becoming due and payable.

  IF THE RECENT IMPROVEMENT IN OUR DELINQUENCY AND CHARGE-OFF RATES DOES NOT
  CONTINUE, IT COULD NEGATIVELY IMPACT OUR ABILITY TO COMPLETE FUTURE
  SECURITIZATION TRANSACTIONS ON ACCEPTABLE TERMS OR AT ALL AND MIGHT RESULT IN
  EARLY AMORTIZATION OF OUTSTANDING SECURITIES ISSUED BY THE METRIS MASTER
  TRUST.

     During late 2002 and most of 2003, we experienced significant increases in
the delinquency rate on our credit card loans and the rate at which our credit
card loans were charged off as uncollectable (the "net charge-off rate"). We
have taken steps that have resulted since late 2003 in a reversal of these
increases. However, if our responsive steps ultimately are not successful and
the recent improvement in our delinquency and net charge-off rates does not
continue, it could, among other things:

     - cause purchasers of securities issued by the Metris Master Trust to
       require even higher credit enhancement levels for future securities
       issued by the Metris Master Trust, which could divert significant amounts
       of cash that otherwise would be available to us;

     - jeopardize our ability to complete future securitization transactions on
       acceptable terms or at all, thereby decreasing our liquidity and forcing
       us to rely on other potentially more expensive funding sources, to the
       extent available; and

     - cause early amortization (required repayment) of outstanding securities
       issued by the Metris Master Trust, with the potential results noted
       above.

  DIRECT MERCHANTS BANK IS SUBJECT TO REGULATORS WHO COULD IMPOSE RESTRICTIONS
  THAT COULD NEGATIVELY IMPACT OUR OPERATIONS OR FINANCIAL RESULTS.

     The operations of Direct Merchants Bank and its activities as a credit card
lender are subject to regular review and examination by federal regulators to
assess compliance with federal laws and regulations regarding the safety and
soundness of financial institutions and federal consumer protection laws. These
regulators have broad discretion to issue or revise regulations, and to issue
guidance, that may significantly affect Direct Merchants Bank and the way the
Bank or we conduct business. For example, the banking regulators have issued
guidelines that require financial institutions engaged in subprime lending
(including Direct Merchants Bank) to carry higher levels of capital and credit
loss reserves than other financial institutions. These regulators are also
authorized to impose penalties for violations of the laws and regulations that
they oversee including, in certain cases, ordering Direct Merchants Bank to pay
restitution to cardholders. Any new or more restrictive requirements could
negatively impact our operations or financial results, limit our growth
prospects, reduce our returns on capital or require us to raise additional
capital.

     In January 2003, the FFIEC issued guidance with respect to account
management, risk management, and loss allowance practices for institutions
engaged in credit card lending. The guidance provides requirements for certain
operational and accounting policies which are designed to bring consistency in
practice between institutions. Many aspects of the guidance have been
implemented by the Bank with no

                                        25
<PAGE>

material impact to our financial statements. We continue testing alternative
approaches to comply with the minimum payment and negative amortization
provisions of the guidance, the results of which are not expected until the
second half of 2004. At this time we are unable to provide assurance that
adoption of the guidance will not have a material adverse effect on our
financial condition.

  DIRECT MERCHANTS BANK'S ACTIVITIES ARE REGULATED BY THE OCC AND FAILURE TO
  OPERATE IN ACCORDANCE WITH ITS RESTRICTIONS, INCLUDING THOSE IN OUR MODIFIED
  OPERATING AGREEMENT WITH THE OCC, COULD RESULT IN ADVERSE ACTIONS BY THE OCC.

     Direct Merchants Bank's activities are regulated by the OCC. The OCC has
imposed on Direct Merchants Bank the restrictions discussed under "Management's
Discussion and Analysis of Operating Results -- Liquidity, Funding and Capital
Resources" and could increase the existing restrictions or impose new ones. New
or more restrictive requirements could include, among others, restrictions
relating to:

     - minimum regulatory capital levels;

     - extensions of credit;

     - strategic acquisitions and asset growth;

     - underwriting criteria, account management, account pricing, and
       accounting policies and practices;

     - enhanced scrutiny and consent requirements relating to business plans and
       liquidity management;

     - submission of special periodic regulatory reports; and

     - additional supervisory actions or sanctions under applicable prompt
       corrective action guidelines and other applicable laws and regulations.

     On December 11, 2003, MCI and Direct Merchants Bank entered into a Modified
Operating Agreement with the OCC described above on pages 17-18 under
"Regulation -- The Company and Direct Merchants Bank." Among other things, the
Modified Operating Agreement:

     - requires Direct Merchants Bank to maintain minimum capital at the dollar
       level reported on its September 30, 2003 Call Report ($213 million),
       unless otherwise approved by the OCC;

     - requires Direct Merchants Bank to maintain, at a minimum, liquid assets
       of not less than $35 million or 100% of the average highest daily funding
       requirement for managed receivables;

     - requires Direct Merchants Bank to continue to comply with the Liquidity
       Reserve Deposit Agreement described above on pages 17-18 under
       "Regulation -- The Company and Direct Merchants Bank;" and

     - requires Director Merchants Bank and MCI to comply with the terms of the
       Capital Assurance and Liquidity Maintenance Agreement ("CALMA") described
       above on pages 17-18 under "Regulation -- The Company and Direct
       Merchants Bank."

     If we or Direct Merchants Bank fail to adhere to the terms of the Modified
Operating Agreement and our other agreements with regulators, Direct Merchants
Bank could face significant restrictions on growth, payments of dividends and
operating activities. Ultimately, failure to adhere could result in the
regulators ordering Direct Merchants Bank to cease lending activities, assessing
civil money penalties, initiating proceedings to terminate deposit insurance for
Direct Merchants Bank, or assuming control of Direct Merchants Bank.

  WE COULD BE REQUIRED TO PROVIDE SUPPORT TO DIRECT MERCHANTS BANK.

     Under our regulatory framework and the CALMA, we could be required to
contribute capital or otherwise provide support to Direct Merchants Bank in
order to maintain or meet Direct Merchants Bank's capital and liquidity needs.
If we had to do this, it could limit our ability to expend funds at the

                                        26
<PAGE>

MCI level or require us to engage in capital raising activities that could
adversely affect our financial results or stock price for a variety of reasons,
including dilution to existing equity holders.

  OUR FINANCIAL RESULTS COULD BE NEGATIVELY IMPACTED BY FLUCTUATIONS IN OUR
  INTERESTS IN OUR SECURITIZATIONS.

     We retain interests in the assets included in Metris Master Trust
securitizations, including retained subordinated interests, spread accounts and
other residual interests. The value of and income earned from these interests
will vary over time as a result of many factors not completely within our
control, including the performance of the securitized loans, interest paid to
the holders of securitization securities and transaction expenses. The
performance of the loans included in our securitizations is subject to risks and
uncertainties including, among others, increased delinquencies and credit
losses, economic downturns and social factors, interest rate fluctuations,
changes in government policies and regulations, competition, expenses,
dependence upon third-party vendors, fluctuations in accounts and account
balances, and industry risks. Since we are required to reflect changes in the
value of these interests in our financial statements, decreases in value could
negatively impact our results of operations and financial condition.

  CHANGES IN THE INTEREST RATES ON THE FUNDS WE BORROW AND THE AMOUNTS WE LOAN
  TO OUR CREDIT CARD CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.

     Like other financial institutions, we borrow money from institutions, which
we then lend to our credit card customers. We earn interest on the credit card
loans we make and pay interest on the borrowings we use to fund those loans.
Changes in these two interest rates affect the value of our assets and
liabilities. Generally, our credit card loans are priced at rates indexed from
the prevailing prime rate. The interest we pay on our borrowings is based on
indexes over LIBOR, the London Interbank Offered Rate. If the rate of interest
we pay on our borrowings increases more than the rate of interest we earn on our
loans, our net interest income, and therefore our earnings, could fall. Our
earnings could also be hurt if the rates on our credit card loans fall more
quickly than those on our borrowings. We manage these risks partly by changing
the interest rates we charge on our credit card accounts. The success of
repricing accounts to match an increase or decrease in our borrowing rates
depends on the overall product mix of those accounts, the number of accounts
repriced, the rate at which we are originating new accounts, and our ability to
retain accounts (and the related loan balances) after repricing. For example, if
we increase the interest rate we charge on our credit card accounts and the
cardholders close their accounts as a result, we may not be able to match our
increased borrowing costs as quickly, if at all. Changes in interest rates also
affect the balances our customers carry on their credit cards. When interest
rates fall, there may be more low-rate product alternatives available to our
customers. Consequently, their credit card balances may fall and pre-payment
rates may rise. We can mitigate this risk by reducing the interest rates we
charge. However, these changes can reduce the overall yield on our portfolio.
When interest rates rise, there are fewer low-rate alternatives available to our
customers. Consequently, credit card balances may rise (or fall more slowly). In
this circumstance, we may have to borrow additional amounts at higher interest
rates to fund the increased balances. In our credit card business, we can
mitigate this risk by increasing the interest rates we charge, although doing so
may increase opportunities for our competitors to offer attractive products to
our customers and consequently increase customer attrition from our portfolio.

  WE FACE INTENSE COMPETITION.

     We face intense and increasing competition from numerous financial services
providers, many of which have greater resources and name recognition than we do.
Our credit card business competes with national, regional and local bankcard
issuers, as well as other general purpose and private label credit card issuers.
Some of these issuers are substantially larger, have more seasoned credit card
portfolios and often compete for customers by offering lower interest rates
and/or fee levels than we do. Moreover, the federal Gramm-Leach-Bliley Act,
which permits the affiliation of commercial banks, securities firms and
insurance companies, may increase the number of competitors in the banking
industry and the level of competition for banking products, including credit
cards. There has been continued focus on solicitations to middle market
consumers, as competitors target this market. Our competitors may take actions
such as

                                        27
<PAGE>

offering lower interest rates and fees, higher credit lines, and other
incentives to customers to use their credit cards and/or transfer existing
balances. Since customers are attracted to credit card issuers largely on the
basis of price, credit limit and other product features, and because customer
loyalty often is limited, these and other competitive practices could result in
the loss of existing customers, reductions in account balances, a slowdown in
account and balance growth, increased customer acquisition costs and reductions
in the levels of finance charges and fees that we charge.

  FAILURE TO COMPLY WITH APPLICABLE LAWS AND REGULATIONS, OR ADVERSE CHANGES IN
  THOSE LAWS OR REGULATIONS, COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL
  RESULTS AND COULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS IN A
  PROFITABLE MANNER.

     Various federal and state laws and regulations significantly limit the
activities in which we and Direct Merchants Bank are permitted to engage. See
"Business -- Regulation." Among other things, these laws and regulations:

     - limit the fees and other charges that we are allowed to charge;

     - limit or prescribe certain other terms of our products and services;

     - require specified disclosures to consumers, including ones regarding our
       practices for collection and sharing of non-public customer information;

     - require us to treat non-public customer information in certain ways;

     - govern the sale and terms of products and services we offer;

     - require that we obtain and maintain licenses and qualifications; and

     - impose capital requirements.

     In some cases, the precise application of these statutes and regulations is
not clear. Our failure to comply with applicable laws and regulations may result
in regulatory action, negative publicity or consumer class action litigation.
Moreover, numerous legislative and regulatory proposals that would impact
aspects of our business are advanced each year. Changes in the laws and
regulations to which our business is subject, including by adoption of new
legislation or by revisions to the interpretation of existing laws and
regulations, could adversely affect our ability to conduct our business in a
profitable manner. Finally, changes in government fiscal or monetary policies,
including changes in our rate of taxation, also could adversely affect our
financial results.

  LITIGATION INVOLVING US COULD NEGATIVELY AFFECT OUR BUSINESS AND FINANCIAL
  RESULTS.

     A putative class action lawsuit was filed against us in 2002 alleging that
we violated federal securities laws by failing to timely disclose an OCC report
of examination. In January 2004, a complaint was filed against us by our former
Chairman and Chief Executive Officer alleging breach of contract, intentional
interference with contract, breach of covenant of good faith, defamation and
violation of Minnesota's whistleblower act. We face the risk of other
litigation, including class action lawsuits, challenging our product terms,
rates, disclosures, collections or other practices, under state and federal
consumer protection statutes and other laws, as well as actions relating to
federal securities laws. In particular, state attorneys general and other
government prosecutors have shown an increased interest in the enforcement of
consumer protection laws, including laws relating to subprime lending and
predatory lending practices, and privacy. See "Legal Proceedings" at pages
31-32. All litigation involves costs, both in terms of money and in terms of
diversion of management's time and attention. In addition, litigation may result
in orders that require us to change specific business practices or adopt
business practices different from our competitors', settlement costs, damages,
and in some cases penalties. Any or all of these could negatively affect our
business, results of operations and financial condition.

                                        28
<PAGE>

  WE ARE THE SUBJECT OF AN SEC INVESTIGATION THAT COULD HAVE A MATERIAL ADVERSE
  EFFECT ON OUR BUSINESS AND FINANCIAL RESULTS.

     On August 5, 2003, we received notification from the SEC that we are the
subject of a formal, nonpublic investigation. We believe that this investigation
initially related primarily to our treatment of "Allowance for loan losses" in
2001 and subsequent years, our 2001 credit line increase program and other
related matters. On December 9, 2003, we received notification that the scope of
the investigation had been expanded to include matters related to our valuation
of "Retained interests in loans securitized." We have since has received
additional SEC subpoenas and requests for information on related and other
financial accounting issues, as well as the above matters. The SEC has advised
us that this is a fact-finding inquiry and that it has not reached any
conclusions related to this matter. We cannot predict the length or outcome of
this investigation, but it could have a material adverse effect on our business
and financial condition.

  WE ARE THE SUBJECT OF AN OCC INVESTIGATION THAT COULD NEGATIVELY AFFECT OUR
  BUSINESS.

     On August 2, 2003, we received from the OCC correspondence indicating that
we were the subject of an investigation, together with a subpoena requiring us
to produce certain documents. In October 2003, the OCC informally requested
additional documents. On April 1, 2004, we received a second subpoena requiring
us to produce additional documents related primarily to executive compensation
and reimbursement. We do not believe that the OCC's investigation concerns any
of the activities of our current executives.

  WE ARE THE SUBJECT OF AN INTERNAL REVENUE SERVICE EXAMINATION THAT COULD HAVE
  A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY AND FINANCIAL RESULTS.

     In December 2003, an Internal Revenue Service("IRS"), examination team
submitted a request for a Technical Advice Memorandum("TAM"), to its Washington,
D.C. National Office regarding our treatment of certain credit card fees as
original issue discount("OID"). The request covers our tax returns filed for the
years ended December 31, 1998 through December 31, 2001. Although we primarily
report the relevant fees as income when billed for financial reporting purposes,
we believe the fees constitute OID for tax purposes and should, therefore, be
deferred and amortized over the life of the underlying credit card loans for tax
purposes. Cumulatively through December 31, 2001, we had deferred approximately
$210 million in federal income tax under the OID rules. An assessment could
ultimately require us to pay up to this amount of federal tax plus state taxes
and related interest. The rulings in the TAM and the outcome of additional
resolution activities for these years, if necessary, will likely determine our
tax treatment of credit card fees in subsequent years. Based on our federal tax
returns filed for years ending December 31, 2002 and December 31, 2003, we had
deferred approximately $244 million and $179 million in federal income tax,
respectively. We believe that our treatment of these fees, which is consistent
with that of numerous other U.S. credit card issuers, is appropriate and we
continue to work with the IRS to resolve this matter. However, both the final
resolution and its timing are uncertain. A resolution that requires us to pay
immediately any material amount of the taxes we had previously deferred could
have a material adverse effect on our liquidity and financial condition.

  OUR RESTATEMENTS OF FINANCIAL RESULTS HAVE HAD, AND MAY IN THE FUTURE CONTINUE
  TO HAVE ADVERSE EFFECTS ON US.

     We recently have restated our financial results for 1998 through 2002 and
for the first three quarters of 2003, in connection with our analysis of our
method of valuing "Retained interests in loans securitized." Included in these
restatements, in addition to changes made as a result of our revised accounting
policies and procedures related to valuing our retained interests, are
corrections to conform with accounting principles generally accepted in the
United States of America related to securitization transaction costs, credit
card solicitation costs, interest rate caps and debt waiver revenue associated
with credit card receivables sold to the Metris Master Trust, and the transfer
of allowance for loan losses that was incorrectly classified as a valuation
reserve. We have also restated certain other prior period amounts to
                                        29
<PAGE>

conform with the current period's presentation. For a more detailed description
of the restatements, see Amendment No. 1 to our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003. These restatements have resulted in
late filings with the SEC and may have harmed our reputation with investors and
possibly customers. Our restatements and their effects may have additional
adverse effects on us in the future.

  DISPUTES AFFECTING MASTERCARD AND VISA COULD NEGATIVELY IMPACT OUR OPERATIONS
  AND FINANCIAL RESULTS.

     We are a member of MasterCard International Incorporated and Visa U.S.A.
Inc. MasterCard(R) and Visa(R) are membership organizations composed of
financial institutions that issue MasterCard or Visa cards. The outcome of
pending or future disputes involving these organizations could, if adversely
decided, affect our operations or result in an increase in the fees we must pay
as a member. In particular, in October 1998, the U.S. Department of Justice, or
DOJ, filed a complaint against MasterCard International Incorporated, Visa
U.S.A. Inc. and Visa International, Inc., asserting that duality (the
overlapping ownership and control of both the MasterCard and Visa associations
by the same group of banks) restrains competition in violation of the antitrust
laws and challenging the rules adopted by both MasterCard and Visa that restrict
member banks from joining American Express, Discover/Novus or other competing
networks. The case was tried in the summer of 2000 and the trial court announced
its decision in October 2001. The trial judge ruled in the associations' favor
on the duality claim, but against the associations on the competing networks
claim. MasterCard and Visa appealed the trial court's ruling, but the appeal was
denied in September 2003. The associations have indicated that they anticipate
seeking further appellate review. We cannot predict the ultimate outcome of this
litigation or its effect on the competitive environment in the credit card
industry. However, it is possible that the outcome of this or any future dispute
involving MasterCard or Visa could negatively impact our operations and
financial results in ways that we cannot currently predict.

  OTHER INDUSTRY-WIDE RISKS COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.

     We face many industry-wide risks that could negatively affect our financial
performance. For example, all businesses in the credit card industry face 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 our products. In addition we face risks related to:

     - rapidly changing technologies, including in particular, technological
       challenges in the developing online credit card and financial services
       market;

     - the possibility that system disruptions and failures may interrupt or
       delay our ability to provide services to our customers;

     - potential claims relating to the proprietary nature of widely used
       technology, such as "smart cards" and call center technology; and

     - the ability to provide and safeguard the secure transmission of
       confidential information over the Internet in the face of security
       breaches, acts of vandalism and developments in computer capabilities
       that could result in a compromise or breach of the technology used to
       protect customer transaction data.

AVAILABLE INFORMATION

     You can find additional information regarding our executive officers and
Board of Directors in the Proxy Statement relating to our 2004 Annual Meeting of
Stockholders. In addition, we periodically file reports and other information
with the SEC under the Securities Exchange Act of 1934. You can read and copy
this information at SEC offices in Washington, D.C., New York City, and Chicago;
obtain copies of this information by mail from the Public Reference Section of
the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates; obtain copies from the SEC's website (http://www.sec.gov);
inspect information at the offices of the New York Stock Exchange, Inc., 20
Broad

                                        30
<PAGE>

Street, New York, New York, 10005; request copies of documents by calling our
Investor Relations Department at (952) 593-4874; and visiting our website.

     Our Internet website is http://www.metriscompanies.com. We make available,
free of charge, through the Investor Relations portion of our website our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to such reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.

ITEM 2.  PROPERTIES

     We currently lease our principal executive office space in Minnetonka,
Minnesota, consisting of leases for approximately 300,000 and 19,000 square
feet. These leases expire in December 2011 and March 2005, respectively.
Subsequent to year-end 2003, we entered into a letter of intent with a
third-party to lease 131,000 square feet of space at our Minnetonka
headquarters. Although the letter of intent is non-binding, management believes
it is highly probable that the Company will be released from a portion of our
obligations under the original lease agreement as a result of the terms outlined
in the letter of intent. We previously entered into sublease agreements for the
remaining 19,000 square foot lease obligation noted above.

     In addition, Direct Merchants Bank leases 54,000 square feet in Phoenix,
Arizona, which serves as the Bank's operation center. This lease expires in
2009. We also lease 7,500 square feet in Scottsdale, Arizona to support the
Company's data center. In addition, we lease facilities in Tulsa, Oklahoma,
White Marsh, Maryland, Jacksonville, Florida and Duluth, Minnesota, consisting
of approximately 100,000, 115,000, 160,000 and 20,000 square feet, respectively.
These leases expire in December 2010, September 2007, May 2005 and September
2006, respectively. We have entered into sublease agreements for approximately
101,000 square feet of our lease obligation in Jacksonville. We have entered
into sublease agreements for approximately 50,000 square feet of our lease
obligation in Maryland. The leased properties in Oklahoma, Maryland, Florida and
Duluth, Minnesota support our collections, customer service and back office
operations. We also own our Hispanic operations center in Orlando, Florida,
which consists of approximately 45,000 square feet. We believe our facilities
are suitable for our businesses and that we will be able to lease or purchase
additional facilities as needed.

ITEM 3.  LEGAL PROCEEDINGS

     In September 2002, a shareholder lawsuit was filed in the United States
District Court for the District of Minnesota, naming MCI, Ronald N. Zebeck and
David D. Wesselink as defendants. The plaintiffs seek to represent a class of
purchasers of MCI common stock between November 5, 2001 and July 17, 2002. The
lawsuit seeks damages in an unspecified amount. The complaint alleges, among
other things, that defendants violated the federal securities laws when MCI
failed to timely disclose the existence of an impact of an OCC Report of
Examination. The lawsuit is currently in the discovery phase. We believe the
lawsuit is without merit and are vigorously defending against the claim.

     We are a party to various legal proceedings resulting from the ordinary
business activities relating to our operations. On January 23, 2004, a complaint
was filed by a Direct Merchants Bank cardholder in Middlesex County Superior
Court in Cambridge, Massachusetts, against the Bank and MCI alleging certain
unfair business practices. The complaint purported to be a class action lawsuit;
however, it was never certified as a class action, and the matter has been
settled and the complaint will be dismissed with prejudice.

     On January 23, 2004, a complaint was filed in Hennepin County District
Court in Minneapolis, Minnesota, against MCI, certain members of its Board of
Directors and a number of other entities, by Ronald N. Zebeck, MCI's former
Chairman and Chief Executive Officer. The complaint alleges breach of contract,
intentional interference with contract, breach of covenant of good faith,
defamation, and violation of Minnesota's whistleblower act. On February 1, 2004,
defendants filed an answer in which they denied the allegations in the
complaint, and MCI filed counterclaims against Mr. Zebeck alleging breach of
                                        31
<PAGE>

fiduciary duty and duty of loyalty, unjust enrichment, breach of covenant not to
compete, requesting an accounting, and seeking declaratory judgment against Mr.
Zebeck for the principal amount($5 million) of a loan made by MCI in 1999, plus
interest. We believe Mr. Zebeck's claims are without factual and legal support,
and we have numerous substantive legal defenses to his claims. We intend to
vigorously defend against Mr. Zebeck's claims and will aggressively prosecute
our case against him.

     For a discussion of current regulatory investigations to which we are
subject, see "Regulatory Investigations" under Item 1 on page 21.

     Because we are unable to estimate damages at this time, these matters may
have a material adverse affect on our results of operations, financial condition
or ability to operate our business in the event of a negative outcome on one or
more of these matters.

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 our fiscal year ended December 31, 2003.

                                    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
pages 99-100 of this Report.

                                        32
<PAGE>

ITEM 6.  TABLE 1: SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                                                                   FOUR-YEAR
                                                                                                   COMPOUND
                                                                                                    GROWTH
                                     2003         2002         2001         2000         1999        RATE
                                  ----------   ----------   ----------   ----------   ----------   ---------
                                            (IN THOUSANDS, EXCEPT EPS, DIVIDENDS AND STOCK PRICES)
<S>                               <C>          <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA:
Net interest income.............  $   16,109   $  125,886   $  202,861   $  (12,608)  $   27,428     (12.5)
Provision for loan losses.......     126,648      219,804      461,106      164,800      122,322       0.9
Other operating income..........     505,020      835,421    1,273,444    1,080,270      794,857     (10.7)
Other operating expense.........     611,746      741,220      727,284      599,139      437,984       8.7
                                  ----------   ----------   ----------   ----------   ----------     -----
Tax rate(1).....................        32.0%       659.7%        39.5%        38.6%        48.1%       --
Net (loss) income...............  $ (147,739)  $   (1,584)  $  160,029   $  185,902   $  109,555       N/A
                                  ----------   ----------   ----------   ----------   ----------     -----
PER COMMON SHARE STATISTICS:
(Loss) earnings per
  share -- diluted..............  $    (3.27)  $    (0.66)  $     1.61   $     2.01   $     1.44       N/A
Stock price                             4.44         2.47        25.71        26.31        23.79     (34.3)
Dividends paid..................          --        0.040        0.040        0.033        0.017
Book value per common share
  equivalent(2).................        8.85        11.53        12.00         9.68         7.38       4.7
Shares outstanding (year-end)...      57,807       57,168       63,419       62,243       57,919
Shares used to compute earnings
  (loss) per share (diluted)....      57,471       59,782       99,366       92,582       76,324
                                  ----------   ----------   ----------   ----------   ----------
SELECTED OPERATING DATA:
Year-end credit card loans......  $  128,615   $  846,417   $2,756,763   $1,184,269   $  150,200
Year-end assets.................   1,392,396    2,590,392    4,165,975    3,738,307    2,041,862      (9.1)
Average credit card loans.......     518,705    1,305,127    1,709,989      614,991       78,036
Average interest-earning
  assets........................   1,023,577    1,889,768    2,060,191      838,468    1,485,094      (8.9)
Average assets..................   2,211,348    3,334,850    3,903,846    2,826,653      193,926      84.0
Average total equity............   1,038,190    1,116,578    1,011,573      759,653      564,288      16.5
Year-end deposits...............       6,262      892,754    2,058,008    2,106,199      775,381     (70.0)
Year-end debt...................     350,448      357,649      647,904      356,066      345,012       0.4
Year-end preferred stock........     470,728      430,642      393,970      360,421      329,729       9.3
Return on average assets........         N/A          N/A          4.1%         6.6%        56.5%
Return on average total
  equity........................         N/A          N/A         15.8%        24.5%        19.4%
Net interest margin.............         1.6%         6.7%         9.8%        (1.5)%        1.9%
Allowance for loan losses.......  $   45,492   $   90,315   $  460,159   $  123,123   $   12,175
Allowance for loan losses as a
  percent of 30-day plus
  delinquent receivables........       224.0%     1,146.7%       165.7%       138.1%       351.1%
Delinquency ratio(3)............        15.8%         0.9%        10.1%         7.5%         2.3%
Allowance for loan losses as a
  percent of credit card
  loans.........................        35.4%        10.7%        16.7%        10.4%         8.1%
Net charge-off ratio(4).........        26.4%        24.9%        12.3%         9.7%        52.7%
</Table>

---------------

(1) 1999 results include a permanent nondeductible tax difference of $50.8
    million due to the extinguishment of the Series B Preferred Stock and 12%
    Senior Notes, and the cancellation of warrants in June 1999 with the
    issuance of the Company's Series C Preferred Stock.

(2) "Book value" is calculated assuming conversion of preferred stock.

(3) "Delinquency ratio" represents credit card loans that were at least 30 days
    contractually past due at year-end as a percentage of year-end owned credit
    card loans. The decrease in delinquencies as of

                                        33
<PAGE>

    December 31, 2002 versus December 31, 2001 primarily reflects the sale of
    approximately $120 million of delinquent receivables during September and
    December 2002.

(4) The "Net charge-off ratio" in 2002 reflects actual principal amounts
    charged-off, less recoveries, as a percentage of average credit card loans.
    The net charge-off ratio also includes a $101.5 million charge-off of loans
    transferred to "held for sale."

                                        34
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

BUSINESS OVERVIEW

     The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of the Company. You should read this discussion along with our
consolidated financial statements and related notes thereto for the period ended
December 31, 2003.

     We provide financial products and services to middle market consumers
throughout the United States. Our consumer lending products are primarily
unsecured credit cards, including the Direct Merchants Bank MasterCard(R) and
Visa(R). We also offer co-branded credit cards through partnerships with other
companies. These credit card loans generate income and cash flow from principal,
interest and fee payments. Additional cash flow is generated through the sale of
our other consumer financial products, such as credit protection.

     Our target market is particularly susceptible to changes in the economy.
Over the past few years, the status of the economy in the United States has led
to increased unemployment rates, increased incidences of personal bankruptcy,
and decreased consumer confidence, all of which have challenged the Company and
the middle market consumer loan industry. In addition, in 2001, we implemented a
program to increase the credit lines to a large portion of our existing
customers, which put increased payment pressure on those customers. We continued
to experience the residual effects of the economic downturn and the 2001 credit
line increase program in 2003 as evidenced by our high charge-off rates.
However, our primary focus continues to be on improving asset quality and we
have taken several actions over the year to ensure this improvement, including
strengthening credit line management strategies, limiting marketing efforts to
better credit quality consumers, tightening credit authorization criteria and
enhancing collection strategies. We have started to see the results of our
efforts with the Metris Master Trust two-cycle plus delinquency rates falling
from their peak of 12.05% in November 2002 to 11.11% as of December 31, 2003. An
additional key indicator of improvement is the recent performance of the Metris
Master Trust compared to the first half of 2003. The three-month average excess
spread as of December 31, 2003 was 3.62% compared to 2.70% for the quarter ended
September 30, 2003, 1.93% for the quarter ended June 30, 2003, and 2.37% for the
quarter ended March 31, 2003. The three-month average excess spread was 4.30% as
of February 29, 2004.

     We continue to evaluate and modify our marketing programs to improve the
overall credit quality of the managed portfolio. Beginning late in 2002 and
continuing throughout 2003, we tested pricing and line assignments for new
customers. These actions were in response to a lower interest rate environment,
increased competition in the middle market sector and overall tightening of our
underwriting. The early results of these initiatives indicate improved credit
quality from our most recent marketing campaigns.

     We took several steps during 2003 to right-size our business in order to
properly position ourselves to execute our strategic plan. We sold our
membership club and warranty business in order to focus our resources on our
core credit card loans business. We reduced our managed portfolio using a
combination of decreased marketing efforts, higher account attrition, and the
sale of $1.1 billion of credit card accounts in September and November 2003. We
also have taken steps to match our workforce needs with the size of our
portfolio by eliminating approximately 1,025 positions.

     Our business requires a high degree of liquidity. Thus, ensuring
appropriate liquidity is, and will continue to be, at the forefront of our
business objectives. We rely heavily on the securitization of our consumer loans
for funding, primarily by selling the loans to the Metris Master Trust. As of
December 31, 2003, our funding needs for 2004 included $3.1 billion in maturing
asset-backed financing and conduits in the Metris Master Trust, $101.7 million
outstanding on our $125 million term loan due in June 2004, and $100 million of
senior notes due in November 2004. Our strategies to meet these funding needs
are portfolio attrition, the renewal or replacement of some of these facilities,
new securitizations, and asset sales as necessary. Downgrades in our credit
ratings and the historical deterioration in our asset quality have reduced our
access to funding and have resulted in higher funding costs and less favorable
terms than

                                        35
<PAGE>

previously were available to us. Future downgrades in our debt ratings or those
of Direct Merchants Bank, or further deterioration in our asset quality, could
continue to negatively impact our funding capabilities.

CRITICAL ACCOUNTING ESTIMATES

     The Company's significant accounting policies are identified on pages 66-73
of this Report, the most critical of which are our determination of the
"Allowance for loan losses" and the valuation of our "Retained interests in
loans securitized."

  ALLOWANCE FOR LOAN LOSSES

     We maintain an "Allowance for loan losses" sufficient to absorb probable
loan losses inherent in the credit card loan portfolio as of the balance sheet
date. The "Allowance for loan losses" results in a reserve approximating 18
months of future charge-offs for subprime receivables and 13 months of future
charge-offs for prime receivables. At the time of charge-off, all principal
balances are written off against the allowance and all fees and finance charges
are netted against the applicable income statement line item. The allowance is
based on management's consideration of all relevant factors, including
management's assessment of applicable economic and seasonal trends.

     We segment the loan portfolio into several individual liquidating pools
with similar credit risk characteristics and estimate (based on historical
experience for similar pools and existing environmental conditions) the dollar
amount of principal, accrued finance charges, and fees that will charge-off. We
then aggregate these pools into prime and subprime portfolios based on the
prescribed FICO score cuts, credit counseling programs, and other
differentiating receivable pools. We also isolate other potentially higher risk
segments such as accounts that are over their credit limit by more than 10%,
accounts in suspended status under our debt waiver benefits, and accounts in
other programs as deemed necessary. We separately analyze the reserve
requirement on each of these groups or portfolios.

     We continually evaluate the individual liquidating risk pools employing a
roll-rate model which uses historical delinquency levels and pay-down levels (12
months of historical data, with emphasis given to the last six months'
performance to capture current economic and seasonal trends), loan seasoning,
and other measures of asset quality to estimate charge-offs for both credit
losses and bankruptcy losses.

     Additionally, in evaluating the adequacy of the loan loss reserves, we also
consider several subjective factors which may be overlaid into the credit risk
roll-rate model in determining the necessary loan loss reserve, including:

     - national and economic trends and business conditions, including the
       condition of various market segments;

     - changes in lending policies and procedures, including those for
       underwriting, collection, charge-off and recovery, as well as the
       experience, ability and depth of our lending management staff;

     - trends in volume and the product pricing of accounts, including any
       concentrations of credit; and

     - impact from external factors, such as changes in competition, and legal
       and regulatory requirements, on the level of estimated credit losses in
       the current portfolio.

     Significant changes in these factors could impact our financial projections
and thereby affect the adequacy of our "Allowance for loan losses."

  VALUATION OF RETAINED INTERESTS IN LOANS SECURITIZED

     The "Retained interests in loans securitized" on our balance sheet
associated with our securitization transactions includes contractual retained
interests, transferor's interests, interest-only strip receivable, and spread
accounts receivable. Each of these components is described below. We determine
the fair value of each component of the "Retained interests in loans
securitized" at the time a securitization transaction or

                                        36
<PAGE>

replenishment sale is completed using a discounted cash flow valuation model and
on a quarterly basis thereafter. Any change in the fair value is recorded in
"Securitization income."

     The discounted cash flow valuation is limited to the receivables that exist
and have been sold to the Metris Master Trust. Therefore, the model assumes
current principal receivable balances amortize with no new sales, interchange
fees or cash advances. The future cash flows are modeled in accordance with the
debt series' legal documents and are applied to all series on a pro-rata basis.
Excess fee income, finance charge and recovery cash flows above contractual
expense payments are first applied to meet spread accounts receivable
requirements then returned to us as part of the interest-only strip receivable.
We determine upper and lower valuation limits of the "Retained interests in
loans securitized" based on historical and forecasted excess spreads. We then
determine the best estimate within the range based on historical trends
(weighted heavily toward the low end of the range), adjusted, as appropriate,
for portfolio forecast information.

     The contractual retained interests represent the subordinated securities
held by us. There is no stated interest rate associated with these securities,
and these securities are not rated. They are subordinated to all other
securities, except for the interest-only strip receivable we own and,
accordingly, are repaid last. Their fair value is determined by discounting the
expected future cash flows using a discount rate commensurate with the risks of
the underlying assets and the expected timing based on the scheduled maturity
date for the underlying securitization. If these securities are recoverable
based on the Metris Master Trust forecasts, cash flows related to the entire
subordinated principal balance are used in determining their fair value.

     The transferor's interests represent undivided interests in receivables
that are not pledged to support a specific security series or class and
represent our interest in the excess principal receivables held in the Metris
Master Trust. The fair value is determined in the same manner as the contractual
retained interests and is discounted based on twelve months to maturity. We have
subordinated our rights to the excess cash flows on the principal receivables
underlying the transferor's interests; thus they are included, instead, in the
value of the interest-only strip receivable.

     Spread accounts receivable balances represent cash held by the Metris
Master Trust trustee as reserves required by certain series. These balances earn
interest and the fair value is determined in the same manner as the contractual
retained interests.

     The interest-only strip receivable represents the contractual right to
receive from the Metris Master Trust interest and other fee revenue, less
certain costs, over the estimated life of the underlying debt securities. The
fair value is determined by discounting the expected future cash flows using a
discount rate commensurate with the risks of the underlying assets and the
expected timing of the amortization inherent in the retained interests valuation
model. We believe our discount rates are consistent with what our competition
would use to determine the fair value of these assets. The valuation model
assumes that we repurchase the outstanding principal receivables at face value
according to the clean-up call provisions contained in the respective security
series' legal documents.

     We use certain assumptions and estimates in determining the fair values of
"Retained interests in loans securitized." These assumptions and estimates
include estimated principal payments, credit losses, gross yield, interest
expense, fees, the timing of cash receipts, and discount rates commensurate with
the risks of the underlying assets. On a quarterly basis, we review and adjust
as appropriate the assumptions and estimates used in our model based on a
variety of internal and external factors, including national and economic trends
and business conditions, current lending policies, procedures and strategies,
historical trends and assumptions about future trends, competition, and legal
and regulatory requirements. Significant estimates are required in determining
these factors and different judgments concerning these factors can result in a
material impact on our balance sheet and income statement. The accompanying
consolidated financial statements do not include an adjustment to the fair value
of "Retained interests in loans securitized" that might result from the
inability to finance future receivables.

                                        37
<PAGE>

RESULTS OF OPERATIONS

  YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

     "Net loss" for the year ended December 31, 2003 was $147.7 million, or
$3.27 per diluted common share, compared to a "Net loss" of $1.6 million, or
$0.66 per diluted common share in 2002. The increase in "Net loss" of $146.2
million is primarily due to a $109.8 million reduction in "Net interest income"
and a $330.4 million reduction in "Other operating income," offset by a $93.2
million decrease in "Provision for loan losses" and a $129.5 million reduction
in other operating expense. Included in the 2003 results is a $93.5 million
after-tax net loss consisting of special items associated with the impacts from
the sale of our membership club and warranty business, two credit card loan
portfolio sales totaling $1.1 billion, a workforce reduction, the sale of
certificates of deposit by Direct Merchants Bank, and the write-down of certain
fixed assets and leases. Included in the same period of 2002 are $27.7 million
of pre-tax special items associated with the write-downs of excess property,
equipment, and operating leases and a write-down of a portfolio of charged-off
loans purchased in 2001 and 2000.

  Net Interest Income

     "Net interest income" consists primarily of interest earned on our "Credit
card loans," less interest expense on borrowings to fund loans and operations.
Table 2 provides an analysis of interest income and expense, net interest
spread, net interest margin and average balance sheet data for the years ended
December 31, 2003, 2002 and 2001.

 TABLE 2:  ANALYSIS OF AVERAGE DAILY BALANCES, INTEREST AND AVERAGE YIELDS AND
                                     RATES

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                        ------------------------------------------------------------------------------------------------
                                     2003                             2002                             2001
                        ------------------------------   ------------------------------   ------------------------------
                         AVERAGE                YIELD/    AVERAGE                YIELD/    AVERAGE                YIELD/
                         BALANCE     INTEREST    RATE     BALANCE     INTEREST    RATE     BALANCE     INTEREST    RATE
                        ----------   --------   ------   ----------   --------   ------   ----------   --------   ------
                                                             (DOLLARS IN THOUSANDS)
<S>                     <C>          <C>        <C>      <C>          <C>        <C>      <C>          <C>        <C>
ASSETS:
Interest-earning
  assets:
Federal funds sold....  $   74,589   $   838      1.1%   $   23,750   $    403     1.7%   $   63,981   $  3,115     4.9%
Short-term
  investments.........     352,847     4,556      1.3%      560,891     10,121     1.8%      286,221     12,373     4.3%
Liquidity reserve
  deposit.............      77,436       761      1.0%           --         --      --
Credit card loans.....     518,705    84,375     16.3%    1,305,127    218,878    16.8%    1,709,989    353,650    20.7%
                        ----------   -------             ----------   --------            ----------   --------
Total interest-earning
  assets..............  $1,023,577   $90,530      8.8%   $1,889,768   $229,402    12.1%   $2,060,191   $369,138    17.9%
Other assets..........   1,282,137        --       --     1,696,174         --      --     2,089,242         --      --
Allowance for loan
  losses..............     (94,366)       --       --      (251,092)        --      --      (245,587)        --      --
                        ----------                       ----------                       ----------
Total assets..........  $2,211,348        --       --    $3,334,850         --      --    $3,903,846         --      --
                        ==========                       ==========                       ==========

LIABILITIES AND EQUITY:
Interest-bearing
  liabilities:
Deposits..............  $  542,953   $28,421      5.2%   $1,406,022   $ 68,740     4.9%   $2,110,967   $127,916     6.1%
Debt..................     366,368    46,000     12.6%      380,728     34,776     9.1%      379,159     38,361    10.1%
                        ----------   -------             ----------   --------            ----------   --------
  Total
    interest-bearing
    liabilities.......  $  909,321   $74,421      8.2%   $1,786,750   $103,516     5.8%   $2,490,126   $166,277     6.7%
Other liabilities.....     263,837        --       --       431,522         --      --       402,147         --      --
                        ----------                       ----------                       ----------
Total liabilities.....   1,173,158        --       --     2,218,272         --      --     2,892,273         --      --
Stockholders'
  equity..............   1,038,190        --       --     1,116,578         --      --     1,011,573         --      --
                        ----------                       ----------                       ----------
</Table>

                                        38
<PAGE>

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                        ------------------------------------------------------------------------------------------------
                                     2003                             2002                             2001
                        ------------------------------   ------------------------------   ------------------------------
                         AVERAGE                YIELD/    AVERAGE                YIELD/    AVERAGE                YIELD/
                         BALANCE     INTEREST    RATE     BALANCE     INTEREST    RATE     BALANCE     INTEREST    RATE
                        ----------   --------   ------   ----------   --------   ------   ----------   --------   ------
                                                             (DOLLARS IN THOUSANDS)
<S>                     <C>          <C>        <C>      <C>          <C>        <C>      <C>          <C>        <C>
Total liabilities and
  equity..............  $2,211,348        --       --    $3,334,850         --      --    $3,903,846         --      --
                        ==========                       ==========                       ==========
Net interest income
  and interest
  margin(1)...........          --   $16,109      1.6%           --   $125,886     6.7%           --   $202,861     9.8%
Net interest rate
  spread(2)...........          --        --      0.6%           --         --     6.3%           --         --    11.2%
</Table>

---------------

(1) We compute "Net interest margin" by dividing net interest income by average
    total interest-earning assets.

(2) The "Net interest rate spread" is the yield on average interest-earning
    assets minus the funding rate on average interest-bearing liabilities.

     "Net interest income" decreased from $125.9 million for the year ended
December 31, 2002, to $16.1 million for year ended December 31, 2003. The
decrease is due to a decrease in average interest-earning assets of $900 million
and a 510 basis point reduction in net interest margin. The decrease in margin
is primarily due to a 330 basis point decrease in yield on interest earning
assets resulting from a $786.4 million reduction in average "Credit card loans"
and a 240 basis point increase in the costs of funds due to higher interest
expense incurred on the term debt instruments outstanding during the respective
periods. As of December 31, 2003, 50.7% of our average interest-earning assets
were in "Credit card loans," compared to 69.1% as of December 31, 2002. The
overall yield decrease is primarily due to the shift in the mix of interest
earning assets to lower yielding assets.

     Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities, in addition to changes in the volume of
interest-earning assets and interest-bearing liabilities. Table 3 presents the
effects of changes in average volume and interest rates on individual financial
statement line items on an owned basis.

                    TABLE 3:  CHANGES IN NET INTEREST INCOME

<Table>
<Caption>
                                  YEAR ENDED DECEMBER 31,            YEAR ENDED DECEMBER 31,
                                       2003 VS. 2002                      2002 VS. 2001
                              --------------------------------   --------------------------------
                                              CHANGE DUE TO                      CHANGE DUE TO
                               INCREASE    -------------------    INCREASE    -------------------
                              (DECREASE)    VOLUME      RATE     (DECREASE)    VOLUME      RATE
                              ----------   ---------   -------   ----------   --------   --------
                                                    (DOLLARS IN THOUSANDS)
<S>                           <C>          <C>         <C>       <C>          <C>        <C>
INTEREST INCOME:
Federal funds sold..........  $     435    $     859   $  (424)  $  (2,712)   $ (1,959)  $   (753)
Short-term investments......     (4,804)      (2,334)   (2,470)     (2,252)     11,874    (14,126)
Credit card loans...........   (134,503)    (142,269)    7,766    (134,772)    (83,731)   (51,041)
                              ---------    ---------   -------   ---------    --------   --------
Total interest income.......   (138,872)    (143,744)    4,872    (139,736)    (73,816)   (65,920)
Interest bearing deposits...    (40,319)     (42,195)    1,876     (59,176)    (42,717)   (16,459)
Other interest expense......     11,224       (1,314)   12,538      (3,585)        159     (3,744)
                              ---------    ---------   -------   ---------    --------   --------
Total interest expense......    (29,095)     (43,509)   14,414     (62,761)    (42,558)   (20,203)
                              ---------    ---------   -------   ---------    --------   --------
  Net interest income.......  $(109,777)   $(100,235)  $(9,542)  $ (76,975)   $(31,258)  $(45,717)
                              =========    =========   =======   =========    ========   ========
</Table>

  Credit Card Loans

     Our delinquency and net loan charge-off rates at any point in time reflect,
among other factors, the credit risk of loans, the average age of our various
credit card account portfolios, the success of our

                                        39
<PAGE>

collection efforts, the impacts of our 2001 credit line increase program, and
general economic conditions. The average age of our credit card portfolio
affects the stability of delinquency and loss rates. In order to minimize
losses, we continue to focus our resources on refining our credit underwriting
standards for new accounts and on collections efforts.

     We also use credit line assignment, customer transaction authorization
controls and account management strategies to minimize loan losses. Our internal
risk models determine initial credit lines at the time of underwriting. We
manage credit lines on an ongoing basis and adjust them based on customer usage,
risk profile, and payment patterns. We continually monitor customer accounts and
initiate appropriate collection activities when an account is delinquent or
overlimit.

  Delinquencies

     It is our policy to accrue interest and fee income on all credit card
accounts, except in limited circumstances, until we charge-off the account. In
November 2002, we stopped billing late fees once an account became 120-days
contractually delinquent, and in March 2003, we stopped billing overlimit fees
once an account became 120-days contractually delinquent. Past-due accounts are
re-aged to current status only after we receive at least three minimum payments
or the equivalent cumulative amount. Accounts can only be re-aged to current
status once every twelve months and two times every five years. Accounts
entering long-term fixed payment forbearance programs may receive a re-age upon
entering the debt forbearance program ("workout re-age"). Workout re-ages can
only occur after receipt of at least three consecutive minimum monthly payments,
or the equivalent cumulative amount as defined by the debt management program.
In accordance with FFIEC guidance, workout re-ages can only occur once in five
years. Table 4 presents the delinquency trends of our credit card loan
portfolio.

                           TABLE 4:  LOAN DELINQUENCY

<Table>
<Caption>
                                      DECEMBER 31,   % OF    DECEMBER 31,   % OF    DECEMBER 31,   % OF
                                          2003       TOTAL       2002       TOTAL       2001       TOTAL
                                      ------------   -----   ------------   -----   ------------   -----
                                                            (DOLLARS IN THOUSANDS)
<S>                                   <C>            <C>     <C>            <C>     <C>            <C>
Loans outstanding...................    $128,615      100%     $846,417      100%    $2,756,763     100%
Loans contractually delinquent:
  30 to 59 days.....................       5,015      3.9%        1,673      0.2%        87,603     3.2%
  60 to 89 days.....................       4,888      3.8%        2,121      0.2%        66,647     2.4%
  90 or more days...................      10,406      8.1%        4,082      0.5%       123,528     4.5%
                                        --------     ----      --------      ---     ----------    ----
     Total..........................    $ 20,309     15.8%     $  7,876      0.9%    $  277,778    10.1%
                                        ========     ====      ========      ===     ==========    ====
</Table>

     As part of our overall portfolio management, we periodically sell
portfolios of delinquent credit card accounts to third parties. These
transactions have a direct effect on our delinquency dollars and rates.
Excluding the sale of $72.5 million of 2-cycle plus delinquent receivables in
December 2002, the delinquency ratio would have been 8.7 percent as of December
31, 2002. There was no sale of delinquent receivables during the fourth quarter
of 2003. The increase in delinquencies as of December 31, 2003 versus December
31, 2002 primarily reflects the overall credit quality of the remaining
receivables in the OWNED portfolio.

  Net charge-offs

     Net charge-offs are the principal amount of losses from cardholders
unwilling or unable to make minimum payments, bankrupt cardholders and deceased
cardholders, less current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged-off against the applicable revenue
line item at the time of charge-off. We charge-off and take accounts as a loss
within (i) 60 days following formal notification of bankruptcy; (ii) at the end
of the month during which most unsecured accounts become contractually 180-days
past-due; (iii) at the end of the month during which unsecured accounts that
have entered into a credit counseling or other similar debt forbearance program
later become

                                        40
<PAGE>

contractually 120-days past-due; or (iv) at the end of the month during which
secured accounts become contractually 120-days past-due after first reducing the
loss by the secured deposit. Beginning in the fourth quarter of 2003 we changed
our policy for recognizing credit losses on accounts that enter into a
settlement payment arrangement. Under the new policy, the portion of the balance
that has been forgiven is charged-off upon entering into the settlement
arrangement with the customer. The previous policy recognized these losses after
the completion of the settlement arrangement. We charge-off accounts that are
identified as fraud losses no later than 90 days after discovery.

     We enter into agreements with third parties for the sale of a majority of
charged-off accounts. We also refer charged-off accounts to our recovery unit
for coordination of collection efforts to recover the amounts owed. When
appropriate, we place accounts with external collection agencies or attorneys.

     Charge-offs due to bankruptcies were $32.6 million, representing 42.5% of
total gross charge-offs, as of December 31, 2003, and $61.5 million,
representing 17.8% of total gross charge-offs, as of December 31, 2002. Table 5
presents our net charge-offs for the periods indicated as reported in the
consolidated financial statements.

                           TABLE 5:  NET CHARGE-OFFS

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                    ----------------------------------
                                                      2003        2002         2001
                                                    --------   ----------   ----------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                 <C>        <C>          <C>
Average credit card loans.........................  $518,705   $1,305,127   $1,709,989
Net charge-offs...................................   137,015      325,351      209,779
Net charge-off ratio..............................      26.4%        24.9%        12.3%
                                                    ========   ==========   ==========
</Table>

     As part of our overall portfolio management, we periodically sell
portfolios of delinquent credit card accounts. These transactions have a direct
effect on our charge-off dollars and rates as any reduction in the loan's value
is reflected as a charge-off. During 2003, we sold two portfolios of delinquent
accounts approximating $69.0 million in receivables, resulting in a $62.3
million charge-off. During 2002, we sold two portfolios of delinquent accounts
approximating $120 million in receivables, resulting in a $101.5 million
charge-off.

  Provision and Allowance for Loan Losses

     We record provisions for loan losses in amounts necessary to maintain the
allowance at a level sufficient to absorb anticipated probable loan losses
inherent in the existing loan portfolio as of the balance sheet date.

     In order to mitigate credit losses, we have focused our collection efforts
to aggressively address any potential delinquency dollar and severity increases.
We also utilize debt forbearance programs and credit counseling services for
qualifying cardholders that are experiencing payment difficulties. These
programs include reduced interest rates, reduced or suspended fees, and other
incentives to induce the customer to continue making payments. The amount of
customer receivables in debt forbearance programs was $6.2 million, or 4.8% of
total credit card loans, as of December 2003, compared to $34.7 million or 4.1%
of total credit card loans, as of December 31, 2002. All delinquent receivables
in debt forbearance programs are included in Table 4.

     The provision for loan losses for the year ended December 31, 2003, totaled
$126.6 million compared to a provision of $219.8 million in 2002. The decrease
in the provision for loan losses in 2003 compared to 2002 primarily reflects the
decrease in "Credit card loans" during the year, primarily offset by the
increased delinquency rate as of December 31, 2003 discussed above. The
"Allowance for loan losses" was $45.5 million, or 35.4% of credit card loans, as
of December 31, 2003, versus $90.3 million, or 10.7% of credit card loans, as of
December 31, 2002.

                                        41
<PAGE>

     Our roll-rate models, including management contingency, indicated our
required "Allowance for loan losses" was $46 million as of December 31, 2003,
compared to a range of $75 million to $90 million as of December 31, 2002. We
believe the allowance for loan losses is adequate to cover probable future
losses inherent in the loan portfolio under current conditions.

  Retained Interests in Loans Securitized

     Our credit card receivables are primarily funded by asset securitizations
through the Metris Master Trust. Upon securitization, the Company removes the
applicable credit card loans from the balance sheet and recognizes the retained
interests in loans securitized at their allocated carrying value in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities-a replacement of FASB Statement No. 125"
("SFAS No. 140"). Assets may be sold to the Metris Master Trust at the inception
of a securitization series. We also sell receivables to the Metris Master Trust
on a daily basis to replenish receivable balances that have decreased due to
payments and charge-offs. The difference between the allocated carrying value
and the proceeds from the assets sold is recorded as a gain or loss on sale and
is included in "Securitization income."

     At the same time, the Company recognizes the "Retained interests in loans
securitized." The "Retained interests in loans securitized" are financial assets
measured at fair value consistent with trading securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and include the contractual retained interests, an interest-only
strip receivable, excess transferor's interests and spread accounts receivable.
The contractual retained interests consist of non-interest bearing securities
held by the Company. The interest-only strip receivable represents the present
value of the excess of the estimated future interest and fee collections
expected to be generated by the securitized loans over the period the
securitized loans are projected to be outstanding above the interest paid on
investor certificates, credit losses, contractual servicing fees, and other
expenses. The excess transferor's interests represent principal receivables held
in the Metris Master Trust over the contractual retained interests. Spread
accounts receivable represents restricted cash reserve accounts held by the
Metris Master Trust that can be used to fund payments due to securitization
investors and credit enhancers if cash flows are insufficient. Cash held in
spread accounts is released to us if certain conditions are met or a
securitization series terminates with amounts remaining in the spread accounts.
The fair value of the "Retained interests in loans securitized" is determined
through estimated cash flows discounted at rates that reflect the level of
subordination, the projected repayment term, and the credit risk of the
securitized loans.

     The following summarizes our "Retained interests in loans securitized" as
of December 31, 2003 and December 31, 2002.

               TABLE 6:  RETAINED INTERESTS IN LOANS SECURITIZED

<Table>
<Caption>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2003           2002
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Contractual retained interests..............................    $542,014       $685,197
Excess transferor's interests...............................      48,775         57,447
Interest-only strip receivable..............................      16,039         13,882
Spread accounts receivable..................................     230,073         51,500
                                                                --------       --------
Retained interests in loans securitized.....................     836,901        808,026
                                                                ========       ========
</Table>

     "Retained interests in loans securitized" increased by $28.9 million
between December 31, 2002 and December 31, 2003, to $836.9 million. The increase
is primarily due to a $178.6 million increase in spread accounts receivable
partially offset by a $143.2 million decrease in contractual retained interests.

                                        42
<PAGE>

     The contractual retained interests decreased $143.2 million from December
31, 2002 to December 31, 2003, primarily due to the sale of receivables to a
third-party in the third and fourth quarters of 2003, and attrition in the
securitized loan portfolio. The decrease in contractual retained interests was
partially offset by higher enhancement levels required by recent securitization
agreements. Spread accounts receivable increased over December 31, 2002 as all
excess spread earned on receivables held in the Metris Master Trust was being
restricted from release to the Company due to the performance of the
receivables. For more information on restricted cash see the "Liquidity,
Funding, and Capital Resources" section of Management's Discussion and Analysis
of Financial Condition and Results of Operations on pages 50-56.

     At least quarterly, the Company adjusts the valuation of the "Retained
interests in loans securitized" to reflect changes in the amount and expected
timing of future cash flows. The significant factors that affect the timing and
amount of cash flows relate to collateral assumptions, which include payment
rate, default rate, gross yield and discount rate. These values can, and will,
vary as a result of changes in the amount and timing of the cash flows and the
underlying economic assumptions. The components of retained interests are
recorded at their fair value. (See "Critical Accounting Estimates" on pages
36-37 for more information on the valuation of the "Retained interests in loans
securitized").

     The significant assumptions used for estimating the fair value of the
"Retained interests in loans securitized" are as follows:

<Table>
<Caption>
                                                                   AT
                                                              DECEMBER 31,
                                                              -------------
                                                              2003    2002
                                                              -----   -----
<S>                                                           <C>     <C>
Monthly payment rate........................................   6.7%    6.7%
Gross yield(1)..............................................  25.4%   26.0%
Annual interest expense and servicing fees..................   4.2%    4.0%
Annual gross principal default rate.........................  20.7%   21.7%
Discount rate:
  Contractual retained interests............................  16.0%   16.0%
  Excess transferor's interests.............................  16.0%   16.0%
  Interest-only strip receivable............................  30.0%   30.0%
  Spread accounts receivable(2).............................  15.3%   16.0%
</Table>

---------------

(1) Includes expected cash flows from finance charges, late and overlimit fees,
    debt waiver premiums and bad debt recoveries. Gross yield for purposes of
    estimating fair value does not include cash flows from interchange income,
    or cash advance fees.

(2) Beginning in 2003, the discount rate on spread account balances have been
    reduced by interest income expected to be earned.

     The decrease in the gross yield assumption reflects lower Libor rates and
an improvement in credit quality in the Metris Master Trust during 2003, which
has resulted in lower yields. The lower default rate assumption also reflects
the improved credit quality in the Metris Master Trust.

     In the third quarter of 2003, we repurchased $446.5 million of randomly
selected credit card loans from the Metris Master Trust and subsequently sold
the assets to a third-party. The sale was undertaken to generate liquidity
needed to fund the sale of the Bank's certificates of deposit in order to comply
with a request by the OCC to eliminate federally insured deposits at Direct
Merchants Bank, or the risk thereof to the FDIC, by September 30, 2003, and to
create additional liquidity in the Metris Master Trust. In addition, at the
direction of our conduit providers to reduce outstanding balances, on November
13, 2003 we repurchased and subsequently sold to a third-party an additional
$494.3 million of randomly selected credit card loans from the Metris Master
Trust. The sale was necessary to create additional liquidity, reduce outstanding
conduit borrowings, and to lower 2004 funding requirements. The proceeds from
both sale transactions were less than the valuation determined under the
discounted cash flow methodology we use in establishing the fair value of our
"Retained interests in loans securitized." These sales were

                                        43
<PAGE>

necessary transactions given the Company's liquidity position and financing
market conditions at that time. We do not believe the prices in the September
and November sales are representative of the overall fair value of our remaining
"Retained interests in loans securitized" and, therefore, these two events were
factored separately into our retained interests valuations.

     At December 31, 2003, the sensitivity of the current fair value of the
"Retained interests in loans securitized" to immediate 10% and 20% adverse
changes are as follows (in millions):

<Table>
<Caption>
                                                         ADVERSE IMPACT ON FAIR VALUE
                                                    ---------------------------------------
                                                    10% ADVERSE CHANGE   20% ADVERSE CHANGE
                                                    ------------------   ------------------
<S>                                                 <C>                  <C>
Annual discount rate..............................        $ 22.6               $ 44.3
Monthly payment rate..............................         139.7                331.4
Gross yield.......................................         132.8                285.4
Annual interest expense and servicing fees........          21.3                 48.1
Annual gross principal default rate...............          99.3                209.4
</Table>

     As the sensitivity indicates, the fair value of the Company's "Retained
interests in loans securitized" on its balance sheet, as well as reported
earnings, could vary significantly if different assumptions or conditions
prevail.

     "Securitization income" was $173.4 million and $323.5 million for the years
ended December 31, 2003 and 2002, respectively. The following table details
"Securitization income" for the years ended December 31, 2003, 2002, and 2001
respectively.

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2003        2002        2001
                                                     ---------   ---------   --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Loss on new securitization of receivables to the
  Metris Master Trust..............................  $ (55,214)  $ (70,578)  $(60,574)
(Loss) gain on replenishment of receivables to the
  Metris Master Trust..............................   (161,743)     28,706    (34,672)
Discount accretion.................................    308,912     305,327    221,670
Change in fair value...............................    (71,669)   (342,080)    28,069
Interest-only revenue..............................    221,331     452,268    510,806
Transaction and other costs........................    (68,250)    (50,126)   (14,899)
                                                     ---------   ---------   --------
Securitization income..............................  $ 173,367   $ 323,517   $650,400
                                                     =========   =========   ========
</Table>

     The decrease of $150.2 million in "Securitization income" for the year
ended December 31, 2003 compared to 2002, is primarily due to a $230.9 million
decrease in interest-only revenue and a $190.5 million adverse change in the
loss/gain on replenishment of receivables to the Metris Master Trust, partially
offset by a $270.4 million improvement in the change in fair market value of
"Retained interests in loans securitized." Interest-only revenue decreased from
$452.3 million in 2002 to $221.3 million in 2003, due to a $2.6 billion
reduction in receivables held in the Metris Master Trust and a 311 basis-point
decrease in excess spread in the Metris Master Trust. The $190.5 million adverse
change in the loss/gain on replenishment of receivables to the Metris Master
Trust from 2002 to 2003 is primarily due to a reduction in the benefit from
receivables purchased from the Bank at a $14.5 million net discount in 2003, as
compared to a $151.5 million net discount in 2002. The $270.4 million
improvement in the change in fair market value of "Retained interests in loans
securitized" is primarily due to a stabilization of the interest-only asset
resulting from the flattening of excess spreads in the Metris Master Trust. The
$71.7 million reduction in fair value in 2003 is primarily due to a discount on
the increasing spread accounts receivable balance.

                                        44
<PAGE>

  Other Operating Income

     Other operating income was $505.0 million in 2003, a decrease of $330.4
million or 39.5% from $835.4 million in 2002. "Securitization income" decreased
$150.1 million during the year as discussed more fully above.

     "Servicing income on securitized/sold receivables" was $176.6 million and
$195.2 million for the years ended December 31, 2003 and 2002, respectively. The
decrease in servicing income was caused by a $900 million reduction in average
principal receivables held by the Metris Master Trust during 2003. "Credit card
fees, interchange, credit protection and other credit card income" was $79.5
million for the year ended December 31, 2003, compared to $163.2 million for the
year ended December 31, 2002. The decrease is primarily due to a decrease in
average "Credit card loans" of $786.4 million over the twelve-month period.
Furthering this decline was an amendment to the core transaction documents of
the Metris Master Trust agreement, resulting in interchange income earned on
receivables held in the Metris Master Trust being recorded as a contribution to
the excess spread of the Metris Master Trust as of May 2002.

     During the third quarter of 2003, we sold our membership club and warranty
business. The "Gain on sale of membership club and warranty business" was $84.8
million. As a result of the sale, "Enhancement services revenue" decreased to
$107.9 million for the year ended December 31, 2003, compared to $153.5 million
for the year ended December 31, 2002. Included in the gain was the recognition
of $82.7 million of "Deferred income" and the write-off of $36.6 million of
deferred costs, included in "Other assets." As of December 31, 2003 we had $7.3
million of "Deferred income," and $1.9 million in deferred costs, associated
with the sold business, which will expire throughout 2004.

  Other Operating Expense

     Other operating expenses were $611.7 million for the year ended December
31, 2003, a decrease of $129.5 million from the year ended December 31, 2002.
This decrease resulted primarily from a shrinking of the core business and the
sale of our membership club and warranty business.

     "Credit card account and other product solicitation and marketing expenses"
were $93.3 million and $173.3 million for the years ended December 31, 2003 and
2002, respectively. The decrease of $80.0 million over 2002 is the result of the
Company's decisions to decrease the size of our managed credit card portfolio
through lower account acquisitions and to exit the membership club and warranty
business. "Employee compensation" decreased $35.3 million for the year ended
December 31, 2003 to $175.5 million primarily as a result of the elimination of
1,025 positions during the year and the sale of our membership club and warranty
business during the third quarter of 2003.

     "Data processing services and communications" expense decreased $15.2
million to $68.7 million for the year ended December 31, 2003, primarily due to
the reduction in our managed credit card portfolio. "Credit protection claims
expense" decreased $13.7 million for the year ended December 31, 2003, primarily
due to a decrease in receivable balances covered by our debt waiver products.
"Occupancy and equipment" expense decreased $11.4 million to $36.6 million for
the year ended December 31, 2003 due to the reduction in facilities as a result
of decreased staffing levels.

     "Asset impairments, lease write-offs and severance" were $56.2 million and
$27.7 million for the years ended December 31, 2003 and 2002, respectively.
During 2003, we recorded $8.3 million for workforce reductions, approximately
$20.8 million in write-downs of excess property, equipment, and operating
leases, a $22.0 million write-off of purchased portfolio premium on "Credit card
loans" sold in the third and fourth quarters of 2003, and a $5.1 million
write-off of commitment fees related to a backup financing facility entered into
in March 2003, with Thomas H. Lee Equity Fund IV, L.P. Comparatively, in 2002,
we recorded a write-down of $10.6 million for portfolios of charged-off loans
purchased in 2001 and 2000, a $17.1 million write-down of excess property,
equipment, operating leases, and the then pending sale of our Arizona facility.

     "Other" expense was $79.4 million compared to $100.2 million for the years
ended December 31, 2003 and 2002, respectively. The $20.8 million decrease
compared to the prior year was primarily due to a
                                        45
<PAGE>

write-off of $7 million in marketing and origination costs on our retail note
program during 2002, a $7 million reduction from the write-off of certain
uncollectible receivables during 2002, and an overall shrinking of the core
business during 2003.

  Derivative Activities

     We use derivative financial instruments for the purpose of managing our
exposure to interest rate risk.

     MRI enters into interest rate cap transactions related to each asset-backed
securitization transaction. MRI assigns all of its right, title and interest
under the interest rate cap agreements to the trustee of the Metris Master Trust
for the benefit of the holders of securities issued by the Metris Master Trust.
The purpose of the interest rate cap is to effectively limit the interest
exposure of the Metris Master Trust for each individual series to a maximum
amount based on the LIBOR rate.

     The interest rate caps do not meet the criteria for hedge accounting
treatment. The change in the fair value of the caps is included in the
consolidated income statement under "Securitization income." We recognized
expense of $5.3 million and $22.6 million from the mark-to-market adjustments on
the interest rate caps for the years ended December 31, 2003 and 2002,
respectively.

     Prior to 2003, we entered into interest rate swap transactions through
Direct Merchants Bank. The swaps were used to convert a portion of the fixed
rate certificates of deposit issued by the Bank ("CDs") to variable rate CDs,
and thus hedge the fair market value of the CDs. The CDs exposed us to
variability in the fair value in rising or declining interest rate environments.
By converting the fixed payment to a variable payment, the interest rate swaps
reduced the variability of the fair market value of the CDs.

     Consistent with SFAS No. 133, all swaps are designated as fair value
hedges. Changes in the value of the swaps are recognized in income, in the
period in which the change in value occurred. In addition, changes in the value
of the CDs, to the extent they are attributable to the risk being hedged, were
simultaneously recognized in income. Any difference between the fair value
change in the swaps versus the fair value change in the related hedged CDs was
considered to be the "ineffective" portion of the hedge. The ineffective portion
of the swap was recorded as an increase or decrease in income.

     During 2002 and 2001, all swaps were sold. At the date of sale, the swap
and the related CDs were valued, and a gain or loss was recognized on the
difference between the change in fair value of the swap and the change in fair
value of the CDs. The cumulative amount recorded as an adjustment to the value
of the CDs was amortized over the life of the CDs as an adjustment to interest
expense.

 YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     Net loss for the year ended December 31, 2002 was $1.6 million, or $0.66
per diluted share, down from net income of $160.0 million, or $1.61 per diluted
share in 2001.

     Net interest income decreased from $202.9 million for the year ended
December 31, 2001 to $125.9 million for year ended December 31, 2002. The
decrease is due to a decrease in average interest-earning assets of $170.4
million and a 310 basis point reduction in net interest margin. The decrease in
margin is primarily due to a 580 basis point decrease in yield resulting from a
$404.9 million reduction in average credit card loans and a 50 basis point
reduction in the prime rate. Additionally, there was a shift in the mix of
assets from higher yielding credit card loans to lower yielding investments. For
the year ended December 31, 2002, 69.1% of our average interest-earning assets
were in credit card loans, compared to 83.0% for the year ended December 31,
2001.

     The provision for loan losses was $219.8 million in 2002 compared to $461.1
million in 2001. The decrease relates to the estimated required balance in the
allowance for loan losses to cover probable losses inherent in our loan
portfolio under applicable conditions. The size of the credit card loan
portfolio, net principal charge-offs, recent delinquency and collection trends,
and economic conditions were factors considered by management in determining the
necessary balance in the allowance for loan losses. Average credit card loans
decreased to $1.3 billion in 2002 from $1.7 billion in 2001.

                                        46
<PAGE>

     The net principal charge-off rate was 24.9% in 2002 compared to 12.3% in
2001. The increase in the net principal charge-off rate is partially due to the
sale of approximately $120 million of delinquent receivables in 2002. The sale
resulted in a charge-off of $101.5 million. The weak economic environment and
the effects of the Company's 2001 credit line increase program on the severity
of credit losses also adversely affected the net charge-off rate. Charge-offs
due to bankruptcies were $61.5 million, representing 17.8% of total gross
charge-offs as of December 31, 2002 and $76.3 million, representing 27.8% of
total gross charge-offs as of December 31, 2001.

     Other operating income decreased $438.0 million, or 34%, to $835.4 million
for the year ended December 31, 2002. This decrease was primarily due to a
$326.9 million decrease in "Securitization income" to $323.5 million in 2002.
The decrease in "Securitization income" was primarily due to an unfavorable
change in the market value adjustment of $370.1 million and a reduction of $58.5
million in interest-only revenue based on the performance of the underlying
assets. These changes were partially offset by an increase of $63.4 million in
gains on asset replenishment and an $83.7 million increase in discount accretion
income. Servicing income on securitized/sold receivables of $195.2 million
increased $36.1 million over 2001. The increase in servicing income was due to
the increase in securitized credit card receivables due to the transfer of
approximately $2.3 billion of receivables from Direct Merchants Bank to the
Metris Master Trust. Credit card fees, interchange and other credit card income
decreased to $163.2 million in 2002, compared to $322.0 million in 2001. The
decrease in credit card fees, interchange and other credit card income is due to
the reduction of our owned credit card portfolio. In addition, we also amended
the Metris Master Trust core transaction documents, which resulted in
interchange income earned on receivables held by the Metris Master Trust to be
recorded as contribution to the excess spread earned, effective May 2002. In
2002, $44.3 million of interchange income was earned by the Metris Master Trust.
Enhancement services revenue increased 8.2% to $153.5 million due primarily to
increased active enrollments in various membership products. These increases
were partially offset by a decrease in ServiceEdge(R) revenue due to the run-off
of the ServiceEdge(R) portfolio and a decrease in PurchaseShield(R) revenue due
to decreased enrollments.

     Total other operating expenses for the year ended December 31, 2002
increased $13.9 million over 2001. Credit card account and other product
solicitation and marketing expenses decreased $14.7 million over 2001. Credit
protection claims expense increased $14.1 million, reflecting higher claims paid
on debt waiver death benefits and interest forgiven, as well as an increase in
our estimate of unreported claims as of the balance sheet date. As of December
31, 2002, we had a debt waiver total covered balance of $2.4 billion, compared
to $2.8 billion as of December 31, 2001. Employee compensation decreased $14.6
million for the year ended December 31, 2002, due to decreased staffing needs
and fringe benefits. Other expenses increased $10.5 million.

     During 2002, we recorded approximately $17.1 million of write-downs of
excess property, equipment, operating leases, and the pending sale of our
Arizona building. In addition, we recorded a $10.6 million write-down on
portfolios of charged-off loans purchased in 2001 and 2000. The book value of
these portfolios was $3.4 million as of December 31, 2002, compared to $20.1
million as of December 31, 2001.

BALANCE SHEET ANALYSIS

 CASH AND CASH EQUIVALENTS

     Cash and cash equivalents decreased $401.7 million to $178.5 million as of
December 31, 2003 compared to $580.2 million as of December 31, 2002. The
decrease was primarily due to the $559.3 million of cash used to fund the sale
of CDs during the third quarter of 2003, offset by sales of receivables from
Direct Merchants Bank to the Metris Master Trust and other third parties.

 LIQUIDITY RESERVE DEPOSIT

     During 2003, in compliance with our Operating Agreement with the OCC,
Direct Merchants Bank established restricted deposits with a third-party
depository bank for the purpose of supporting Direct

                                        47
<PAGE>

Merchant Bank's funding needs. These deposits are invested in short-term liquid
investments. As of December 31, 2003, the balance of these deposits was $80.2
million.

 CREDIT CARD LOANS

     Credit card loans were $128.6 million as of December 31, 2003, compared to
$846.4 million as of December 31, 2002. The $717.8 million decrease is primarily
a result of the sale of $708.5 million in "Credit card loans" from Direct
Merchants Bank to the Metris Master Trust. In addition, $213.3 million in
"Credit card loans" were sold to third-parties in September 2003.

 PROPERTY AND EQUIPMENT

     "Property and equipment, net" decreased to $33.7 million at December 31,
2003, primarily due to the sale of our Arizona facility in the second quarter of
2003 and the third quarter sale of other assets. Additional decreases occurred
from the write-down of excess leasehold improvements, furniture and fixtures.

 PURCHASED PORTFOLIO PREMIUM

     "Purchased portfolio premium" decreased to $17.6 million at December 31,
2003, from $64.6 million at December 31, 2002. The $47.0 million decrease was
due to the write-down of "Purchased portfolio premium" associated with the sales
of credit card loans to third parties during the second half of 2003, and the
$25.0 million amortization expense recorded in 2003.

 OTHER ASSETS

     "Other assets" decreased from $187.2 million at December 31, 2002 to $81.8
million at December 31, 2003. The decrease was due to the $66.8 million
reduction in deferred marketing costs from the membership club and warranty
business that was sold in July 2003, and a decrease of $23.6 million in deferred
tax assets at December 31, 2003.

 DEPOSITS

     Deposits decreased $886.5 million to $6.3 million as of December 31, 2003,
from $892.8 million as of December 31, 2002. In July 2003, the OCC requested and
Direct Merchants Bank agreed to eliminate federally-insured deposits at the
Bank, or the risk thereof to the FDIC. The Bank sold $559.3 million of insured
CDs on September 30, 2003, utilizing a combination of cash on hand, cash
generated through the sale of credit card receivables to a third-party, and
sales of credit card receivables to MCI, in order to fully comply with the OCC's
request. The sale of the CDs resulted in a loss of approximately $33.0 million.
We do not anticipate issuing CDs in the foreseeable future.

  DEFERRED INCOME

     Deferred income decreased to $18.1 million as of December 31, 2003 compared
to $143.1 million as of December 31, 2002. The decrease primarily relates to the
sale of our membership club and warranty business in July 2003.

  STOCKHOLDERS' EQUITY

     Stockholders' equity was $909.2 million as of December 31, 2003, a decrease
of $145.5 million from $1,054.7 million as of December 31, 2002. The decrease
primarily results from a net loss of $147.7 million partially offset by $2.0
million of stock issuances under employee benefit plans.

OFF-BALANCE SHEET ARRANGEMENTS

     Our operations are funded primarily through asset securitizations of our
credit card receivable principal balances. We rely heavily on this method of
funding and any negative effect on our ability to
                                        48
<PAGE>

securitize assets would have a material impact on our business. We securitize
consumer loans in order to manage our total cost of funds. Our securitizations
involve packaging and selling pools of both current and future principal
receivable balances on credit card accounts, in which we retain the servicing of
such receivables. Our securitizations are treated as sales under accounting
principles generally accepted in the United States of America and are removed
from our balance sheet. We primarily securitize receivables by selling the
receivables to the Metris Master Trust, a proprietary, non-consolidated trust,
which issues securities through public and private asset-backed securitizations
or to multi-seller commercial paper conduits.

     The Metris Master Trust was formed in May 1995 pursuant to a pooling and
servicing agreement, as amended. Metris Receivables, Inc. ("MRI"), one of our
special purpose entity subsidiaries, transfers receivables in designated
accounts to the Metris Master Trust. The Metris Master Trust may, and does from
time to time, issue securities that represent undivided interests in the
receivables in the Metris Master Trust. These securities are issued by series
and each series typically has multiple classes of securities. Each series or
class within a series may have different terms. The different classes of an
individual series are structured to obtain specific debt ratings. As of December
31, 2003, 11 series of publicly issued securities were outstanding. MRI
currently retains the most subordinated class of securities in each series and
all other classes are issued to nonaffiliated third parties. These securities
are interests in the Metris Master Trust only and are not obligations of MRI,
MCI, Direct Merchants Bank, or any other subsidiary of the Company. The interest
in the Metris Master Trust not represented by any series of securities issued by
the Metris Master Trust also belongs to MRI and is known as the transferor's
interest.

     Generally, each series involves an initial reinvestment period, referred to
as the "revolving period," in which principal payments on receivables allocated
to such series are returned to MRI and reinvested in new principal receivables
arising in the accounts. After the revolving period ends, principal payments
allocated to the series are then accumulated and used to repay the investors.
This period is referred to as the "accumulation period," and is followed by a
"controlled amortization period" wherein investors are repaid their invested
amount. Currently, the Metris Master Trust does not have any series in an
accumulation period or controlled amortization period. The scheduled
accumulation and amortization periods are set forth in the agreements governing
each series. However, all series set forth certain events by which amortization
can be accelerated, referred to as "early amortization." Reasons an early
amortization could occur include: (i) one or three-month average of portfolio
collections, less principal and finance charge charge-offs, financing costs and
servicing costs, would drop below certain levels; (ii) negative transferor's
interest within the Metris Master Trust; or (iii) failure to obtain funding
during an accumulation period for a maturing term asset-backed securitization.
New receivables in designated accounts cannot be funded from a series that is in
early amortization. We currently do not have any series that are in early
amortization.

     In addition, there are various triggers within our securitization
agreements that, if broken, would restrict the release of cash to us from the
Metris Master Trust. This restricted cash provides additional security to the
investors in the Metris Master Trust. We reflect cash restricted from release in
the Metris Master Trust at its fair value as "Retained interests in loans
securitized" in the consolidated balance sheet. The triggers are usually related
to the performance of the Metris Master Trust, specifically the average of net
excess spread over a one to three-month period.

     On a monthly basis, each series is allocated its share of finance charge
and fee collections which are used to pay investors interest on their
securities, pay their share of servicing fees, and reimburse investors for their
share of losses due to charge-offs. Amounts remaining may be deposited in cash
accounts of the Metris Master Trust as additional protection for future losses.
Once each of these obligations is fully met, remaining finance charge
collections, if any, are returned to us. Principal receivables held by the
Metris Master Trust were $7.5 billion and $9.8 billion as of December 31, 2003
and 2002, respectively.

     Revenues and expenses generated from the Metris Master Trust are found in
the "Securitization income" and "Servicing income on securitized/sold
receivables" lines in the consolidated statements of income. Our interests
retained in credit card receivables sold to the Metris Master Trust are recorded
at

                                        49
<PAGE>

fair value in "Retained interests in loans securitized" on the consolidated
balance sheets. The cash flows generated from the Metris Master Trust are
presented in Note 6 to the consolidated financial statements on page 76 of this
Report.

     Maintaining adequate liquidity in the Metris Master Trust is, and will
continue to be, at the forefront of our business objectives. Additional
information regarding asset securitization is set forth under "Liquidity,
Funding, and Capital Resources" below. Additional information regarding the
accounting for our "Retained interests in loans securitized" can be found in
"Note 2 -- Significant Accounting Policies" on pages 66-73 of this Report.

LIQUIDITY, FUNDING, AND CAPITAL RESOURCES

     One of our primary financial goals is to maintain an adequate level of
liquidity through active management of assets and liabilities. Liquidity
management is a dynamic process, affected by changes in the characteristics of
our assets and liabilities and short- and long-term interest rates, and by the
capital markets. We use a variety of financing sources to manage liquidity,
funding, and interest rate risks. Table 9 summarizes our funding and liquidity
as of December 31, 2003 and 2002, respectively.

               TABLE 9:  LIQUIDITY, FUNDING AND CAPITAL RESOURCES

<Table>
<Caption>
                                   DECEMBER 31, 2003                   DECEMBER 31, 2002
                           ---------------------------------   ----------------------------------
                            DMCCB      OTHER    CONSOLIDATED    DMCCB      OTHER     CONSOLIDATED
                           --------   -------   ------------   --------   --------   ------------
                                                       (IN THOUSANDS)
<S>                        <C>        <C>       <C>            <C>        <C>        <C>
Cash and due from
  banks..................  $ 29,399   $ 2,677     $ 32,076     $ 58,399   $  4,414     $ 62,813
Federal funds sold.......    25,300        --       25,300       88,000         --       88,000
Short-term investments...    71,829    49,280      121,109      322,039    107,380      429,419
                           --------   -------     --------     --------   --------     --------
Total cash and cash
  equivalents............  $126,528   $51,957     $178,485     $468,438   $111,794     $580,232
                           ========   =======     ========     ========   ========     ========
</Table>

<Table>
<Caption>
                                           DECEMBER 31, 2003        DECEMBER 31, 2002
                                         ----------------------   ----------------------
                                                        UNUSED                   UNUSED
ON-BALANCE SHEET FUNDING                 OUTSTANDING   CAPACITY   OUTSTANDING   CAPACITY
------------------------                 -----------   --------   -----------   --------
                                                         (IN THOUSANDS)
<S>                                      <C>           <C>        <C>           <C>
Revolving credit line -- July 2003.....  $      N/A    $    N/A   $        --   $162,696
Term loan -- expired in June 2003......         N/A         N/A       100,000        N/A
10% senior notes -- November 2004......     100,000         N/A       100,000        N/A
10.125% senior notes -- July 2006......     147,724         N/A       146,824        N/A
Term loan -- June 2004.................     101,679         N/A            --        N/A
Other..................................       1,045         N/A        10,825        N/A
Deposits...............................       6,262         N/A       892,754        N/A
                                         ----------               -----------
     Subtotal..........................     356,710         N/A     1,250,403    162,696
OFF-BALANCE SHEET FUNDING
Metris Master Trust:
  Term asset back
     securitizations -- various
     maturities through January 2009...   6,400,000          --     7,610,000         --
  Conduits -- matured March 2004.......     196,000     654,000     1,177,957    422,043
  Amortizing term series -- matured
     February 2004.....................      99,200          --            --         --
  Metris facility -- expired in March
     2003..............................          --          --        48,900     26,100
                                         ----------    --------   -----------   --------
     Subtotal..........................   6,695,200     654,000     8,836,857    448,143
                                         ----------    --------   -----------   --------
     Total.............................  $7,051,910    $654,000   $10,087,260   $610,839
                                         ==========    ========   ===========   ========
</Table>

                                        50
<PAGE>

     The following table presents the amounts, as of December 31, 2003, of
off-balance sheet funding outstanding in the Metris Master Trust scheduled to
amortize in future years. We base the amortization amounts on estimated
amortization periods, which are subject to change based on the Metris Master
Trust performance.

<Table>
<Caption>
                                                              (IN THOUSANDS)
<S>                                                           <C>
2004........................................................    $1,945,200
2005........................................................     2,300,000
2006........................................................     1,250,000
2007........................................................       600,000
2008........................................................            --
Thereafter..................................................       600,000
                                                                ----------
Total.......................................................    $6,695,200
                                                                ==========
</Table>

     The effective weighted-average interest rate on the Company's outstanding
funding as of December 31, 2003 and 2002 was as follows:

<Table>
<Caption>
                                                      DECEMBER 31, 2003   DECEMBER 31, 2002
                                                      -----------------   -----------------
<S>                                                   <C>                 <C>
Term loan -- 2003...................................          --                 4.7%
Senior Secured Credit Agreement -- 2004.............        27.6%                 --
Senior notes -- 2004................................        10.0%               10.0%
Senior notes -- 2006................................        11.4%               11.4%
Other...............................................        12.3%                8.7%
Deposits............................................         2.2%                5.1%
Metris Master Trust.................................         1.9%                2.1%
Metris facility.....................................          --                 1.9%
</Table>

     The term loan matured in 2003. The 20 basis point decrease in the
weighted-average interest rate on the Metris Master Trust was primarily due to
the decrease in LIBOR, which is the base rate for these funding vehicles, and
the maturity of the Series 1997-1 asset-backed securitization, which had fixed
rate funding at 6.9%, in April 2002. As the base rate, the 30-day LIBOR
decreased from 1.4% as of December 31, 2002, to 1.1% as of December 31, 2003.

     During 2003 and 2002, we had net proceeds of approximately $700 million and
$900 million, respectively, from sales of credit card loans to the Metris Master
Trust and the Metris facility referred to in the above table. We used cash
generated from these transactions to reduce borrowings and to fund the credit
card loan portfolio.

     Our contractual cash obligations as of December 31, 2003 were as follows:

<Table>
<Caption>
                                   LESS THAN     ONE TO       FOUR TO     OVER FIVE
                                   ONE YEAR    THREE YEARS   FIVE YEARS     YEARS      TOTAL
                                   ---------   -----------   ----------   ---------   --------
                                                         (IN THOUSANDS)
<S>                                <C>         <C>           <C>          <C>         <C>
Long-term debt...................  $202,254     $147,975      $    23      $   196    $350,448
Operating leases.................    13,374       21,593        5,663       13,167      53,797
Contractual purchase
  obligations(1).................    63,704      146,206       32,416           --     242,326
Deposits.........................     6,262           --           --           --       6,262
                                   --------     --------      -------      -------    --------
Total............................  $285,594     $315,774      $38,102      $13,363    $652,833
                                   ========     ========      =======      =======    ========
</Table>

---------------

(1) Includes purchase obligations for goods and services covered by
    noncancellable contracts and contracts including cancellation fees.

                                        51
<PAGE>

     In addition to contractual cash obligations, open-to-buy on credit card
accounts as of December 31, 2003 was $8.0 billion. While this amount represents
the total lines of credit available to our customers, we have not experienced
and do not anticipate that all of our customers will exercise their entire
available line at any given point in time. We also have the right to increase,
reduce, cancel, alter or amend the terms for these available lines of credit at
any time. See the tables on pages 9-11 of this Report for further information.

     As of December 31, 2003, we had twelve-month contractual cash obligations
of $285.6 million and off-balance sheet funding scheduled to amortize of $1.9
billion. We base the amortization amounts on estimated amortization periods,
which are subject to change based on the Metris Master Trust performance. We
have historically utilized a variety of funding vehicles, as well as ongoing
cash generated from operations, to finance "Credit card loans," maturing debt
obligations and general operating needs. During the next twelve months we intend
to reduce outstanding receivables in the Metris Master Trust through lower
credit card account acquisitions, attrition in the portfolio and third-party
sales as necessary. This reduction in the size of the portfolio will
significantly reduce our need for additional financing facilities or the
issuance of new asset-backed securities. The Company will need to obtain conduit
warehouse funding arrangements to meet other maturing obligations in the Metris
Master Trust and is currently reviewing its alternatives in the conduit market.

     We believe that we will be able to obtain the requisite funding that will
provide us with adequate liquidity to meet anticipated cash needs through a
variety of funding options. As an example, on March 2, 2004, the Company secured
an amortizing term series financing of $500 million maturing May 3, 2004, and
defeased a $500 million term asset-backed securitization (Series 1999-1) that
began an accumulation period on March 1, 2004. At this time, the conduit
financing proposals received to date may require us to refinance existing
corporate debt that matures in 2004.

     The Metris Master Trust has three surety-wrapped asset-backed term
securitization series that mature over the next two years totaling $1.7 billion
with maturity dates of June 2004, May 2005, and November 2005, respectively. On
March 2, 2004, MRI received a $1.7 billion, two-year commitment from MBIA
Insurance Corporation ("MBIA") to provide financial guaranty insurance policies
to refinance these maturing MBIA-guaranteed series from the Metris Master Trust.
This commitment from MBIA will provide financial guaranty insurance capacity to
wrap newly issued series from the Metris Master Trust.

     We are currently reviewing alternatives to refinance the $95.3 million
outstanding (as of March 31, 2004) of the $125.0 million term loan due June
2004, and the $100.0 million of 10% senior notes due in November 2004. Subject
to the condition to refinance existing corporate debt discussed above, we
believe we will have sufficient cash on hand to allow us to retire both of these
loans in 2004 without incurring any additional corporate debt, if necessary. We
are also reviewing alternatives to refinance the current outstanding amount of
$280 million from the $500 million amortizing Metris Master Trust series due on
May 3, 2004. If we are unable to obtain funding from a third party, we would be
able to fund the accumulation account for a maturing asset-backed term
securitization with operating cash for a period of approximately two weeks.

     No assurance can be given either that we will be able to obtain all future
funding requirements or as to the terms and costs of any funding obtained.
Recent downgrades in our credit ratings and the deterioration in our asset
quality have reduced our access to funding and have resulted in higher funding
costs and less favorable terms than previously were available to us. Future
downgrades in our debt ratings or those of Direct Merchants Bank, as well as
further deterioration in our asset quality, could continue to negatively impact
our funding capabilities.

     The Metris Master Trust and the associated off-balance sheet debt provide
for early amortization if certain events occur. These events are described in
the core transaction documents or individual series documents of each
securitization transaction. Significant events may include (i) three-month
average excess spreads below levels between 0.0% and 1.0%, (ii) negative excess
transferor's interest within the Metris Master Trust, or (iii) failure to fund
during an accumulation period for a maturing term asset-backed securitization.
In addition, there are various provisions ("triggers") within our Series
Supplements
                                        52
<PAGE>

that, when triggered, restrict the release of cash to us. The Metris Master
Trust trustee holds the cash in spread accounts. This restricted cash provides
additional security to the investors in the Metris Master Trust. We reflect cash
restricted from release by the Metris Master Trust in "Retained interests in
loans securitized" in the consolidated balance sheets. The triggers are
primarily related to the performance of the Metris Master Trust, in particular
the average of net excess spread over a one to three-month period.

     The following table shows the annualized yields, defaults, costs and excess
spreads for the Metris Master Trust on a cash basis.

<Table>
<Caption>
                                              YEAR ENDED DECEMBER 31,
                            ------------------------------------------------------------
                                   2003                 2002                 2001
                            ------------------   ------------------   ------------------
                                               (DOLLARS IN THOUSANDS)
<S>                         <C>          <C>     <C>          <C>     <C>          <C>
Gross yield(1)............  $2,367,452   26.84%  $2,564,009   26.46%  $2,035,113   27.58%
Annual principal
  defaults................   1,803,022   20.44%   1,587,095   16.38%     972,348   13.18%
                            ----------   -----   ----------   -----   ----------   -----
Net portfolio yield.......     564,430    6.40%     976,914   10.08%   1,062,765   14.40%
Annual interest expense
  and servicing fees......     316,992    3.78%     406,826    4.35%     451,061    6.62%
                            ----------   -----   ----------   -----   ----------   -----
Net excess spread.........  $  247,438    2.62%  $  570,088    5.73%  $  611,704    7.78%
                            ==========   =====   ==========   =====   ==========   =====
</Table>

---------------

(1) Includes cash flows from finance charges, late, overlimit and cash advance
    fees, bad debt recoveries, interchange income (effective May 2002), and debt
    waiver fees, less finance charge and fee charge-offs.

     The following table illustrates the maximum amount of cash (as a percentage
of outstanding securitized principal receivables) that could be held by the
Metris Master Trust trustee as additional collateral if the one-month and
three-month average excess spread of the Metris Master Trust was within various
ranges.

<Table>
<Caption>
                                                                MAXIMUM
CASH BASIS NET EXCESS SPREAD                                   RESTRICTED
----------------------------                                   ----------
<S>                                                            <C>
greater than 5.5%...........................................           --
      5.0% - 5.5%...........................................   0.5% - 1.0%
      4.5% - 5.0%...........................................   0.5% - 1.5%
      4.0% - 4.5%...........................................   2.0% - 2.5%
      3.5% - 4.0%...........................................   2.5% - 3.0%
      3.0% - 3.5%...........................................   2.5% - 4.0%
   less than 3.0%...........................................   4.0% - 5.0%
</Table>

     The cash restricted from release is limited to the amount of excess spread
generated in the Metris Master Trust on a cash basis. During periods of lower
excess spreads, the required amount of cash to be restricted in the Metris
Master Trust may not be achieved. During those periods, all excess cash normally
released to MRI will be restricted from release. Once the maximum amount of cash
required to be restricted is restricted from release or excess spreads improve,
cash again can be released to us. Based on the performance of the Metris Master
Trust, the amount of cash required to be restricted was $294 million at December
31, 2003, and $304 million at December 31, 2002. As of December 31, 2003, $255.4
million has been restricted from release due to performance, $21.4 million has
been restricted from release due to corporate debt ratings at the inception of
the securitization transactions, and $16.9 million has been restricted from
release for maturity reserves. In addition, $12.2 million has been restricted
from release for defeasance of the Series 2001-1. As of December 31, 2002, $29.1
million had been restricted from release in the Metris Master Trust due to
performance and $21.4 million had been restricted from release due to corporate
debt ratings at the inception of the securitization transactions. The $226.3
million increase in cash restricted due to performance for the period ended
December 31, 2003 consisted of approximately $194.1 million of net excess cash
generated by the Metris Master Trust that was restricted from release,

                                        53
<PAGE>

and approximately $32.2 million that was funded by us as additional enhancement
on new transactions. We expect continued restrictions on the release of a
significant portion of our cash basis excess spread throughout 2004.

     On March 17, 2003, we obtained a $425 million extension through March 2004
of an $850 million conduit financing which was scheduled to mature in June 2003.
We also secured a $425 million conduit financing through March 2004, which
replaced bank conduit financing and warehouse facilities that matured during
March through May 2003. Finally, we obtained an amortizing term series financing
of $622.2 million maturing March 2004 to replace a $610 million term
asset-backed securitization that began an accumulation period on November 1,
2003.

     On March 31, 2003, Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV")
committed to provide a term loan to the Company in an aggregate amount of $125
million as a backup financing facility, secured by assets of the Company. On
June 27, 2003, the term loan commitment was terminated and replaced with a $125
million senior secured loan funded by a consortium of lenders. With the
termination of the THL Fund IV commitment, we wrote off $5.1 million of
capitalized commitment fees.

     The $125 million senior secured loan was issued pursuant to an Amended and
Restated Senior Secured Credit Agreement dated June 18, 2003, and effective as
of June 27, 2003, as amended ("Credit Agreement"). The loan matures June 27,
2004, and carries a fixed interest rate of 12% plus a monthly performance
payment, which is indexed to the monthly excess spread in the Metris Master
Trust. The funds were primarily used to pay off a $100 million term loan that
matured in June 2003. The terms of the Credit Agreement under which the loan was
issued require mandatory prepayment of a portion of the principal if the Company
receives funds due to the sale of certain Company assets. During the third
quarter of 2003, we were required to make a $22.5 million principal repayment
from the proceeds of the sale of our membership club and warranty business.
Since year-end 2003, we have made additional principal payments of approximately
$6.4 million. We are bound by certain covenants under the Credit Agreement. As
of December 31, 2003, we were in compliance with all covenants under the Credit
Agreement. In addition, under that agreement, dividends declared and paid by
Direct Merchants Bank indirectly to MCI are limited to the Bank's earnings not
to exceed $20 million per calendar quarter.

     In the fourth quarter of 2003, the Internal Revenue Service ("IRS")
examination team submitted a request for a Technical Advice Memorandum ("TAM")
to its Washington, D.C. National Office regarding our treatment of certain
credit card fees as original issue discount ("OID"). The request for a TAM
covers tax returns filed for the years ended December 31, 1998 through December
31, 2001. Although these fees are primarily reported as income when billed for
financial reporting purposes, we believe the fees constitute OID and must be
deferred and amortized over the life of the underlying credit card loans for tax
purposes. Cumulatively through December 31, 2001, the Company had deferred
approximately $210 million in federal income tax under the OID rules. An
assessment ultimately could require the Company to pay up to that amount of
federal tax plus state taxes and related interest.

     The Company believes its treatment of these fees is appropriate and
continues to work with the IRS to resolve this matter. The Company's position is
consistent with that of numerous other U.S. credit card issuers. While both the
timing and amount of the final resolution are uncertain, we do not expect any
additional tax to be paid over the next twelve months.

     The Company has $470.7 million of Series C Perpetual Convertible Preferred
Stock outstanding, which is held by affiliates of Thomas H. Lee Partners, L.P.
(formerly, Thomas H. Lee Company) ("THL Partners"), a private equity firm, and
is convertible into common stock at a conversion price of $12.42 per common
share subject to adjustment in certain circumstances. The Series C Preferred
Stock has a 9% dividend payable in additional shares of Series C Preferred Stock
and will also receive any cash dividends paid on the Company's common stock on a
converted basis. One share of Series C Preferred Stock is convertible into 30
shares of common stock, plus a premium amount designed to guarantee a portion of
seven years' worth of dividends at a 9% annual rate. For conversions in 2003,
the premium amount would be equal to approximately 76.5% of those future
dividends. Assuming conversion of the Series C Preferred Stock into common
stock, THL Partners would own approximately 42.5% of the Company on a diluted
                                        54
<PAGE>

basis at December 31, 2003. So long as affiliates of THL Partners own at least
25% of the originally issued Series C Preferred Stock (or any shares of Common
Stock issued upon conversion thereof), the holders of a majority of the
then-outstanding shares of the Series C Preferred Stock are entitled to elect
four members to MCI's Board of Directors. The Series C Preferred Stock may be
redeemed by us in certain circumstances by paying 103% of the redemption price
of $372.50 and all accrued dividends at the time of redemption. We also have the
option to redeem the Series C Preferred Stock after December 9, 2008, without
restriction by paying the redemption price of $372.50 and all accrued dividends
at the time of redemption.

     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
MCI or its subsidiaries. Additionally, Direct Merchants Bank is limited in its
ability to declare dividends to MCI or its subsidiaries. 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.

     Our secured/unsecured debt is rated by Moody's Investor Services
("Moody's"), Standard & Poor's Rating Services ("S&P") and Fitch, Inc.
("Fitch"). Factors affecting the various ratings include the overall health of
the global/national economy, specific economic conditions impacting the subprime
consumer finance industry, and the overall financial performance of the Company,
including earnings, credit losses, delinquencies, excess spreads in the Metris
Master Trust and our overall liquidity. Furthermore, certain of our term
asset-backed securitizations require the restriction of cash if our corporate
debt ratings go below certain levels. The table below illustrates the current
debt ratings of MCI.

<Table>
<Caption>
                                                              MOODY'S   S&P    FITCH
                                                              -------   ----   -----
<S>                                                           <C>       <C>    <C>
METRIS COMPANIES INC.
  Senior unsecured debt.....................................   Caa2     CCC-    CCC
</Table>

     Moody's, S&P and Fitch have a "negative outlook" for our debt ratings and
the Company. The rating agencies cited concerns about our funding and liquidity
challenges, earnings and asset quality.

     Since the later part of 2002, our corporate debt ratings, the Metris Master
Trust ratings and the ratings of Direct Merchants Bank have been downgraded.
These downgrades reflect the continuing losses we have experienced in 2003, as
well as deteriorating performance in the Metris Master Trust. These downgrades
and any future downgrades will have a negative effect on our ability to obtain
funding. In addition, access to funding may be at a higher cost and on terms
less favorable to us than those previously available as a result of the
deterioration in our financial performance and asset quality.

     On March 18, 2003, we entered into an Operating Agreement with the OCC. On
December 11, 2003, the Operating Agreement was modified. For discussion on the
Modified Operating Agreement, and the related capital and liquidity
requirements, see page 18 of this Report.

     The Company is bound by certain financing covenants and capital
requirements. The most significant covenants and requirements are related to the
Metris Master Trust, the term loan due June 2004, and Direct Merchants Bank's
capital requirements. The significant covenants related to the Metris Master
Trust are discussed on page 89 of this Report. The covenants related to the term
loan due June 2004 are included in the Credit Agreement as filed July 11, 2003
on Form 8-K. Direct Merchants Bank's capital requirements are discussed on page
56 of this Report.

     During 2003, Direct Merchants Bank declared and indirectly paid $190.8
million of dividends to MCI.

     As of December 31, 2003 and 2002, we had $5.9 and $7.3 million,
respectively, of letters of credit issued. We hold 110% cash collateral against
our letters of credit. Under our Credit Agreement, we need to maintain, among
other items, minimum equity plus reserves to managed accounts receivable of 15%,
a minimum three-month average excess spread of 1% (on each individual series of
securities issued under the Metris Master Trust), minimum equity of $750
million, and a ratio of equity plus allowance for loan losses and discount on
gross "Retained interests in loans securitized" to managed 90-day plus

                                        55
<PAGE>

delinquencies of 2.25%. Furthermore, the Company has pledged certain assets as
collateral on the Credit Agreement.

CAPITAL ADEQUACY

     In the normal course of business, Direct Merchants Bank enters into
agreements, or is subject to regulatory requirements, that result in cash, debt,
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 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, MCI and its affiliates. Bank regulatory laws limit or prohibit
Direct Merchants Bank's ability to lend to MCI and its affiliates. Additionally,
Direct Merchants Bank is limited in its ability to declare dividends indirectly
to MCI in accordance with the National Bank Act dividend provisions.

     We have approximately $241.3 million of equity and $126.5 million of cash,
cash equivalents and marketable securities at Direct Merchants Bank as of
December 31, 2003. A portion of this cash is available, upon approval of
regulatory authorities, to assist in the Company's financing needs.

     Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At December 31, 2003 and 2002, 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, as illustrated in the table
below.

     In addition to the statutory minimums, according to the Modified Operating
Agreement, the Bank must maintain minimum capital at a dollar level as reported
on the September 30, 2003 Call Report ($213 million). Nothing in the Modified
Operating Agreement shall prevent the Bank from reducing its capital should
circumstances permit so long as the Bank first requests and obtains the OCC's
supervisory non-objection to such reduction.

     Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Direct Merchants Bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.

     Quantitative measures established by regulation to ensure capital adequacy
require Direct Merchants Bank to maintain minimum amounts and ratios (set forth
in Table 9) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), and of Tier 1 leverage
capital (as defined in the regulations) to average assets (as defined in the
regulations). Failure to meet minimum capital requirements can result in certain
mandatory and/or discretionary actions by regulators that, if undertaken, could
have a direct material adverse effect on our financial statements.

                                        56
<PAGE>

     Additional information about Direct Merchants Bank's actual capital amounts
and ratios are presented in the following table:

<Table>
<Caption>
                                                          TO BE
                                                        ADEQUATELY         TO BE WELL
                                       ACTUAL          CAPITALIZED        CAPITALIZED
                                  ----------------   ----------------   ----------------
                                   AMOUNT    RATIO    AMOUNT    RATIO    AMOUNT    RATIO
                                  --------   -----   --------   -----   --------   -----
<S>                               <C>        <C>     <C>        <C>     <C>        <C>
AS OF DECEMBER 31, 2003
Total capital...................  $240,868   140.0%  $ 13,760    8.0%   $ 17,200   10.0%
(to risk-weighted assets)
Tier 1 capital..................   238,328   138.6%     6,880    4.0%     10,320    6.0%
(to risk-weighted assets)
Tier 1 capital..................   238,328    70.2%    13,589    4.0%     16,987    5.0%
(to average assets)

AS OF DECEMBER 31, 2002
Total capital...................  $402,721    30.8%  $104,516    8.0%   $130,645   10.0%
(to risk-weighted assets)
Tier 1 capital..................   385,480    29.5%    52,258    4.0%     78,387    6.0%
(to risk-weighted assets)
Tier 1 capital..................   385,480    24.7%    62,381    4.0%     77,977    5.0%
(to average assets)
</Table>

     FFIEC guidelines indicate that an institution with a concentration in
subprime lending should hold one and one-half to three times the normal minimum
capital required.

NEWLY ISSUED PRONOUNCEMENTS

     In January 2003, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. SFAS No. 148 requirements are effective for fiscal
years ending after December 15, 2002. The adoption of SFAS No. 148 did not have
a material impact on our financial statements.

     In January 2003, the FFIEC issued guidance with respect to account
management, risk management, and loss allowance practices for institutions
engaged in credit card lending. The guidance provides requirements for certain
operational and accounting policies which are designed to bring consistency in
practice between institutions. Many aspects of the guidance have been
implemented by the Bank with no material impact to our financial statements. We
continue testing alternative approaches to comply with the minimum payment and
negative amortization provisions of the guidance, the results of which are not
expected until the second half of 2004. At this time we are unable to provide
assurance that adoption of the guidance will not have a material adverse effect
on our financial condition.

     In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
FASB Interpretation No. 46 requires a variable interest entity to be
consolidated by a company, if that company is subject to a majority of the risk
of loss from the variable interest entity activities or entitled to receive a
majority of the entity's residual returns or both. Interpretation No. 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of Interpretation No. 46 apply immediately to
variable interest entities created after January 31, 2003, and apply to existing
variable interest entities in the first fiscal year or interim period ending
after December 15, 2003. Interpretation No. 46 provides a specific

                                        57
<PAGE>

exemption for entities qualifying as Qualified Special Purpose Entities as
described in SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities -- a replacement of FASB Statement No.
125." Our non-consolidated entity, the Metris Master Trust, is a Qualified
Special Purpose Entity under the definition in SFAS No. 140. The adoption of
this Interpretation did not have a material impact on our financial statements.

     In April 2003, FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
September 30, 2003. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after September 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on our financial statements.

     In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for classification and measurement of certain instruments
with characteristics of both liabilities and equity. It requires that financial
instruments within its scope be classified as a liability (or asset in some
circumstances). Many of those instruments were classified as equity under
previous accounting guidance. The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on our
financial statements.

SELECTED OPERATING DATA -- MANAGED BASIS

     In addition to analyzing our performance on an owned basis, we analyze our
financial performance on a managed loan portfolio basis. On a managed basis, the
balance sheets and income statements include other investors' interests in
securitized loans that are not assets of the Company, thereby reversing the
effects of sale accounting under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". We believe
this information is meaningful to the reader of the financial statements. We
service the receivables that have been securitized and sold and own the right to
the cash flows from those receivables sold in excess of amounts owed to security
holders.

                                        58
<PAGE>

     The following information is not in conformity with accounting principles
generally accepted in the United States of America. However, we believe the
information is relevant to understanding our overall financial condition and
results of operations.

              TABLE 10:  SELECTED OPERATING DATA -- MANAGED BASIS

<Table>
<Caption>
                                              YEAR ENDED DECEMBER 31,                         FOUR-YEAR
                         -----------------------------------------------------------------    COMPOUND
                            2003          2002          2001          2000         1999      GROWTH RATE
                         -----------   -----------   -----------   ----------   ----------   -----------
                                                         (IN THOUSANDS)
<S>                      <C>           <C>           <C>           <C>          <C>          <C>
SELECTED OPERATING
  DATA:
Total credit card
  accounts.............        2,837         3,929         4,929        4,464        3,680      (6.3)%
Year-end loans.........  $ 8,131,831   $11,420,186   $11,991,784   $9,345,631   $7,343,272       2.6%
Year-end assets........    8,098,524    11,431,203    12,124,528    9,806,249    7,563,394       1.7%
Average loans..........   10,047,580    11,850,927    10,419,280    8,081,638    6,053,811      13.5%
Average
  interest-earning
  assets...............   10,552,452    12,435,568    10,769,482    8,305,115    6,190,267      14.3%
Average assets.........   10,023,893    11,972,958    10,656,156    8,332,500    6,269,760      12.5%
Return on average
  assets...............          N/A           N/A           2.3%         2.3%         1.0%
Equity to managed
  assets...............         11.2%          9.3%          9.4%         9.0%         8.2%
Delinquency ratio(1)...         11.1%         11.0%          9.4%         8.2%         7.6%
Net charge-off
  ratio(2).............         20.2%         15.5%         10.9%         9.6%         9.0%
</Table>

---------------

(1) Delinquency ratio represents credit card loans that were at least 30 days
    contractually past due at year-end as a percentage of year-end managed
    loans.

(2) Net charge-off ratio reflects actual principal amounts charged-off, less
    recoveries, as a percentage of average managed credit card loans.

                       TABLE 11:  MANAGED LOAN PORTFOLIO

<Table>
<Caption>
                                                        DECEMBER 31,
                               ---------------------------------------------------------------
                                             % OF                  % OF                  % OF
                                  2003       TOTAL      2002       TOTAL      2001       TOTAL
                               -----------   -----   -----------   -----   -----------   -----
                                                   (DOLLARS IN THOUSANDS)
<S>                            <C>           <C>     <C>           <C>     <C>           <C>
Credit card loans............  $   128,615           $   846,417           $ 2,756,763
Receivables held by the
  Metris Master Trust........    8,003,216            10,573,769             9,235,021
                               -----------           -----------           -----------
Total managed loan
  portfolio..................  $ 8,131,831           $11,420,186           $11,991,784
                               ===========           ===========           ===========
Loans contractually
  delinquent:
  30 to 59 days..............      242,571    3.0%       359,223    3.1%       375,887    3.1%
  60 to 89 days..............      204,621    2.5%       285,448    2.5%       274,278    2.3%
  90 or more days............      454,884    5.6%       615,278    5.4%       473,003    4.0%
                               -----------   ----    -----------   ----    -----------   ----
     Total...................  $   902,076   11.1%   $ 1,259,949   11.0%   $ 1,123,168    9.4%
                               ===========   ====    ===========   ====    ===========   ====
AVERAGE BALANCES:
Credit card loans............  $   518,705           $ 1,305,127           $ 1,709,989
Receivables held by the
  Metris Master Trust........    9,528,875            10,545,800             8,709,291
                               -----------           -----------           -----------
Total managed loan
  portfolio..................  $10,047,580           $11,850,927           $10,419,280
                               ===========           ===========           ===========
Net charge-offs..............  $ 2,033,852   20.2%   $ 1,840,786   15.5%   $ 1,140,151   10.9%
                               ===========   ====    ===========   ====    ===========   ====
</Table>

                                        59
<PAGE>

     The increase in the managed delinquency rates as of December 31, 2003, over
December 31, 2002 and 2001, primarily reflects the sale of $72.5 million of
2-cycle plus delinquent assets in December 2002. Excluding the sale, the managed
delinquency ratio would have been 11.6 percent as of December 31, 2002. The
December 31, 2002 increase in delinquency rates over December 31, 2001 reflects
the effect of the past deterioration in the economy and the impact of our 2001
credit line increase program. The 2001 credit line increase program added
pressure to our customers due to increased average outstanding balances, which
require higher monthly payments. These factors have made our collections efforts
more difficult, resulting in higher delinquencies. In addition, as part of our
overall portfolio management, we sell portfolios of delinquent credit card
accounts. These transactions have a direct effect on delinquency dollars and
rates.

     Managed net charge-offs at December 31, 2003, increased 470 and 930 basis
points over December 31, 2002 and 2001, respectively, primarily due to the
impact of the 2001 credit line increase program and the residual effect of the
past deterioration in the economy. As part of our overall portfolio management,
we sell portfolios of delinquent credit card accounts. These transactions have a
direct effect on charge-off dollars and rates as any reduction in the loan's
value is reflected as a charge-off. We sold $72.5 million of 2-cycle plus
delinquent assets in December 2002. The effect of this transaction is included
in the delinquency and net charge-off rates presented in Table 11.

     We charge-off bankrupt accounts within 60 days of formal notification.
Charge-offs due to bankruptcies were $681.1 million, representing 28.1% of total
managed gross charge-offs as of December 31, 2003 and $654.5 million,
representing 33.7% of total managed gross charge-offs as of December 31, 2002.
In addition to those bankrupt accounts that were charged-off, we received formal
notification of $65.8 million and $106.3 million of managed bankrupt accounts as
of December 31, 2003 and 2002, respectively.

     Total managed loans decreased $3.3 billion to $8.1 billion as of December
31, 2003, compared to $11.4 billion as of December 31, 2002, and $12.0 billion
at December 31, 2001. This was primarily due to a reduction in credit lines and
tighter underwriting standards implemented in 2002, fewer new accounts,
increased charged-off receivables, and the sale of credit card loans to third
parties. The amount of credit card loans in debt forbearance programs was $695.4
million, or 8.6% of total managed loans, as of December 31, 2003, compared with
$860.1 million, or 7.5% of managed loans, as of December 31, 2002. All
delinquent receivables in debt forbearance programs are included in Table 11.

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
subject to the "safe harbor" created by those sections. Forward-looking
statements include, without limitation: expressions of the "belief,"
"anticipation," "intent," or "expectations" of management; statements and
information as to our strategies and objectives; return on equity; changes in
our managed loan portfolio; net interest margins; funding costs; liquidity; cash
flow; operating costs and marketing expenses; delinquencies and charge-offs and
industry comparisons or projections; statements as to industry trends or future
results of operations of the Company and its subsidiaries; and other statements
that are not historical fact. 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. Forward-looking statements are based on certain
assumptions by management and are subject to risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements.

     These risks and uncertainties are described under the heading "Risk
Factors" in pages 23-30 of this Report, and are also discussed in other parts of
this Report, including "Legal Proceedings" (pages 31-32), "Management's
Discussion and Analysis of Financial Condition and Results of Operations" (pages
35-61) and "Quantitative and Qualitative Disclosures About Market Risk (page
61). Although we have

                                        60
<PAGE>

attempted to list comprehensively the major risks and uncertainties, other
factors may in the future prove to be important in causing actual results to
differ materially from those contained in any forward-looking statement. Readers
are cautioned not to place undue reliance on any forward-looking statement,
which speaks only as of the date thereof, and are reminded that they are not
guarantees of future performance of the Company. We undertake no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk is the risk of loss from adverse changes in market prices and
rates. Our principal market risk is due to changes in interest rates. This
affects us directly in our lending and borrowing activities, as well as
indirectly, as interest rates may impact the payment performance of our
cardholders.

     To manage our direct risk to market interest rates, management actively
monitors the interest rates and the interest sensitive components of our balance
sheet to minimize the impact that changes in interest rates have on the fair
value of assets, net income and cash flow. We seek to minimize that impact
primarily by matching asset and liability re-pricings.

     Our primary assets are "Credit card loans," and "Retained interests in
loans securitized." Our receivables and receivables held by the Metris Master
Trust are virtually all priced at rates indexed to the variable Prime Rate. We
fund "Credit card loans" through a combination of cash flows from operations,
bank loans, long-term debt and equity issuances. Our securitized loans are held
by the Metris Master Trust and bank-sponsored multi-seller receivables conduits
and investors in term series securities within the Metris Master Trust, which
have committed funding primarily indexed to variable commercial paper rates and
LIBOR. The long-term debt is at fixed interest rates. At December 31, 2003 and
2002, none of the securities issued out of the Metris Master Trust and conduit
funding of securitized receivables was funded with fixed rate securities.

     In an interest rate environment with rates significantly above current
rates, the potential negative impact on earnings of higher interest expense is
partially mitigated by fixed rate funding and interest rate cap contracts.

     The approach we use to quantify interest rate risk is a sensitivity
analysis, which we believe best reflects the risk inherent in our business. This
approach calculates the impact on net income from an instantaneous and sustained
change in interest rates of 200 basis points. In this analysis, interest rates
on floating rate debt are not allowed to decrease below zero percent. Assuming
that we take no counteractive measures, as of December 31, 2003, a
200-basis-point increase in interest rates affecting our floating rate financial
instruments, including both debt obligations and receivables, would result in a
decrease in net income of approximately $23 million relative to a base case over
the next 12 months, compared to an approximate $11 million increase as of
December 31, 2002 relative to a base case over the next 12 months. A decrease of
200 basis points would result in an increase in "Net income" of approximately
$37 million as of December 31, 2003, and an increase of approximately $55
million as of December 31, 2002.

     The change in sensitivity for the 200 basis point decrease is primarily due
to the decreased impact on interest expense as interest expense cannot fall
below zero. The change in sensitivity for the 200 basis point increase is
primarily due to a lower percentage of receivables that will be impacted by a
rate increase.

                                        61
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                     METRIS COMPANIES INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                      DECEMBER 31,
                                                              -----------------------------
                                                                  2003            2002
                                                              -------------   -------------
                                                              (DOLLARS IN THOUSANDS, EXCEPT
                                                                     PER-SHARE DATA)
<S>                                                           <C>             <C>
                                          ASSETS:
Cash and due from banks.....................................   $   32,076      $   62,813
Federal funds sold..........................................       25,300          88,000
Short-term investments......................................      121,109         429,419
                                                               ----------      ----------
  Cash and cash equivalents.................................      178,485         580,232
                                                               ----------      ----------
Liquidity reserve deposit...................................       80,158              --
Credit card loans...........................................      128,615         846,417
Less: Allowance for loan losses.............................       45,492          90,315
                                                               ----------      ----------
  Net credit card loans.....................................       83,123         756,102
                                                               ----------      ----------
Retained interests in loans securitized.....................      836,901         808,026
Property and equipment, net.................................       33,680          83,831
Purchased portfolio premium, net............................       17,561          64,579
Other receivables due from credit card securitizations,
  net.......................................................       80,714         110,471
Other assets................................................       81,774         187,151
                                                               ----------      ----------
  TOTAL ASSETS..............................................   $1,392,396      $2,590,392
                                                               ==========      ==========
                                       LIABILITIES:
Deposits....................................................   $    6,262      $  892,754
Debt........................................................      350,448         357,649
Accounts payable............................................       32,397          53,589
Deferred income.............................................       18,060         143,148
Accrued expenses and other liabilities......................       76,036          88,579
                                                               ----------      ----------
  TOTAL LIABILITIES.........................................      483,203       1,535,719
                                                               ----------      ----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock -- Series C, par value $.01 per
  share; 10,000,000 shares authorized, 1,263,699 and
  1,156,086 shares issued and outstanding, respectively.....      470,728         430,642
Common stock, par value $.01 per share; 300,000,000 shares
  authorized, 64,862,314 and 64,223,231 shares issued,
  respectively..............................................          649             642
Paid-in capital.............................................      229,655         227,376
Unearned compensation.......................................          (27)             --
Treasury stock -- 7,055,300 shares..........................      (58,308)        (58,308)
Retained earnings...........................................      266,496         454,321
                                                               ----------      ----------
  TOTAL STOCKHOLDERS' EQUITY................................      909,193       1,054,673
                                                               ----------      ----------
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................   $1,392,396      $2,590,392
                                                               ==========      ==========
</Table>

          See accompanying Notes to Consolidated Financial Statements.
                                        62
<PAGE>

                     METRIS COMPANIES INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

<Table>
<Caption>
                                                                          YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------------
                                                                 2003              2002              2001
                                                              -----------       ----------       ------------
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S>                                                           <C>               <C>              <C>
INTEREST INCOME:
Credit card loans...........................................   $  84,375         $218,878         $  353,650
Federal funds sold..........................................         838              403              3,115
Other.......................................................       5,317           10,121             12,373
                                                               ---------         --------         ----------
  Total interest income.....................................      90,530          229,402            369,138
                                                               ---------         --------         ----------
Deposit interest expense....................................      28,421           68,740            127,916
Other interest expense......................................      46,000           34,776             38,361
                                                               ---------         --------         ----------
  Total interest expense....................................      74,421          103,516            166,277
                                                               ---------         --------         ----------
    NET INTEREST INCOME.....................................      16,109          125,886            202,861
Provision for loan losses...................................     126,648          219,804            461,106
                                                               ---------         --------         ----------
    NET INTEREST EXPENSE AFTER PROVISION FOR LOAN LOSSES....    (110,539)         (93,918)          (258,245)
                                                               ---------         --------         ----------
OTHER OPERATING INCOME:
Securitization income.......................................     173,367          323,517            650,400
Servicing income on securitized/sold receivables............     176,627          195,214            159,074
Credit card fees, interchange and other credit card
  income....................................................      79,492          163,174            322,048
Enhancement services revenue................................     107,930          153,516            141,922
Loss on sale of credit card loans...........................    (117,183)              --                 --
Gain on sale of membership club and warranty business.......      84,787               --                 --
                                                               ---------         --------         ----------
                                                                 505,020          835,421          1,273,444
                                                               ---------         --------         ----------
OTHER OPERATING EXPENSE:
Credit card account and other product solicitation and
  marketing expenses........................................      93,349          173,269            188,009
Employee compensation.......................................     175,539          210,826            225,463
Data processing services and communications.................      68,715           83,874             90,222
Credit protection claims expense............................      30,882           44,550             30,457
Occupancy and equipment.....................................      36,564           48,013             47,572
Purchased portfolio premium amortization....................      25,000           30,220             30,277
Mastercard/Visa assessment and fees.........................       9,243           13,869             16,522
Credit card fraud losses....................................       3,821            8,647              9,068
Asset impairments, lease write-offs and severance...........      56,222           27,736                 --
Loss on sale of deposits....................................      32,963               --                 --
Other.......................................................      79,448          100,216             89,694
                                                               ---------         --------         ----------
                                                                 611,746          741,220            727,284
                                                               ---------         --------         ----------
(LOSS) INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
  ACCOUNTING CHANGE.........................................    (217,265)             283            287,915
Income tax (benefit) expense................................     (69,526)           1,867            113,660
                                                               ---------         --------         ----------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
  CHANGE....................................................    (147,739)          (1,584)           174,255
Cumulative effect of accounting change (net of income taxes
  of $9,273)................................................          --               --             14,226
                                                               ---------         --------         ----------
NET (LOSS) INCOME...........................................    (147,739)          (1,584)           160,029
Convertible preferred stock dividends.......................      40,086           38,009             34,771
                                                               ---------         --------         ----------
NET (LOSS) INCOME APPLICABLE TO COMMON STOCKHOLDERS.........   $(187,825)        $(39,593)        $  125,258
                                                               =========         ========         ==========
(LOSS) EARNINGS PER SHARE:
  Basic -- (loss) income before cumulative effect of
    accounting change.......................................   $   (3.27)        $  (0.66)        $     1.79
  Basic -- cumulative effect of accounting change...........          --               --              (0.15)
                                                               ---------         --------         ----------
  Basic-net (loss) income...................................   $   (3.27)        $  (0.66)        $     1.64
                                                               =========         ========         ==========
  Diluted -- (loss) income before cumulative effect of
    accounting change.......................................   $   (3.27)        $  (0.66)        $     1.75
  Diluted -- cumulative effect of accounting change.........          --               --              (0.14)
                                                               ---------         --------         ----------
  Diluted -- net (loss) income..............................   $   (3.27)        $  (0.66)        $     1.61
                                                               =========         ========         ==========
SHARES USED TO COMPUTE EARNINGS (LOSS) PER SHARE:
  Basic.....................................................      57,471           59,782             97,641
  Diluted...................................................      57,471           59,782             99,366
DIVIDENDS DECLARED AND PAID PER COMMON SHARE................   $      --         $  0.040         $    0.040
</Table>

          See accompanying Notes to Consolidated Financial Statements.
                                        63
<PAGE>

                     METRIS COMPANIES INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
                                     NUMBER OF SHARES
                                       OUTSTANDING
                                    ------------------   PREFERRED   COMMON   PAID-IN      UNEARNED
                                    PREFERRED   COMMON     STOCK     STOCK    CAPITAL    COMPENSATION
                                    ---------   ------   ---------   ------   --------   ------------
                                                    (DOLLARS AND SHARES IN THOUSANDS)
<S>                                 <C>         <C>      <C>         <C>      <C>        <C>
BALANCE, DECEMBER 31, 2000........      968     62,243   $360,421     $622    $198,077     $    --
                                      =====     ======   ========     ====    ========     =======
Net income........................       --        --          --       --          --          --
Cash dividends....................       --        --          --       --          --          --
Common stock repurchased..........       --      (806)         --       --          --          --
Preferred dividends in kind.......       90        --      33,549       --          --          --
Issuance of common stock under
  employee benefit plans..........       --     1,518          --       15      27,927          --
Deferred compensation.............       --       464          --        5       6,409      (8,108)
Amortization of restricted
  stock...........................       --        --          --       --          --       3,128
                                      -----     ------   --------     ----    --------     -------
BALANCE, DECEMBER 31, 2001........    1,058     63,419   $393,970     $642    $232,413     $(4,980)
                                      =====     ======   ========     ====    ========     =======
Net loss..........................       --        --          --       --          --          --
Cash dividends....................       --        --          --       --          --          --
Common stock repurchased..........       --     (6,249)        --       --          --          --
Preferred dividends in kind.......       98        --      36,672       --          --          --
Issuance of common stock under
  employee benefit plans..........       --       462          --        4       2,975          --
Deferred compensation.............       --        76          --        1         967        (968)
Amortization of restricted
  stock...........................       --        --          --       --          --       1,808
Forfeiture of restricted stock....       --      (540)         --       (5)     (8,979)      4,140
                                      -----     ------   --------     ----    --------     -------
BALANCE, DECEMBER 31, 2002........    1,156     57,168   $430,642     $642    $227,376     $    --
                                      =====     ======   ========     ====    ========     =======
Net loss..........................       --        --          --       --          --          --
Preferred dividends in kind.......      108        --      40,086       --          --          --
Issuance of common stock under
  employee benefit plans..........       --       461          --        5       1,961          --
Deferred compensation.............       --       303          --        3         546        (549)
Restricted stock forfeitures......       --      (125)         --       (1)       (228)        229
Amortization of restricted
  stock...........................       --        --          --       --          --         293
                                      -----     ------   --------     ----    --------     -------
BALANCE, DECEMBER 31, 2003........    1,264     57,807   $470,728     $649    $229,655     $   (27)
                                      =====     ======   ========     ====    ========     =======

<Caption>

                                                              TOTAL
                                    TREASURY   RETAINED   STOCKHOLDERS'
                                     STOCK     EARNINGS      EQUITY
                                    --------   --------   -------------
                                     (DOLLARS AND SHARES IN THOUSANDS)
<S>                                 <C>        <C>        <C>
BALANCE, DECEMBER 31, 2000........  $     --   $373,577    $  932,697
                                    ========   ========    ==========
Net income........................        --    160,029       160,029
Cash dividends....................        --     (3,752)       (3,752)
Common stock repurchased..........   (13,014)        --       (13,014)
Preferred dividends in kind.......        --    (33,549)           --
Issuance of common stock under
  employee benefit plans..........        --         --        27,942
Deferred compensation.............        --         --        (1,694)
Amortization of restricted
  stock...........................        --         --         3,128
                                    --------   --------    ----------
BALANCE, DECEMBER 31, 2001........  $(13,014)  $496,305    $1,105,336
                                    ========   ========    ==========
Net loss..........................        --     (1,584)       (1,584)
Cash dividends....................        --     (3,728)       (3,728)
Common stock repurchased..........   (45,294)        --       (45,294)
Preferred dividends in kind.......        --    (36,672)           --
Issuance of common stock under
  employee benefit plans..........        --         --         2,979
Deferred compensation.............        --         --            --
Amortization of restricted
  stock...........................        --         --         1,808
Forfeiture of restricted stock....        --         --        (4,844)
                                    --------   --------    ----------
BALANCE, DECEMBER 31, 2002........  $(58,308)  $454,321    $1,054,673
                                    ========   ========    ==========
Net loss..........................        --   (147,739)     (147,739)
Preferred dividends in kind.......        --    (40,086)           --
Issuance of common stock under
  employee benefit plans..........        --         --         1,966
Deferred compensation.............        --         --            --
Restricted stock forfeitures......        --         --            --
Amortization of restricted
  stock...........................        --         --           293
                                    --------   --------    ----------
BALANCE, DECEMBER 31, 2003........  $(58,308)  $266,496    $  909,193
                                    ========   ========    ==========
</Table>

          See accompanying notes to Consolidated Financial Statements
                                        64
<PAGE>

                     METRIS COMPANIES INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                     YEAR ENDED DECEMBER 31,
                                                              -------------------------------------
                                                                2003         2002          2001
                                                              ---------   -----------   -----------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>           <C>
OPERATING ACTIVITIES:
Net(loss)income.............................................  $(147,739)  $    (1,584)  $   160,029
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
Cumulative effect of accounting change......................         --            --        14,226
Depreciation, amortization and accretion....................   (175,252)     (175,314)     (125,096)
Provision for loan losses...................................    126,648       219,804       461,106
(Gain) loss from credit card securitization.................    216,957       (41,872)       95,246
Gain on sale of membership club and warranty business.......    (84,787)           --            --
Asset impairments, lease write-offs, and severance..........     56,222        27,736            --
Market (gain) loss on derivative financial instruments......      5,303        22,562       (10,128)
Loss on sale of deposits....................................     32,963            --            --
Changes in operating assets and liabilities, net:
  Fair value of retained interests in loans securitized.....     71,669       342,080       (28,069)
  Spread accounts receivable................................   (268,805)      (39,785)        6,570
  Other receivables due from credit card securitizations....     29,757        29,362      (132,177)
  Accounts payable and accrued expenses.....................    (62,398)      (27,163)       32,370
  Liquidity reserve deposit.................................    (80,158)           --            --
  Deferred income...........................................    (34,299)      (45,587)      (23,306)
  Other.....................................................    (25,312)       (1,728)       26,990
                                                              ---------   -----------   -----------
Net cash (used in) provided by operating activities.........   (339,231)      308,511       477,761
                                                              ---------   -----------   -----------
INVESTING ACTIVITIES:
Proceeds from transfers of portfolios to the Metris Master
  Trust.....................................................    695,459     2,087,097       553,180
Net cash from loan originations and principal collections on
  loans receivable..........................................   (794,033)     (704,614)   (1,127,389)
Proceeds from sales of credit card portfolios to
  third-parties.............................................    891,256        16,278            --
Proceeds from sale of membership club and warranty
  business..................................................     45,000            --            --
Credit card portfolio acquisitions..........................         --            --      (290,774)
Disposal of property and equipment, net.....................     25,942            --            --
Additions to property and equipment, net....................         --        (6,159)       (5,708)
                                                              ---------   -----------   -----------
Net cash provided by (used in) investing activities.........    863,624     1,392,602      (870,691)
                                                              ---------   -----------   -----------
FINANCING ACTIVITIES:
Proceeds from issuance of debt..............................    125,606        51,745       387,000
Repayment of debt...........................................   (133,707)     (342,000)      (95,162)
Sale of deposits............................................   (559,282)           --            --
Net decrease in deposits....................................   (327,210)   (1,165,254)      (48,191)
Premium paid and transaction costs on sale of deposits......    (32,963)           --            --
Cash dividends paid.........................................         --        (3,728)       (3,752)
Proceeds from issuance of common stock......................      1,416         2,011        26,248
Repurchase of common stock..................................         --       (45,294)      (13,014)
                                                              ---------   -----------   -----------
Net cash provided by (used in) financing activities.........   (926,140)   (1,502,520)      253,129
                                                              ---------   -----------   -----------
Net decrease in cash and cash equivalents...................   (401,747)      198,593      (139,801)
Cash and cash equivalents at beginning of year..............    580,232       381,639       521,440
                                                              ---------   -----------   -----------
Cash and cash equivalents at end of year....................  $ 178,485   $   580,232   $   381,639
                                                              =========   ===========   ===========
SUPPLEMENTAL DISCLOSURES AND CASH FLOW INFORMATION:
Cash paid (received) during the year for:
  Interest..................................................  $  67,519   $   106,394   $   165,241
  Income taxes..............................................    (78,601)      (32,996)       25,718
  Tax benefit from employee stock option exercises..........          1           174         8,989
</Table>

          See accompanying Notes to Consolidated Financial Statements.
                                        65
<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. MCI's principal subsidiaries are
Direct Merchants Credit Card Bank, National Association ("Direct Merchants Bank"
or the "Bank"), Metris Direct, Inc., and Metris Receivables, Inc. ("MRI"). MCI
and its subsidiaries, as applicable, may be referred to as "we," "us," "our", or
the "Company." We are an information-based direct marketer of consumer lending
products.

     All dollar amounts are presented as pre-tax amounts unless otherwise noted.
We have eliminated all significant intercompany balances and transactions in
consolidation.

 PERVASIVENESS OF ESTIMATES

     We have prepared the consolidated financial statements in accordance with
accounting principles generally accepted accounting in the United States of
America ("GAAP"), which require us to make estimates and assumptions that affect
the reported amounts in the consolidated financial statements and accompanying
notes. The most significant and subjective of these estimates is our
determination of the adequacy of the "Allowance for loan losses," and our
determination of the fair value of "Retained interests in loans securitized."
The significant factors susceptible to future change that have an impact on
these estimates include default rates, net interest spreads, payment rates,
liquidity/ability to finance future receivables activity, and overall economic
conditions. The actual losses in our credit card loan portfolio and the fair
value of our "Retained interests in loans securitized" as of December 31, 2003,
and December 31, 2002, could materially differ from these estimates. The
accompanying consolidated financial statements do not include an adjustment to
the fair value of "Retained interests in loans securitized" that might result
from the possible inability to finance future receivables.

 COMPREHENSIVE INCOME

     SFAS No. 130 "Reporting Comprehensive Income," does not apply to our
current financial results and therefore net income equals comprehensive income.

 SEGMENT REPORTING

     In the third quarter of 2003, we sold our membership club and warranty
business. After the sale of this business, the Company conducts all operations
through a single segment of consumer lending products, and as such, management
no longer separately evaluates the results of the former enhancement services
segment in deciding how to allocate resources or in evaluating performance.

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 AND SHORT-TERM INVESTMENTS

     "Federal funds sold" are short-term loans made to banks through the Federal
Reserve System. It is our policy to make such loans only to banks that are
considered to be in compliance with their regulatory capital requirements.
Short-term investments are investments in money market mutual funds, Treasuries,
other Government Agency Obligations, and commercial paper with maturities less
than three months. We invest in certain certificates of deposit and Housing
Bonds in order to meet the Bank's obligations under the Community Reinvestment
Act, and fulfill the credit needs of the Bank's local community.

                                        66
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 LIQUIDITY RESERVE DEPOSIT

     Direct Merchants Bank has established restricted deposits with third-party
depository banks for the purpose of supporting Direct Merchants Bank's funding
needs and to satisfy banking regulators' requirements under the Operating
Agreement, dated March 18, 2003, which was modified on December 11, 2003, among
Direct Merchants Bank, MCI, and the Office of the Comptroller of the Currency.
These deposits are invested in short-term liquid assets and are classified on
the consolidated balance sheets as "Liquidity reserve deposit."

 CREDIT CARD LOANS

     "Credit card loans" presented on our consolidated balance sheets are
receivables from cardholders that we have not sold via securitizations or
third-party conduit warehousing arrangements, and are recorded at the amount
outstanding plus related deferred acquisition costs, net of related deferred
revenue. "Interest income" on "Credit card loans" is earned and accrued based on
the amount of the loans outstanding. Accrued interest and fees, which have been
billed to the cardholder but not yet received, are classified on the
consolidated balance sheets with the related "Credit card loans". Accrued
interest that has not yet been billed to the cardholder is estimated and
classified on the consolidated balance sheets in "Other assets." "Interest
income" and fees are generally recognized until a loan is charged-off. Upon
charge-off, any unpaid principal is applied to the "Allowance for loan losses"
and any unpaid finance charges and fees are netted against the applicable income
statement line items. Interest charges are reduced or eliminated and fee
billings are eliminated if a cardholder is placed in a credit counseling or debt
forbearance program. Effective November 2002, we suspended the billing of late
fees after an account becomes 120 days contractually delinquent. Effective March
2003, we stopped billing overlimit fees once an account became 120 days
contractually delinquent.

     When we decide to sell a portion of our "Credit card loans", the loans are
specifically identified and transferred to the held-for-sale account. The loans
are transferred into the account at the lower of cost or fair value at the date
the decision to sell is made. Any reduction in the loan's value is reflected as
a charge-off of the recorded investment in the loan with a corresponding
reduction in the "Allowance for loan losses". All deferred costs and fees are
written off upon the decision to sell. At the time of sale we record the
difference between the carrying value and sales price as an increase or decrease
in the "Provision for loan losses." Any "Purchased portfolio premium" would also
be written off unless we retain ownership of the cardholder account. To the
extent that the loan's carrying value at the time of transfer does not reflect
fair value, an additional "Provision for loan losses" is recorded. Any loans in
the held-for-sale account are revalued to the lower of cost or fair value at
each subsequent reporting date. We had no loans in the held-for-sale account as
of December 31, 2003 and 2002.

  ALLOWANCE FOR LOAN LOSSES

     We maintain an "Allowance for loan losses" sufficient to absorb anticipated
probable loan losses inherent in the credit card loan portfolio as of the
balance sheet date. The allowance is based on management's consideration of all
relevant factors including management's assessment of applicable economic and
seasonal trends. In addition, we have incorporated updated regulatory guidance
regarding analysis and documentation for the allowance for loan losses.

     We segment the loan portfolio into several individual liquidating pools
with similar credit risk characteristics, and estimate (based on historical
experience for similar pools and existing environmental conditions) the dollar
amount of principal, accrued finance charges and fees that will ultimately
charge-off. We then aggregate these pools into prime and subprime portfolios
based on the prescribed FICO score cuts, credit counseling programs, and various
pools of other receivables. We also isolate other potentially higher risk
segments such as accounts that are over their credit limit by more than 10%,
accounts in
                                        67
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

suspended status under our debt waiver benefits and other programs as deemed
necessary. We separately analyze the reserve requirement on each of these groups
or portfolios.

     We continually evaluate the homogenous liquidating risk pools employing a
roll-rate model which uses historical delinquency levels and pay-down levels (12
months of historical data, with influence given to the last six months'
performance to capture current economic and seasonal trends), loan seasoning,
and other measures of asset quality to estimate charge-offs for both credit
losses and bankruptcy losses.

     Additionally, in evaluating the adequacy of the "Allowance for loan
losses," we consider several subjective factors which may be overlaid into the
credit risk roll-rate model in determining the necessary loan loss reserve,
including:

     - national and economic trends and business conditions, including the
       condition of various market segments;

     - changes in lending policies and procedures, including those for
       underwriting, collection, charge-off and recovery, as well as in the
       experience, ability and depth of lending management and staff;

     - trends in volume and the product pricing of accounts, including any
       concentrations of credit; and

     - impacts from external factors -- such as changes in competition, and
       legal and regulatory requirements -- on the level of estimated credit
       losses in the current portfolio.

     Significant changes in these factors could impact our financial projections
and thereby affect the adequacy of our "Allowance for loan losses."

     Various regulatory agencies, as an integral part of their examination
process, periodically review our allowance for loan losses maintained at Direct
Merchants Bank. Such agencies may require that we recognize additions to the
allowance based on their judgment on information available to them at the time
of their examination. In our opinion, the allowance for loan losses is adequate
to cover probable losses inherent in the loan portfolio under current
conditions.

     We charge-off unsecured credit card accounts at the end of the month during
which the loan becomes contractually 180 days past due except as follows. We
charge-off all secured credit card accounts and accounts which enter into credit
counseling or other similar programs and later become delinquent at the end of
the month during which the loan becomes contractually 120 days past due after
first reducing the loss by the security deposit. Bankrupt accounts are
charged-off within 60 days of formal notification of bankruptcy. Accounts of
deceased accountholders without a surviving, contractually liable individual, or
an estate large enough to pay the debt in full are charged-off immediately upon
notification.

  CREDIT CARD FEES AND ORIGINATION COSTS

     Credit card fees include annual membership, late payment, overlimit,
returned check, cash advance transaction and other miscellaneous fees. We assess
these fees according to the terms of the related cardholder agreements and,
except for annual membership fees, we recognize the fees as revenue when charged
to the cardholder's account.

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases," we defer certain direct
credit card origination costs associated with successful credit card
solicitations. These costs are capitalized and amortized to "Interest income" on
a straight-line basis over the cardholder's privilege period, generally 12
months. These net deferred costs are included in "Credit card loans." If
deferred direct credit card acquisition costs were to exceed forecasted future
cash flows, we would make an appropriate adjustment for impairment. All other
costs of credit card solicitation are expensed as incurred.
                                        68
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  CREDIT CARD FRAUD LOSSES

     We experience "Credit card fraud losses" from the unauthorized use of
credit cards. We expense these fraudulent transactions when identified, through
the establishment of a reserve for the transactions. We charge-off these amounts
through "Credit card fraud losses" no later than 90 days from discovery, after
all attempts to recover the amounts from these transactions, including
chargebacks to merchants and claims against cardholders, are exhausted.

  RETAINED INTERESTS IN LOANS SECURITIZED AND SECURITIZATION INCOME

     Upon securitization, the Company removes the applicable Credit card
receivables from the balance sheet and recognizes the "Retained interests in
loans securitized" at their allocated carrying value in accordance with SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities-a replacement of FASB Statement No. 125" ("SFAS
No. 140"). Credit card receivables may be sold to the Metris Master Trust at the
inception of a securitization series. We also sell credit card receivables daily
to the Metris Master Trust to replenish receivable balances that have decreased
due to payments and charge-offs. The difference between the allocated carrying
value and the proceeds from the assets sold is recorded as a gain or loss on
sale and is included in "Securitization income." At the same time, the Company
recognizes the "Retained interests in loans securitized."

     The "Retained interests in loans securitized" are financial assets measured
at fair value consistent with trading securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
include the contractual retained interests, an interest-only strip receivable,
excess transferor's interests, and spread accounts receivable. The contractual
retained interests consist of non-interest bearing securities held by the
Company. The interest-only strip receivable represents the present value of the
excess of the estimated future interest and fee collections expected to be
generated by the securitized loans over the period the securitized loans are
projected to be outstanding above the interest paid on investor certificates,
credit losses, contractual servicing fees, and other expenses. The excess
transferor's interests represent principal receivables held in the Metris Master
Trust above the contractual retained interests. Spread accounts receivable
represent restricted cash reserve accounts held by the Metris Master Trust that
can be used to fund payments due to securitization investors and credit
enhancers if cash flows are insufficient. Cash held in spread accounts is
released to us if certain conditions are met or a securitization series
terminates with amounts remaining in the spread accounts. The fair value of the
"Retained interests in loans securitized" is determined through estimated cash
flows discounted at rates that reflect the risk of the securitized loans.

     At least quarterly, the Company reviews its "Retained interests in loans
securitized" for changes in fair value and recognizes those changes in
"Securitization income." The changes in fair value reflect the Company's
revisions in the expected timing and amount of future cash flows. The
significant factors that affect the timing and amount of future cash flows
relate to the collateral assumptions, which include payment rate, default rate,
gross yield, and discount rate.

     The Company recognizes future cash flows associated with its "Retained
interests in loans securitized" using the effective yield method in accordance
with Emerging Issues Task Force ("EITF") 99-20 "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets." Accordingly, "Securitization income" includes discount
accretion associated with the contractual retained interests, the excess
transferor's interests, the interest-only strip receivable, spread accounts
receivable, as well as the difference in the actual excess spread received as
compared to the estimated amount recorded related to the interest-only strip.
Since the Company's retained interests are trading securities, the impairment
provisions of EITF 99-20 are not applicable.

                                        69
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Up-front transaction costs related to securitizations are allocated and
recognized over the initial and reinvestment periods unless the transaction
results in a loss, in which case, the costs are expensed as incurred and
recorded as "Securitization income."

     The Company services the receivables held by the Metris Master Trust, and
receives annual servicing fees based upon the principal receivables outstanding.
"Servicing income" is recognized when earned. We consider these fees to be
adequate compensation and as a result no servicing asset or liability is
recorded.

     "Other receivables due from credit card securitizations, net" primarily
represents cash accumulated in the Metris Master Trust during a month, which is
released to Metris Receivables, Inc. the following month.

  DEBT ISSUANCE COSTS

     Debt issuance costs (upfront fees) are the costs related to issuing new
on-balance-sheet debt securities. We capitalize these costs and amortize them to
expense over the term of the new on-balance sheet debt security.

  PROPERTY AND EQUIPMENT

     We record "Property and equipment" at cost and depreciate it on a
straight-line basis over its estimated economic useful lives, which range from
one to 25 years. We capitalize software developed for internal use that
represents major enhancements or replacements of operating and management
information systems. We begin amortization of such capitalized software when the
systems are fully developed and ready for implementation. We expense repair and
maintenance costs as incurred. We review "Property and equipment" for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Any impairment is recorded in "Asset
impairments, lease write-offs and severance." Upon the decision to sell
"Property and equipment," we adjust the carrying value to the lower of cost or
market and transfer the assets to a held for sale account. No depreciation is
recognized on held for sale assets.

  PURCHASED PORTFOLIO PREMIUM

     The "Purchased portfolio premium" represents the excess of amounts paid for
portfolio acquisitions over the related "Credit card loans," net of reserves and
discounts. The premium is amortized over the estimated account life, generally
seven years, based on expected account attrition. The recoverability of the
premium is evaluated quarterly.

  DEBT WAIVER PRODUCTS

     Direct Merchants Bank offers various debt waiver products on receivables it
owns as well as securitized receivables. The Bank records "Deferred Revenue" on
receivables owned by the Bank when the debt waiver customer is billed. Revenue
on receivables it owns is recognized in the month following the completion of
the cancellation period, which is one-month. Revenues recorded for debt waiver
products on receivables owned by the Bank are included in the consolidated
statements of income under "Credit card fees, interchanges and other credit card
income." Unearned revenues on receivables owned by the Bank are recorded in the
consolidated balance sheets in "Deferred income."

     Cash flows from debt waiver products on receivables sold to the Metris
Master Trust are included in the valuation of the interest-only strip
receivable.

     The Bank incurs the related claims and marketing expenses for all debt
waiver products. A reserve is maintained for future death and finance charge
claims based on experience with settlement of such claims.

                                        70
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reserves for pending and incurred but not reported claims are recorded in the
consolidated balance sheets in "Accrued expenses and other liabilities."
Expenses related to these claims are included in "Credit protection claims
expense" on the consolidated statements of income.

     Qualifying membership acquisition costs for all debt waiver products are
deferred and charged to expense as debt waiver product fees are recognized. We
amortize these costs using an accelerated methodology, which approximates our
historical cancellation experience for the debt waiver products. Amortization of
debt waiver acquisition costs is included on the consolidated statements of
income in "Credit card account and other product solicitation expenses." All
other debt waiver acquisition costs are expensed as incurred.

 INTEREST RATE RISK MANAGEMENT CONTRACTS

     From time to time we enter into interest rate risk management contracts
such as interest rate swap, floor and cap agreements with highly rated
counterparties in order to hedge our interest rate exposure on securitized loans
and deposits. We account for these contracts in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS 138. We recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. The change in fair
value of the derivatives is recognized currently in earnings unless specific
hedge accounting criteria are met. If the derivative qualifies as a hedge, the
accounting treatment for the change in fair value varies based on the type of
risk being hedged. 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" or "Deposit interest expense," as appropriate, on the
consolidated statements of income. Interest payable or receivable under these
contracts is classified under "Other receivables due from credit card
securitization, net" or "Other assets," as appropriate on the consolidated
balance sheets.

 INCOME TAXES

     Deferred taxes are based on the temporary differences between the financial
statements 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. A
valuation allowance is recognized if it is more likely than not that all or some
portion of the deferred tax asset will not be realized.

                                        71
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 EARNINGS PER SHARE

     The following table presents the computation of basic and diluted
weighted-average shares used in the per-share calculations:

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                      -------------------------------
                                                        2003        2002       2001
                                                      ---------   --------   --------
                                                              (IN THOUSANDS)
<S>                                                   <C>         <C>        <C>
(Loss) income before cumulative effect of accounting
  change............................................  $(147,739)  $ (1,584)  $174,255
Preferred dividends.................................     40,086     38,009     34,771
Net (loss) income applicable to common stockholders
  before cumulative effect of accounting change,
  net...............................................   (187,825)   (39,593)   139,484
Cumulative effect of accounting change, net.........         --         --     14,226
                                                      ---------   --------   --------
Net (loss) income applicable to common
  Stockholders......................................  $(187,825)  $(39,593)  $125,258
                                                      =========   ========   ========
Weighted average common shares outstanding..........     57,471     59,782     62,962
Adjustment for:
Assumed conversion of convertible preferred
  stock(1)..........................................         --         --     34,679
                                                      ---------   --------   --------
Basic common shares.................................     57,471     59,782     97,641
Assumed exercise of outstanding stock options(1)....         --         --      1,725
                                                      ---------   --------   --------
Diluted common shares...............................     57,471     59,782     99,366
                                                      =========   ========   ========
</Table>

---------------

(1) The earnings per share calculation for the year ended December 31, 2003 and
    2002 excludes the assumed conversion of the Convertible Preferred Stock and
    the outstanding stock options, as they are anti-dilutive.

 STOCK-BASED COMPENSATION PLANS

     We recognize compensation cost for stock-based employee compensation plans
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. No
expense was reflected in "Net (loss) income" related to stock options as all
options granted had an exercise price equal to the market value of the
underlying common stock on the date of the grant. We recorded $0.2 million of
amortization of deferred compensation obligation, net of related tax benefit, in
"Employee compensation" related to restricted stock granted in 2003.

     Pro forma information regarding "Net (loss) income" and "(Loss) earnings
per share" has been determined as if we accounted for our employee stock options
under the fair value method. The fair value of the options was estimated at the
grant date using a Black-Scholes option-pricing model. The fair value of the
options is amortized to expense over the options' vesting periods. Under the
fair value method, our

                                        72
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Net (loss) income" and "(Loss) earnings per share" would have been recorded to
the pro forma amounts indicated below:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                      -------------------------------------
                                                         2003          2002         2001
                                                      -----------   ----------   ----------
                                                      (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                                   <C>           <C>          <C>
Net (loss)income, as reported.......................   $(147,739)    $ (1,584)    $160,029
Add: Stock-based employee compensation expense
  included in reported net (loss) income, net of
  related tax effects...............................         192        1,152        1,930
Deduct: Annual stock-based employee compensation
  (benefit) expense determined based on the fair
  value for all awards, net of related tax
  effects...........................................     (20,609)      19,293       18,777
                                                       ---------     --------     --------
Pro forma net (loss)income..........................   $(126,938)    $(19,725)    $143,182
                                                       =========     ========     ========
(Loss) earnings per share:
Basic -- as reported................................   $   (3.27)    $  (0.66)    $   1.64
                                                       =========     ========     ========
Basic -- pro forma..................................   $   (2.91)    $  (0.97)    $   1.47
                                                       =========     ========     ========
Diluted -- as reported..............................   $   (3.27)    $  (0.66)    $   1.61
                                                       =========     ========     ========
Diluted -- pro forma................................   $   (2.91)    $  (0.97)    $   1.44
                                                       =========     ========     ========
Weighted-average assumptions in option valuation:
Risk-free interest rates............................         1.5%         3.7%         4.9%
Dividend yields.....................................          --          1.6%         0.2%
Stock volatility factor.............................       111.4%        92.9%        52.2%
Expected life of options (in years).................         3.7          6.0          6.0
</Table>

     The above pro forma amounts may not be representative of the effects on
reported net earnings for future years. In February 2003, we granted 303,000
shares of restricted stock totaling $0.5 million of unearned compensation, which
amortized into "Compensation expense" over the twelve month vesting period.
During 2003 we had $0.3 million in amortization expense and $0.2 million in
forfeiture benefits related to this restricted stock.

                                        73
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- ALLOWANCE FOR LOAN LOSSES

     Activity in the "Allowance for loan losses" is as follows:

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      2003        2002        2001
                                                    ---------   ---------   ---------
                                                             (IN THOUSANDS)
<S>                                                 <C>         <C>         <C>
Balance at beginning of year......................  $  90,315   $ 460,159   $ 123,123
Allowance related to assets acquired..............         --          --      14,106
Allowance related to assets transferred to the
  Metris Master Trust.............................    (34,456)   (264,297)     71,603
Provision for loan losses.........................    126,648     219,804     461,106
Principal receivables charged-off(1)..............   (141,164)   (345,785)   (235,197)
Recoveries........................................      4,149      20,434      25,418
                                                    ---------   ---------   ---------
Net loans charged-off.............................   (137,015)   (325,351)   (209,779)
                                                    ---------   ---------   ---------
Balance at end of year............................  $  45,492   $  90,315   $ 460,159
                                                    =========   =========   =========
</Table>

---------------

(1) Included in principal receivables charged-off for all periods presented is
    the effect of sales of "Credit card loans" to third parties.

     "Credit card loans" greater than 30 days contractually past due for the
years ended December 31, 2003, 2002 and 2001 were $20.3 million, $7.9 million,
and $277.8 million, respectively.

NOTE 4 -- RETAINED INTERESTS IN LOANS SECURITIZED

     Our "Credit card loans" are primarily funded through asset securitizations.
As part of the asset securitizations, credit card receivables are transferred to
the Metris Master Trust, a non-consolidated, qualifying special purpose entity
that issues asset-backed securities representing undivided interests in
receivables held in the Metris Master Trust and the right to receive future
collections of principal, interest, and fees related to those receivables. The
senior classes of these securities are sold to third-party investors. We retain
subordinated interests in the securitized receivables, including contractual
retained interests, excess transferor's interests maintained above the
contractual retained interests, an interest-only strip receivable, and spread
accounts receivable. The components of these retained interests are recorded at
their fair value.

     The following table shows the fair value of the components of the "Retained
interests in loans securitized" as of December 31, 2003 and 2002, respectively.

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                                              -------------------
                                                                2003       2002
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Contractual retained interests..............................  $542,014   $685,197
Excess transferor's interests...............................    48,775     57,447
Interest-only strip receivable..............................    16,039     13,882
Spread accounts receivable..................................   230,073     51,500
                                                              --------   --------
Retained interests in loans securitized.....................  $836,901   $808,026
                                                              ========   ========
</Table>

                                        74
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table illustrates the significant assumptions used in
estimating the fair value of retained interests as of December 31, 2003 and
2002, respectively.

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                              2003      2002
                                                              -----     -----
<S>                                                           <C>       <C>
Monthly payment rate........................................   6.7%      6.7%
Gross yield(1)..............................................  25.4%     26.0%
Annual interest expense and servicing fees..................   4.2%      4.0%
Annual gross principal default rate.........................  20.7%     21.7%
Discount rate:
  Contractual retained interests............................  16.0%     16.0%
  Excess transferor's interests.............................  16.0%     16.0%
  Interest-only strip receivable............................  30.0%     30.0%
  Spread accounts receivable................................  15.3%     16.0%
</Table>

---------------

(1) Includes expected cash flows from finance charges, late and overlimit fees,
    debt waiver premiums, and bad debt recoveries. Gross yield for purposes of
    estimating fair value does not include cash flows from interchange income or
    cash advance fees.

     At December 31, 2003, the sensitivity of the current fair value of the
retained interests to immediate 10% and 20% adverse changes are as follows:

<Table>
<Caption>
                                                         ADVERSE IMPACT ON FAIR VALUE
                                                    ---------------------------------------
                                                    10% ADVERSE CHANGE   20% ADVERSE CHANGE
                                                    ------------------   ------------------
                                                                 (IN MILLIONS)
<S>                                                 <C>                  <C>
Annual discount rate..............................        $ 22.6               $ 44.3
Monthly payment rate..............................         139.7                331.4
Gross yield.......................................         132.8                285.4
Annual interest expense and servicing fees........          21.3                 48.1
Annual gross principal default rate...............          99.3                209.4
</Table>

As the sensitivity indicates, the value of the Company's retained interests on
its balance sheet, as well as reported earnings, could differ significantly if
different assumptions or conditions prevail.

     The actual rates for loans securitized are as follows:

<Table>
<Caption>
                                                              AT DECEMBER 31,
                                                              ---------------
                                                              2003      2002
                                                              -----     -----
<S>                                                           <C>       <C>
Annual gross principal default rate.........................  20.4%     16.4%
Monthly payment rate........................................   6.8%      6.6%
Gross yield(1)..............................................  26.8%     26.5%
</Table>

---------------

(1) Includes finance charges, late and overlimit fees, debt waiver premiums,
    interchange income, cash advance fees, and bad debt recoveries, net of
    finance charge and fee charge-offs.

                                        75
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- SECURITIZATION INCOME

     The following summarizes "Securitization income" for the years ended
December 31, 2003, 2002 and 2001, respectively.

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               2003        2002        2001
                                                             ---------   ---------   --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
Loss on new securitization of receivables to the Metris
  Master Trust.............................................  $ (55,214)  $ (70,578)  $(60,574)
(Loss) gain on replenishment of receivables to the Metris
  Master Trust.............................................   (161,743)     28,706    (34,672)
Discount accretion.........................................    308,912     305,327    221,670
Change in fair value.......................................    (71,669)   (342,080)    28,069
Interest-only revenue......................................    221,331     452,268    510,806
Transaction and other costs................................    (68,250)    (50,126)   (14,899)
                                                             ---------   ---------   --------
Securitization income......................................  $ 173,367   $ 323,517   $650,400
                                                             =========   =========   ========
</Table>

NOTE 6 -- SECURITIZATION ACTIVITY

     Securitization activity for the years ended December 31, 2003 and 2002, is
as follows:

<Table>
<Caption>
                                                                    DECEMBER 31,
                                                              ------------------------
                                                                 2003         2002
                                                              ----------   -----------
                                                                   (IN THOUSANDS)
<S>                                                           <C>          <C>
Credit card loans...........................................  $  128,615   $   846,417
Receivables held in the Metris Master Trust.................   8,003,216    10,573,769
                                                              ----------   -----------
  Total managed loans.......................................  $8,131,831   $11,420,186
                                                              ==========   ===========
Managed loans more than 30-days contractually delinquent....  $  902,075   $ 1,259,949
Managed loans charged-off, net of recoveries................  $2,033,852   $ 1,840,786
</Table>

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                             -------------------------
                                                                2003          2002
                                                             -----------   -----------
                                                                  (IN THOUSANDS)
<S>                                                          <C>           <C>
Cash flow to/from the Company:
Proceeds from transfers of portfolios to the Metris Master
  Trust....................................................  $ 1,077,200   $ 2,087,097
Net proceeds from sales and repayments of securitized
  loans....................................................   (3,218,857)   (1,145,947)
Proceeds from principal receivables collections reinvested
  in revolving credit card securitizations.................    5,306,757     5,490,499
Servicing fees received....................................      174,964       192,325
Cash flows received from net excess spread.................      247,438       570,088
                                                             -----------   -----------
  Total....................................................  $ 3,587,502   $ 7,194,062
                                                             ===========   ===========
</Table>

                                        76
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- PROPERTY AND EQUIPMENT

     The carrying value of property and equipment is as follows:

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                                              -------------------
                                                                2003       2002
                                                              --------   --------
<S>                                                           <C>        <C>
Furniture and equipment.....................................  $ 36,363   $ 40,870
Computer software and equipment.............................    68,923     71,640
Buildings and land..........................................     4,604     24,143
Leasehold improvements......................................    12,638     16,389
                                                              --------   --------
  Total.....................................................  $122,528   $153,042
Less: Accumulated depreciation and amortization.............    88,848     69,211
                                                              --------   --------
  Balance at end of year....................................  $ 33,680   $ 83,831
                                                              ========   ========
</Table>

     Depreciation and amortization expense for the years ended December 31,
2003, 2002, and 2001, was $18.2 million, $25.6 million, and $24.7 million,
respectively.

NOTE 8 -- PURCHASED PORTFOLIO PREMIUM

     The carrying value of the "Purchased portfolio premium" was $17.6 million
and $64.6 million as of December 31, 2003 and 2002, net of accumulated
amortization of $136.6 million and $124.2 million, respectively. Amortization
expense for the years ended December 31, 2003, 2002, and 2001, was $25.0
million, $30.2 million, and $30.3 million, respectively. During 2003, $22.0
million of "Purchased portfolio premium" was written off due to asset sales.
"Purchased portfolio premium" is amortized based on account attrition. On a
quarterly basis, "Purchased portfolio premium" is analyzed for impairment by
comparing the expected account attrition to actual account attrition.

NOTE 9 -- PORTFOLIO ACQUISITIONS AND SALES

     On September 16, 2003, we sold approximately 160,000 credit card accounts
amounting to $590.9 million of "Credit card loans" to a third-party for cash
proceeds of $488.3 million. The sale included $144.4 million of receivables from
Direct Merchants Bank and $446.5 million of receivables from Metris Receivables,
Inc., which were held by the Metris Master Trust prior to the sale. We recorded
a loss on the sale of $72.1 million, including a write-off of "Purchased
portfolio premium" and other transaction costs. The sale was undertaken in order
to provide funding for the sale of Direct Merchants Bank's certificates of
deposit and to create additional liquidity in the Metris Master Trust. On
November 13, 2003, we sold approximately 125,000 credit card accounts amounting
to $494.3 million of "Credit card loans" to a third-party for cash proceeds of
$396.5 million. Prior to the sale, these credit card receivables were held by
the Metris Master Trust.

     During 2003, we sold two portfolios of delinquent accounts approximating
$69.0 million in receivables. Upon the decision to sell, $62.3 million of
receivables were charged-off.

     During 2002, we sold two portfolios of delinquent accounts approximating
$120 million in receivables. Upon the decision to sell, $101.5 million of the
receivables were charged off.

NOTE 10 -- CONVERTIBLE PREFERRED STOCK

     Affiliates of Thomas H. Lee Partners, L.P. ("THL Partners"), a Boston-based
investment firm, and its predecessor, Thomas H. Lee Company, hold 100% of the
outstanding shares of our Series C Perpetual Convertible Preferred Stock. The
Series C Preferred Stock has a 9% dividend payable in additional shares

                                        77
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of Series C Preferred Stock and also receives any cash dividends paid on our
common stock based on the number of shares of common stock into which the
Preferred Stock would convert on the record date of the dividend. Each share of
Series C Preferred Stock is convertible into 30 shares of common stock plus, if
converted at the option of the holder before January 1, 2004, a premium amount
designed to guarantee a portion of seven years worth of dividends at the 9%
annual rate. The premium amount would have been equal to 76.5% of those future
dividends for conversions in 2003 and would have been 54.4% of those dividends
in 2002.

     The Series C Preferred Stock is normally fully convertible into common
stock. This would mean that upon conversion of their Preferred Stock, our
Preferred Stockholders could have received 42,616,367 shares, or approximately
42.5%, of the outstanding common stock on a diluted basis as of December 31,
2003. However, the indenture that governs our 10% Senior Notes due 2004 requires
us to offer to purchase those notes in the event that such a conversion would
result in a shareholder or group (within the meaning of Rules 13d-3 and 13d-5 of
the Securities Exchange Act of 1934) obtaining 35% or more of our outstanding
voting stock. Therefore, we included a provision in the terms of our Series C
Preferred Stock that sets the maximum percentage of outstanding voting stock
that any shareholder or group, such as the affiliates of THL Partners, could
obtain while any of our 10% Notes remain outstanding at 34.9%. Accordingly, as
of December 31, 2003, the Series C Preferred Stock could have been converted
into 30,894,763 shares, or 34.9%, of our common stock on a diluted basis, with
the excess Series C Preferred Stock converting into 11,721,604 shares of
nonvoting Series D Preferred Stock. The Series D Preferred Stock automatically
converts into common stock on a share-for-share basis at the time that the
conversion will not exceed the ownership limitations described above. The terms
of our Series D Preferred Stock are essentially the same as the terms of our
common stock, except that

     - the Series D Preferred Stock has a liquidation preference of $.01 per
       share, and

     - is non-voting, except as required by law to preserve the powers,
       preferences or other rights of that class of stock.

     So long as they or their affiliates own at least 25% of the originally
issued Series C Preferred Stock (or any shares of common stock issued upon
conversion thereof), the holders of a majority of the shares of Series C
Preferred Stock are entitled to elect four of 11 directors of the Board. So long
as they or their affiliates: (a) own any shares of Series C Preferred Stock (or
any shares of common stock issued upon conversion thereof); and (b) are entitled
to elect four directors, Thomas H. Lee Equity Fund IV, L.P., which owns
approximately 85% of our outstanding Series C Preferred Stock, has the right to
appoint one of the four directors. So long as they or their affiliates own at
least 10% but less than 25% of the originally issued Series C Preferred Stock
(or any shares of common stock issued upon conversion thereof), the holders of a
majority of the shares of Series C Preferred Stock are entitled to elect one
director. The four directors who have been elected by the holders of our Series
C Preferred Stock are all affiliates of THL Partners and, through such
affiliation as well as actual ownership of Series C Preferred Stock, may be
deemed to be the beneficial owners of approximately 97% of the common stock that
would be issued upon conversion of our Series C and D Preferred Stock, both
individually and in the aggregate.

     The Series C Preferred Stock may be redeemed by us in certain circumstances
by paying 103% of the redemption price of $372.50 and any accrued dividends at
the time of redemption. We also have the option to redeem the Series C Preferred
Stock after December 9, 2008, without restriction by paying the redemption price
of $372.50 and any accrued dividends at the time of redemption.

NOTE 11 -- STOCK OPTIONS

     We provide the Metris Companies Inc. Long-Term Incentive and Stock Option
Plan, which permits a variety of stock-based grants and awards and gives us
flexibility in tailoring our long-term compensation

                                        78
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

programs. As of December 31, 2003, 8.3 million shares were available for grant.
We do not provide loans to employees for the purchase of stock or the exercise
of stock options.

     The Compensation Committee of the Board 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 ten 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 are eligible to receive nonqualified options and awards. Only
full-or part-time employees are eligible to receive ISOs. Our stock options
expire ten years from the date of grant and vest over periods ranging from one
to six years with some options vesting at 25% to 33.3% per year.

     We also issue restricted stock grants under the stock option plan. During
2003, a total of 305,600 shares were issued to various employees with an
approximate aggregate market value of $0.5 million at the time of the grant. As
of the date restricted stock is granted, deferred compensation is recorded as a
reduction of equity for the fair value of the shares granted. The deferred
compensation is amortized to compensation expense on a straight-line basis over
the vesting period.

     In prior years we issued restricted stock to our former Chairman and Chief
Executive Officer. Upon his termination, he forfeited all the restricted stock
previously granted to him. All previously recognized expense was reversed and
the related deferred compensation was added back to stockholders' equity. The
amount of compensation reversed in 2002 that had been recognized in previous
years was $3.0 million.

     We also provide the Metris Companies Inc. Non-Employee Director Stock
Option Plan, which provides up to 750,000 shares of common stock for awards of
options, subject to adjustments in certain circumstances. During 2003, 2002 and
2001, we granted 105,000, 100,000 and 89,000 options, respectively. At December
31, 2003, 81,000 shares were available for grant.

     Information regarding our stock option plans for 2003, 2002, and 2001, is
as follows:

<Table>
<Caption>
                                                         YEAR ENDED DECEMBER 31,
                                 ------------------------------------------------------------------------
                                          2003                     2002                     2001
                                 ----------------------   ----------------------   ----------------------
                                              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......................  11,729,444    $19.05     10,604,136    $19.73      9,907,062    $17.67
Options exercised..............       2,500      5.33         49,899     13.67      1,383,358     11.81
Options granted................   1,622,794      1.83      2,180,885     12.09      2,832,838     25.01
Options canceled/forfeited.....   7,522,495     17.99      1,005,678     11.45        752,406     27.01
                                 ----------               ----------               ----------
Options outstanding, end of
  year.........................   5,827,243     15.53     11,729,444     19.05     10,604,136     19.73
                                 ==========               ==========               ==========
Weighted-average fair value of
  options granted during the
  year.........................          --    $ 1.34             --    $ 8.19             --    $13.57
</Table>

                                        79
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about stock options outstanding
at December 31, 2003:

<Table>
<Caption>
                                    OPTIONS OUTSTANDING
                                 -------------------------                 OPTIONS EXERCISABLE
                                                WEIGHTED-                -----------------------
                                                 AVERAGE     WEIGHTED-     NUMBER      WEIGHTED-
                                   NUMBER       REMAINING     AVERAGE    EXERCISABLE    AVERAGE
                                 OUTSTANDING   CONTRACTUAL   EXERCISE        AT        EXERCISE
EXERCISE PRICE                   AT 12/31/03      LIFE         PRICE      12/31/03       PRICE
--------------                   -----------   -----------   ---------   -----------   ---------
<S>                              <C>           <C>           <C>         <C>           <C>
$0-$16.77                         3,209,942        7.4        $ 8.22      1,695,059     $10.50
$17.10-$24.42                     1,660,841        6.3         22.01      1,313,756      21.94
$24.67-$38.88                       956,460        7.0         28.79        633,601      28.29
                                  ---------        ---        ------      ---------     ------
                                  5,827,243        7.0         15.53      3,642,416      17.72
</Table>

 EMPLOYEE STOCK PURCHASE PLAN

     We provide the Metris Companies Inc. Employee Stock Purchase Plan ("ESPP"),
whereby eligible employees may authorize payroll deductions of the lesser of up
to 15% of their salary or $25,000 to purchase shares of our common stock. Under
the plan, shares of our common stock may be purchased at the end of each monthly
offering period at 85% of the lower of the fair market value on the first or
last day of the monthly offering period. Employees contributed $0.8 million and
$1.8 million to purchase 387,828 and 374,166 shares of common stock under the
ESPP during 2003 and 2002, respectively. We are authorized to issue up to 2.5
million shares of common stock to employees under the plan, and as of December
31, 2003, there were approximately 1.9 million shares available for future
issuance.

     We offer certain employees the Non-Qualified Employees Stock Purchase Plan
("NQ ESPP"). Eligible employees may purchase shares of our common stock at 100%
of the fair market value of common shares on the last day of the monthly
offering period. Employees contributed $0.09 million and $0.1 million to
purchase 30,024 and 27,946 shares of common stock under the NQ ESPP during 2003
and 2002, respectively. We are authorized to issue up to 0.5 million shares of
common stock to employees under the plan, and as of December 31, 2003, there
were approximately 0.5 million shares available for future issuance.

 MANAGEMENT STOCK PURCHASE PLANS

     We provide a management stock purchase plan, whereby any employee who is a
Senior Vice President level or above, excluding corporate officers designated by
the Board of Directors, who participates in the Metris Management Incentive
Bonus Plan is eligible to participate. Participants may elect to defer up to 50%
of their bonus received under the Management Bonus Plan, which is credited to a
stock purchase account as restricted stock units. We will match $1 for every $3
contributed by the participant. The participant's contributions are vested
immediately and our matching contributions vest after three years. During 2003,
employees contributed $6,750 to purchase 1,502 restricted stock units under the
plan. The restricted stock units convert to common stock when distributed from
the plan. No contributions were made to the plan during 2002. The restricted
stock units convert to common stock when distributed from the plans. We are
authorized to issue up to 450,000 shares of common stock to employees under the
plans, and as of December 31, 2003, approximately 287,359 of the authorized
shares were available for future issuance.

     We provided an additional management stock purchase plan, whereby officers
designated by the Board of Directors, who participate in the Metris Annual
Incentive Bonus Plan for Designated Corporate Officers were eligible to
participate. Participants elected to defer up to 50% of their bonus received
under the Management Bonus Plan, which was credited to a stock purchase account
as restricted stock units. We matched $1 for every $3 contributed by the
participant. The participant's contributions were vested

                                        80
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

immediately and our matching contributions vest after three years. No
contributions were made to the plan during 2003 or 2002. The restricted stock
units convert to common stock when distributed from the plan. This plan
terminated on December 31, 2003.

NOTE 12 -- EMPLOYEE BENEFIT PLANS

     We offer a defined contribution plan that is intended to qualify under
section 401(k) of the Internal Revenue Code. The 401(k) Plan provides retirement
benefits for eligible employees. Eligible employees may elect to contribute to
the 401(k) Plan, and we match a portion of employee contributions and make
discretionary contributions based upon our financial performance. For the years
ended December 31, 2003, 2002, and 2001, we contributed $3.3 million, $2.6
million and $2.0 million to the 401(k) Plan, respectively.

     The Company also offered a Non-Qualified Deferred Compensation Plan for a
select group of management or highly compensated employees. The plan provided
saving and investment opportunities to those individuals who elected to defer a
portion of their salary. The Company matched a portion of the employee
contribution and made discretionary contributions based on the Company's
financial performance. We contributed $0.4 million and $0.3 million to the plan
for the years ended December 31, 2002 and 2001, respectively.

     During 2003, the Non-Qualified Deferred Compensation Plan was discontinued
and all vested balances were distributed to participants.

 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

     Our Supplemental Executive Retirement Plan ("SERP") provides officers and
other members of senior management with supplemental retirement benefits in
excess of limits imposed on qualified plans by federal tax law. The SERP is an
account balance plan to which we will make annual contributions targeted to
provide 40%-60% of the average of the participant's final three years of salary
and bonus with us. These benefits will be paid in 15 annual installments
beginning the year after they become eligible to receive benefits. Participants
are eligible to receive benefits upon leaving our employment if they are at
least 65 years of age or at least age 55 with five years of plan participation,
if a change of control occurs or in the event of death. We recognized $3.4
million, $0.9 million, and $0.7 million of expense in 2003, 2002, and 2001,
respectively, related to the SERP. Our liability was $7.1 million and $3.8
million at December 31, 2003 and 2002, respectively, for future payments under
this plan. We calculate this expense and liability based on actuarial
assumptions regarding years of participation, future investment returns and
participants continuing in the SERP until age 65.

                                        81
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13 -- INCOME TAXES

     The components of the (benefit) expense for income taxes consisted of the
following:

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2003       2002       2001
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Current:
  Federal............................................  $(93,725)  $(28,893)  $ 63,865
  State..............................................       557        138      6,381
                                                       --------   --------   --------
                                                        (93,168)   (28,755)    70,246
Deferred:
  Federal............................................    22,940     29,840     41,445
  State..............................................       702        782      1,969
                                                       --------   --------   --------
                                                         23,642     30,622     43,414
Total................................................  $(69,526)  $  1,867   $113,660
                                                       ========   ========   ========
</Table>

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

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                              2003      2002     2001
                                                              -----    ------    -----
<S>                                                           <C>      <C>       <C>
Statutory federal income tax rate...........................  35.0%     35.0%    35.0%
State income taxes, net of federal benefit..................  (0.4)    211.3      1.9
Valuation allowance.........................................  (1.1)       --       --
Other, net..................................................  (1.5)    413.4      2.6
                                                              ----     -----     ----
Effective income tax rate...................................  32.0%    659.7%    39.5%
                                                              ====     =====     ====
</Table>

     The 2002 effective income tax rate is high relative to statutory rates
primarily due to the effect of nondeductible expenses, minimum state income
taxes, and low pre-tax income.

                                        82
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Our deferred tax assets and liabilities are as follows:

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                                              -------------------
                                                                2003       2002
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred income tax assets resulting from future deductible
  and taxable temporary differences:
Allowance for loan losses and retained interests fair value
  adjustments...............................................  $122,852   $172,299
Intangibles.................................................    30,343     31,635
Net operating loss and credit carry forwards................    28,200         --
Deferred revenues...........................................     8,730     59,042
Other.......................................................    23,639     36,508
Valuation allowance.........................................    (2,427)        --
                                                              --------   --------
  Total deferred tax assets.................................  $211,337   $299,484
Deferred income tax liabilities resulting from future
  taxable and deductible temporary differences:
Accrued interest on credit card loans.......................   194,766    207,984
Deferred marketing costs....................................     3,034     35,689
Other.......................................................    16,354     34,986
                                                              --------   --------
  Total deferred tax liabilities............................   214,154    278,659
                                                              --------   --------
  Net deferred tax (liabilities) assets.....................  $ (2,817)  $ 20,825
                                                              ========   ========
</Table>

     During 2003, the Company recorded a $2.4 million valuation allowance
against its deferred tax assets due to uncertainties related to their
realization. We believe, based on our operating earnings in prior years,
expected reversal of taxable temporary differences, and to a lesser degree,
reliance on future earnings, the remaining deferred tax assets are fully
realizable.

     In the fourth quarter of 2003, the Internal Revenue Service ("IRS")
examination team submitted a request for a Technical Advice Memorandum ("TAM")
to its Washington, D.C. National Office regarding the Company's treatment of
certain credit card fees as original issue discount ("OID"). With this
submission, the examination team has effectively withdrawn its 2002 proposed
adjustment for returns filed through December 31, 1998. The request for a TAM
covers tax returns filed through December 31, 2001. Although these fees are
primarily reported as income when billed for financial reporting purposes, we
believe the fees constitute OID and must be deferred and amortized over the life
of the underlying credit card loans for tax purposes. Cumulatively through
December 31, 2001, the Company had deferred approximately $210 million in
federal income tax under the OID rules. An assessment could ultimately require
the Company to pay up to this amount of federal tax plus state taxes and related
interest.

     The Company believes its treatment of these fees is appropriate and
continues to work with the IRS to resolve this matter. The Company's position is
consistent with that of numerous other U.S. credit card issuers. While both the
timing and amount of the final resolution are uncertain, we do not expect any
additional tax to be paid over the next twelve months.

NOTE 14 -- STOCKHOLDERS' EQUITY

     During the years ended December 31, 2003 and 2002, we paid cash dividends
of $0 and $3.7 million. Under our credit facility agreement we can not make
dividend payments that exceed either $.01 per share of total shares and options
outstanding stock or $1.0 million per quarter.

                                        83
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Upon our termination of our former Chairman and Chief Executive Officer in
December 2002, he forfeited 540,029 shares of restricted stock. As a result,
$4.8 million of deferred compensation and common stock was added back to
stockholders' equity.

NOTE 15 -- RELATED PARTY TRANSACTIONS

     In the ordinary course of business, our executive officers may have credit
card loans issued by us. Pursuant to our 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 May 7, 1999 we entered into a loan agreement with our former Chairman
and Chief Executive Officer, Ronald N. Zebeck. The loan's original and current
principal balance is $5 million. The loan is unsecured and bears interest at a
rate of 6.25% per annum. Mr. Zebeck was terminated effective December 15, 2002.

     On January 23, 2004, a complaint was filed in Hennepin County District
Court in Minneapolis, Minnesota, against Metris, certain members of its board of
directors and a number of other entities, by Mr. Zebeck. On February 1, 2004,
defendants filed an answer in which they denied the allegations in the
complaint, and MCI filed counterclaims against Mr. Zebeck seeking a declaratory
judgment against Mr. Zebeck for the principal amount of the loan made by MCI in
1999, plus interest.

NOTE 16 -- COMMITMENTS AND CONTINGENCIES

     Commitments to extend credit to consumers represent the unused credit
limits on open credit card accounts. These commitments were $8.0 billion and $12
billion as of December 31, 2003 and 2002, respectively. While these amounts
represent the total lines of credit available to our customers, we have not
experienced and do not anticipate that all of our customers will exercise their
entire available line at any given point in time. We also have the right to
increase, reduce, cancel, alter or amend the terms of these available lines of
credit at any time.

     We lease 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 these operating leases for the years ended December 31, 2003,
2002, and 2001, was $11.5 million, $23.8 million and $21.8 million,
respectively. In 2003, 2002, and 2001 we recognized $14.1, $6.4, and $0 million,
respectively, of expense due to excess capacity related to certain operating
leases.

     Future minimum lease commitments at December 31, 2003, under cancelable and
non-cancelable operating leases are as follows:

<Table>
<S>                                                            <C>
2004........................................................   $13,373
2005........................................................     8,100
2006........................................................     7,037
2007........................................................     6,456
2008........................................................     5,663
Thereafter..................................................    13,167
                                                               -------
  Total minimum lease payments..............................   $53,796
                                                               =======
</Table>

     We are a party to various legal proceedings resulting from the ordinary
business activities relating to our operations.

                                        84
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In September 2002, a shareholder lawsuit was filed in the United States
District Court for the District of Minnesota, naming MCI, Ronald N. Zebeck and
David D. Wesselink as defendants. The plaintiffs seek to represent a class of
purchasers of MCI common stock between November 5, 2001 and July 17, 2002. The
lawsuit seeks damages in an unspecified amount. The complaint alleges that
defendants violated the federal securities laws when MCI failed to disclose the
existence of the OCC Report of Examination until April 17, 2002. We believe the
lawsuit is without merit.

     Our activities as a credit card lender are subject to regular review and
examination by federal regulators to assess compliance with various federal
consumer protection laws. Regulators are authorized to impose penalties for
violations of these laws and, in certain cases, to order us to pay restitution
to injured cardholders.

     On May 3, 2001, Direct Merchants Bank entered into a consent order with the
OCC. The consent order required us to pay approximately $3.2 million in
restitution to approximately 62,000 credit card customers who applied for and
received a credit card in connection with a series of limited test marketing
campaigns from March 1999 to June 2000. Under the terms of the consent order, we
made no admission or agreement on the merits of the OCC's assertions. The
restitution as required by the OCC consent order was paid and is reflected in
our December 31, 2001 financial statements. In October 2002, the OCC advised
that Direct Merchants Bank is in full compliance with the consent order.
Furthermore, the OCC made a determination not to assess civil money penalties.

     On December 11, 2003, we entered into a Modified Operating Agreement with
the OCC, which replaced the original Operating Agreement dated March 18, 2003.
The Modified Operating Agreement requires, among other things, the following:

     - The Bank must maintain capital at the dollar level reported on the
       September 30, 2003, Call Report, unless otherwise approved by the OCC.
       The Bank may continue to pay dividends in accordance with applicable
       statutory and regulatory requirements, provided capital remains at the
       aforementioned level.

     - The Bank shall maintain, at a minimum, liquid assets of not less than $35
       million or 100% of the average highest daily funding requirement for
       managed receivables.

     - The Bank is required to continue to comply with the terms of the
       Liquidity Reserve Deposit Agreement.

     - The Bank and MCI are required to comply with the terms of the Capital
       Assurance and Liquidity Maintenance Agreement.

     If the OCC were to conclude that the Bank failed to adhere to any provision
of the Modified Operating Agreement, the OCC could pursue various enforcement
options.

NOTE 17 -- CAPITAL REQUIREMENTS AND RESTRICTED PAYMENTS

     In the normal course of business, we enter into agreements, or are 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 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 us and our affiliates. Such restrictions limit Direct Merchants
Bank's ability to lend to us and our affiliates. Additionally, Direct Merchants
Bank is limited in its ability to declare dividends to us and our affiliates in
accordance with the national bank dividend rules and the Modified Operating
Agreement.

                                        85
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the OCC. At December 31, 2003 and 2002, 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.

     We are also bound by restrictions set forth in the indentures related to
the Senior Notes dated November 7, 1997, and July 15, 1999. Pursuant to those
indentures, we may not make dividend payments in the event of a default or if
all such restricted payments would exceed 25% of our aggregate cumulative "Net
income." Furthermore, our senior secured credit agreement limits payments of
quarterly dividends to $.01 per share.

NOTE 18 -- 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. We are 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, 2003 or 2002.

     We target our consumer lending products primarily to middle 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.

     The banking regulators have issued guidelines to further segregate a credit
card issuer's loan portfolio between subprime loans (loans to consumers who have
a FICO credit score of 660 or less) and prime loans (loans to consumers with
FICO scores in excess of 660). The banking regulators deem subprime loans to
have higher credit risk. Subprime receivables were $83.5 million or 65.7% of the
credit card portfolio as of December 31, 2003, compared to $447.3 million or
52.9% of the credit card portfolio as of December 31, 2002.

NOTE 19 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

     We have estimated the fair value of our 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 our consolidated balance sheets, for which it is practicable to
estimate fair value. The fair value of an asset is the amount at which the asset
could be bought or sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale. 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 our various lines of business) are
not considered financial instruments and, accordingly, are not valued for
purposes of this disclosure. 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 our 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. These 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 our 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.

                                        86
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

  CASH AND CASH EQUIVALENTS AND LIQUIDITY RESERVE DEPOSIT

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

  NET CREDIT CARD LOANS

     "Credit card loans" are originated with variable rates of interest that
adjust with changing market interest rates. Thus, the carrying value of the
"Credit card loans," less the "Allowance for loan losses," approximates fair
value. This valuation does not include the value that relates to estimated cash
flows generated from new loans from existing cardholders 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.

  RETAINED INTERESTS AND OTHER SECURITIZATION RELATED ASSETS

     The fair value of the "Retained interests in loans securitized" and other
securitization related assets are estimated by discounting the expected future
cash flows from the Metris Master Trust and each of the conduits at rates, which
we believe to be consistent with those that would be used by an independent
third party. However, because there is no active market for the "Retained
interests in loans securitized," 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 are limited to the securitized receivables that exist at
year end and do not reflect the value associated with future receivables
generated by accountholder activity.

  INTEREST RATE CAPS

     We enter into interest rate cap transactions related to most series of
securities issued from the Metris Master Trust. We mark these assets to market
based on third-party and counter party valuations, and as such carrying value
approximates fair value.

  DEBT

     We make short-term borrowings with variable rates of interest that adjust
with changing market interest rates. Thus, carrying value approximates fair
value.

     We obtain the fair value of long-term debt from quoted market yields, when
available.

  DEPOSITS

     The fair value for fixed rate certificates of deposit are estimated based
on quoted market prices of comparable instruments.

                                        87
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The estimated fair values of our financial instruments are summarized as
follows:

<Table>
<Caption>
                                                            AT DECEMBER 31,
                                             ---------------------------------------------
                                                     2003                    2002
                                             ---------------------   ---------------------
                                             CARRYING   ESTIMATED    CARRYING   ESTIMATED
                                              AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
                                             --------   ----------   --------   ----------
                                                            (IN THOUSANDS)
<S>                                          <C>        <C>          <C>        <C>
Cash and cash equivalents..................  $178,485    $178,485    $580,232    $580,232
Liquidity reserve deposit..................    80,158      80,158          --          --
Credit card loans, net.....................    83,123      83,123     756,102     756,102
Retained interests in loans securitized and
  other receivables due from credit card
  securitizations, net.....................   917,615     917,615     918,497     918,497
Interest rate caps.........................     9,787       9,787      12,711      12,711
Debt.......................................   350,448     274,849     357,649     341,580
Deposits...................................     6,262       6,262     892,754     911,141
</Table>

NOTE 20 -- DERIVATIVE FINANCIAL INSTRUMENTS

     We use derivative financial instruments for the purpose of managing our
exposure to interest rate risks.

     MRI enters into interest rate cap transactions related to most asset-backed
securitization transactions. MRI assigns all of its right, title, and interest
under the interest rate cap agreement to the Trustee of the Metris Master Trust
for the benefit of the holders of securities issued by the Metris Master Trust.
The purpose of the interest rate cap is to effectively limit the interest
exposure of the Metris Master Trust for each individual series to a maximum
based upon the LIBOR rate.

     The interest rate caps do not meet the criteria for hedge accounting
treatment. The change in the fair value of the caps is included in the
consolidated income statement under "Securitization income." We recognized
expense of $5.3 million and $22.6 million from the mark-to-market adjustments on
the interest rate caps for the years ended December 31, 2003 and 2002,
respectively.

     We entered into interest rate swap transactions through Direct Merchants
Bank. The swaps were used to convert a portion of the fixed rate certificates of
deposit ("CDs") to variable rate CDs, and thus hedge the fair market value of
the CDs. The CDs expose us to variability in the fair value in rising or
declining interest rate environments. By converting the fixed payment to a
variable payment, the interest rate swaps reduce the variability of the fair
market value of the CDs.

     As of the adoption of SFAS No. 133 or their inception, all swaps were
designated as fair value hedges. Changes in the value of the swaps are
recognized in income, in the period in which the change in value occurred. In
addition, changes in the value of the CDs, to the extent they are attributable
to the risk being hedged, are simultaneously recognized in income. Any
difference between the fair value change in the swaps versus the fair value
change in the related hedged CDs was considered to be the "ineffective" portion
of the hedge. The ineffective portion of the swap is recorded as an increase or
decrease in income.

     During 2002 and 2001, all swaps were sold. At the date of sale, the swap
and the related CDs were valued, and a gain or loss was recognized for the
difference between the change in fair value of the swap and the change in fair
value of the CDs. The cumulative amount recorded as an adjustment to the value
of the CDs was being amortized over the life of the CDs as an adjustment to
interest expense. This amount was written off by the third quarter of 2003 at
the time of the certificates of deposit sale.

                                        88
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Prior to SFAS No. 133, we amortized the costs of interest rate contracts on
a straight-line basis over the expected life of the contract. The adoption of
SFAS No. 133 resulted in a one-time, non-cash, after-tax charge to earnings of
$14.2 million, reflected as a "Cumulative effect of accounting change" in the
consolidated statements of income for the year ended December 31, 2001.

NOTE 21 -- SALE OF MEMBERSHIP CLUB AND WARRANTY BUSINESS

     On July 29, 2003, we sold our membership club and warranty business to CPP
Group, a privately-owned leading provider of assistance products and services
throughout Europe, for cash proceeds of $45 million. We recorded a gain on the
sale of $84.8 million. Included in the gain was the recognition of $90.8 million
of "Deferred income" and the write-off of $45.4 million of deferred costs, which
are included in "Other assets." As of December 31, 2003, we have $7.3 million of
"Deferred income", $1.9 million in deferred costs, and $0.7 million of "Accrued
expenses and other liabilities" on our balance sheet related to certain
obligations associated with the sold business, which will expire throughout
2004.

NOTE 22 -- ASSET IMPAIRMENTS, LEASE WRITE-OFFS AND SEVERANCE

     During 2003, we recorded $8.3 million for workforce reductions,
approximately $20.8 million in write-downs of excess property, equipment, and
operating leases, a $22.0 million write-off of purchased portfolio premium on
"Credit card loans" sold in the third and fourth quarters of 2003, and a $5.1
million write-off of commitment fees related to a backup financing facility
entered into in March of 2003, with Thomas H. Lee Equity Fund IV, L.P. In 2002,
we recorded a write-down of $10.6 million for portfolios of charged-off loans
purchased in 2001 and 2000, a $17.1 million write-down of excess property,
equipment, operating leases, and the then pending sale of our Arizona facility.

NOTE 23 -- DEBT AND DEPOSITS

     A $125 million senior secured loan was issued pursuant to an Amended and
Restated Senior Secured Credit Agreement dated as of June 18, 2003, as amended,
and effective as of June 27, 2003 (the "Credit Agreement"). The loan matures
June 27, 2004, and carries a fixed interest rate of 12% plus a monthly
performance payment, which is indexed to the monthly excess spread in the Metris
Master Trust. The funds were primarily used to pay off a $100 million term loan
that matured in June 2003. The terms of the Credit Agreement under which the
loan was issued require mandatory prepayment of a portion of the principal if
the Company receives funds due to the sale of certain Company assets. During
2003 we were required to make $23.3 million in principal repayments from the
proceeds of the sale of our membership club and warranty business and proceeds
from the sale of office equipment. At December 31, 2003, we had outstanding
borrowings of $101.7 million under the Credit Agreement with an effective
weighted average interest rate of 27.6%. Since year-end we have made additional
principal pre-payments of approximately $6.4 million. We are bound by certain
covenants and as of December 31, 2003 and 2002, we were in compliance with all
financial covenants under the Credit Agreement. In addition, under that
agreement dividends declared and paid by Direct Merchants Bank indirectly to MCI
are limited to the Bank's earnings not to exceed $20 million per calendar
quarter.

     As of December 31, 2003, we had $150.0 million of 10.125% Senior Notes due
2006 outstanding. The carrying value of these Senior Notes is $148.0 million as
of December 31, 2003. These Senior Notes were issued at a discount of $6.3
million to yield an effective interest rate of 11%.

     The Senior Notes due 2004 and 2006 and the Senior Secured Credit Agreement
are unconditionally guaranteed on a senior basis, jointly and severally, by
Metris Direct, Inc., magnUS Services, Inc. (formerly Metris Recovery Services,
Inc.), Crescent Ridge Aviation, Inc., Metris Financial Services, Inc., Metris
Card Services, LLC and Metris Credit Card Services, Inc. (the "Guarantors"). Any
subsidiaries

                                        89
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

we form in the future may provide a guarantee of this indebtedness. The
guarantee is an unsecured obligation of the Guarantors and ranks equally with
all existing and future unsubordinated indebtedness.

     We also have $100 million of 10% Senior Notes due 2004 outstanding with
terms and conditions substantially similar to the Senior Notes due 2006.

     During third quarter 2003, we prepaid a $10.0 million 9.19% term loan that
was due 2005 associated with a sale of certain Company assets. Subsequent to
December 31, 2003, we redeemed all notes and prepaid all interest and principal
amounts of approximately $1.0 million due under our Renewable Unsecured
Subordinated Note Program. The redeemed notes were originally issued with terms
ranging from two to ten years. There are currently no outstanding notes under
this program and the program has been terminated.

     Our debt outstanding as of December 31, 2003, matures as follows:

<Table>
<S>                                                            <C>
2004........................................................   $202,254
2005........................................................        127
2006........................................................    147,769
2007........................................................         79
2008........................................................         23
Thereafter..................................................        196
                                                               --------
  Total debt outstanding....................................    350,448
                                                               ========
</Table>

     The Bank has established deposit accounts related to its secured card
product. These accounts do not have a set maturity date and pay a fixed interest
rate of 2%. As of December 31, 2003 and 2002, $6.3 million and $6.4 million
secured card deposits were outstanding, respectively.

     On September 30, 2003, we sold all of the brokered and retail jumbo
certificates of deposit issued by Direct Merchants Bank. The face value of the
"Deposits" sold was $559.3 million. We recorded a loss on that sale of $33.0
million. Upon completion of the sale, we were in full compliance with a request
by the OCC to eliminate the deposit risk to the FDIC.

     We have various indirect subsidiaries, which do not guarantee Company debt.
We have prepared condensed consolidating financial statements of the Company,
which follow the detail Guarantor subsidiaries and the non-guarantor
subsidiaries for purposes of complying with SEC reporting requirements. Separate
financial statements of the guaranteeing subsidiaries and the non-guaranteeing
subsidiaries are not presented because we have determined that the subsidiaries
financial information would not be material to investors.

                                        90
<PAGE>

                             METRIS COMPANIES INC.

                   SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
                               DECEMBER 31, 2003

<Table>
<Caption>
                                    METRIS                        NON-
                                  COMPANIES     GUARANTOR      GUARANTOR
                                     INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                  ----------   ------------   ------------   ------------   ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                               <C>          <C>            <C>            <C>            <C>
ASSETS:
Cash and cash equivalents.......  $   (1,081)   $    3,034     $  176,532    $        --     $  178,485
Liquidity reserve deposit.......          --            --         80,158             --         80,158
Net credit card loans...........      15,203            --         67,920             --         83,123
Retained interests in loans
  securitized...................          --            --        822,900         14,001        836,901
Property and equipment, net.....          --        33,663             17             --         33,680
Purchased portfolio premium.....          80            --         17,481             --         17,561
Other receivables due from
  credit card securitizations,
  net...........................           5            --         80,709             --         80,714
Other assets....................      21,242        30,934         54,917        (25,319)        81,774
Investment in subsidiaries......   1,296,461       878,810             --     (2,175,271)            --
                                  ----------    ----------     ----------    -----------     ----------
TOTAL ASSETS....................  $1,331,910    $  946,441     $1,300,634    $(2,186,589)    $1,392,396
                                  ==========    ==========     ==========    ===========     ==========

LIABILITIES:
Deposits........................  $   (1,000)   $       --     $    7,262    $        --     $    6,262
Debt............................     384,684      (413,842)       422,606        (43,000)       350,448
Accounts payable................         489        15,406         16,805           (303)        32,397
Deferred income.................          --            --         18,060             --         18,060
Accrued expenses and other
  liabilities...................      38,544        48,416        (42,909)        31,985         76,036
                                  ----------    ----------     ----------    -----------     ----------
TOTAL LIABILITIES...............     422,717      (350,020)       421,824        (11,318)       483,203
                                  ----------    ----------     ----------    -----------     ----------
TOTAL STOCKHOLDERS' EQUITY......     909,193     1,296,461        878,810     (2,175,271)       909,193
                                  ----------    ----------     ----------    -----------     ----------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY..........  $1,331,910    $  946,441     $1,300,634    $(2,186,589)    $1,392,396
                                  ==========    ==========     ==========    ===========     ==========
</Table>

                                        91
<PAGE>

                             METRIS COMPANIES INC.

                   SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
                               DECEMBER 31, 2002

<Table>
<Caption>
                                    METRIS                        NON-
                                  COMPANIES     GUARANTOR      GUARANTOR
                                     INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                  ----------   ------------   ------------   ------------   ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                               <C>          <C>            <C>            <C>            <C>
ASSETS:
Cash and cash equivalents.......  $   (3,795)   $    8,109     $  575,918    $        --     $  580,232
Net credit card loans...........       3,813            --        752,289             --        756,102
Retained interests in loans
  securitized...................          --            --        808,026             --        808,026
Property and equipment, net.....          --        63,395         20,436             --         83,831
Purchased portfolio premium.....         128            --         64,451             --         64,579
Other receivables due from
  credit card securitizations,
  net...........................          13            --        110,458             --        110,471
Other assets....................      10,160        44,252        180,591        (47,852)       187,151
Investment in subsidiaries......   1,594,352     1,549,307             --     (3,143,659)            --
                                  ----------    ----------     ----------    -----------     ----------
TOTAL ASSETS....................  $1,604,671    $1,665,063     $2,512,169    $(3,191,511)    $2,590,392
                                  ==========    ==========     ==========    ===========     ==========

LIABILITIES:
Deposits........................  $   (1,000)   $       --     $  893,754    $        --     $  892,754
Debt............................     391,228         9,421             --        (43,000)       357,649
Accounts payable................          71        20,683         38,949         (6,114)        53,589
Deferred income.................          --        16,681        129,978         (3,511)       143,148
Accrued expenses and other
  liabilities...................     159,699        23,926        (99,819)         4,773         88,579
                                  ----------    ----------     ----------    -----------     ----------
TOTAL LIABILITIES...............     549,998        70,711        962,862        (47,852)     1,535,719
                                  ----------    ----------     ----------    -----------     ----------
TOTAL STOCKHOLDERS' EQUITY......   1,054,673     1,594,352      1,549,307     (3,143,659)     1,054,673
                                  ----------    ----------     ----------    -----------     ----------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY..........  $1,604,671    $1,665,063     $2,512,169    $(3,191,511)    $2,590,392
                                  ==========    ==========     ==========    ===========     ==========
</Table>

                                        92
<PAGE>

                             METRIS COMPANIES INC.

                SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME
                          YEAR ENDED DECEMBER 31, 2003

<Table>
<Caption>
                                      METRIS                        NON-
                                     COMPANIES    GUARANTOR      GUARANTOR
                                       INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                     ---------   ------------   ------------   ------------   ------------
                                                            (DOLLARS IN THOUSANDS)
<S>                                  <C>         <C>            <C>            <C>            <C>
NET INTEREST (EXPENSE) INCOME......  $ (45,265)   $   4,873      $  56,501      $      --      $  16,109
Provision for loan losses..........      2,568           --        124,182           (102)       126,648
                                     ---------    ---------      ---------      ---------      ---------
NET INTEREST (EXPENSE) INCOME AFTER
  PROVISION FOR LOAN LOSSES........    (47,833)       4,873        (67,681)           102       (110,539)
                                     ---------    ---------      ---------      ---------      ---------
OTHER OPERATING INCOME:
Securitization (expense) income....       (158)          --        174,976         (1,451)       173,367
Servicing income on
  securitized/sold receivables.....         --           --        176,627             --        176,627
Credit card fees, interchange and
  other credit card income
  (expense)........................      2,535       66,153         89,383        (78,579)        79,492
Enhancement services revenue.......         --           --        107,930             --        107,930
Loss on sale of credit card
  loans............................         --           --       (117,183)            --       (117,183)
(Loss) gain on sale of membership
  club and warranty business.......       (624)      28,011         45,787         11,613         84,787
Intercompany allocations...........      2,375      243,873         22,520       (268,768)            --
                                     ---------    ---------      ---------      ---------      ---------
                                         4,128      338,037        500,040       (337,185)       505,020
OTHER OPERATING EXPENSE:
Credit card account and other
  product solicitation and
  marketing expenses...............         --       50,144        101,137        (57,932)        93,349
Employee compensation..............         --      170,597          4,942             --        175,539
Data processing services and
  communications...................         18      (78,471)       161,584        (14,416)        68,715
Credit protection claims expense...         --           --         30,882             --         30,882
Occupancy and equipment............         --           --         36,564             --         36,564
Purchased portfolio premium
  amortization.....................         48           --         28,457         (3,505)        25,000
Mastercard/Visa assessment and
  fees.............................         --           --          9,243             --          9,243
Credit card fraud losses...........         51           --          3,770             --          3,821
Asset impairments, lease write-offs
  and severance....................         --           --         56,222             --         56,222
Loss on sale of deposits...........         --           --         32,963             --         32,963
Other..............................      2,863      124,418        (30,442)       (17,391)        79,448
Intercompany allocations...........         90       80,690        187,988       (268,768)            --
                                     ---------    ---------      ---------      ---------      ---------
                                         3,070      347,378        623,310       (362,012)       611,746
LOSS BEFORE INCOME TAX BENEFIT AND
  EQUITY IN (LOSS) INCOME OF
  SUBSIDIARIES.....................    (46,775)      (4,468)      (190,951)        24,929       (217,265)
Income tax (benefit) expense.......    (14,969)      (6,791)       (53,256)         5,490        (69,526)
Equity in loss of subsidiaries.....   (115,933)    (130,400)            --        246,333             --
                                     ---------    ---------      ---------      ---------      ---------
NET (LOSS) INCOME..................  $(147,739)   $(128,077)     $(137,695)     $ 265,772      $(147,739)
                                     =========    =========      =========      =========      =========
</Table>

                                        93
<PAGE>

                             METRIS COMPANIES INC.

                SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME
                          YEAR ENDED DECEMBER 31, 2002

<Table>
<Caption>
                                          METRIS                        NON-
                                         COMPANIES    GUARANTOR      GUARANTOR
                                           INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                         ---------   ------------   ------------   ------------   ------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                      <C>         <C>            <C>            <C>            <C>
NET INTEREST (EXPENSE) INCOME..........  $(30,584)     $   (389)      $156,859      $      --       $125,886
Provision for loan losses..............      (603)           --        220,305            102        219,804
                                         --------      --------       --------      ---------       --------
NET INTEREST EXPENSE AFTER PROVISION
  FOR LOAN LOSSES......................   (29,981)         (389)       (63,446)          (102)       (93,918)
                                         --------      --------       --------      ---------       --------
OTHER OPERATING INCOME:
Securitization income(expense).........     3,168            --        324,872         (4,523)       323,517
Servicing income on securitized/sold
  receivables..........................        --            --        195,214             --        195,214
Credit card fees, interchange and other
  credit card income (expense).........     1,748        94,941        166,747       (100,262)       163,174
Enhancement services revenue
  (expense)............................        --        58,664        154,519        (59,667)       153,516
Intercompany allocations...............       166       266,604         45,742       (312,512)            --
                                         --------      --------       --------      ---------       --------
                                            5,082       420,209        887,094       (476,964)       835,421
OTHER OPERATING EXPENSE:
Credit card account and other product
  solicitation and marketing
  expenses.............................        16       112,249        181,196       (120,192)       173,269
Employee compensation..................    (1,101)      183,701         28,226             --        210,826
Data processing services and
  communications.......................        52       (92,080)       184,702         (8,800)        83,874
Credit protection claims expense.......        --         1,334         43,216             --         44,550
Occupancy and equipment................        --            --         48,013             --         48,013
Purchased portfolio premium
  amortization.........................       119            --         33,727         (3,626)        30,220
Mastercard/Visa assessment and fees....        --            --         13,869             --         13,869
Credit card fraud losses...............       177            --          8,470             --          8,647
Asset impairments, lease write-offs and
  severance............................        --            --         27,736             --         27,736
Other..................................     7,037       143,488        (40,918)        (9,391)       100,216
Intercompany allocations...............        80        92,814        219,618       (312,512)            --
                                         --------      --------       --------      ---------       --------
                                            6,380       441,506        747,855       (454,521)       741,220
(LOSS) INCOME BEFORE INCOME TAXES AND
  EQUITY IN INCOME OF SUBSIDIARIES.....   (31,279)      (21,686)        75,793        (22,545)           283
Income tax (benefit) expense...........    (9,377)      (20,107)        38,110         (6,759)         1,867
Equity in income (loss) of
  subsidiaries.........................    20,318        37,683             --        (58,001)            --
                                         --------      --------       --------      ---------       --------
NET (LOSS) INCOME......................  $ (1,584)     $ 36,104       $ 37,683      $ (73,787)      $ (1,584)
                                         ========      ========       ========      =========       ========
</Table>

                                        94
<PAGE>

                             METRIS COMPANIES INC.

                SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME
                          YEAR ENDED DECEMBER 31, 2001

<Table>
<Caption>
                                         METRIS                        NON-
                                        COMPANIES    GUARANTOR      GUARANTOR
                                          INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                        ---------   ------------   ------------   ------------   ------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                     <C>         <C>            <C>            <C>            <C>
NET INTEREST INCOME (EXPENSE).........  $  8,579      $ (8,437)     $  202,719     $      --      $  202,861
Provision for loan losses.............     1,393            --         459,713            --         461,106
                                        --------      --------      ----------     ---------      ----------
NET INTEREST INCOME (EXPENSE) AFTER
  PROVISION FOR LOAN LOSSES...........     7,186        (8,437)       (256,994)           --        (258,245)
                                        --------      --------      ----------     ---------      ----------
OTHER OPERATING INCOME:
Securitization income.................        67            --         650,333            --         650,400
Servicing income on securitized/sold
  receivables.........................        --            --         159,074            --         159,074
Credit card fees, interchange and
  other credit card income
  (expense)...........................     2,890        31,507         318,718       (31,067)        322,048
Enhancement services revenues.........        --        57,836          84,086            --         141,922
Intercompany allocations..............       152       229,643          34,807      (264,602)             --
                                        --------      --------      ----------     ---------      ----------
                                           3,109       318,986       1,247,018      (295,669)      1,273,444
OTHER OPERATING EXPENSE:
Credit card account and other product
  solicitation and marketing
  expenses............................        --        12,869         175,140            --         188,009
Employee compensation.................     1,101       197,646          26,716            --         225,463
Data processing services and
  communications......................         3       (90,538)        198,876       (18,119)         90,222
Credit protection claims expense......        --           877          29,580            --          30,457
Credit card fraud losses..............         1             5           9,062            --           9,068
Purchased portfolio premium
  amortization........................        --            --          32,116        (1,839)         30,277
Occupancy and equipment...............        --            --          47,572            --          47,572
Mastercard/Visa assessment and fees...        --            --          16,522            --          16,522
Other.................................      (392)      127,304         (34,366)       (2,852)         89,694
Intercompany allocations..............       127        57,355         207,120      (264,602)             --
                                        --------      --------      ----------     ---------      ----------
                                             840       305,518         708,338      (287,412)        727,284
INCOME BEFORE INCOME TAXES, EQUITY IN
  INCOME OF SUBSIDIARIES, AND
  CUMULATIVE EFFECT OF ACCOUNTING
  CHANGE..............................     9,455         5,031         281,686        (8,257)        287,915
Income tax expense (benefit)..........     3,646         1,168         111,875        (3,029)        113,660
Equity in income (loss) of
  subsidiaries........................   154,220       155,585              --      (309,805)             --
                                        --------      --------      ----------     ---------      ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
  OF ACCOUNTING CHANGE................   160,029       159,448         169,811      (315,033)        174,255
Cumulative effect of accounting
  change, net.........................        --            --          14,226            --          14,226
                                        --------      --------      ----------     ---------      ----------
NET INCOME (LOSS).....................  $160,029      $159,448      $  155,585     $(315,033)     $  160,029
                                        ========      ========      ==========     =========      ==========
</Table>

                                        95
<PAGE>

                             METRIS COMPANIES INC.

         SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2003

<Table>
<Caption>
                                    METRIS                        NON-
                                   COMPANIES    GUARANTOR      GUARANTOR
                                     INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                   ---------   ------------   ------------   ------------   ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                                <C>         <C>            <C>            <C>            <C>
OPERATING ACTIVITIES:
Net cash (used in) provided by
  operating activities...........  $(166,479)   $(114,182)    $  (330,567)     $271,997      $(339,231)
                                   ---------    ---------     -----------      --------      ---------
INVESTING ACTIVITIES:
Proceeds from transfers of
  portfolios to the Metris Master
  Trust..........................         --           --         695,459            --        695,459
Net cash from loan originations
  and principal collections on
  loans receivable...............    (13,962)          --        (766,070)      (14,001)      (794,033)
Proceeds from sales of credit
  card portfolios to
  third-parties..................         --           --         891,256            --        891,256
Proceeds from sale of membership
  club and warranty business.....         --        8,100          36,900            --         45,000
Disposal of property and
  equipment, net.................         --        5,717          20,225            --         25,942
Investment in subsidiaries.......    180,419      275,006         512,963      (968,388)            --
                                   ---------    ---------     -----------      --------      ---------
Net cash provided by (used in)
  investing activities...........    166,457      288,823       1,390,733      (982,389)       863,624
                                   ---------    ---------     -----------      --------      ---------
FINANCING ACTIVITIES:
Net increase (decrease) in
  debt...........................      1,320       (9,421)             --            --         (8,101)
Sale of deposits.................         --           --        (559,282)           --       (559,282)
Net decrease in deposits.........         --           --        (327,210)           --       (327,210)
Premium paid and transaction
  costs on deposits sold.........         --           --         (32,963)           --        (32,963)
Proceeds from issuance of common
  stock..........................      1,416           --              --            --          1,416
Repurchase of common stock.......         --     (170,295)       (540,097)      710,392             --
                                   ---------    ---------     -----------      --------      ---------
Net cash provided by (used in)
  financing activities...........      2,736     (179,716)     (1,459,552)      710,392       (926,140)
                                   ---------    ---------     -----------      --------      ---------
Net increase (decrease) in cash
  and cash equivalents...........      2,714       (5,075)       (399,386)           --       (401,747)
Cash and cash equivalents at
  beginning of year..............     (3,795)       8,109         575,918            --        580,232
                                   ---------    ---------     -----------      --------      ---------
Cash and cash equivalents at end
  of year........................  $  (1,081)   $   3,034     $   176,532      $     --      $ 178,485
                                   =========    =========     ===========      ========      =========
</Table>

                                        96
<PAGE>

                             METRIS COMPANIES INC.

         SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2002

<Table>
<Caption>
                                    METRIS                        NON-
                                   COMPANIES    GUARANTOR      GUARANTOR
                                     INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                   ---------   ------------   ------------   ------------   ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                                <C>         <C>            <C>            <C>            <C>
OPERATING ACTIVITIES:
Net cash provided by (used in)
  operating activities...........  $ 78,331     $  51,110     $   209,857     $ (30,787)    $   308,511
                                   --------     ---------     -----------     ---------     -----------
INVESTING ACTIVITIES:
Proceeds from sales and
  repayments of securitized
  loans..........................        --            --       2,087,097            --       2,087,097
Net cash from loan originations
  and principal collections on
  loans receivable...............    (1,554)           --        (703,060)           --        (704,614)
Proceeds from sales of credit
  card portfolios to
  third-parties..................        --            --          16,278            --          16,278
Additions to property and
  equipment, net.................        --        (5,161)           (998)           --          (6,159)
Investment in subsidiaries.......   (96,479)      248,588         243,969      (396,078)             --
                                   --------     ---------     -----------     ---------     -----------
Net cash (used in) provided by
  investing activities...........   (98,033)      243,427       1,643,286      (396,078)      1,392,602
                                   --------     ---------     -----------     ---------     -----------
FINANCING ACTIVITIES:
Net increase (decrease) in
  debt...........................    45,304          (559)       (292,000)      (43,000)       (290,255)
Net decrease in deposits.........        --            --      (1,165,254)           --      (1,165,254)
Cash dividends paid..............    (3,728)           --              --            --          (3,728)
Proceeds from issuance of common
  stock..........................     2,011            --              --            --           2,011
Capital contributions............        --      (287,374)       (182,491)      469,865              --
Repurchase of common stock.......   (45,294)           --              --            --         (45,294)
                                   --------     ---------     -----------     ---------     -----------
Net cash (used in) provided by
  financing activities...........    (1,707)     (287,933)     (1,639,745)      426,865      (1,502,520)
                                   --------     ---------     -----------     ---------     -----------
Net (decrease) increase in cash
  and cash equivalents...........   (21,409)        6,604         213,398            --         198,593
Cash and cash equivalents at
  beginning of year..............    17,614         1,505         362,520            --         381,639
                                   --------     ---------     -----------     ---------     -----------
Cash and cash equivalents at end
  of year........................  $ (3,795)    $   8,109     $   575,918     $      --     $   580,232
                                   ========     =========     ===========     =========     ===========
</Table>

                                        97
<PAGE>

                             METRIS COMPANIES INC.

         SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2001

<Table>
<Caption>
                                       METRIS                        NON-
                                      COMPANIES    GUARANTOR      GUARANTOR
                                        INC.      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                      ---------   ------------   ------------   ------------   ------------
                                                             (DOLLARS IN THOUSANDS)
<S>                                   <C>         <C>            <C>            <C>            <C>
OPERATING ACTIVITIES:
Net cash provided by (used in)
  operating activities..............  $ 161,612    $ 132,930     $   498,252     $(315,033)    $   477,761
                                      ---------    ---------     -----------     ---------     -----------
INVESTING ACTIVITIES:
Proceeds from transfers of
  portfolios to the Metris Master
  Trust.............................         --           --         553,180            --         553,180
Net cash from loan originations and
  principle collections on loans
  receivable........................       (503)          --      (1,126,886)           --      (1,127,389)
Credit card portfolio
  acquisitions......................         --           --        (290,774)           --        (290,774)
(Additions to) disposal of property
  and equipment, net................         --      (18,257)         12,549            --          (5,708)
Investments in subsidiaries.........   (218,746)    (170,922)          2,238       387,430              --
                                      ---------    ---------     -----------     ---------     -----------
Net increase (decrease) in debt.....   (219,249)    (189,179)       (849,693)      387,430        (870,691)
                                      ---------    ---------     -----------     ---------     -----------
FINANCING ACTIVITIES:
Net increase (decrease) in debt.....        900       (1,062)        292,000            --         291,838
Net decrease in deposits............         --           --         (48,191)           --         (48,191)
Cash dividends paid.................     (3,752)          --              --            --          (3,752)
Proceeds from issuance of common
  stock.............................     26,248           --              --            --          26,248
Capital contributions...............         --       48,156          24,241       (72,397)             --
Repurchase of common stock..........    (13,014)          --              --            --         (13,014)
                                      ---------    ---------     -----------     ---------     -----------
Net cash provided by (used in)
  financing activities..............     10,382       47,094         268,050       (72,397)        253,129
                                      ---------    ---------     -----------     ---------     -----------
  Net (decrease) increase in cash
     and cash equivalents...........    (47,255)      (9,155)        (83,391)           --        (139,801)
Cash and cash equivalents at
  beginning of year.................     64,869       10,660         445,911            --         521,440
                                      ---------    ---------     -----------     ---------     -----------
Cash and cash equivalents at end of
  year..............................  $  17,614    $   1,505     $   362,520     $      --     $   381,639
                                      =========    =========     ===========     =========     ===========
</Table>

                                        98
<PAGE>

                     METRIS COMPANIES INC. AND SUBSIDIARIES

            SUMMARY OF CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
                                 AND STOCK DATA

<Table>
<Caption>
                                                                         2003
                                                    ----------------------------------------------
                                                     FOURTH       THIRD      SECOND       FIRST
                                                     QUARTER     QUARTER     QUARTER     QUARTER
                                                    ---------   ---------   ---------   ----------
                                                                     (UNAUDITED)
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S>                                                 <C>         <C>         <C>         <C>
SUMMARY OF OPERATIONS:
Interest income...................................  $  2,281    $ 24,656    $ 31,432    $  32,161
Interest expense..................................    14,068      22,296      18,716       19,341
                                                    --------    --------    --------    ---------
Net Interest Income...............................   (11,787)      2,360      12,716       12,820
Provision for loan losses.........................    18,810      33,019      30,033       44,786
Other Operating Income............................   163,838     135,319     126,192       79,671
Other Operating Expense(1)........................    93,290     196,836     146,474      175,146
                                                    --------    --------    --------    ---------
Income (Loss) Before Income Taxes.................    39,951     (92,176)    (37,599)    (127,441)
Income taxes......................................     5,134     (17,198)    (12,851)     (44,611)
                                                    --------    --------    --------    ---------
Net Income (Loss).................................    34,817     (74,978)    (24,748)     (82,830)
Preferred Stock Dividends.........................    10,358      10,131       9,908        9,689
                                                    --------    --------    --------    ---------
Net Income (Loss) Applicable to Common
  Stockholders....................................  $ 24,459    $(85,109)   $(34,656)   $ (92,519)
                                                    ========    ========    ========    =========
PER COMMON SHARE:
Earnings (Loss) per Share:
  Basic...........................................  $   0.39    $  (1.48)   $  (0.60)   $   (1.62)
  Diluted.........................................      0.39       (1.48)      (0.60)       (1.62)
Shares used to Compute EPS (000's):
  Basic...........................................    88,580      57,546      57,462       57,257
  Diluted.........................................    88,750      57,546      57,462       57,257
Cash Dividends:...................................  $     --    $     --    $     --    $      --
Market Prices:
  High............................................  $   5.06    $   6.68    $   6.87    $    2.92
  Low.............................................      3.80        2.78        2.11         1.25
  Close...........................................      4.44        4.12        5.55         2.35
</Table>

                                        99
<PAGE>

                     METRIS COMPANIES INC. AND SUBSIDIARIES

            SUMMARY OF CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
                                 AND STOCK DATA

<Table>
<Caption>
                                                                         2002
                                                     ---------------------------------------------
                                                      FOURTH       THIRD      SECOND       FIRST
                                                      QUARTER     QUARTER     QUARTER     QUARTER
                                                     ---------   ---------   ---------   ---------
                                                                      (UNAUDITED)
                                                     (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S>                                                  <C>         <C>         <C>         <C>
SUMMARY OF OPERATIONS:
Interest income....................................  $ 39,350    $ 31,416    $ 68,792    $ 89,844
Interest expense...................................    21,144      23,252      26,955      32,165
                                                     --------    --------    --------    --------
Net Interest Income................................    18,206       8,164      41,837      57,679
Provision for loan Losses..........................    40,987      26,340      90,601      61,876
Other Operating Income.............................   147,480     262,967     167,556     257,418
Other Operating Expense(1).........................   186,636     174,540     198,954     181,090
                                                     --------    --------    --------    --------
Income (Loss) Before Income Taxes..................   (61,937)     70,251     (80,162)     72,131
Income taxes.......................................   (21,145)     25,201     (30,040)     27,851
                                                     --------    --------    --------    --------
Net Income (Loss)..................................   (40,792)     45,050     (50,122)     44,280
Preferred Stock Dividends..........................     9,822       9,605       9,394       9,188
                                                     --------    --------    --------    --------
Net Income (Loss) Applicable to Common
  Stockholders.....................................  $(50,614)   $ 35,445    $(59,516)   $ 35,092
                                                     ========    ========    ========    ========
PER COMMON SHARE:
Earnings (Loss) per Share:
  Basic............................................  $  (0.88)   $   0.50    $  (0.97)   $   0.46
  Diluted..........................................     (0.88)       0.50       (0.97)       0.46
Shares used to Compute EPS (000's):
  Basic............................................    57,199      89,574      61,503      96,032
  Diluted..........................................    57,199      89,579      61,503      96,973
Cash Dividends:....................................  $  0.010    $  0.010    $  0.010    $  0.010
Market Prices:
  High.............................................  $   4.70    $   8.40    $  22.75    $  27.49
  Low..............................................      1.45        1.61        7.39       12.35
  Close............................................      2.47        2.31        8.31       20.00
</Table>

                                       100
<PAGE>

STOCK DATA

     Our common stock, which is traded under the symbol "MXT," has been listed
on the New York Stock Exchange since May 7, 1999. Prior to its listing on the
New York Stock Exchange, our common stock traded under the symbol "MTRS" on the
Nasdaq Stock Market since its initial public offering on October 25, 1996. As of
March 8, 2004, there were approximately 800 holders of record and approximately
18,500 beneficial holders of our common stock.

     We are also bound by restrictions set forth in the indentures related to
the Senior Notes dated November 7, 1997, and July 15, 1999. Pursuant to those
indentures, we may not make dividend payments in the event of a default or if
all such restricted payments would exceed 25% of our aggregate cumulative "Net
income." Furthermore, our Amended and Restated Senior Secured Credit Agreement
limits payments of quarterly dividends to $.01 per share.

                                       101
<PAGE>

            MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
                              AND INTERNAL CONTROL

     The accompanying consolidated financial statements, related financial data,
and other information in this annual report were prepared by the management of
Metris Companies Inc. Management is responsible for the integrity and
objectivity of the data presented, including amounts that must necessarily be
based on judgments and estimates. The consolidated financial statements were
prepared in conformity with accounting principles generally accepted in the
United States of America.

     Management of Metris Companies Inc. depends on its accounting systems and
internal control structures in meeting its responsibilities for reliable
consolidated financial statements. In management's opinion, these systems and
structures provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
authorizations. As an integral part of these systems and structures, the Company
employs a professional staff of internal auditors who conduct operational and
special audits and coordinate audit coverage with Company management and the
independent auditors.

     The consolidated financial statements have been audited by the Company's
independent auditors, KPMG LLP, whose opinion appears separately. Their opinion
on the consolidated financial statements is based on auditing procedures that
include performing selected tests of transactions and records as they deem
appropriate. These auditing procedures are designed to provide reasonable
assurance that the consolidated financial statements are free of material
misstatement.

     The Audit Committee of the Company's Board of Directors, composed solely of
outside directors, meets quarterly with the internal auditors, the independent
auditors and management to review the work of each and ensure that each is
properly discharging its responsibilities. The internal and independent auditors
have free access to the Audit Committee to discuss the results of their audit
work and their findings.

<Table>
<S>                                                  <C>
/s/ DAVID D. WESSELINK                               /s/ JOHN A. WITHAM
---------------------------------------------------  ---------------------------------------------------
David D. Wesselink                                   John A. Witham
Chairman and Chief Executive Officer                 Executive Vice President and
                                                     Chief Financial Officer
</Table>

                                       102
<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, 2003 and 2002, 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,
2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

     As discussed in Note 20 to the consolidated financial statements, the
Company changed its method of accounting for derivative financial instruments in
2001.

                                          /s/ KPMG LLP
                                          --------------------------------------
                                          KPMG LLP

Minneapolis, Minnesota
April 9, 2004

                                       103
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     None

ITEM 9A.  CONTROLS AND PROCEDURES

     Under the supervision and with the participation of the Company's
management, including the Chairman and Chief Executive Officer ("CEO") and the
Chief Financial Officer ("CFO"), we evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e)or 15d-15(e) under the Exchange Act). Based on that evaluation,
the Company's management, including the CEO and CFO, have concluded that, as of
December 31, 2003, our disclosure controls and procedures were not effective in
ensuring that information required to be disclosed in the reports we file under
the Securities Exchange Act of 1934, as amended ("Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. During the quarter ended December 31, 2003, except as described
below, there were no changes in our internal controls over financial reporting
(as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.

     On November 17, 2003, our external auditors, KPMG LLP, issued a material
weakness report noting a material weakness in our policies and procedures for
estimating the fair value of our "Retained interests in loans securitized" and
associated revenue recognition. During the past several months we have taken
steps to revise our valuation model and related policies, procedures and
assumptions to address the issues in the material weakness report. During the
period, the Company also identified and changed its accounting policies to
conform with accounting principles generally accepted in the United States of
America associated with the accounting for securitization transaction costs,
credit card solicitation costs, and debt waiver revenue associated with
receivables sold to the Metris Master Trust.

     The Company, as of February 24, 2004 has re-evaluated the effectiveness of
the design of the Company's disclosure controls and procedures (as defined in
Rule 13a-14(c) or 15d-14(c) under the Exchange Act). Based on that evaluation,
the Company's management, including the CEO and CFO, have concluded that the
design of our disclosure controls and procedures is effective in ensuring that
information required to be disclosed in the reports we file under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms. The Company has not yet evaluated (tested) the
operating effectiveness of such controls.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

     The current directors of the Company elected by our common stockholders are
as follows. Directors elected by our common stockholders serve a one-year term
which will expire at the Company's 2004 Annual Meeting of Stockholders.

     Lee R. Anderson, Sr. (age 64; director since 1997) is Chairman and Chief
Executive Officer of the API Group, Inc. located in Saint Paul, Minnesota, a
group of 23 separate construction, manufacturing, fire protection and material
distribution companies operating out of 90 offices in the United States, Canada
and Great Britain.

     John A. Cleary (age 72; director since 1998) was the Chief Executive
Officer of Donnelley Marketing, Inc. from 1979 until 1993. Donnelley Marketing,
Inc. was a subsidiary of Dun and Bradstreet Corporation until 1991 when it was
acquired by a group of investors and senior management. Mr. Cleary continued as
CEO until 1993 when he was elected Vice Chairman of the Board of Directors, a
position he held until 1996 when First Data Corporation acquired the company.
Mr. Cleary continued as a senior

                                       104
<PAGE>

advisor and consultant to the company. Mr. Cleary is also a director of
SoundWater, Inc., a non-profit environmental education organization dedicated to
the preservation and protection of Long Island Sound. Mr. Cleary was also a
director of the Direct Marketing Association from 1985 to 1996, and served as
Chairman of its Board from 1990 to 1991.

     Walter M. Hoff (age 51; director since 1999) is Chairman and Chief
Executive Officer of NDCHealth. Prior to joining NDCHealth, Mr. Hoff was
Executive Vice President of First Data Corporation from 1991 to 1997, with
responsibility for First Data Card Services Group. Mr. Hoff served as Chief
Financial Officer and Executive Vice President of American Express Information
Services Corporation (predecessor to First Data Corporation) from 1989 to 1991.

     Edward B. Speno (age 67; director since 2000) was Executive Vice President
of Credit Card Service Corporation ("CCSC") from 1982 to 1991. Prior to joining
CCSC, he was Executive Vice President and Business Manager of Citicorp
Financial, Inc. from 1977 to 1982. Mr. Speno served as Vice President of
Citibank, N.A. from 1975 to 1982. He is a past director of CCC Information
Service Group, Inc., CCSC and its various subsidiaries, Multibank Financial
Corp., and Speno Railroad Ballast Cleaning Company. Mr. Speno is a charter
member of the John Carroll Society of the Archdiocese of Baltimore. He is also a
member of the advisory boards of the Dana and Albert Broccoli Center for Aortic
Diseases and The Cardiovascular Institute, Heart Initiative, at the Johns
Hopkins University School of Medicine, and is Fundraising Chairman for the Henry
Ciccarone Center for the Prevention of Heart Disease at Johns Hopkins.

     Frank D. Trestman (age 69; director since 1996) has been President of
Trestman Enterprises, an investment and business development firm, for the past
seven years. Mr. Trestman is also Chairman of The Avalon Group, a real estate
development company. He has been a consultant to McKesson Corporation and is the
former Chairman of the Board and Chief Executive Officer of Mass Merchandisers,
Inc., a distributor of non-food products to grocery retailers and a former
subsidiary of McKesson Corporation. Mr. Trestman is a director of Insignia
Systems, Inc. and Best Buy Co., Inc. He also serves on the Board of Trustees of
The Harry Kay Foundation and is Chair of the Jewish Community Capital Campaign.

     David D. Wesselink (age 61; director since 2002) has been Chairman and
Chief Executive Officer of the Company since December 2002. Mr. Wesselink
previously was Vice Chairman of the Company from September 2000 to December
2002, and Executive Vice President and Chief Financial Officer of the Company
from December 1998 to August 2000. Prior to joining the Company, Mr. Wesselink
was Senior Vice President and Chief Financial Officer of Advanta Corporation
from 1993 to February 1998. 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. Mr. Wesselink is also a director of Saxon Capital,
Inc., CFC International, Inc., MasterCard Incorporated US Region Board, American
Financial Services Association and Central College.

     The current directors of the Company elected by our preferred stockholders
are as follows. Directors elected by our preferred stockholders serve a one-year
term which will expire at the Company's 2004 Annual Meeting of Stockholders.

     C. Hunter Boll (age 48; director since 1999) has been employed by Thomas H.
Lee Partners, L.P. and its predecessor, Thomas H. Lee Company, since 1986. From
1984 through 1986, Mr. Boll was with The Boston Consulting Group. From 1977
through 1982, he served as an Assistant Vice President, Energy and Minerals
Division of Chemical Bank. Mr. Boll is a director of Cott Corp., TransWestern
Publishing, L.P., and United Industries, Inc.

     Thomas M. Hagerty (age 41; director since 1999) has been employed by Thomas
H. Lee Partners, L.P. and its predecessor, Thomas H. Lee Company, since 1988.
Prior to joining Thomas H. Lee Partners, L.P., Mr. Hagerty was in the mergers
and acquisitions department of Morgan Stanley & Co. Incorporated. Mr. Hagerty is
a director of Affordable Residential Communities Inc., ARC Holdings, Cott Corp.,
Houghton Mifflin Company, MGIC Investment Corporation and Syratech Corp. Mr.
Hagerty is also a

                                       105
<PAGE>

Vice President of T.H. Lee Mezzanine II, the Administrative General Partner of
Thomas H. Lee Advisors II, L.P., which is the sole limited partner of the
Managing General Partner of ML-Lee Acquisition Fund II, L.P. and ML-Lee
Acquisition Fund (Retirement Accounts) II, L.P. Mr. Hagerty was the Interim
Chief Financial Officer of Conseco, Inc. from July 2000 through April 2001. On
December 17, 2002, Conseco, Inc. voluntarily commenced a case under Chapter 11
of the United States Code in the United States Bankruptcy Court, Northern
District of Illinois, Eastern Division.

     David V. Harkins (age 63; director since 1999) has been affiliated with
Thomas H. Lee Partners, L.P. and its predecessor, Thomas H. Lee Company, since
its founding in 1974, and currently serves as President of Thomas H. Lee
Partners, L.P. In addition, he has over 30 years experience in the investment
and venture capital industry with the John Hancock Mutual Life Insurance
Company, where he began his career, as well as TA Associates and Massachusetts
Capital Corporation. Mr. Harkins also founded National Dentex Corporation and
serves as Chairman of the Board. He is currently a director of Cott Corp. and
Syratech Corp. Mr. Harkins also serves as President and Trustee of T.H. Lee
Mezzanine II, the Administrative General Partner of Thomas H. Lee Advisors II,
L.P., which is the sole limited partner of the Managing General Partner of
ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P., Principal Managing Director of Thomas H. Lee Advisors, LLC,
TH Lee, Putnam Capital Advisors, LLC, and Thomas H. Lee Management Company, LLC,
President of THL Fund IV Bridge Corp. and THL Investment Management Corp., and
Vice President of THL Equity Holdings III, Inc.

     Thomas H. Lee (age 60; director since 1999) founded Thomas H. Lee Partners,
L.P.'s predecessor, Thomas H. Lee Company, in 1974 and from that time through
July 1999, served as its President. Mr. Lee currently serves as General Director
of Thomas H. Lee Partners, L.P., which is a Boston-based private equity firm
that focuses on investments in growth companies. From 1966 through 1974, Mr. Lee
was with First National Bank of Boston where he directed the bank's high
technology lending group from 1968 to 1974. Mr. Lee is also a director of Vertis
Holdings, Inc., Finlay Fine Jewelry Corporation, First Security Services
Corporation, Miller Import Corporation, Safelite Glass Corporation, The Smith &
Wollensky Restaurant Group, Inc., Vail Resorts, Inc., and Wyndham International,
Inc. Mr. Lee is an individual general partner of ML-Lee Acquisition Fund II,
L.P. and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. Mr. Lee also
serves as Chairman of T.H. Lee Mezzanine II, the Administrative General Partner
of Thomas H. Lee Advisors II, L.P., which is the sole limited partner of the
Managing General Partner of ML-Lee Acquisition Fund II, L.P. and ML-Lee
Acquisition Fund (Retirement Accounts) II, L.P.

BOARD COMPOSITION

     Mr. Hoff has notified the Board of Directors that he does not intend to
stand for re-election at our 2004 Annual Meeting of Stockholders. Furthermore,
New York Stock Exchange rules requiring that a majority of the members of our
Board be independent directors by the date of that meeting will require
additional changes to the composition of our Board.

EXECUTIVE OFFICERS

     Information regarding the Company's executive officers is set forth in Part
I of the Form 10-K under "Item 1. Business -- Executive Officers of the
Registrant."

AUDIT COMMITTEE FINANCIAL EXPERT

     The Board of Directors has determined that Frank D. Trestman, Chairman of
the Audit Committee, is an "audit committee financial expert" as defined by Item
401(h) of SEC Regulation S-K. Mr. Trestman meets the independence requirements
set forth in the NYSE listing standards.

     Each member of the Audit Committee can read and understand fundamental
financial statements, including the Company's balance sheet, income statement
and cash flow statement.

                                       106
<PAGE>

AUDIT COMMITTEE

     The Company's Board of Directors has a separately-designated standing Audit
Committee, currently comprised of Frank D. Trestman, Walter M. Hoff and Edward
B. Speno. The Audit Committee supervises and reviews the Company's financial and
accounting practices, reviews and discusses financial information with
management before the public release of quarterly earnings information, meets
with PricewaterhouseCoopers LLP, our internal auditor, and makes recommendations
to the Board as to the selection of the independent auditor.

DIRECTOR NOMINATION PROCEDURES

     There have been no material changes made to the procedures by which
security holders may recommend nominees to the Company's Board of Directors
since the last annual meeting of stockholders.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     To our knowledge, based upon a review of our records and responses to
questionnaires of all reporting officers and directors, all reports required to
be filed by the Company's executive officers, directors and beneficial owners of
more than 10% of Common Stock pursuant to Section 16(a) of the Securities
Exchange Act of 1934 during the fiscal year ended December 31, 2003, were filed
on a timely basis.

CODE OF ETHICS

     The Company has adopted a Code of Conduct and Business Ethics that is
applicable to all of its employees, as well as its Board of Directors. In
addition, the Company has adopted a Code of Conduct and Business Ethics for
Senior Financial Management that is applicable to its principal executive
officer, principal financial officer, principal accounting officer and other
employees performing similar functions. Both Codes of Conduct are posted on our
website at www.metriscompanies.com.

ITEM 11.  EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVES

     For the fiscal years ended December 31, 2003, 2002 and 2001, the following
table sets forth the cash and non-cash compensation awarded to or earned by our
Chief Executive Officer and our four most highly compensated executive officers
who served as executive officers at December 31, 2003, as well as one additional
individual who would have been one of our four most highly compensated executive
officers but

                                       107
<PAGE>

was not serving as such at December 31, 2003. John A. Witham was not employed by
the Company in 2001.

                           SUMMARY COMPENSATION TABLE

<Table>
<Caption>
                                                                               LONG-TERM COMPENSATION
                                             ANNUAL COMPENSATION                       AWARDS
                                    --------------------------------------   --------------------------
                                                                OTHER        RESTRICTED    SECURITIES
                                                               ANNUAL          STOCK       UNDERLYING        ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR   SALARY(a)    BONUS     COMPENSATION(b)   AWARDS(c)    OPTIONS(#)(d)   COMPENSATION(e)
---------------------------  ----   ---------   --------   ---------------   ----------   -------------   ---------------
<S>                          <C>    <C>         <C>        <C>               <C>          <C>             <C>
David D. Wesselink......     2003   $628,135    $      0      $193,124        $     0        400,000        $1,282,568
Chairman and                 2002   $461,034    $      0      $145,378        $     0        140,230        $  818,955
Chief Executive Officer      2001   $418,654    $825,563      $181,080        $27,519        160,322        $  600,346
Richard G. Evans........     2003   $321,923    $      0      $ 37,240        $     0         75,000        $  290,999
Executive Vice President,    2002   $300,000    $      0      $ 40,190        $     0         72,846        $  267,498
General Counsel              2001   $167,308    $275,000      $ 23,675        $ 9,167         75,000        $  243,857
John A. Witham..........     2003   $288,952    $      0      $ 37,540        $     0         75,000        $  224,976
Executive Vice President,    2002   $140,384    $100,000      $ 19,990        $     0         25,000        $  182,601
Chief Financial Officer
Dan N. Piteleski........     2003   $255,192    $      0      $ 27,647        $     0         68,189        $  207,033
Executive Vice President,    2002   $239,279    $      0      $ 33,236        $     0         67,598        $  200,930
Chief Information Officer    2001   $147,115    $200,000      $ 23,336        $     0         30,000        $  110,140
Matthew S. Melius.......     2003   $251,651    $      0      $ 39,633        $     0         75,000        $   82,171
Executive Vice President,    2002   $230,516    $      0      $ 34,542        $     0         56,092        $   81,940
Credit Risk Management;      2001   $204,461    $400,000      $ 61,172        $     0         60,560        $   72,283
President and CEO of Direct
  Merchants Bank
Joseph A. Hoffman(f)....     2003   $284,631    $      0      $ 83,982        $     0         68,189        $    9,422
Former Executive Vice        2002   $329,308    $      0      $ 56,668        $     0         80,132        $  156,018
President, Credit Card       2001   $299,038    $526,350      $103,323        $43,863         91,612        $  134,587
Marketing/Operations
</Table>

---------------

(a) Amounts in this column include base pay and any paid time off.

(b) Amounts reported in this column include items such as a cash perquisite
    allowance, executive medical reimbursement, financial planning and tax
    preparation, personal or non-business travel, and gross-up payments to pay
    income taxes on such amounts. Amounts paid that represent more than 25% of
    total perquisites for each named executive officer for each of the fiscal
    years above are as follows:

          2003:  Mr. Wesselink received $66,021 for commuting expenses and a tax
     gross-up amount of $70,383; Messrs. Evans, Witham and Piteleski each
     received a perquisite allowance of $26,052; Mr. Melius received a
     perquisite allowance of $24,678; and Mr. Hoffman received a perquisite
     allowance of $20,625.

          2002:  Mr. Wesselink received $65,493 for commuting expenses and a tax
     gross-up amount of $53,305; Messrs. Evans, Piteleski, Melius and Hoffman
     each received a perquisite allowance of $26,052; and Mr. Witham received a
     perquisite allowance of $12,907.

          2001:  Mr. Wesselink received $70,407 for commuting expenses and a tax
     gross-up amount of $57,304; Mr. Evans received $4,150 for spousal travel, a
     tax gross-up amount of $2,254 and a perquisite allowance of $15,197; Mr.
     Piteleski received $6,133 for spousal travel, a tax gross-up amount of
     $3,332 and a perquisite allowance of $13,704; Mr. Melius received $19,702
     for spousal travel, a tax gross-up amount of $10,703 and a perquisite
     allowance of $20,556; and Mr. Hoffman received $38,040 for spousal travel,
     a tax gross-up amount of $20,664 and a perquisite allowance of $26,052. Mr.
     Witham was not employed by the Company in 2001.

(c) Amounts reported in this column represent the dollar value of the Company
    match of Restricted Stock Units ("RSUs") made under the Company's Management
    Stock Purchase Plan and Annual Incentive Bonus Plan for Designated Corporate
    Officers. The number of Company match RSUs for

                                       108
<PAGE>

    each of the named executive officers is as follows: Mr. Wesselink in 2001
    (1,963 shares); Mr. Evans in 2001 (654 shares); Mr. Piteleski in 2001 (476
    shares); and Mr. Hoffman in 2001 (3,129 shares). The Company match RSUs
    granted in 2001 vest on December 31, 2004. No Company match RSUs were
    granted in 2002 or 2003. Mr. Witham was not employed by the Company in 2001.
    Mr. Melius did not participate in the Management Stock Purchase Plan in
    2001. The value of the restricted stock award and the RSUs were determined
    by multiplying the closing market price of the Company's Common Stock on the
    date of grant by the number of shares awarded. Dividends, when declared,
    were paid on the shares of restricted stock at the same rate as paid to all
    stockholders.

(d) Amounts represent option grants to purchase the Company's Common Stock under
    the Metris Companies Inc. Amended and Restated Long-Term Incentive and Stock
    Option Plan.

(e) The amounts disclosed in this column include, for each of the years listed:

          2003:  Supplemental Executive Retirement Plan ("SERP") payments of
     $1,264,613 for Mr. Wesselink, $280,374 for Mr. Evans, $215,933 for Mr.
     Witham, $197,938 for Mr. Piteleski, $73,748 for Mr. Melius, and $0 for Mr.
     Hoffman. 401(k) matching contributions in the amount of $8,000 for Messrs.
     Wesselink, Evans, Piteleski, Melius and Hoffman, and $7,779 for Mr. Witham.

          2002:  SERP payments of $798,444 for Mr. Wesselink, $251,687 for Mr.
     Evans, $80,829 for Mr. Witham, $188,408 for Mr. Piteleski, $67,056 for Mr.
     Melius and $140,568 for Mr. Hoffman; Non-Qualified Deferred Restorative
     Retirement Plan ("DRRP") payments of $9,000 for Messrs. Wesselink, Evans,
     Witham, Piteleski, Melius and Hoffman; and 401(k) matching contributions in
     the amount of $5,500 for Messrs. Wesselink, Evans, Witham, Piteleski,
     Melius and Hoffman.

          2001:  SERP payments of $583,035 for Mr. Wesselink, $229,123 for Mr.
     Evans, $109,519 for Mr. Piteleski, $57,850 for Mr. Melius, and $119,335 for
     Mr. Hoffman; DRRP payments of $9,000 for Messrs. Wesselink, Piteleski,
     Melius and Hoffman, and $0 for Mr. Evans; 401(k) matching contributions in
     the amount of $5,100 for Messrs. Wesselink, Piteleski, Melius and Hoffman,
     and $0 for Mr. Evans. Mr. Witham was not employed by the Company in 2001.

(f) Mr. Hoffman's employment with the Company terminated October 3, 2003.

     The following table shows information concerning stock options granted
during the fiscal year ended December 31, 2003, for the named executive
officers. The percentage of total options set forth below is based on an
aggregate of 1,622,794 options granted to employees during 2003. All options
were granted with an exercise price equal to the closing price of the Company's
Common Stock on the New York Stock Exchange on the day prior to the date of
grant.

                       OPTION GRANTS IN LAST FISCAL YEAR
                               INDIVIDUAL GRANTS

<Table>
<Caption>
                                   NUMBER OF     % OF TOTAL
                                   SECURITIES     OPTIONS
                                   UNDERLYING    GRANTED TO    EXERCISE
                                    OPTIONS     EMPLOYEES IN     PRICE     EXPIRATION      GRANT DATE
NAME                               GRANTED(a)       2003       ($/SHARE)      DATE      PRESENT VALUE(b)
----                               ----------   ------------   ---------   ----------   ----------------
<S>                                <C>          <C>            <C>         <C>          <C>
David D. Wesselink...............   400,000         25.0%        $1.80      02/10/13        $501,560
John A. Witham...................    75,000          4.7%        $1.30      03/18/13        $ 73,995
Richard G. Evans.................    75,000          4.7%        $1.30      03/18/13        $ 73,995
Dan N. Piteleski.................    68,189          4.3%        $1.30      03/18/13        $ 67,275
Matthew S. Melius................    75,000          4.7%        $1.30      03/18/13        $ 73,995
Joseph A. Hoffman(c).............    68,189          4.3%        $1.30      03/18/13        $ 67,275
</Table>

---------------

(a) These options were granted under the Metris Companies Inc. Amended and
    Restated Long-Term Incentive and Stock Option Plan and expire 10 years after
    their grant date. Mr. Wesselink was granted options on February 10, 2003;
    50% of the grant vested immediately and 50% will vest on February 10,

                                       109
<PAGE>

    2005. All other options were granted on March 18, 2003 and will vest in
    equal increments over three years. These options have an option reload
    provision which allows the executive to cover the tax and cost of the option
    exercise by surrendering mature shares. The executive is then granted an
    option to purchase the number of shares of Common Stock equal to the number
    of shares surrendered.

(b) The dollar amounts reflected in this column are the result of calculations
    of the present value of the grant on the date of grant using the
    Black-Scholes option pricing method and the following assumptions: 0%
    dividend yield, 111.4% expected volatility, 1.5% risk-free interest rate and
    3.7 year expected life. The actual gains, if any, on stock option exercises
    will depend on the future performance of the Common Stock.

(c) Mr. Hoffman's employment with the Company terminated October 3, 2003. All
    options previously granted to him continued to vest for 90 days from his
    last date of employment. He had seven months from the last day employed to
    exercise any vested options or such options expired.

     The following table indicates the number of shares of Common Stock acquired
upon the exercise of options in the fiscal year ended December 31, 2003, and the
value and number of shares of Common Stock subject to exercisable and
unexercisable options held as of December 31, 2003, by each of the named
executive officers.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<Table>
<Caption>
                                                                  NUMBER OF SECURITIES   VALUE OF UNEXERCISED
                                                                       UNDERLYING            IN-THE-MONEY
                                                                  UNEXERCISED OPTIONS          OPTIONS
                                                                      AT 12/31/03           AT 12/31/03(1)
                                  SHARES ACQUIRED      VALUE          EXERCISABLE/           EXERCISABLE/
NAME                              ON EXERCISE(#)    REALIZED($)      UNEXERCISABLE          UNEXERCISABLE
----                              ---------------   -----------   --------------------   --------------------
<S>                               <C>               <C>           <C>                    <C>
David D. Wesselink..............         0              $0              666,414                $528,000
                                                                        478,756                $528,000
Richard G. Evans................         0              $0               42,439                $      0
                                                                        180,407                $235,500
John A. Witham..................         0              $0                6,250                $ 13,688
                                                                         93,750                $276,563
Dan N. Piteleski................         0              $0               22,721                $      0
                                                                        143,066                $214,113
Matthew S. Melius...............         0              $0              114,821                $      0
                                                                        171,165                $235,500
Joseph A. Hoffman(2)............         0              $0              239,371                $      0
                                                                        216,548                $      0
</Table>

---------------

(1) The value of unexercised in-the-money options represents the aggregate
    difference between the market value on December 31, 2003, of the Company's
    Common Stock based on its closing price as reported on the New York Stock
    Exchange for that day, and the applicable exercise prices of the options.

(2) Mr. Hoffman's employment with the Company terminated October 3, 2003. All
    options previously granted to him continued to vest for 90 days from his
    last date of employment. He had seven months from his last date employed to
    exercise any vested options or such options expired.

                                       110
<PAGE>

COMPENSATION OF DIRECTORS

     Only non-employee directors received compensation for serving as directors
of the Company. We pay the following to non-employee directors.

<Table>
<S>                                     <C>
Annual Retainer......................   $30,000 to each Board member
                                        $30,000 to each Executive Committee member
Attendance Fees......................   $3,500 for each Board and Committee meeting attended
                                        in person
                                        $1,750 for each Board and Committee meeting attended
                                        via teleconference
Committee Chair Stipend..............   $10,000 annually for Audit Committee
                                        $5,000 annually for Compensation Committee and
                                        Nominating/Corporate Governance Committee
</Table>

     In 2003, non-employee directors received compensation totaling $1,101,507
as a group.

     We believe that payment of compensation to non-employee directors should
not be solely in the form of cash but should be tied to the Company's
performance. In October 1996, the Board adopted a Non-Employee Director Stock
Option Plan. The first grants under the plan went to non-employee directors
serving at the time of our initial public offering. Those grants were in the
amount of 15,000 shares to each non-employee director with an exercise price of
$5.33, which was the price of the Common Stock at the time of the initial public
offering, and were subsequently adjusted for the two-for-one stock split in June
1999, and the three-for-two stock split in June 2000.

     The Board adopted a resolution in May 2001 updating a policy that it
originally approved in April 1997, whereby non-employee directors receive
options to purchase Common Stock at the fair market value on certain dates. That
policy awards 7,500 options to each non-employee director upon commencement of
service on the Board. Each non-employee director also receives options to
purchase 7,500 shares annually. The exercise price for those options is based on
the closing price of the Common Stock the day before the grant. The options are
immediately exercisable. In 2003, our non-employee directors (Lee R. Anderson,
Sr., C. Hunter Boll, John A. Cleary, Thomas M. Hagerty, David V. Harkins, Walter
M. Hoff, Thomas H. Lee, Edward B. Speno and Frank D. Trestman) were each awarded
options to purchase 7,500 shares of Common Stock of the Company under the Metris
Companies Inc. Amended and Restated Non-Employee Director Stock Option Plan.

     The Board may change the amounts and timing of such awards in the future.
To date, the Board has granted options to purchase up to 669,000 shares of
Common Stock to its non-employee directors.

     Directors that are employees of the Company do not receive compensation for
service as a director. However, all directors, including employee directors, are
reimbursed for reasonable travel, lodging and other incidental expenses incurred
in attending meetings of the Board and its Committees.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

     Deferred Restorative Retirement Plan.  In November 1999, the Compensation
Committee of the Board adopted a Deferred Restorative Retirement Plan ("DRRP")
that was limited to a select group of management and highly compensated
employees of the Company as a means of sheltering a portion of their income from
current taxation while accumulating resources for future investments or
retirement. The DRRP is designed to make whole an employee whose benefits under
the Company's 401(k) Plan are limited by the application of Section 415 of the
Internal Revenue Code, which limits the amount of contributions that can be made
to a defined contribution plan on behalf of an employee. Under the DRRP,
participants may defer up to 15% of their salary and bonus with a maximum
compensation level of $300,000. The DRRP allowed for a 50% match on the first 6%
of eligible compensation deferred by the employee. The DRRP also restored the
discretionary profit sharing contribution if made under the 401(k) Plan for
compensation recognized above the Section 415 limit up to $300,000. On February
10, 2003, the

                                       111
<PAGE>

Compensation Committee terminated the DRRP and directed the distribution of
vested balances to plan participants.

     Supplemental Executive Retirement Plan.  In October 1999, the Compensation
Committee of the Board adopted a Supplemental Executive Retirement Plan ("SERP")
that covers the Company's officers or other senior management employees who are
selected for participation by the Compensation Committee and the CEO. The SERP
is an account balance plan to which the Company makes annual contributions
targeted to provide a specified benefit at retirement. Under the SERP, the
Company will pay a benefit to a participant whose employment relationship with
the Company is completely severed either (a) at age 65, or (b) if the
participant has completed five years of plan participation and has attained age
of 55 or greater while employed with the Company. The annual retirement benefit
payable under the SERP is targeted to equal either 60% (for the CEO and
Executive Vice Presidents) or 40% (for Senior Vice Presidents) of the average of
the participant's final three years of salary and bonus with the Company.
Benefits under the SERP will be paid in 15 annual installments, commencing no
later than 60 days after the last day of the year in which the participant
retires. Upon a change in control of the Company, a termination of the
participant's employment will be deemed to have occurred and, for purposes of
determining eligibility for benefits, a participant will be deemed to have
reached the age of retirement and completed five years of plan participation.

     The SERP was amended in 2001 to include the following clarification of
change in control and the additional triggers that would result in the payout of
the age 55 benefit:

     - a material diminution or other material adverse change in the
       participant's job title, offices, duties, responsibilities, level of
       administrative support or status from that held, assigned or received
       within the 90-day period preceding the change in control event;

     - a material reduction in the participant's compensation (including base
       salary and bonuses), qualified and non-qualified pension and profit
       sharing benefits, welfare and fringe benefits, or executive expense
       allowances in comparison to that which the participant was entitled to
       during the 90-day period immediately before the change in control event;

     - the participant is forced to relocate to a business location more than
       forty (40) miles from the location at which the participant was assigned
       immediately before the initial change in control event; or

     - the participant's employer, or the surviving company in a merger to which
       the employer is a party, terminates its sponsorship of the SERP or
       suspends or discontinues annual Company contributions to the SERP.

     The SERP was further amended in January 2004 to provide the Compensation
Committee with the authority, under certain circumstances, to accelerate the
vesting of any unvested participant balances if it deems early vesting to be in
the best interest of the Company.

     If a participant dies before his/her employment terminates, his/her death
will be treated as a termination of employment and the participant will be
deemed to have reached the age of retirement and completed five years of plan
participation. During 2003, the Company contributed the following amounts under
the SERP for our CEO and each of the other named executive officers who are
participants: Mr. Wesselink, $1,264,613; Mr. Evans, $280,374; Mr. Witham,
$215,933; Mr. Piteleski, $197,938; Mr. Melius, $73,748; and Mr. Hoffman, $0. The
Company calculated those contributions based on actuarial assumptions regarding
years of participation and future investment return on participants' account
balances. The Company assumed that these officers will remain participants in
the SERP until age 65. The total amount that has been deferred under the SERP
for the named executive officers is $5,403,135. The estimated annual benefit
payable to each of the named executive officers upon retirement is: $989,770 for
Mr. Wesselink; $605,018 for Mr. Evans; $624,958 for Mr. Witham; $564,410 for Mr.
Piteleski; $1,386,712 for Mr. Melius; and $0 for Mr. Hoffman. Due to Mr.
Hoffman's termination of employment prior to vesting, he is not entitled to
receive benefits under the SERP.

                                       112
<PAGE>

     Management Stock Purchase Plan.  In May 1999, the Company's stockholders
approved a Management Stock Purchase Plan ("MSPP") which allows a participant to
defer up to 50% of his/her annual bonus. Any employee whose job title is Senior
Vice President or higher and who participates in the Management Incentive Bonus
Plan is eligible to participate in the MSPP.

     Amounts deferred under the MSPP are credited to a stock purchase account as
RSUs representing unissued shares of Common Stock. The price of the RSU is the
closing price of the Company's Common Stock on the date the deferral was made.
The Company will also match the deferred amount at a rate equal to $1 for every
$3 contributed by the participant. The participant's contribution is immediately
vested and the match vests on the last day of the calendar year of the third
anniversary of the performance year for which the bonus was paid. Unless a
participant's employment is terminated, amounts contributed to the stock
purchase account must remain in the account for a minimum of three years.

     Incentive Plan for Designated Corporate Officers.  The Incentive Plan for
Designated Corporate Officers was established by the Company's stockholders in
response to Section 162(m) of the Internal Revenue Code. The plan originally was
approved by the stockholders at the 1997 Annual Meeting, and amendments to the
plan were approved by the stockholders at the 1998 and 1999 Annual Meetings. The
plan contains a stock purchase component which allows a participant to defer up
to 50% of his/her bonus. The Compensation Committee annually names the
participants in this plan.

     Amounts deferred under the Incentive Plan for Designated Corporate Officers
are credited to a stock purchase account as RSUs representing unissued shares of
Common Stock. The price of the RSU is the closing price of the Company's Common
Stock on the date the deferral was made. The Company will also match the
deferred amount at a rate equal to $1 for every $3 contributed by the
participant. The participant's contribution is immediately vested and the match
vests on the last day of the calendar year of the third anniversary of the
performance year for which the bonus was paid. Unless a participant's employment
is terminated, amounts contributed to the stock purchase account must remain in
the account for a minimum of three years.

     Change of Control Severance Agreement.  The Company has entered into Change
of Control Severance Agreements ("Severance Agreements") with key employees,
including each of the named executive officers in this Proxy Statement. The
Severance Agreements are intended to provide continuity of management in the
event of a change of control. Each Severance Agreement provides that the covered
employee be assured of certain salary and compensation while employed during the
two-year period after a change of control ("Post-Change Period"), and also
provides severance payments if the Company terminates employment of the covered
employee, other than for death, "disability" or "cause," or if such employee
terminates his or her employment for "good reason," as defined in the Severance
Agreement.

     While employed during the Post-Change Period, each covered employee will be
paid an annual salary at least equal to 12 times that employee's highest monthly
base salary paid during the 12-month period prior to the change of control event
("Guaranteed Base Salary"). In addition, the covered employee will be entitled
to participate in all incentive compensation, retirement and welfare plans
applicable to peer executives at the Company during the Post-Change Period, but
in no event shall those incentive compensation, retirement and welfare plans be
on terms less favorable to the employee than the most favorable terms provided
to the employee under plans in effect 90 days prior to the change of control.
All outstanding stock options granted to the covered employee will become fully
vested upon the occurrence of a change of control event. To the extent those
options are forfeited, the covered employee will be entitled to receive a cash
payment equal to the aggregate difference between the fair market value of
Common Stock underlying such forfeited options and the exercise price to
purchase such stock.

     The severance payments to be made if the employee is terminated without
"cause," or if he/she resigns with "good reason" during the Post-Change Period,
include the following:

          (a) an amount equal to the Guaranteed Base Salary and accrued vacation
     through the applicable termination date;

                                       113
<PAGE>

          (b) a lump sum payment in cash equal to two times the covered
     employee's Guaranteed Base Salary, plus the highest annual bonus paid to
     that employee during the preceding two years ("Guaranteed Bonus");

          (c) a cash payment equal to a pro rata share of the Guaranteed Bonus
     for the year of termination;

          (d) all deferred amounts under any Company non-qualified deferred
     compensation or pension plan, together with accrued but unpaid earnings
     thereon;

          (e) an amount equal to the unvested portion of the employee's
     accounts, accrued benefits or payable amounts under any qualified plan, and
     certain pension, profit sharing and retirement plans maintained by the
     Company; and

          (f) an amount equal to fees and costs charged by an outplacement firm.

     In addition, the Company has agreed, for the period following the
employee's termination date until the first anniversary of his/her termination
date, to continue to provide to such employee certain welfare benefits,
including, but not limited to, medical, dental, disability, and individual life
and travel accident insurance on terms at least as favorable as provided to
other employees at the same level during the 90-day period preceding the change
of control event.

     Mr. Hoffman's employment with the Company terminated effective October 3,
2003. Accordingly, his change of control coverage ended on his last day of
employment.

     A "change of control" under the Severance Agreements occurs if any of the
following events occur:

          (a) "any person" as defined in the Securities Exchange Act of 1934
     acquires beneficial ownership, as defined in the Exchange Act, of more than
     50% of the Common Stock of the Company, except for Mr. Melius where the
     trigger is more than 25% of the Common Stock;

          (b) individuals who constitute the Board prior to a change of control
     cease to constitute a majority of the Board; or

          (c) certain corporate reorganizations, including certain mergers, sale
     of substantially all of the assets, liquidation or dissolution of the
     Company.

     The issuance of the Series C Preferred Stock to affiliates of Thomas H. Lee
Partners, L.P. and its predecessor, Thomas H. Lee Company, on June 1, 1999,
constituted a change of control under Mr. Melius' Severance Agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

     During 2003, the following members of the Board of Directors served on the
Compensation Committee: John A. Cleary, Thomas M. Hagerty and Edward B. Speno.
On December 31, 2003, Thomas M. Hagerty resigned as a member of the Compensation
Committee due to his level of ownership in Thomas H. Lee Equity Fund IV, L.P.,
an entity to which the Company paid a commitment fee in 2003. Pursuant to
Internal Revenue Code sec.162(m), Mr. Hagerty would not be considered an outside
director subsequent to December 31, 2003, for purposes of voting on compensation
plans of the Company. The members of the Compensation Committee had no
relationships requiring disclosure pursuant to Item 402(j) of Regulation S-K.

                                       114
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     The following table provides information as of December 31, 2003 with
respect to our common stock issuable under equity compensation plans approved by
security holders:

<Table>
<Caption>
                                                   NUMBER OF           WEIGHTED-        NUMBER OF SECURITIES
                                               SECURITIES TO BE    AVERAGE EXERCISE    REMAINING AVAILABLE FOR
                                                  ISSUED UPON          PRICE OF         FUTURE ISSUANCE UNDER
                                                  EXERCISE OF         OUTSTANDING        EQUITY COMPENSATION
                                                  OUTSTANDING          OPTIONS,           PLANS (EXCLUDING
                                               OPTIONS, WARRANTS     WARRANTS AND      SECURITIES REFLECTED IN
PLAN CATEGORY                                     AND RIGHTS            RIGHTS               COLUMN (a))
-------------                                  -----------------   -----------------   -----------------------
                                                      (a)                 (b)                    (c)
<S>                                            <C>                 <C>                 <C>
                            EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS
Metris Companies Inc. Amended and Restated
  Long-Term Incentive and Stock Option
  Plan(1)....................................      5,238,243            $15.34                8,265,838
Metris Companies Inc. Non-Employee Director
  Stock Option Plan..........................        589,000            $17.22                   81,000
Management Stock Purchase Plan(2)............         18,415            $11.09                  287,359
Annual Incentive Plan for Designated
  Corporate Officers(3)......................          7,851            $10.13                       --
Employee Stock Purchase Plan(2)..............             --            $ 0.00                1,535,359
Non-qualified Employee Stock Purchase Plan...             --            $ 0.00                  432,144
                                                   ---------            ------               ----------
  TOTAL......................................      5,853,509                                 10,601,700
                                                   =========            ======               ==========
</Table>

---------------

(1) The Long-Term Incentive and Stock Option Plan permits the issuance of
    restricted stock awards and performance awards.

(2) Shares are issued based on each participant's election to participate in the
    plan.

(3) The Annual Incentive Plan for Designated Corporate Officers terminated on
    December 31, 2003. There are no securities remaining available for future
    issuance under that plan.

     We do not have any equity compensation plans that have not been approved by
the Company's security holders as of December 31, 2003.

                                       115
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table sets forth information with respect to persons we know
to be the beneficial owner of more than 5% of our outstanding Common Stock on
March 31, 2004. There were 57,908,052 shares of outstanding Common Stock as of
March 31, 2004.

     The shares beneficially owned by each of Messrs. Lee, Harkins, Boll and
Hagerty include 43,173,909 shares which they indirectly own through THL Equity
Advisors IV, LLC, which is the sole general partner of Thomas H. Lee Equity Fund
IV, L.P., Thomas H. Lee Foreign Fund IV, L.P. and Thomas H. Lee Foreign Fund
IV-B, L.P. (See footnotes to the table for additional information.)

<Table>
<Caption>
                                                      NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER                            OWNED(1)              PERCENT OF CLASS(2)
------------------------------------                  -----------------------------   -------------------
<S>                                                   <C>                             <C>
Thomas H. Lee and certain of his affiliates(3)......           44,090,103                   43.2%
  c/o Thomas H. Lee Partners, L.P.
  75 State Street
  Boston, MA 02109
David V. Harkins and certain of his affiliates(4)...           43,360,582                   42.8%
  c/o Thomas H. Lee Partners, L.P.
  75 State Street
  Boston, MA 02109
C. Hunter Boll and certain of his affiliates(5).....           43,323,279                   42.8%
  c/o Thomas H. Lee Partners, L.P.
  75 State Street
  Boston, MA 02109
Thomas M. Hagerty and certain of his                                                        42.8%
  affiliates(6).....................................           43,323,279
  c/o Thomas H. Lee Partners, L.P.
  75 State Street
  Boston, MA 02109
THL Equity Advisors IV, LLC and certain of its                                              42.7%
  affiliates(7).....................................           43,173,909
  c/o Thomas H. Lee Partners, L.P.
  75 State Street
  Boston, MA 02109
Thomas H. Lee Equity Fund IV, L.P.(8)...............           38,141,967                   39.7%
  c/o Thomas H. Lee Partners, L.P.
  75 State Street
  Boston, MA 02109
NewSouth Capital Management, Inc.(9)................            6,073,887                   10.5%
  1100 Ridgeway Loop Road, Suite 444
  Memphis, TN 38120

Vanguard Windsor Funds-.............................            5,871,600                   10.1%
Vanguard Windsor Fund(10)
  100 Vanguard Boulevard
  Malvern, PA 19355
Second Curve Capital, Inc.(11)......................            4,109,700                    7.1%
  200 Park Avenue
  Suite 3300
  New York, NY 10166
Thomas H. Lee Foreign Fund IV-B, L.P.(12)...........            3,712,908                    6.0%
  c/o Thomas H. Lee Partners, L.P.
  75 State Street
  Boston, MA 02109
</Table>

                            (continued on next page)
                                       116
<PAGE>

<Table>
<Caption>
                                                      NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER                            OWNED(1)              PERCENT OF CLASS(2)
------------------------------------                  -----------------------------   -------------------
<S>                                                   <C>                             <C>

Dimensional Fund Advisors Inc.(13)..................            3,397,550                    5.9%
  129 Ocean Avenue, 11th Floor
  Santa Monica, CA 90401
Morgan Stanley(14)..................................            3,091,634                    5.3%
  1585 Broadway
  New York, NY 10036
</Table>

---------------

 (1) "Beneficial ownership" is a technical term broadly defined under the
     Securities Exchange Act of 1934 to mean more than ownership in the usual
     sense. So, for example, you beneficially own our Common Stock not only if
     you hold it directly, but also if you indirectly (through a relationship, a
     position as a director or trustee, or a contract or understanding) have (or
     share) the power to vote the stock, or to sell it, or you have the right to
     acquire it within 60 days.

 (2) Shares of Common Stock subject to options currently exercisable or
     exercisable within 60 days of March 31, 2004, are deemed outstanding for
     purposes of computing the percentage beneficially owned by the person
     holding such options, but are not deemed outstanding for purposes of
     computing the percentage beneficially owned by any other person. Shares of
     Common Stock currently convertible from our Series C Preferred Stock are
     deemed outstanding for purposes of computing the percentage beneficially
     owned by the person holding such Series C Preferred Stock, but are not
     deemed outstanding for purposes of computing the percentage beneficially
     owned by any other person. Unless otherwise noted, the persons or entities
     named have sole voting and investment power for all shares shown as
     beneficially owned by them.

 (3) The shares beneficially owned by THOMAS H. LEE ("Lee") are reflected
     assuming conversion of the Series C Preferred Stock into Common Stock of
     the Company. The number of shares listed equals the maximum number of
     shares of Common Stock into which the Series C Preferred Stock could have
     been voluntarily converted during 2003. If voluntarily converted, the
     actual number of shares of Common Stock issued may be less than the number
     reported in accordance with the limitations of the Company's Series C
     Preferred Stock to satisfy certain provisions under the Indentures for the
     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Shares beneficially owned by Lee include shares held by
     the following affiliates of Lee:

<Table>
<Caption>
NAME                                                          NUMBER OF SHARES
----                                                          ----------------
<S>                                                           <C>
Thomas H. Lee Equity Fund IV, L.P. .........................     38,141,967
Thomas H. Lee Foreign Fund IV, L.P. ........................      1,319,034
Thomas H. Lee Foreign Fund IV-B, L.P. ......................      3,712,908
1997 Thomas H. Lee Nominee Trust............................        583,426
Thomas H. Lee Charitable Investment L.P. ...................        284,167
Thomas H. Lee Investors Limited Partnership.................         11,101
</Table>

     Except to the extent of a pecuniary interest therein, Lee disclaims
     beneficial ownership of the shares beneficially owned in the aggregate by
     Thomas H. Lee Equity Fund IV, L.P., Thomas H. Lee Foreign Fund IV, L.P. and
     Thomas H. Lee Foreign Fund IV-B, L.P., which may also be deemed to be
     beneficially owned by THL Equity Advisors IV, LLC ("THL Advisors"), as
     their general partner. In addition, except to the extent of a pecuniary
     interest therein, Lee disclaims beneficial ownership of the shares
     beneficially owned by Thomas H. Lee Investors Limited Partnership, which
     may also be deemed to be beneficially owned by THL Investment Management
     Corp. ("Management Corp."). Lee also disclaims beneficial ownership of the
     shares beneficially owned by Thomas H. Lee Charitable Investment L.P.
     ("Charitable Investment"), which may also be deemed to be beneficially
     owned by Management Corp. Lee, as General Director of THL Advisors, Chief

                                       117
<PAGE>

     Executive Officer and sole shareholder of Management Corp., General Partner
     of Charitable Investment, and grantor of the 1997 Thomas H. Lee Nominee
     Trust, may be deemed to share voting and investment power with respect to
     44,052,603 shares beneficially owned by such entities. Also includes 37,500
     shares that Lee has the right to acquire within 60 days of March 31, 2004
     through the exercise of stock options. Information for security ownership
     of Lee is based on Company records and the Schedule 13D Amendment No. 4
     filed on February 18, 2004.

 (4) The shares beneficially owned by DAVID V. HARKINS ("Harkins") are reflected
     assuming conversion of the Series C Preferred Stock into Common Stock of
     the Company. The number of shares listed equals the maximum number of
     shares of Common Stock into which the Series C Preferred Stock could have
     been voluntarily converted during 2003. If voluntarily converted, the
     actual number of shares of Common Stock issued may be less than the number
     reported in accordance with the limitations of the Company's Series C
     Preferred Stock to satisfy certain provisions under the Indentures for the
     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Shares beneficially owned by Harkins include shares held
     by the following affiliates of Harkins:

<Table>
<Caption>
NAME                                                          NUMBER OF SHARES
----                                                          ----------------
<S>                                                           <C>
Thomas H. Lee Equity Fund IV, L.P. .........................     38,141,967
Thomas H. Lee Foreign Fund IV, L.P. ........................      1,319,034
Thomas H. Lee Foreign Fund IV-B, L.P. ......................      3,712,908
The 1995 Harkins Gift Trust.................................         14,969
</Table>

     Except to the extent of a pecuniary interest therein, Harkins disclaims
     beneficial ownership of the shares beneficially owned in the aggregate by
     Thomas H. Lee Equity Fund IV, L.P., Thomas H. Lee Foreign Fund IV, L.P. and
     Thomas H. Lee Foreign Fund IV-B, L.P., which may also be deemed to be
     beneficially owned by THL Equity Advisors IV, LLC, as their general
     partner. Harkins may be deemed to share voting and investment power with
     other investors with respect to 43,173,909 shares beneficially owned by
     such entities. Harkins also disclaims beneficial ownership of the shares
     beneficially owned by The 1995 Harkins Gift Trust ("Trust"). Harkins may be
     deemed to share voting and investment power over shares held by the Trust.
     Also includes: (i) 134,204 shares of Common Stock which may be acquired
     through the conversion of Series C Preferred Stock; and (ii) 37,500 shares
     of Common Stock that Harkins has the right to acquire within 60 days of
     March 31, 2004 through the exercise of stock options. Information for
     security ownership of Harkins is based on Company records and the Schedule
     13D Amendment No. 4 filed on February 18, 2004.

 (5) The shares beneficially owned by C. HUNTER BOLL ("Boll") are reflected
     assuming conversion of the Series C Preferred Stock into Common Stock of
     the Company. The number of shares listed equals the maximum number of
     shares of Common Stock into which the Series C Preferred Stock could have
     been voluntarily converted during 2003. If voluntarily converted, the
     actual number of shares of Common Stock issued may be less than the number
     reported in accordance with the limitations of the Company's Series C
     Preferred Stock to satisfy certain provisions under the Indentures for the
     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Shares beneficially owned by Boll include shares held by
     the following affiliates of Boll:

<Table>
<Caption>
                                                               NUMBER OF
NAME                                                             SHARES
----                                                           ----------
<S>                                                            <C>
Thomas H. Lee Equity Fund IV, L.P. .........................   38,141,967
Thomas H. Lee Foreign Fund IV, L.P. ........................    1,319,034
Thomas H. Lee Foreign Fund IV-B, L.P. ......................    3,712,908
</Table>

                                       118
<PAGE>

     Except to the extent of a pecuniary interest therein, Boll disclaims
     beneficial ownership of the shares beneficially owned in the aggregate by
     Thomas H. Lee Equity Fund IV, L.P., Thomas H. Lee Foreign Fund IV, L.P. and
     Thomas H. Lee Foreign Fund IV-B, L.P., which may also be deemed to be
     beneficially owned by THL Equity Advisors IV, LLC, as their general
     partner. Boll may be deemed to share voting and investment power with other
     investors with respect to 43,173,909 shares beneficially owned by such
     entities. Also includes: (i) 111,870 shares of Common Stock which may be
     acquired through the conversion of Series C Preferred Stock; and (ii)
     37,500 shares of Common Stock that Boll has the right to acquire within 60
     days of March 31, 2004 through the exercise of stock options. Information
     for security ownership of Boll is based on Company records and the Schedule
     13D Amendment No. 4 filed on February 18, 2004.

 (6) The shares beneficially owned by THOMAS M. HAGERTY ("Hagerty") are
     reflected assuming conversion of the Series C Preferred Stock into Common
     Stock of the Company. The number of shares listed equals the maximum number
     of shares of Common Stock into which the Series C Preferred Stock could
     have been voluntarily converted during 2003. If voluntarily converted, the
     actual number of shares of Common Stock issued may be less than the number
     reported in accordance with the limitations of the Company's Series C
     Preferred Stock to satisfy certain provisions under the Indentures for the
     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Shares beneficially owned by Hagerty include shares held
     by the following affiliates of Hagerty:

<Table>
<Caption>
                                                               NUMBER OF
NAME                                                             SHARES
----                                                           ----------
<S>                                                            <C>
Thomas H. Lee Equity Fund IV, L.P. .........................   38,141,967
Thomas H. Lee Foreign Fund IV, L.P. ........................    1,319,034
Thomas H. Lee Foreign Fund IV-B, L.P. ......................    3,712,908
</Table>

     Except to the extent of a pecuniary interest therein, Hagerty disclaims
     beneficial ownership of the shares beneficially owned in the aggregate by
     Thomas H. Lee Equity Fund IV, L.P., Thomas H. Lee Foreign Fund IV, L.P. and
     Thomas H. Lee Foreign Fund IV-B, L.P., which may also be deemed to be
     beneficially owned by THL Equity Advisors IV, LLC, as their general
     partner. Hagerty may be deemed to share voting and investment power with
     other investors with respect to 43,173,909 shares beneficially owned by
     such entities. Also includes: (i) 111,870 shares of Common Stock which may
     be acquired through the conversion of Series C Preferred Stock; and (ii)
     37,500 shares of Common Stock that Hagerty has the right to acquire within
     60 days of March 31, 2004 through the exercise of stock options.
     Information for security ownership of Hagerty is based on Company records
     and the Schedule 13D Amendment No. 4 filed on February 18, 2004.

 (7) The shares beneficially owned by THL EQUITY ADVISORS IV, LLC ("THL
     Advisors") are reflected assuming conversion of the Series C Preferred
     Stock into Common Stock of the Company. The number of shares listed equals
     the maximum number of shares of Common Stock into which the Series C
     Preferred Stock could have been voluntarily converted during 2003. If
     voluntarily converted, the actual number of shares of Common Stock issued
     may be less than the number reported in accordance with the limitations of
     the Company's Series C Preferred Stock to satisfy certain provisions under
     the Indentures for the Company's 10% Senior Notes due 2004 and 10 1/8%
     Senior Notes due 2006. The extra shares of Series C Preferred Stock which
     are not convertible into Common Stock will be convertible into the
     Company's non-voting Series D Preferred Stock. Shares beneficially owned by
     THL Advisors include shares held by the following affiliates of THL
     Advisors:

<Table>
<Caption>
                                                               NUMBER OF
NAME                                                             SHARES
----                                                           ----------
<S>                                                            <C>
Thomas H. Lee Equity Fund IV, L.P. .........................   38,141,967
Thomas H. Lee Foreign Fund IV, L.P. ........................    1,319,034
Thomas H. Lee Foreign Fund IV-B, L.P. ......................    3,712,908
</Table>

                                       119
<PAGE>

     THL Advisors, as sole general partner of each of the affiliates listed
     above, may be deemed to share voting and investment power with respect to
     the 43,173,909 shares beneficially owned in the aggregate by the affiliates
     listed above. Information for security ownership of THL Advisors is based
     on the Schedule 13D Amendment No. 4 filed on February 18, 2004.

 (8) The shares beneficially owned by THOMAS H. LEE EQUITY FUND IV, L.P.
     ("Equity Fund") are reflected assuming conversion of the Series C Preferred
     Stock into Common Stock of the Company. The number of shares listed equals
     the maximum number of shares of Common Stock into which the Series C
     Preferred Stock could have been voluntarily converted during 2003. If
     voluntarily converted, the actual number of shares of Common Stock issued
     may be less than the number reported in accordance with the limitations of
     the Company's Series C Preferred Stock to satisfy certain provisions under
     the Indentures for the Company's 10% Senior Notes due 2004 and 10 1/8%
     Senior Notes due 2006. The extra shares of Series C Preferred Stock which
     are not convertible into Common Stock will be convertible into the
     Company's non-voting Series D Preferred Stock. Shares owned by Equity Fund
     may also be deemed to be beneficially owned by THL Equity Advisors IV, LLC,
     as its general partner. Information for security ownership of Equity Fund
     is based on Schedule 13D Amendment No. 4 filed on February 18, 2004.

 (9) NewSouth Capital Management, Inc. ("NewSouth") has sole voting power over
     5,995,887 shares of Common Stock, shared voting power over 66,000 shares of
     Common Stock, and sole investment power over 6,073,887 shares of Common
     Stock. Information for security ownership of NewSouth is based on the
     Schedule 13G Amendment No. 6 filed by NewSouth on February 9, 2004.

(10) Vanguard Windsor Funds-Vanguard Windsor Fund ("Vanguard") has sole voting
     power over 5,871,600 shares of Common Stock, and shared investment power
     with its clients over 5,871,600 shares of Common Stock. Information for
     security ownership of Vanguard is based on the Schedule 13G Amendment No. 2
     filed by Vanguard on February 6, 2004.

(11) Information for security ownership of Second Curve Capital, LLC ("Second
     Curve") is based on Form 13F-HR filed by Second Curve on February 13, 2004.

(12) The shares beneficially owned by THOMAS H. LEE FOREIGN FUND IV-B,
     L.P.("Foreign Fund B") are reflected assuming conversion of the Series C
     Preferred Stock into Common Stock of the Company. The number of shares
     listed equals the maximum number of shares of Common Stock into which the
     Series C Preferred Stock could have been voluntarily converted during 2003.
     If voluntarily converted, the actual number of shares of Common Stock
     issued may be less than the number reported in accordance with the
     limitations of the Company's Series C Preferred Stock to satisfy certain
     provisions under the Indentures for the Company's 10% Senior Notes due 2004
     and 10 1/8% Senior Notes due 2006. The extra shares of Series C Preferred
     Stock which are not convertible into Common Stock will be convertible into
     the Company's non-voting Series D Preferred Stock. Shares owned by Foreign
     Fund B may also be deemed to be beneficially owned by THL Equity Advisors
     IV, LLC, as its general partner. Information for security ownership of
     Foreign Fund B is based on the Schedule 13D Amendment No. 4 filed on
     February 18, 2004.

(13) Dimensional Fund Advisors Inc. ("Dimensional"), an investment advisor
     registered under Section 203 of the Investment Advisors Act of 1940,
     furnishes investment advice to four investment companies registered under
     the Investment Company Act of 1940, and serves as investment manager to
     certain other commingled group trusts and separate accounts. (These
     investment companies, trusts and accounts collectively are referred to as
     the "Funds.") In its role as investment advisor or manager, Dimensional
     possesses voting and/or investment power over the securities of the Company
     that are owned by the Funds, and may be deemed to be the beneficial owner
     of the shares of Common Stock of the Company held by the Funds. However,
     the 3,397,550 shares of Common Stock reported in this table are owned by
     the Funds. Dimensional disclaims beneficial ownership of such securities.
     Information for security ownership of Dimensional is based on the Schedule
     13G filed by Dimensional on February 6, 2004.

(14) Morgan Stanley has shared voting and investment power over 2,594,091 shares
     of Common Stock. It filed a Schedule 13G solely in its capacity as the
     parent company of, and indirect beneficial owner of

                                       120
<PAGE>

     securities held by, one of its business units. Information for security
     ownership of Morgan is based on the Schedule 13G filed by Morgan Stanley on
     February 17, 2004.

SECURITY OWNERSHIP OF MANAGEMENT

     The following table contains information as to the ownership of the
Company's Common Stock as of March 31, 2004, with respect to (i) each of the
directors, (ii) the named executive officers, and (iii) all directors and
executive officers as a group. We have determined beneficial ownership for this
purpose in accordance with Rule 13d-3 of Section 13 of the Securities Exchange
Act of 1934. Under that rule, a person is deemed to be the beneficial owner of
securities if he has or shares voting power or investment power with respect to
the securities, or has the right to acquire beneficial ownership within 60 days
of March 31, 2004. There were 57,908,052 shares of outstanding Common Stock as
of March 31, 2004.

     The shares beneficially owned by each of Messrs. Lee, Harkins, Boll and
Hagerty include 43,173,909 shares which they indirectly own through THL Equity
Advisors IV, LLC, which is the sole general partner of Thomas H. Lee Equity Fund
IV, L.P., Thomas H. Lee Foreign Fund IV, L.P. and Thomas H. Lee Foreign Fund
IV-B, L.P. (See footnotes to the table for additional information.)

<Table>
<Caption>
                                                               NUMBER OF SHARES OF
                                                                  COMMON STOCK       PERCENT OF
NAME OF BENEFICIAL OWNER                                       BENEFICIALLY OWNED     CLASS(1)
------------------------                                       -------------------   -----------
<S>                                                            <C>                   <C>
Thomas H. Lee...............................................        44,090,103(2)       43.2%
David V. Harkins............................................        43,360,582(3)       42.8%
C. Hunter Boll..............................................        43,323,279(4)       42.8%
Thomas M. Hagerty...........................................        43,323,279(5)       42.8%
David D. Wesselink..........................................           758,343(6)        1.3%
Lee R. Anderson, Sr. .......................................           436,233(7)          *
Frank D. Trestman...........................................           155,000(8)          *
John A. Cleary..............................................            68,000(9)          *
Edward B. Speno.............................................            38,500(10)         *
Walter M. Hoff..............................................            37,500(11)         *
Matthew S. Melius...........................................           167,417(12)         *
Richard G. Evans............................................            82,021(13)         *
Dan N. Piteleski............................................            64,774(14)         *
John A. Witham..............................................            31,250(15)         *
Joseph A. Hoffman...........................................            12,291(16)         *
All directors and executive officers as a group (17
  persons)..................................................        46,011,601(17)      44.3%
</Table>

---------------

 (*) Less than 1%.

 (1) Shares of Common Stock subject to options currently exercisable or
     exercisable within 60 days of March 31, 2004, are deemed outstanding for
     purposes of computing the percentage beneficially owned by the person
     holding such options, but are not deemed outstanding for purposes of
     computing the percentage beneficially owned by any other person. Shares of
     Common Stock currently convertible from our Preferred Stock are deemed
     outstanding for purposes of computing the percentage beneficially owned by
     the person holding such Preferred Stock, but are not deemed outstanding for
     purposes of computing the percentage beneficially owned by any other
     person. Unless otherwise noted, the persons named have sole voting and
     investment power for all shares shown as beneficially owned by them.

 (2) Includes 44,052,603 shares of Common Stock into which the Series C
     Preferred Stock could have been voluntarily converted during 2003. If
     voluntarily converted, the actual number of shares of Common Stock issued
     may be less than the number reported in accordance with the limitations of
     the Company's Series C Preferred Stock to satisfy certain provisions under
     the Indentures for the

                                       121
<PAGE>

     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Of those 44,052,603 shares: (a) 43,173,909 shares are
     beneficially owned in the aggregate by Thomas H. Lee Equity Fund IV, L.P.
     ("Equity Fund"), Thomas H. Lee Foreign Fund IV, L.P. ("Foreign Fund") and
     Thomas H. Lee Foreign Fund IV-B, L.P. ("Foreign Fund B"), which may also be
     deemed to be beneficially owned by THL Equity Advisors IV, LLC ("THL
     Advisors"), as their general partner; (b) 583,426 shares are beneficially
     owned by the 1997 Thomas H. Lee Nominee Trust ("Nominee Trust"); (c)
     284,167 shares are beneficially owned by Thomas H. Lee Charitable
     Investment L.P. ("Charitable Investment"); and (d) 11,101 shares are
     beneficially owned by Thomas H. Lee Investors Limited Partnership
     ("Investors Partnership"), which may also be deemed to be beneficially
     owned by THL Investment Management Corp. ("Management Corp."). Mr. Lee may
     be deemed to beneficially own these shares because he acts as (i) Principal
     Managing Director; (ii) settlor and beneficiary; (iii) General Partner; and
     (iv) sole shareholder, respectively, of these entities. Mr. Lee disclaims
     beneficial ownership of all shares except for those shares owned by the
     Nominee Trust and except to the extent of his pecuniary interest in those
     shares owned by Equity Fund, Foreign Fund, Foreign Fund B and Investors
     Partnership. Mr. Lee, as General Director of THL Advisors, Chief Executive
     Officer and sole shareholder of Management Corp., General Partner of
     Charitable Investment, and grantor of the Nominee Trust, may be deemed to
     share voting and investment power with respect to 44,052,603 shares
     beneficially owned by such entities. Also includes 37,500 shares that Mr.
     Lee has the right to acquire within 60 days of March 31, 2004 through the
     exercise of stock options.

 (3) Includes the following shares of Common Stock which may be acquired through
     the conversion of Series C and D Preferred Stock: (a) 43,173,909 shares
     beneficially owned in the aggregate by Thomas H. Lee Equity Fund IV, L.P.
     ("Equity Fund"), Thomas H. Lee Foreign Fund IV, L.P. ("Foreign Fund") and
     Thomas H. Lee Foreign Fund IV-B, L.P. ("Foreign Fund B"), which may also be
     deemed to be beneficially owned by THL Equity Advisors IV, LLC, as their
     general partner; (b) 134,204 shares beneficially owned by Mr. Harkins; and
     (c) 14,969 shares beneficially owned by the 1995 Harkins Gift Trust
     ("Trust"). Mr. Harkins disclaims beneficial ownership of the shares
     beneficially owned by the Trust and shares beneficially owned in the
     aggregate by Equity Fund, Foreign Fund and Foreign Fund B, except to the
     extent of his pecuniary interest therein. Mr. Harkins may be deemed to
     share voting and investment power with other investors with respect to
     43,173,909 shares beneficially owned by Equity Fund, Foreign Fund and
     Foreign Fund B. These 43,323,082 shares represent the maximum number of
     shares of Common Stock into which the Series C Preferred Stock can be
     voluntarily converted during 2003. If voluntarily converted, the actual
     number of shares of Common Stock issued may be less than the number
     reported in accordance with the limitations of the Company's Series C
     Preferred Stock to satisfy certain provisions under the Indentures for the
     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Mr. Harkins may also be deemed to share voting and
     investment power over shares held by the Trust. Also includes 37,500 shares
     that Mr. Harkins has the right to acquire within 60 days of March 31, 2004,
     through the exercise of stock options.

 (4) Includes the following shares of Common Stock which may be acquired through
     the conversion of Series C and D Preferred Stock: (a) 43,173,909 shares
     beneficially owned in the aggregate by Thomas H. Lee Equity Fund IV, L.P.
     ("Equity Fund"), Thomas H. Lee Foreign Fund IV, L.P. ("Foreign Fund") and
     Thomas H. Lee Foreign Fund IV-B, L.P. ("Foreign Fund B"), which may also be
     deemed to be beneficially owned by THL Equity Advisors IV, LLC, as their
     general partner; and (b) 111,870 shares beneficially owned by Mr. Boll. Mr.
     Boll disclaims beneficial ownership of the shares beneficially owned in the
     aggregate by Equity Fund, Foreign Fund and Foreign Fund B, except to the
     extent of his pecuniary interest therein. Mr. Boll may be deemed to share
     voting and investment power with other investors with respect to 43,173,909
     shares beneficially owned by Equity Fund, Foreign Fund and Foreign Fund B.
     These 43,285,779 shares represent the maximum number

                                       122
<PAGE>

     of shares of Common Stock into which the Series C Preferred Stock can be
     voluntarily converted during 2003. If voluntarily converted, the actual
     number of shares of Common Stock issued may be less than the number
     reported in accordance with the limitations of the Company's Series C
     Preferred Stock to satisfy certain provisions under the Indentures for the
     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Also includes 37,500 shares that Mr. Boll has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

 (5) Includes the following shares of Common Stock which may be acquired through
     the conversion of Series C and D Preferred Stock: (a) 43,173,909 shares
     beneficially owned in the aggregate by Thomas H. Lee Equity Fund IV, L.P.
     ("Equity Fund"), Thomas H. Lee Foreign Fund IV, L.P. ("Foreign Fund") and
     Thomas H. Lee Foreign Fund IV-B, L.P. ("Foreign Fund B"), which may also be
     deemed to be beneficially owned by THL Equity Advisors IV, LLC, as their
     general partner; and (b) 111,870 shares beneficially owned by Mr. Hagerty.
     Mr. Hagerty disclaims beneficial ownership of the shares beneficially owned
     in the aggregate by Equity Fund, Foreign Fund and Foreign Fund B, except to
     the extent of his pecuniary interest therein. Mr. Hagerty may be deemed to
     share voting and investment power with other investors with respect to
     43,173,909 shares beneficially owned by Equity Fund, Foreign Fund and
     Foreign Fund B. These 43,285,779 shares represent the maximum number of
     shares of Common Stock into which the Series C Preferred Stock can be
     voluntarily converted during 2003. If voluntarily converted, the actual
     number of shares of Common Stock issued may be less than the number
     reported in accordance with the limitations of the Company's Series C
     Preferred Stock to satisfy certain provisions under the Indentures for the
     Company's 10% Senior Notes due 2004 and 10 1/8% Senior Notes due 2006. The
     extra shares of Series C Preferred Stock which are not convertible into
     Common Stock will be convertible into the Company's non-voting Series D
     Preferred Stock. Also includes 37,500 shares that Mr. Hagerty has the right
     to acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

 (6) Includes (a) stock units representing 5,931 shares of vested but unissued
     Common Stock credited to Mr. Wesselink's deferred stock account in the
     Company's Annual Incentive Bonus Plan for Designated Corporate Officers;
     (b) 712,103 shares of Common Stock that Mr. Wesselink has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options; and (c) 450 shares of Common Stock held by Mr. Wesselink's son,
     over which Mr. Wesselink has power of attorney.

 (7) Includes 75,000 shares of Common Stock that Mr. Anderson has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

 (8) Includes 90,000 shares of Common Stock that Mr. Trestman has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

 (9) Includes 55,000 shares of Common Stock that Mr. Cleary has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

(10) Includes 37,500 shares of Common Stock that Mr. Speno has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

(11) Includes 37,500 shares of Common Stock that Mr. Hoff has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

(12) Includes (a) 154,402 shares of Common Stock that Mr. Melius has the right
     to acquire within 60 days of March 31, 2004, through the exercise of stock
     options; and (b) 4,037 shares held in Mr. Melius' 401(k) account.

(13) Includes (a) stock units representing 1,976 shares of vested but unissued
     Common Stock credited to Mr. Evans' stock purchase account in the Company's
     Management Stock Purchase Plan; (b) 76,545 shares of Common Stock that Mr.
     Evans has the right to acquire within 60 days of March 31, 2004, through
     the exercise of stock options; and (c) 2,500 shares held by Mr. Evans'
     revocable trust.

                                       123
<PAGE>

(14) Includes (a) stock units representing 1,437 shares of vested but unissued
     Common Stock credited to Mr. Piteleski's stock purchase account in the
     Company's Management Stock Purchase Plan; and (b) 57,337 shares of Common
     Stock that Mr. Piteleski has the right to acquire within 60 days of March
     31, 2004, through the exercise of stock options.

(15) Includes 31,250 shares of Common Stock that Mr. Witham has the right to
     acquire within 60 days of March 31, 2004, through the exercise of stock
     options.

(16) Mr. Hoffman's employment with the Company terminated October 3, 2003.

(17) Includes (a) stock units representing 5,931 shares of vested but unissued
     Common Stock credited to deferred stock accounts in the Company's Annual
     Incentive Bonus Plan for Designated Corporate Officers; (b) stock units
     representing 3,413 shares of vested but unissued Common Stock credited to
     stock purchase accounts in the Company's Management Stock Purchase Plan;
     (c) 1,499,446 shares of Common Stock that the directors and executive
     officers have the right to acquire within 60 days of March 31, 2004,
     through the exercise of stock options; and (d) 44,425,516 shares of Common
     Stock through the conversion of Series C and D Preferred Stock.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Lee R. Anderson, Sr. owns 51% of A&L Partnership, LLP, the landlord with
which our subsidiary, Metris Direct, Inc. ("MDI"), entered into a lease in June
2001 of a building in Duluth, Minnesota. The facility, which MDI leased for an
initial term of five years, houses an operations center where we currently
employ approximately 190 collectors and support staff. During 2003, MDI paid a
total of $321,277, which includes base rent and operating expenses. Under the
terms of the lease, base rent (excluding operating expenses) was $21,083 per
month from January through August 2003, currently is $22,333 per month, and will
increase by approximately $1,250 per month effective September of each lease
year for the remainder of the lease term. Mr. Anderson was not involved in
negotiations regarding the lease. Neither Metris nor A&L Partnership considers
the lease to be material to its business. We believe that the rental rates and
other terms of the lease are comparable to those that MDI would negotiate on an
arm's-length basis with other entities with which our directors do not have
relationships.

     Directors Representing Our Series C Preferred Stock.  All of our preferred
stockholders, and the four directors representing them -- C. Hunter Boll, Thomas
M. Hagerty, David V. Harkins and Thomas H. Lee -- are affiliates of Thomas H.
Lee Partners, L.P. As of March 31, 2004, the outstanding shares of Series C
Preferred Stock were convertible into approximately (a) 31.0 million shares of
Common Stock, or 34.9% of our Common Stock on a diluted basis, and (b) 14.0
million shares of non-voting Series D Preferred Stock. Our independent auditor,
KPMG LLP, and our internal auditor, PricewaterhouseCoopers LLP, provide services
on a periodic basis to affiliates of Thomas H. Lee Partners, L.P.

     On March 31, 2003, Thomas H. Lee Equity Fund IV, L.P. ("THL Fund IV"), an
affiliate of Thomas H. Lee Partners, L.P., committed to provide a term loan to
the Company in an aggregate amount of $125 million as a backup financing
facility, secured by assets of the Company. The Company paid THL Equity Advisors
IV, LLC, a $5.625 million commitment fee for this transaction. The Company
obtained alternative financing and did not draw down on this facility.

     As of March 31, 2004, THL Fund IV holds shares of the Company's Series C
Preferred Stock convertible into 38,141,967 shares of the Company's Common
Stock. Furthermore, the four directors elected by holders of our Series C
Preferred Stock, Messrs. Boll, Hagerty, Harkins and Lee, are each a principal
managing director of Thomas H. Lee Advisors, LLC, which is the general partner
of Thomas H. Lee Partners, L.P., which is the managing member of THL Equity
Advisors IV, LLC, which in turn is the sole general partner of THL Fund IV.
Therefore, these four directors may have had a material interest in this backup
financing facility transaction.

     Former Director of the Company.  On February 7, 2003, Derek V. Smith
resigned as a director of the Company. Mr. Smith is Chairman and CEO of
ChoicePoint Inc., a company that provided

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<PAGE>

information-related services to Metris on a regular basis. In 2003, the Company
paid ChoicePoint $73,615 for services provided.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The Audit Committee has engaged KPMG LLP to serve as our independent
auditor for fiscal year 2004. KPMG has been our independent auditor since 1996.

     The following table sets forth the amount of audit fees, audit related
fees, tax fees, and all other fees billed for services by KPMG LLP, our
independent auditor, for the years ended December 31, 2002 and 2003,
respectively.

<Table>
<Caption>
                                                                2002        2003
                                                              ---------   ---------
<S>                                                           <C>         <C>
Audit Fees(1)...............................................  1,038,704   3,124,582
Audit-Related Fees(2).......................................    196,500     379,500
Tax Fees(3).................................................     98,025      36,677
All Other Fees(4)...........................................          0      80,000
                                                              ---------   ---------
Total Fees..................................................  1,333,229   3,624,587
                                                              =========   =========
</Table>

---------------

(1) Audit fees principally relate to the audit of the Company's annual financial
    statements and the review of the Company's quarterly financial statements
    included in the Quarterly Reports on Form 10-Q. They also relate to services
    such as comfort letters, statutory audits and consent filings.

(2) Audit-related fees principally relate to audits of employee benefit plans,
    performance of agreed-upon procedures associated with certain securitization
    activities, consultation with management as to the accounting treatment of
    specific transactions, and consultations in connection with regulatory
    inquiries and investigations.

(3) Tax fees principally relate to IRS exam assistance. They also relate to
    transaction planning and compliance services.

(4) All other fees in 2003 relate to Sarbanes-Oxley Section 404 advisory
    services.

     The Audit Committee of the Board has considered and determined that the
provision of the non-audit services described in the table above is compatible
with maintaining KPMG's independence.

     The Audit Committee reviews and pre-approves all audit and non-audit
services performed by the Company's independent auditor, other than as may be
allowed by applicable law. The Committee delegated to Mr. Trestman, Chairman of
the Audit Committee, the authority to grant any pre-approvals required to be
made by the Committee pursuant to Section 10A(i) of the Securities Exchange Act
of 1934, as amended, including as amended by Section 202 of the Sarbanes-Oxley
Act of 2002, and directed Mr. Trestman to report any such pre-approvals to the
Committee at each of its scheduled meetings. All audit services and non-audit
services have been pre-approved in accordance with this pre-approval policy and
such policy has not been waived in any instance.

                                       125
<PAGE>

                                    PART IV

ITEM 15.  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.

          3. Exhibits. See Exhibit Index on page 113 of this Report.

     (b) Reports on Form 8-K: During the three months ended December 31, 2003,
through the date of this Report, the Company filed the following Current Reports
on Form 8-K:

          On October 2, 2003, we filed a Current Report on Form 8-K to report
     under Items 5 and 7 the closing of our sale of federally insured "Deposits"
     from Direct Merchants Bank, N.A.

          On October 23, 2003, we filed a Current Report on Form 8-K, and an
     amendment on Form 8-K/A, to report under Items 5 and 7 our financial
     results for the third quarter ended September 30, 2003.

          On November 17, 2003, we filed a Current Report on Form 8-K, to report
     under Items 5 and 7 a press release announcing our delay in filing the 10-Q
     for the third quarter pending resolution of valuation issues.

          On November 17, 2003, we filed a Current Report on Form 8-K, to report
     under Items 5 and 7, the filing of a press release announcing our sale of
     credit card accounts and related receivables.

          On December 12, 2003, we filed a Current Report on Form 8-K, to report
     under Item 5 that we entered into a new Modified Operating Agreement with
     the Office of the Comptroller of Currency that supersedes the existing
     agreement dated March 18, 2003.

          On December 19, 2003, we filed a Current Report on Form 8-K to report
     under Item 5 the notification received from the SEC, expanding its
     investigation to include the valuation of our retained interests in
     securitized loans.

          On March 15, 2004, we filed a Current Report on Form 8-K to report
     under Items 7, 9 and 12, the filing of a press release announcing (a)
     financial results for our fourth quarter ended December 31, 2003, (b) the
     receipt of a commitment from MBIA Insurance Corporation to provide
     financial guaranty insurance policies to refinance a portion of the
     Company's maturing asset-backed securitization transactions in 2004 and
     2005, and (c) the late filing of our Annual Report on Form 10-K.

     (c) Exhibits: See Exhibit Index on page 129 of this Report.

                                       126
<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 29th day of
April, 2004.

                                          METRIS COMPANIES INC.
                                          (Registrant)

                                          By     /s/ DAVID D. WESSELINK
                                            ------------------------------------
                                                     David D. Wesselink
                                            Chairman 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.

<Table>
<Caption>
                    SIGNATURE                                       TITLE                        DATE
                    ---------                                       -----                        ----
<S>     <C>                                          <C>                                   <C>
Principal executive officer:                               Chairman of the Board,             April 29, 2004
                                                           Chief Executive Officer
              /s/ DAVID D. WESSELINK
 ------------------------------------------------
                David D. Wesselink


Principal financial officer:                              Executive Vice President,           April 29, 2004
                                                           Chief Financial Officer
                /s/ JOHN A. WITHAM
 ------------------------------------------------
                  John A. Witham


Principal accounting officer:                         Senior Vice President, Controller       April 29, 2004
               /s/ MARK P. WAGENER
 ------------------------------------------------
                 Mark P. Wagener


             /s/ LEE R. ANDERSON, SR.                             Director                    April 29, 2004
 ------------------------------------------------
               Lee R. Anderson, Sr.


                /s/ C. HUNTER BOLL                                Director                    April 29, 2004
 ------------------------------------------------
                  C. Hunter Boll


                /s/ JOHN A. CLEARY                                Director                    April 29, 2004
 ------------------------------------------------
                  John A. Cleary


              /s/ THOMAS M. HAGERTY                               Director                    April 29, 2004
 ------------------------------------------------
                Thomas M. Hagerty


               /s/ DAVID V. HARKINS                               Director                    April 29, 2004
 ------------------------------------------------
                 David V. Harkins
</Table>

                                       127
<PAGE>

<Table>
<Caption>
                    SIGNATURE                                       TITLE                        DATE
                    ---------                                       -----                        ----

<S>     <C>                                          <C>                                   <C>

                /s/ WALTER M. HOFF                                Director                    April 29, 2004
 ------------------------------------------------
                  Walter M. Hoff


                /s/ THOMAS H. LEE                                 Director                    April 29, 2004
 ------------------------------------------------
                  Thomas H. Lee


               /s/ EDWARD B. SPENO                                Director                    April 29, 2004
 ------------------------------------------------
                 Edward B. Speno


              /s/ FRANK D. TRESTMAN                               Director                    April 29, 2004
 ------------------------------------------------
                Frank D. Trestman
</Table>

                                       128
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
 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 8-A (File No.
          1-12351)).
          (a) Certificate of Amendment to articles of incorporation
          dated June 4, 2003.**
 3.2      Amended and Restated Bylaws of the Company (incorporated by
          reference to Exhibit 3.1 to the Company's Quarterly Report
          on Form 10-Q for the period ended June 30, 1999 (File No.
          1-12351)).
Instruments Defining Rights:
 4.1      Indenture, dated as of November 7, 1997, among MCI, Metris
          Direct, Inc., as 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 MCI's
          Registration Statement on Form S-4 (File No. 333-43771)).
          (a) First Supplemental Indenture, dated as of June 25, 1999,
          among MCI, the Guarantors named therein and the First
          National Bank of Chicago (incorporated by reference to
          Exhibit 4.4 to MCI's Registration Statement on Form S-4
          (File No. 333-86695)).
          (b) Second Supplemental Indenture, dated as of February 28,
          2000, among MCI, the Guarantors named therein and Bank One
          Trust Company, N.A., as Trustee, successor in interest to
          the First National Bank of Chicago (incorporated by
          reference to Exhibit 4.2 to MCI's Quarterly Report on Form
          10-Q for the period ended March 31, 2000 (File No.
          1-12351)).
          (c) Third Supplemental Indenture, dated as of January 2,
          2001, among MCI, the guarantors named therein and Bank One
          Trust Company, N.A. (incorporated by reference to Exhibit
          4.1(c) to MCI's Annual Report on Form 10-K for the year
          ended December 31, 2001 (File No. 1-12351)).
          (d) Agreement of Resignation, Appointment and Acceptance,
          dated as of November 14, 2001, among MCI, Bank One Trust
          Company, N.A., as Prior Trustee, and US Bank National
          Association, as Successor Trustee (incorporated by reference
          to Exhibit 4.1(d) to MCI's Annual Report on Form 10-K for
          the year ended December 31, 2001 (File No. 1-12351)).
 4.2      Certificate of Designation of Series C Perpetual Preferred
          Stock (incorporated by reference to Exhibit 4.2 of MCI's
          Current Report on Form 8-K dated December 22, 1998 (File No.
          1-12351)).
          (a) Amended Certificate of Designation of Series C Perpetual
          Convertible Preferred Stock (incorporated by reference to
          Exhibit 3.3 to MCI's Registration Statement on Form S-3
          (File No. 333-82007)).
 4.3      Certificate of Designation of Series D Junior Participating
          Convertible Preferred Stock (incorporated by reference to
          Exhibit 4.3 of MCI's Current Report on Form 8-K dated
          December 22, 1998 (File No. 1-12351)).
 4.4      Registration Rights Agreement, dated as of December 9, 1998,
          between MCI and the Investors named therein (incorporated by
          reference to Exhibit 10.3 to MCI's Current Report on Form
          8-K dated December 22, 1998 (File No. 1-12351)).
 4.5      Form of common stock certificate of MCI (incorporated by
          reference to Exhibit 4.3 to MCI's Registration Statement on
          Form S-8 (File No. 333-91917)).
 4.6      Indenture, dated as of July 13, 1999, by and among MCI,
          Metris Direct, Inc. and The Bank of New York, including Form
          of 10 1/8% Senior Notes due 2006 and Form of Guarantee
          (incorporated by reference to Exhibit 4.1 to MCI's
          Registration Statement on Form S-4 (File No. 333-86695)).
          (a) First Supplemental Indenture, dated as of February 28,
          2000, among MCI, the Guarantors named therein and The Bank
          of New York, (incorporated by reference to Exhibit 4.1 to
          MCI's Quarterly Report on Form 10-Q for the period ended
          March 31, 2000 (File No. 1-12351)).
          (b) Second Supplemental Indenture, dated as of February 2,
          2001, among MCI, the Guarantors named therein and The Bank
          of New York (incorporated by reference to Exhibit 4.7(b) to
          MCI's Annual Report on Form 10-K for the year ended December
          31, 2001 (File No. 1-12351)).
</Table>

                                       129
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
          (c) Agreement of Resignation, Appointment and Acceptance,
          dated as of February 20, 2002, among MCI, The Bank of New
          York, as Prior Trustee, and US Bank National Association, as
          Successor Trustee (incorporated by reference to Exhibit
          4.7(c) to MCI's Annual Report on Form 10-K for the year
          ended December 31, 2002 (File No. 1-12351)).
 4.7      Exchange and Registration Rights Agreement, dated as of July
          13, 1999, by and among MCI, Bear, Stearns & Co. Inc., Chase
          Securities Inc., Salomon Smith Barney Inc. and Barclays
          Capital Inc., relating to the new notes (incorporated by
          reference to Exhibit 4.2 to MCI's Registration Statement on
          Form S-4 (File No. 333-86695)).
Material Contracts
10.1      Second Amended and Restated Pooling and Servicing Agreement,
          dated as of January 22, 2002, among Metris Receivables, Inc.
          ("MRI"), as Transferor, Direct Merchants Credit Card Bank,
          National Association ("Direct Merchants Bank"), as Servicer,
          and U.S. Bank National Association, as Trustee (incorporated
          by reference to Exhibit 4.3 to MRI's Current Report on Form
          8-K dated January 24, 2002 (File No. 0-23961)).
          (a) Amendment No. 1 to the Second Amended and Restated Bank
          Receivables Purchase Agreement, dated as of June 14, 2002,
          between Metris Companies Inc., as Buyer, and Direct
          Merchants Credit Card Bank, National Association, as Seller
          (incorporated by reference to Exhibit 4.1 to MRI's Current
          Report on Form 8-K dated June 18, 2002 (File No. 0-23961).
10.2      Second Amended and Restated Bank Receivables Purchase
          Agreement, dated as of January 22, 2002, between Direct
          Merchants Bank and MCI (incorporated by reference to Exhibit
          4.1 to MRI's Current Report on Form 8-K dated January 24,
          2002 (File No. 0-23961)).
          (a) Amendment No. 1 to the Second Amended and Restated
          Purchase Agreement, dated as of June 14, 2002, between
          Metris Receivables, Inc., as Buyer, and Metris Companies
          Inc., as Seller (incorporated by reference to Exhibit 4.2 to
          MRI's Current Report on Form 8-K dated June 18, 2002 (File
          No. 0-23961).
10.3      Second Amended and Restated Bank Receivables Purchase
          Agreement, dated as of January 22, 2002, between MCI and MRI
          (incorporated by reference to Exhibit 4.2 to MRI's Current
          Report on Form 8-K dated January 24, 2002 (File No.
          0-23961)).
          (a) Amendment No. 1 to the Metris Master Trust Second
          Amended and Restated Pooling and Servicing Agreement, dated
          as of June 14, 2002, among Metris Receivables, Inc., as
          Transferor, Direct Merchants Credit Card Bank, National
          Association, as Servicer, and U.S. Bank National
          Association, as Trustee (incorporated by reference to
          Exhibit 4.3 to MRI's Current Report on Form 8-K dated June
          18, 2002 (File No. 0-23961).
10.4*     Change of Control Severance Agreement, dated as of May 15,
          1998, by and between MCI and Ronald N. Zebeck and a schedule
          of executive officers of the Company also having such an
          agreement with MCI, indicating the differences from the
          version of agreement filed (as permitted by Instruction 2 to
          Item 601 of Regulation S-K) (incorporated by reference to
          Exhibit 10.2 to MCI's Quarterly Report on Form 10-Q for the
          quarter ended September 30, 1998 (File No. 1-12351)).
          (a) Amendment to Ronald N. Zebeck's Change of Control
          Severance Agreement, dated as of December 9, 1998
          (incorporated by reference to Exhibit 10.7(i) to MCI's
          Annual Report on Form 10-K for the year ended December 31,
          1998 (File No. 1-12351)).
          (b) Amended Schedule of Executive Officers with Change of
          Control Severance Agreements (incorporated by reference to
          Exhibit 10.4(b) to MCI's Annual Report on Form 10-K for the
          year ended December 31, 2001 (File No. 1-12351)).
10.5*     Retention Agreement, dated May 17, 1999, between Ronald N.
          Zebeck and MCI (incorporated by reference to Exhibit 10.2 to
          MCI's Quarterly Report on Form 10-Q for the quarter ended
          June 30, 1999 (File No. 1-12351)).
10.6      Capital Assurance and Liquidity Maintenance Agreement, dated
          as of March 18, 2003, between Direct Merchants Bank, and MCI
          (Incorporated by reference to Exhibit 99.3 to MCI's Current
          Report on Form 8-K dated March 19, 2003 (File No. 1-12351)).
</Table>

                                       130
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
10.7      Liquidity Reserve Deposit Agreement, dated as of March 18,
          2003, among Direct Merchants Bank, JPMorgan Chase Bank, and
          the Office of the Comptroller of the Currency (Incorporated
          by reference to Exhibit 99.4 to MCI's Current Report on Form
          8-K dated March 19, 2003 (File No. 1-12351)).
10.8      Amended and Restated Senior Secured Credit Agreement, dated
          as of June 18, 2003, among Metris Companies Inc., the
          Lenders from time to time parties thereto, Goldman Sachs
          Credit Partners L.P. as Administrative Agent, and Deutsche
          Bank Trust Companies America as Collateral Agent
          (Incorporated by reference to Exhibit 10 to MCI's Current
          Report on Form 8-K dated July 11, 2003 (File No. 1-12351)).
          (a) First Amendment to the Amended and Restated Senior
          Secured Credit Agreement and to credit Agreement Reserve
          Securities Account Control Agreement, dated as of July 29,
          2003 among Metris Companies Inc., the Lenders from time to
          time parties to the Senior Secured Credit Agreement, Goldman
          Sachs Credit Partners L.P. as Administrative Agent, and
          Deutsche Bank Trust Companies America as Collateral Agent
          (Incorporated by reference to Exhibit 10.2 to MCI's Current
          Report on Form 10-Q dated August 14, 2003 (File No.
          1-12351)).
          (b) Agreement of Resignation, Appointment and Acceptance,
          dated as of September 15, 2003, by and among Metris
          Companies Inc., the lenders from time to time parties to the
          Senior Secured Credit Agreement, Deutsche Bank Trust Company
          Americas as Successor Administrative Agent and Goldman Sachs
          Credit Partners L.P. as Resigning Administrative Agent.
          (Incorporated by reference to Exhibit 10.1 to MCI's Current
          Report on Form 10-Q dated March 2, 2003 (File No. 1-12351)).
          (c) Second Amendment to the Amended and Restated Senior
          Secured Credit Agreement dated as of September 30, 2003,
          among Metris Companies Inc., the Lenders from time to time
          parties to the Senior Secured Credit Agreement, Deutsche
          Bank Trust Companies America as Administrative Agent and
          Collateral Agent (Incorporated by reference to Exhibit 10.2
          to MCI's Current Report on Form 10-Q dated March 2, 2003
          (File No. 1-12351)).
          (d) Third Amendment to the Amended and Restated Senior
          Secured Credit Agreement dated as of November 19, 2003,
          among Metris Companies Inc., the Lenders from time to time
          parties to the Senior Secured Credit Agreement, Deutsche
          Bank Trust Companies America as Administrative Agent and
          Collateral Agent (Incorporated by reference to Exhibit 10.3
          to MCI's Current Report on Form 10-Q dated March 2, 2003
          (File No. 1-12351)).
          (e) Fourth Amendment to the Amended and Restated Senior
          Secured Credit Agreement dated as of December 19, 2003,
          among Metris Companies Inc., the Lenders from time to time
          parties to the Senior Secured Credit Agreement, Deutsche
          Bank Trust Companies America as Administrative Agent and
          Collateral Agent (Incorporated by reference to Exhibit 10.4
          to MCI's Current Report on Form 10-Q dated March 2, 2003
          (File No. 1-12351)).
          (f) Fifth Amendment to the Amended and Restated Senior
          Secured Credit Agreement dated as of January 26, 2004, among
          Metris Companies Inc., the Lenders from time to time parties
          to the Senior Secured Credit Agreement, Deutsche Bank Trust
          Companies America as Administrative Agent and Collateral
          Agent (Incorporated by reference to Exhibit 10.5 to MCI's
          Current Report on Form 10-Q dated March 2, 2003 (File No.
          1-12351)).
10.9      Asset Purchase Agreement Dated July 29, 2003 by and among
          Metris Companies Inc., Metris Direct, Inc., Metris Direct
          Services, Inc., Metris Travel Services Inc., Metris Club
          Services, Inc., Metris Warranty Services, Inc., and Metris
          Warranty Services of Florida, Inc., CPP Holdings Limited and
          CPP US Operations Group, LLC (Incorporated by reference to
          Exhibit 10.3 to MCI's Current Report on Form 8-K dated
          August 14, 2003 (File No. 1-12351)).
10.10     Transition Services Agreement dated July 29, 2003 by and
          among CPP Holdings Limited and CPP US Operations Group, LLC
          and Metris Companies Inc. and MES Insurance Agency, LLC
          (Incorporated by reference to Exhibit 10.4 to MCI's Current
          Report on Form 8-K dated August 14, 2003 (File No.
          1-12351)).
10.11     Employee Leasing Agreement dated July 29, 2003, by and
          between CPP Holdings Limited and CPP US Operations Group,
          LLC and Metris Companies Inc. (Incorporated by reference to
          Exhibit 10.5 to MCI's Current Report on Form 8-K dated
          August 14, 2003 (File No. 1-12351)).
</Table>

                                       131
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
10.12     Deposit Accounts Purchase and Assumption Agreement dated as
          of September 26, 2003, by and between Direct Merchants
          Credit Card Bank, National Association, a national banking
          association as Seller and First National Bank of Omaha, as
          Purchaser (Incorporated by reference to Exhibit 10.6 to
          MCI's Current Report on Form 10-Q dated March 2, 2003 (File
          No. 1-12351)).
          (a) Amendment to Deposit Accounts Purchase and Assumption
          Agreement dated as of September 30, 2003, by and between
          Direct Merchants Credit Card Bank, National Association as
          Seller and first National Bank of Omaha as Purchaser
          (Incorporated by reference to Exhibit 10.7 to MCI's Current
          Report on Form 10-Q dated March 2, 2003 (File No. 1-12351)).
10.13     Modified Operating Agreement effective as of December 11,
          2003, by and between Direct Merchants Bank, Metris Companies
          Inc., and the Office of the Comptroller of the Currency.
          (Incorporated by reference to Exhibit 99-1 to MCI's Current
          Report on Form 8-K dated December 12, 2003 (File No.
          1-12351)).
10.14*    MCI Non-Employee Director Stock Option Plan (incorporated by
          reference to Exhibit 10.3 to MCI's Registration Statement on
          Form S-4/A (File No. 333-86695)).
10.15*    MCI Management Stock Purchase Plan (incorporated by
          reference to Exhibit 10.4 to MCI's Registration Statement on
          Form S-4/A (File No. 333-86695)).
10.17*    MCI Amended and Restated Long-Term Incentive and Stock
          Option Plan (incorporated by reference to Exhibit 10.6 to
          MCI's Registration Statement on Form S-4/A (File No.
          333-86695)).
          (a) Form of Non-Qualified Stock Option Agreement
          (incorporated by reference to Exhibit 10.8 to MCI's Annual
          Report on Form 10-K for the year ended December 31, 1998
          (File No. 1-12351)).
          (b) Form of Non-Qualified Performance Accelerated Stock
          Option Agreement (incorporated by reference to Exhibit
          10.10(b) to MCI's Annual Report on Form 10-K for the year
          ended December 31, 2001 (File No. 1-12351)).
          (c) Form of Restricted Stock Award Agreement (incorporated
          by reference to Exhibit 10.10(c) to MCI's Annual Report on
          Form 10-K for the year ended December 31, 2001 (File No.
          1-12351)).
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.**
21        Subsidiaries of MCI.**
23        Independent Auditors' Consent.
31.1      Certification of Chief Executive Officer Pursuant to Section
          302 of the Sarbanes Oxley Act of 2002.
31.2      Certification of Chief Financial Officer Pursuant to Section
          302 of the Sarbanes Oxley Act of 2002.
32.1      Certification of Chief Executive Officer Pursuant to Section
          1350 of Chapter 63 of Title 18 of the United States Code.
32.2      Certification of Chief Financial Officer Pursuant to Section
          1350 of Chapter 63 of Title 18 of the United States Code.
</Table>

---------------

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

** Filed on April 12, 2004, with the Company's original Annual Report on Form
   10-K for the year ended December 31, 2003.

                                       132