##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2002

Commission file number 001-12351



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Metris Companies Inc.

(Exact name of registrant as specified in its
charter)


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

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:

|                                                |  |                                                                           
|----------------------------------------------- |  | --------------------------------------------------------------------------
|Common Stock, $.01 Par ValueTitle of Each Class |  | New York Stock Exchange, Inc.Name of Each Exchange On Which
    Registered

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 þ          No o

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 þ          No o

The
aggregate market value of the voting stock held by
non-affiliates of the Registrant as of June 28, 2002 was
approximately $493,557,434 based upon the closing price of $8.31
on the New York Stock Exchange on that date.

As
of March 14, 2003, 57,657,924 shares of the
Registrants Common Stock were outstanding and the
aggregate market value of common stock held by non-affiliates of
the Registrant on that date was approximately $76,887,744 based
upon the closing price of $1.37 on the New York Stock Exchange
on March 14, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of
the Proxy Statement for the Annual Meeting of Stockholders of
Metris Companies Inc. to be held on May 6, 2003, which will
be filed with the Securities and Exchange Commission
(SEC) within 120 days after December 31,
2002, are incorporated by reference in Part III.



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                       
|Item 1. Business                                                                             
|Item 2. Properties                                                                           
|Item 3. Legal Proceedings                                                                    
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                                                      
|Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|Item 6. Selected Financial Data                                                              
|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 8. Financial Statements and Supplementary Data                                          
|INDEPENDENT AUDITORS REPORT                                                                 
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                                     
|Item 10. Directors and Executive Officers of the Registrant                                  
|Item 11. Executive Compensation                                                              
|Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|Item 13. Certain Relationships and Related Transactions                                      
|Item 14. Controls and Procedures                                                             
|PART IV                                                                                      
|Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                                                                   
|EXHIBIT INDEX                                                                                
|EX-4.7(c) Agreement of Registration                                                          
|EX-10.6(b) Amendment No. 2 to Credit Agreement                                               
|EX-10.15 Term Loan Commitment Letter                                                         
|EX-11 Computation of Earnings Per Share                                                      
|EX-12.(a) Computation of Ratio of Earnings                                                   
|EX-12.(b) Computation of Ratio of Earnings                                                   
|EX-21 Subsidiaries of MCI                                                                    
|EX-23 Independent Auditor's Consent                                                          
|EX-99.1 Certification of Executive Officer                                                   
|EX-99.2 Certification of Financial Officer                                                   



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##### Table of Contents



TABLE OF CONTENTS

|              |  |                                                                                           |     |      |     | 
|------------- |  | ----------------------------------------------------------------------------------------- | --- | ---- | --- | 
|              |  |                                                                                           |     | Page |    
|              |  |                                                                                           |     |      |    
|PART I       
|Item 1.       |  | Business                                                                                  |     |      | 2   | 
|Item 2.       |  | Properties                                                                                |     |      | 34  | 
|Item 3.       |  | Legal Proceedings                                                                         |     |      | 35  | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                   |     |      | 35  | 
|PART II      
|Item 5.       |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |     |      | 35  | 
|Item 6.       |  | Selected Financial Data                                                                   |     |      | 36  | 
|Item 7.       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |     |      | 37  | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |     |      | 57  | 
|Item 8.       |  | Financial Statements and Supplementary Data                                               |     |      | 64  | 
|Item 9.       |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |     |      | 107 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the Registrant                                        |     |      | 107 | 
|Item 11.      |  | Executive Compensation                                                                    |     |      | 107 | 
|Item 12.      |  | Security Ownership of Certain Beneficial Owners
    and Management                        |     |      | 107 | 
|Item 13.      |  | Certain Relationships and Related Transactions                                            |     |      | 108 | 
|Item 14.      |  | Controls and Procedures                                                                   |     |      | 108 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |     |      | 108 | 
|Signatures    |  |                                                                                           | 109 |     
|Exhibit Index |  |                                                                                           | 113 |     

1



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PART I







Item 1.     Business


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 issue credit cards and thereby generate
consumer loans through Direct Merchants Bank. Direct Merchants
Bank obtains information about prospective customers from credit
bureau information as well as from other third-party sources
including other companies customer lists and databases.

We also offer consumers a variety of enhancement
services products, including credit protection products,
membership program products, warranty products, third-party
insurance, and list syndication products. We market our
enhancement services to our credit card customers, customers of
third parties and the broad market.

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. Historically,
we have funded our business through a variety of funding
sources, including securitizations of our consumer loans,
deposits, bank borrowings and debt issuances. However, recent
downgrades in our debt 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
were previously available to us. Economic, legal, regulatory,
accounting and tax changes might also make future
securitizations and other sources of funding more difficult,
less efficient, more expensive or unavailable.

We rely heavily on the securitization of our
consumer loans for funding, primarily by selling the loans
either to our proprietary trust, the Metris Master Trust (the
Master Trust), or to bank-sponsored single-seller
and multi-seller commercial paper conduits. However, during the
past 18 months the delinquency rate on our consumer loans
and the rate at which our consumer loans are charged off as
uncollectible have increased significantly. Poor performance of
loans that have been securitized has resulted in higher required
credit levels in the securitizations, which has diverted
significant amounts of cash that otherwise would have been
available to us. Continuing poor performance could result in a
downgrade or the withdrawal of ratings on the outstanding
securities issued in our securitizations, a further increase in
credit enhancement levels or early amortization of our
securitizations (early maturity of the Master Trust outstanding
debt), which would have a material adverse effect on the Company.

Historically, we also have relied on certificates
of deposit (CD) issued by Direct Merchants Bank as a
source of funding. However, we entered into an operating
agreement with the Office of the Comptroller of the Currency
(OCC) on March 18, 2003, under which we have
agreed to reduce receivables at Direct Merchants Bank to no more
than $550 million by December 31, 2003, and to zero by
December 31, 2004. As a result, we do not anticipate
issuing jumbo CDs in the foreseeable future.

Upon entering into the agreement, Direct
Merchants Bank declared and paid a dividend of $155 million
to us on March 19, 2003. Furthermore, the agreement allows
Direct Merchants Bank to declare and pay future dividends
without prior approval by the OCC, provided such dividends are
in compliance with OCC regulations. The operating agreement is
discussed in more detail under Regulation on
pages 20-22.

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Strategy

We are developing a strategic plan designed to
address our underperformance and asset quality problems, to
ensure appropriate liquidity and to rebuild our business. Since
the later part of 2002, our corporate debt ratings, the Master
Trust ratings and the ratings of Direct Merchants Bank have been
downgraded. These downgrades reflect the losses we experienced
in 2002, as well as deteriorating performance in the Master
Trust. These downgrades and any future downgrades will have a
negative effect on our ability to obtain funding. Further, the
current economic, capital markets and regulatory environment
increase our liquidity pressures and add to the difficulties we
encounter in maintaining our liquidity position. As a result,
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. One of our biggest challenges over the next year will
be to continue to maintain adequate liquidity. To ensure
appropriate liquidity, we recently haven taken a number of
actions and intend to take additional actions, including the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On March 17, 2003 we obtained a
    $425 million extension through March 2004 of an
    $850 million conduit which was scheduled to mature in June
    of 2003. We also secured a $425 million conduit through
    March 2004, which will replace conduits and warehouse facilities
    scheduled to mature during March through May 2003. Furthermore,
    these conduits will provide for the financing of a term
    asset-backed securitization that is scheduled to mature in July
    2003. The availability of funding under these facilities is
    subject to various conditions, including a net reduction of
    receivables in the Master Trust. Maturities of the conduits can
    accelerate in certain instances, including if net excess spreads
    in the Master Trust fall below certain levels.                                                                                                                                                   
|
| |  | On March 31, 2003, we obtained a commitment
    from Thomas H. Lee Equity Fund IV, L.P. (THL
    Fund IV) to provide a term loan to us in an aggregate
    amount of $125 million as a backup financing facility.
    During the past fiscal year we had in place a $270 million
    term loan and revolving credit facility. In connection with the
    conduit transactions discussed above, all availability under the
    $170 million revolving portion of this facility was
    terminated as of March 18, 2003, with the exception of
    $7.3 million of outstanding letters of credit. Term loans
    of $100 million remain outstanding under the facility and
    mature on June 30, 2003. We may refinance these loans with
    the backup facility provided by THL Fund IV. THL
    Fund IVs obligation to provide this backup facility
    is subject to a number of conditions, and there can be no
    assurance that these conditions will be met.

During the next year we intend to shrink the size
of the receivables in the Master Trust by approximately
$2.1 billion 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 bank conduits or
the issuance of new asset-backed securities.

In addition, we have recently taken the following
actions to address our underperformance and asset quality
problems:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have significantly reduced new account
    marketing, tightened credit line increases to existing credit
    cardholders, and selectively repriced loans that exhibited
    increased risk levels.                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | We have tightened credit line increases that were
    extended under a credit line increase program implemented in
    February 2001. As a part of this credit line tightening, we have
    reduced our customer commitments by over $3.5 billion by
    closing inactive credit card accounts and reducing credit lines
    on higher risk credit card accounts in 2002; limited the
    availability of credit line increases to only the lowest risk
    customers; limited the issuance of new credit cards to high risk
    customers; and implemented new credit line management strategies.
|
| |  | On December 15, 2002, our Board of Directors
    terminated Ronald N. Zebeck as our Chairman and Chief
    Executive Officer and appointed David D. Wesselink to that
    position. Mr. Wesselink, who has more than 30 years of
    experience in the financial services industry, joined Metris as
    Chief Financial Officer in 1998 and was named Vice Chairman in
    2000. Before joining Metris,                                                                                                                                                                                          

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| |   |                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Mr. Wesselink was with Advanta Corp., which
    he joined in 1993 as Senior Vice President and Chief Financial
    Officer. Prior to Advanta, 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.                   
|
| |  | On January 22, 2003, we reduced our
    workforce by approximately 180 employees in an effort to
    streamline and revitalize our operations. These workforce
    reductions are expected to result in an annualized cost savings
    of approximately $20.8 million. We will take a first
    quarter 2003 charge of approximately $4.9 million in
    connection with the reductions.

In addition to these recent initiatives, we
continue to pursue our core business strategy. The four(4)
principal components of our strategy are the following:



|   |                                                                         
|-- | ------------------------------------------------------------------------
|1. | Identify and solicit additional external
    prospects for credit cards.

We intend to add credit card accounts through the
use of our own internally developed risk models. We use a
proprietary credit risk modeling system. By incorporating
individual credit information from the major credit bureaus into
this modeling system, we expect to generate additional customer
relationships from external prospects.



|   |                        
|-- | -----------------------
|2. | Use risk-based pricing.

We determine the specific pricing for an
individuals credit card offer through the prospective
customers risk profile and expected responsiveness prior
to solicitation, and continually monitor and adjust pricing as
the relationship continues, a practice known as risk-based
pricing. We believe the use of risk-based pricing allows
us to maximize the profitability of a customer relationship.



|   |                                                          
|-- | ---------------------------------------------------------
|3. | Sell multiple products and services to each
    customer.

We intend to use interactions with our customers
to sell additional products, thereby leveraging our account
acquisition costs and infrastructure. Currently, we focus our
efforts on selling enhancement services products to our credit
card customers and customers of third parties.



|   |                                                  
|-- | -------------------------------------------------
|4. | Diversify product offerings to our
    customers.

We segment markets to expand the success of our
existing consumer lending and enhancement services products. We
analyze the data in our proprietary database and the databases
of others to determine the needs of our target markets. Then we
develop, test and market these new products to our target
markets.

Business Segments

We measure performance and operate in two
business segments:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consumer Lending
    Products,which are primarily
    unsecured credit cards issued by Direct Merchants Bank; and                                                               
|
| |  | Enhancement
    Services,which include credit
    protection products, membership program products, warranty
    products, third-party insurance, and list syndication products.

We generate income from our consumer lending
products through:



| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interest and other finance charges assessed on
    outstanding credit card loans;                                                                      
|
| |  | interchange fees and credit card fees (including
    annual membership, cash advance, overlimit and late fees)on
    outstanding credit card loans; and
|
| |  | servicing fees and excess spread on credit card
    loans sold to the Master Trust.                                                                    

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The primary expenses of this business are:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | the costs of funding the loans;                                                                           
|
| |  | provisions for loan losses;                                                                               
|
| |  | operating expenses, including employee
    compensation, account solicitation, and marketing expenses; and
|
| |  | data processing and servicing expenses.                                                                   

Profitability is affected by:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | response and approval rates to solicitation
    efforts;                     
|
| |  | the size of our managed (owned and securitized)
    loan portfolios;         
|
| |  | net interest income on loans, which is largely
    impacted by cost of funds;
|
| |  | credit card usage;                                                           
|
| |  | credit quality (delinquencies, bankruptcies and
    charge-offs);            
|
| |  | credit card cancellations;                                                   
|
| |  | fraud losses; and                                                            
|
| |  | cardholder servicing expenses.                                               

Our consumer lending business primarily targets
moderate-income 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. (See more detailed discussion
under Business Segments on pages 4-19, and
under Note 19 (Segments) on pages 89-91 of
this Report.)

Our enhancement services business derives
benefits from our consumer lending business as we cross-sell
enhancement services to our credit cardholders. Nonetheless, our
two business segments are different with respect to the factors
that affect profitability, including how income is generated and
expenses are incurred. These differences require us to manage
our operations separately.

We receive revenue from our enhancement services
through fees for those services.

Expenses include costs of:



| |   |                                                         
| | - | --------------------------------------------------------
| |  | enrollment acquisition;                                 
|
| |  | underwriting and claims servicing expenses;             
|
| |  | commissions paid to third parties; and                  
|
| |  | operating expenses, including employee
    compensation.

The primary factors that affect profitability for
the enhancement services business are:



| |   |                                        
| | - | ---------------------------------------
| |  | response rates to solicitation efforts;
|
| |  | returns or cancellation rates;         
|
| |  | renewal rates; and                     
|
| |  | claims.                                

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Consumer
Lending

Products

Our consumer lending products are primarily
unsecured credit cards, including the Direct Merchants Bank
MasterCard® and Visa®. We offer co-branded credit
cards through partnerships with other companies. At
December 31, 2002, we had approximately 3.9 million
credit card accounts with approximately $11.4 billion in
managed credit card receivables.

Please note that 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). We believe
these numbers facilitate the analysis of our business, but they
are not GAAP compliant. For more information regarding managed
financial information, please see
 Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Introduction and Recent Developments  Managed
Financial Information.

Prospects

Our primary sources of prospects for credit card
offers are credit bureau queries and third-party customer lists
and databases. Currently, our most significant source is the
leads obtained from credit bureau queries. 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 and Co. (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 generate external prospects from lists
obtained from the major credit bureaus based on criteria
established by us, as well as from other third-party sources. We
use proprietary models and additional analysis in conjunction
with the files obtained from credit bureaus to further segment
prospects based upon their likelihood of default.

We believe our methods are effective in further
segmenting and evaluating risk within 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.

We believe that both the proprietary models and
our internal credit score give us a competitive advantage in
evaluating the credit risk of moderate-income 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.

Solicitation

Prospects for solicitation include both external
prospects and customers of third parties. We contact prospects
on a nationwide basis primarily through pre-screened direct
mail, invitations to apply and telephone solicitations. We
receive responses to our solicitations, 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 the exception
processing. We process exceptions for,

6



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##### Table of Contents



among other things, derogatory credit bureau
information and fraud warnings. Our credit analysts process
exception applications based on policies approved by our credit
policy committee.


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 periodically
monitor customers internal and external credit performance
and recalculate delinquency, profitability and attrition
predictors. As customers evolve through the credit life cycle
and are regularly rescored, the lending relationship may evolve
to include more or less restrictive pricing and product
configurations.

Age
of Portfolio

The following tables set forth, as of
December 31, 2002 and 2001, the number of credit card
accounts and the amount of outstanding loans based on the age of
the owned accounts. (Accounts in acquired portfolios are
presented based on when the account was originated with the
previous issuer.)

2002

|                      |       |                        |         |         |             |  |       |               |  |   |             |         |  |  |       |        | 
|--------------------- | ----- | ---------------------- | ------- | ------- | ----------- |  | ----- | ------------- |  | - | ----------- | ------- |  |  | ----- | ------ | 
|                      |       |                        |         |         |             |  |       | Percentage of | 
|                      |       | Number                 |         |         | Percentage  |  |       | Loans         |  |   | Loans       |        
|Age Since Origination |       | of Accounts            |         |         | of Accounts |  |       | Outstanding   |  |   | Outstanding |        
|                      |       |                        |         |         |             |  |       |               |  |   |             |        
|                      |       |                       
|                      |       | (Dollars in thousands) |        
|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% | 
|                      |       |                        |         |         |             |  |       |               |  |   |             |        

2001

|                      |       |                        |         |           |             |  |       |               |  |   |             |           |  |  |       |        | 
|--------------------- | ----- | ---------------------- | ------- | --------- | ----------- |  | ----- | ------------- |  | - | ----------- | --------- |  |  | ----- | ------ | 
|                      |       |                        |         |           |             |  |       | Percentage of | 
|                      |       | Number                 |         |           | Percentage  |  |       | Loans         |  |   | Loans       |          
|Age Since Origination |       | of Accounts            |         |           | of Accounts |  |       | Outstanding   |  |   | Outstanding |          
|                      |       |                        |         |           |             |  |       |               |  |   |             |          
|                      |       |                       
|                      |       | (Dollars in thousands) |        
|0-6 Months            |       |                        | 419,586 |           |             |  | 21.2% |               |  | $ | 337,840     |           |  |  | 12.2% |       
|7-12 Months           |       |                        | 269,831 |           |             |  | 13.7% |               |  |   | 478,649     |           |  |  | 17.4% |       
|13-18 Months          |       |                        | 297,057 |           |             |  | 15.0% |               |  |   | 496,114     |           |  |  | 18.0% |       
|19-24 Months          |       |                        | 324,656 |           |             |  | 16.4% |               |  |   | 534,486     |           |  |  | 19.4% |       
|25-36 Months          |       |                        | 145,054 |           |             |  | 7.3%  |               |  |   | 223,041     |           |  |  | 8.1%  |       
|37+ Months            |       |                        | 521,171 |           |             |  | 26.4% |               |  |   | 686,633     |           |  |  | 24.9% |       
|                      |       |                        |         |           |             |  |       |               |  |   |             |          
|                      | Total |                        |         | 1,977,355 |             |  |       | 100.0%        |  |   | $           | 2,756,763 |  |  |       | 100.0% | 
|                      |       |                        |         |           |             |  |       |               |  |   |             |          

The following tables set forth, as of
December 31, 2002 and 2001, the number of credit card
accounts and the amount of outstanding loans based on the age of
the managedaccounts (includes investors

7



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##### Table of Contents



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


2002

|                      |       |                        |           |           |             |  |       |               |  |   |             |            |  |  |       |        | 
|--------------------- | ----- | ---------------------- | --------- | --------- | ----------- |  | ----- | ------------- |  | - | ----------- | ---------- |  |  | ----- | ------ | 
|                      |       |                        |           |           |             |  |       | Percentage of | 
|                      |       | Number of              |           |           | Percentage  |  |       | Loans         |  |   | Loans       |           
|Age Since Origination |       | Accounts               |           |           | of Accounts |  |       | Outstanding   |  |   | Outstanding |           
|                      |       |                        |           |           |             |  |       |               |  |   |             |           
|                      |       |                       
|                      |       | (Dollars in thousands) |          
|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% | 
|                      |       |                        |           |           |             |  |       |               |  |   |             |           

2001

|                      |       |                        |           |           |             |  |       |               |  |   |             |            |  |  |       |        | 
|--------------------- | ----- | ---------------------- | --------- | --------- | ----------- |  | ----- | ------------- |  | - | ----------- | ---------- |  |  | ----- | ------ | 
|                      |       |                        |           |           |             |  |       | Percentage of | 
|                      |       | Number of              |           |           | Percentage  |  |       | Loans         |  |   | Loans       |           
|Age Since Origination |       | Accounts               |           |           | of Accounts |  |       | Outstanding   |  |   | Outstanding |           
|                      |       |                        |           |           |             |  |       |               |  |   |             |           
|                      |       |                       
|                      |       | (Dollars in thousands) |          
|0-6 Months            |       |                        | 587,942   |           |             |  | 11.9% |               |  | $ | 580,410     |            |  |  | 4.9%  |       
|7-12 Months           |       |                        | 466,773   |           |             |  | 9.5%  |               |  |   | 760,300     |            |  |  | 6.3%  |       
|13-18 Months          |       |                        | 552,678   |           |             |  | 11.2% |               |  |   | 981,056     |            |  |  | 8.2%  |       
|19-24 Months          |       |                        | 547,183   |           |             |  | 11.1% |               |  |   | 1,167,580   |            |  |  | 9.7%  |       
|25-36 Months          |       |                        | 613,626   |           |             |  | 12.5% |               |  |   | 1,778,055   |            |  |  | 14.8% |       
|37+ Months            |       |                        | 2,161,177 |           |             |  | 43.8% |               |  |   | 6,724,383   |            |  |  | 56.1% |       
|                      |       |                        |           |           |             |  |       |               |  |   |             |           
|                      | Total |                        |           | 4,929,379 |             |  |       | 100.0%        |  |   | $           | 11,991,784 |  |  |       | 100.0% | 
|                      |       |                        |           |           |             |  |       |               |  |   |             |           

Historically, we have distributed internally
originated customer accounts between the owned portfolio and
accounts included in the Master Trust on a random basis.
Acquired portfolios, as well as our secured card and partner
programs, were generally included in the owned credit card
portfolio until they could be securitized. During 2002, we sold
approximately $2.3 billion of credit card loans from Direct
Merchants Bank to the Master Trust. As a result, the age of our
receivables on an owned basis is younger than on a managed
basis. On an owned basis, the percentage of accounts and
percentage of outstanding balances greater than two years
since origination as of December 31, 2002 were 46.2% and
49.5%, versus 66.9% and 78.0% on a managed basis. As of
December 31, 2001, the percentage of accounts and
percentage of outstanding balances on the owned portfolio
greater than two years since origination were 33.7% and
33.0%, versus 56.3% and 70.9% on a managed basis.

8



---



##### Table of Contents





| |                        
| | -----------------------
| | 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
managedaccounts and amount of managed outstanding loans
by state as of December 31, 2002 and 2001.

2002

|              |       |                        |           |           |             |  |       |               |  |   |             |            |  |  |       |        | 
|------------- | ----- | ---------------------- | --------- | --------- | ----------- |  | ----- | ------------- |  | - | ----------- | ---------- |  |  | ----- | ------ | 
|              |       |                        |           |           |             |  |       | Percentage of | 
|              |       | Number                 |           |           | Percentage  |  |       | Loans         |  |   | Loans       |           
|State         |       | of Accounts            |           |           | of Accounts |  |       | Outstanding   |  |   | Outstanding |           
|              |       |                        |           |           |             |  |       |               |  |   |             |           
|              |       |                       
|              |       | (Dollars in thousands) |          
|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% | 
|              |       |                        |           |           |             |  |       |               |  |   |             |           

2001

|              |       |                        |           |           |             |  |       |               |  |   |             |            |  |  |       |        | 
|------------- | ----- | ---------------------- | --------- | --------- | ----------- |  | ----- | ------------- |  | - | ----------- | ---------- |  |  | ----- | ------ | 
|              |       |                        |           |           |             |  |       | Percentage of | 
|              |       | Number of              |           |           | Percentage  |  |       | Loans         |  |   | Loans       |           
|State         |       | Accounts               |           |           | of Accounts |  |       | Outstanding   |  |   | Outstanding |           
|              |       |                        |           |           |             |  |       |               |  |   |             |           
|              |       |                       
|              |       | (Dollars in thousands) |          
|California    |       |                        | 684,964   |           |             |  | 13.9% |               |  | $ | 1,487,384   |            |  |  | 12.4% |       
|New York      |       |                        | 426,585   |           |             |  | 8.7%  |               |  |   | 1,001,146   |            |  |  | 8.4%  |       
|Texas         |       |                        | 407,072   |           |             |  | 8.3%  |               |  |   | 963,379     |            |  |  | 8.0%  |       
|Florida       |       |                        | 354,529   |           |             |  | 7.2%  |               |  |   | 866,722     |            |  |  | 7.2%  |       
|Illinois      |       |                        | 210,230   |           |             |  | 4.3%  |               |  |   | 493,124     |            |  |  | 4.1%  |       
|Ohio          |       |                        | 186,421   |           |             |  | 3.8%  |               |  |   | 483,621     |            |  |  | 4.0%  |       
|Pennsylvania  |       |                        | 161,812   |           |             |  | 3.3%  |               |  |   | 407,574     |            |  |  | 3.4%  |       
|New Jersey    |       |                        | 156,847   |           |             |  | 3.2%  |               |  |   | 354,337     |            |  |  | 3.0%  |       
|Michigan      |       |                        | 135,341   |           |             |  | 2.7%  |               |  |   | 338,404     |            |  |  | 2.8%  |       
|Georgia       |       |                        | 123,223   |           |             |  | 2.5%  |               |  |   | 320,815     |            |  |  | 2.7%  |       
|Virginia      |       |                        | 122,899   |           |             |  | 2.5%  |               |  |   | 313,126     |            |  |  | 2.6%  |       
|All others(1) |       |                        | 1,959,456 |           |             |  | 39.6% |               |  |   | 4,962,152   |            |  |  | 41.4% |       
|              |       |                        |           |           |             |  |       |               |  |   |             |           
|              | Total |                        |           | 4,929,379 |             |  |       | 100.0%        |  |   | $           | 11,991,784 |  |  |       | 100.0% | 
|              |       |                        |           |           |             |  |       |               |  |   |             |           



---



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

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##### Table of Contents





| |             
| | ------------
| | Credit Lines

When we approve a credit 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 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
ownedcredit card loan portfolio as of December 31,
2002 and 2001.

2002

|                   |       |                        |         |         |             |            |         |             |  |  |             |        |            |          |           |           |  |  |       |       | 
|------------------ | ----- | ---------------------- | ------- | ------- | ----------- | ---------- | ------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | --------- |  |  | ----- | ----- | 
|                   |       |                        |         |         |             | Percentage |         |             |  |  |            
|                   |       | Number of              |         |         | Loans       |            |         | of Loans    |  |  |             |        | Percentage |         
|Credit Limit Range |       | Accounts               |         |         | Outstanding |            |         | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                   |       |                        |         |         |             |            |         |             |  |  |             |        |            |          |          
|                   |       |                       
|                   |       | (Dollars in thousands) |        
|$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% | 
|                   |       |                        |         |         |             |            |         |             |  |  |             |        |            |          |          

2001

|                   |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |           |           |  |  |       |       | 
|------------------ | ----- | ---------------------- | ------- | --------- | ----------- | ---------- | ------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | --------- |  |  | ----- | ----- | 
|                   |       |                        |         |           |             | Percentage |         |             |  |  |            
|                   |       | Number of              |         |           | Loans       |            |         | of Loans    |  |  |             |        | Percentage |         
|Credit Limit Range |       | Accounts               |         |           | Outstanding |            |         | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                   |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |          
|                   |       |                       
|                   |       | (Dollars in thousands) |        
|$1,000 or Less     |       |                        | 285,573 |           |             | $          | 135,685 |             |  |  | 4.9%        |        |            | $        | 65,236    |           |  |  | 67.5% |      
|$1,001-$2,000      |       |                        | 300,827 |           |             |            | 253,301 |             |  |  | 9.2%        |        |            |          | 234,328   |           |  |  | 51.9% |      
|$2,001-$3,500      |       |                        | 392,914 |           |             |            | 471,482 |             |  |  | 17.1%       |        |            |          | 664,365   |           |  |  | 41.5% |      
|$3,501-$5,000      |       |                        | 330,690 |           |             |            | 506,166 |             |  |  | 18.3%       |        |            |          | 943,968   |           |  |  | 34.9% |      
|$5,001-$10,000     |       |                        | 511,596 |           |             |            | 930,876 |             |  |  | 33.8%       |        |            |          | 2,896,001 |           |  |  | 24.3% |      
|Over $10,000       |       |                        | 155,755 |           |             |            | 459,253 |             |  |  | 16.7%       |        |            |          | 1,493,769 |           |  |  | 23.5% |      
|                   |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |          
|                   | Total |                        |         | 1,977,355 |             |            | $       | 2,756,763   |  |  |             | 100.0% |            |          | $         | 6,297,667 |  |  |       | 30.4% | 
|                   |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |          

10



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##### Table of Contents



2002

|                      |       |                        |         |         |             |            |         |             |  |  |             |        |            |          |           |           |  |  |       |       | 
|--------------------- | ----- | ---------------------- | ------- | ------- | ----------- | ---------- | ------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | --------- |  |  | ----- | ----- | 
|                      |       |                        |         |         |             | Percentage |         |             |  |  |            
|                      |       | Number of              |         |         | Loans       |            |         | of Loans    |  |  |             |        | Percentage |         
|Account Balance Range |       | Accounts               |         |         | Outstanding |            |         | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                      |       |                        |         |         |             |            |         |             |  |  |             |        |            |          |          
|                      |       |                       
|                      |       | (Dollars in thousands) |        
|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% | 
|                      |       |                        |         |         |             |            |         |             |  |  |             |        |            |          |          

2001

|                      |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |           |           |  |  |       |       | 
|--------------------- | ----- | ---------------------- | ------- | --------- | ----------- | ---------- | ------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | --------- |  |  | ----- | ----- | 
|                      |       |                        |         |           |             | Percentage |         |             |  |  |            
|                      |       | Number of              |         |           | Loans       |            |         | of Loans    |  |  |             |        | Percentage |         
|Account Balance Range |       | Accounts               |         |           | Outstanding |            |         | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                      |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |          
|                      |       |                       
|                      |       | (Dollars in thousands) |        
|Credit Balance        |       |                        | 23,973  |           |             | $          | (2,757  | )           |  |  | (0.1%       | )      |            | $        | 79,986    |           |  |  | (3.6% | )    
|No Balance            |       |                        | 667,750 |           |             |            |        |             |  |  |            |        |            |          | 3,548,784 |           |  |  |      |      
|$1,000 or Less        |       |                        | 542,734 |           |             |            | 253,622 |             |  |  | 9.2%        |        |            |          | 1,398,772 |           |  |  | 15.4% |      
|$1,001-$2,000         |       |                        | 267,326 |           |             |            | 408,001 |             |  |  | 14.8%       |        |            |          | 474,256   |           |  |  | 46.3% |      
|$2,001-$3,500         |       |                        | 231,103 |           |             |            | 647,839 |             |  |  | 23.5%       |        |            |          | 388,647   |           |  |  | 62.5% |      
|$3,501-$5,000         |       |                        | 124,025 |           |             |            | 540,326 |             |  |  | 19.6%       |        |            |          | 211,318   |           |  |  | 71.9% |      
|$5,001-$10,000        |       |                        | 107,181 |           |             |            | 744,326 |             |  |  | 27.0%       |        |            |          | 183,097   |           |  |  | 80.3% |      
|Over $10,000          |       |                        | 13,263  |           |             |            | 165,406 |             |  |  | 6.0%        |        |            |          | 12,807    |           |  |  | 92.8% |      
|                      |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |          
|                      | Total |                        |         | 1,977,355 |             |            | $       | 2,756,763   |  |  |             | 100.0% |            |          | $         | 6,297,667 |  |  |       | 30.4% | 
|                      |       |                        |         |           |             |            |         |             |  |  |             |        |            |          |          

The following tables set forth information with
respect to credit limit and account balance ranges of our
managedloan portfolio (includes investors
interests in loans securitized) as of December 31, 2002 and
2001.

2002

|                   |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |           |            |  |  |       |       | 
|------------------ | ----- | ---------------------- | --------- | --------- | ----------- | ---------- | --------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | ---------- |  |  | ----- | ----- | 
|                   |       |                        |           |           |             | Percentage |           |             |  |  |            
|                   |       | Number of              |           |           | Loans       |            |           | of Loans    |  |  |             |        | Percentage |         
|Credit Limit Range |       | Accounts               |           |           | Outstanding |            |           | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                   |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          
|                   |       |                       
|                   |       | (Dollars in thousands) |          
|$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% | 
|                   |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          

11



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##### Table of Contents



2001

|                   |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |           |            |  |  |       |       | 
|------------------ | ----- | ---------------------- | --------- | --------- | ----------- | ---------- | --------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | ---------- |  |  | ----- | ----- | 
|                   |       |                        |           |           |             | Percentage |           |             |  |  |            
|                   |       | Number of              |           |           | Loans       |            |           | of Loans    |  |  |             |        | Percentage |         
|Credit Limit Range |       | Accounts               |           |           | Outstanding |            |           | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                   |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          
|                   |       |                       
|                   |       | (Dollars in thousands) |          
|$1,000 or Less     |       |                        | 480,909   |           |             | $          | 224,381   |             |  |  | 1.9%        |        |            | $        | 102,657   |            |  |  | 68.6% |      
|$1,001-$2,000      |       |                        | 566,593   |           |             |            | 535,634   |             |  |  | 4.5%        |        |            |          | 396,326   |            |  |  | 57.5% |      
|$2,001-$3,500      |       |                        | 774,180   |           |             |            | 1,130,378 |             |  |  | 9.4%        |        |            |          | 1,123,276 |            |  |  | 50.2% |      
|$3,501-$5,000      |       |                        | 768,475   |           |             |            | 1,463,003 |             |  |  | 12.2%       |        |            |          | 1,882,893 |            |  |  | 43.7% |      
|$5,001-$10,000     |       |                        | 1,585,518 |           |             |            | 4,598,526 |             |  |  | 38.3%       |        |            |          | 6,959,736 |            |  |  | 39.8% |      
|Over $10,000       |       |                        | 753,704   |           |             |            | 4,039,862 |             |  |  | 33.7%       |        |            |          | 5,213,070 |            |  |  | 43.7% |      
|                   |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          
|                   | Total |                        |           | 4,929,379 |             |            | $         | 11,991,784  |  |  |             | 100.0% |            |          | $         | 15,677,958 |  |  |       | 43.3% | 
|                   |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          

2002

|                      |       |                        |         |           |             |            |           |             |  |  |             |        |            |          |           |            |  |  |       |       | 
|--------------------- | ----- | ---------------------- | ------- | --------- | ----------- | ---------- | --------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | ---------- |  |  | ----- | ----- | 
|                      |       |                        |         |           |             | Percentage |           |             |  |  |            
|                      |       | Number of              |         |           | Loans       |            |           | of Loans    |  |  |             |        | Percentage |         
|Account Balance Range |       | Accounts               |         |           | Outstanding |            |           | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                      |       |                        |         |           |             |            |           |             |  |  |             |        |            |          |          
|                      |       |                       
|                      |       | (Dollars in thousands) |        
|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% | 
|                      |       |                        |         |           |             |            |           |             |  |  |             |        |            |          |          

2001

|                      |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |           |            |  |  |       |       | 
|--------------------- | ----- | ---------------------- | --------- | --------- | ----------- | ---------- | --------- | ----------- |  |  | ----------- | ------ | ---------- | -------- | --------- | ---------- |  |  | ----- | ----- | 
|                      |       |                        |           |           |             | Percentage |           |             |  |  |            
|                      |       | Number of              |           |           | Loans       |            |           | of Loans    |  |  |             |        | Percentage |         
|Account Balance Range |       | Accounts               |           |           | Outstanding |            |           | Outstanding |  |  | Open to Buy |        |            | Utilized |          
|                      |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          
|                      |       |                       
|                      |       | (Dollars in thousands) |          
|Credit Balance        |       |                        | 58,543    |           |             | $          | (5,833    | )           |  |  | (0.1%       | )      |            | $        | 242,223   |            |  |  | (2.5% | )    
|No Balance            |       |                        | 1,256,609 |           |             |            |          |             |  |  |            |        |            |          | 6,873,754 |            |  |  |      |      
|$1,000 or Less        |       |                        | 1,021,506 |           |             |            | 449,257   |             |  |  | 3.8%        |        |            |          | 3,399,474 |            |  |  | 11.7% |      
|$1,001-$2,000         |       |                        | 602,868   |           |             |            | 902,550   |             |  |  | 7.5%        |        |            |          | 1,349,979 |            |  |  | 40.1% |      
|$2,001-$3,500         |       |                        | 643,048   |           |             |            | 1,764,114 |             |  |  | 14.7%       |        |            |          | 1,382,680 |            |  |  | 56.1% |      
|$3,501-$5,000         |       |                        | 464,559   |           |             |            | 1,976,179 |             |  |  | 16.5%       |        |            |          | 998,741   |            |  |  | 66.4% |      
|$5,001-$10,000        |       |                        | 728,695   |           |             |            | 5,098,756 |             |  |  | 42.5%       |        |            |          | 1,310,998 |            |  |  | 79.5% |      
|Over $10,000          |       |                        | 153,551   |           |             |            | 1,806,761 |             |  |  | 15.1%       |        |            |          | 120,109   |            |  |  | 93.8% |      
|                      |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          
|                      | Total |                        |           | 4,929,379 |             |            | $         | 11,991,784  |  |  |             | 100.0% |            |          | $         | 15,677,958 |  |  |       | 43.3% | 
|                      |       |                        |           |           |             |            |           |             |  |  |             |        |            |          |          

In February 2001, the Company initiated a
targeted credit line increase program to a large portion of the
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.

12



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##### Table of Contents



In total, this program generated 1.6 million
credit line increases from February 2001 through September 2001,
generating over $4.5 billion in available credit from the
credit line increases. As of December 31, 2002,
approximately $1.4 billion in additional loan balances have
been generated from the program.

Contributing to our increased delinquencies and
losses during 2002 was the credit line increase program
implemented in 2001 to our existing cardholders. 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. The average balance per
charged-off account in 2001 was $3,000 compared to $4,700 in
2002. As a result, significant programs have been implemented
across the portfolio to reduce the available credit, including:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | over $3.5 billion of customer commitments
    were eliminated by closing inactive credit card accounts and
    reducing credit lines on high risk accounts in 2002;
|
| |  | the limitation of overlimit authorization
    expansion to only the lowest risk customers;                                                                         
|
| |  | the limitation on issuance of new credit card
    plastics 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.                             

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 as 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. As of
December 31, 2001, on an owned basis, 16.7% of the
outstanding receivable balance relates to cardholders with
credit limits in excess of $10,000 as compared to 33.7% on a
managed basis. On an owned basis 50.5% of the credit card
portfolio was outstanding to cardholders with credit limits in
excess of $5,000, compared to 72.0% 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 mix of secured card receivables in the owned credit
card portfolio.

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 and, therefore,
require higher levels of capital and allowance for loan losses.
Subprime receivables on an owned basis were $447.3 million
or 52.9% of the owned credit card portfolio as of
December 31, 2002, compared to $1.6 billion or 59.2%
of the owned credit card portfolio as of December 31, 2001.
The amount of subprime receivables on a managed basis was
$7.1 billion or 62.3% of the managed credit card portfolio
as of December 31, 2002, compared to $7.3 billion or
60.6% of the managed credit card portfolio as of
December 31, 2001.

Overall, the Company believes that the credit
quality in the owned credit card portfolio is generally similar
to the managed credit card portfolio. Delinquent loans for the
owned credit card portfolio were 0.9% and 10.1% as of
December 31, 2002 and 2001, versus 11.0% and 9.4% on a
managed basis. Net principal charge-offs in the owned credit
card portfolio were 24.9% and 14.5% for the years ended
December 31, 2002 and 2001, versus 15.5% and 10.9%
respectively on a managed basis. The large decrease in
delinquent loans as of December 31, 2002, on an owned basis
was due to the sale of approximately $120 million of
delinquent receivables. The sale resulted in a charge-off of
$101.5 million.

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##### Table of Contents



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 which issue credit cards to consumers), and
merchant processing (services for financial institutions which
make arrangements 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; and
|
| |  | interbank settlement.  

We handle the following functions internally:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | applications processing; and                                    
|
| |  | back office support for mail inquiries and fraud
    management.

We handle most inbound customer service telephone
calls for our customer base. We outsource 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). Customer
payments are routed to one of three Household locations based on
the customers zip code. All payments received by
5:00 p.m. (Eastern time) are processed and dated that day.
Any payments received after 5:00 p.m. (Eastern time) are
posted the following day.

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 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
cardholders 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 some credit card
accounts. We may waive the annual fee, or a portion thereof, in
connection with the solicitation of new accounts 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;                                           
|
| |  | 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;                                           
|
| |  | 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
|
| |  | card processing fees for some credit card offers.                                                                                                                                  

14



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##### Table of Contents



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 cardholders whose accounts have an outstanding
balance greater than $1. All cardholders with open accounts must
make a minimum monthly payment, 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 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. The remaining transactions generally are low
dollar amounts, typically below $50. 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® 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 as fraud via the scoring model, or
rules-based queues, are blocked until the activity can be
verified with the cardholder. This process targets all main
fraud types including lost/stolen, non receipt, fraud
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 a 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 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 and later 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 forward flow agreements with third
parties for the sale of receivables on a majority of our
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.

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##### Table of Contents



Asset
Securitizations and Other Funding Vehicles

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 receivable balances
on credit card accounts, in which we retain the servicing of
such receivables. Our securitizations are treated either as
sales or collateralized borrowing agreements under accounting
principles generally accepted in the United States of America.
The securitized receivables accounted for as sales are removed
from our balance sheet.

We primarily securitize receivables by selling
the receivables either to the Master Trust, or to bank-sponsored
single-seller and multi-seller commercial paper conduits.

The
Master Trust

The 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 Master Trust. The Master Trust may, and does
from time to time, issue securities that represent undivided
interests in the receivables in the 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, 2002, 12 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 Master Trust only and are
not obligations of MRI, MCI, Direct Merchants Bank, or any other
subsidiary of the Company. The interest in the Master Trust not
represented by any series of securities issued by the 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.
Currently, the 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 accumulation and amortization can
be accelerated, referred to as early amortization.
Usually, this would occur if (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 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 Master Trust. This restricted
cash provides additional security to the investors in the Master
Trust. We reflect cash restricted from release in the Master
Trust as other receivables due from credit card
securitizations, net in the consolidated balance sheet.
The triggers are related to the performance of the 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 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 Master Trust as additional protection for future
losses. Once each of these obligations is fully met, any
remaining finance charge collections, if any, are returned to us.

16



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##### Table of Contents



Bank-Sponsored
Conduit Programs

We maintain flexibility in our current funding
program by maintaining primarily bank-sponsored commercial paper
conduits. These conduits purchase an interest in receivables
arising in designated accounts. These transactions also feature
a revolving period in which principal payments on receivables
allocated to the conduits are returned to us and reinvested in
new receivables. These agreements also have early amortization
triggers (see above discussion under 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.

Additional information regarding asset
securitization is set forth under Liquidity, Funding and
Capital Resources on pages 50-55 of this Report.

Bank-Sponsored
Deposit Programs

Direct Merchants Bank has issued jumbo
certificates of deposit (CD) in increments of
$100,000 through registered investment brokers. The broker is
responsible for customer service, information distribution,
customer record maintenance and tax reporting. The jumbo CDs
have fixed interest rates and original maturities ranging from
six months to five years.

Direct Merchants Bank also has offered jumbo CDs
directly to investors via advertising in local and national
newspapers, in addition to posting rates on several websites.
The direct program is run in conjunction with the
above-referenced brokered program and has similar terms.

Under the OCC operating agreement, the Company
has agreed to reduce receivables at Direct Merchants Bank to no
more than $550 million by December 31, 2003, and to zero by
December 31, 2004. As a result, we do not anticipate
issuing jumbo CDs in the foreseeable future.

Enhancement Services

We market enhancement services in three principal
lines of business:

Credit protection products, including:



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | credit account protection benefits arising from
    death, involuntary unemployment, disability or family leave; and
|
| |  | third-party credit life insure directly to our
    cardholders.                                                     

Membership program products, including:



| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | membership benefit programs in categories such as
    credit bureau monitoring, fraud prevention and resolution,
    travel, credit card purchase protection, automotive roadside
    assistance, discounted health services and entertainment
    products.

Warranty and other products, including:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | extended service plans for third-party retail
    products;
|
| |  | warranties for the home, appliances and
    electronics;   
|
| |  | third-party insurance; and                                 
|
| |  | list syndication.                                          

17



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##### Table of Contents



We currently market the following programs:

Credit
Protection Products

Credit protection and insurance products sold
exclusively to Direct Merchants Bank credit cardholders
including:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Account Protection
    PlusSMis 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 in the event of involuntary unemployment,
    disability or the need to take a Family Medical Leave Act
    leave-of-absence from employment. 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 Planis 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 Insuranceoffers 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.           

Membership
Program Products

Membership program products are sold to
cardholders of Direct Merchants Bank, customers of third-party
partners and directly to consumers, and include the following:



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | DirectAlert®
    helps members monitor and review their credit bureau report
    through the following benefits:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | unlimited access to their credit bureau report in
    easy-to-read paper or online formats;
|
| |  | regular monitoring updates detailing changes in
    their credit bureau report;            
|
| |  | information about inquiries or new trade lines
    opened in their name; and               
|
| |  | access to expert information to assist with
    handling disputes.                         



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Fraud Alert
    ServicesSMprovides members
    with the comprehensive ability to manage the risks associated
    with the sudden loss of personal financial information. Members
    receive personal computer firewall software to protect their
    home computers from attacks by hackers. If credit cards are lost
    or stolen, members can have all their credit card issuers
    notified with a single call and emergency cash or airline
    tickets can be delivered to travelers away from home. Should any
    member become the victim of identity theft, experts will help
    members resolve these issues by assisting with law enforcement
    officials, credit bureaus and other necessary parties.
|
| | RoadSaverSMprovides members with emergency roadside assistance, an
    automotive mechanic helpline, customized trip planning, and car
    buyer information services. Members are covered regardless of
    the car in which they are travelling, and a single
    RoadSaverSM membership covers all household
    family members.                                                                                                                                                                                                                                                                                                                                                                                    
|
| | TripSaverSMgives members a broad array of travel benefits  such
    as access to a full-service travel agency, driving vacation
    packages, restaurant and entertainment discounts, automotive
    maintenance rebates, and other special travel offers.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Total Advantage
    HealthSMprovides members
    access to discounts on doctor visits, prescriptions, dental
    treatments, eyewear, hearing aids, vitamins, and chiropractic or
    alternative health visits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inside
    AccessSMoffers discounted
    tickets to sporting events, concerts, theater productions and
    special members-only events, including savings on theme parks,
    movies, dining and online shopping.

Warranty and
Other Products

Extended Service
Plans.We issue and administer
extended service plans that provide warranty coverage beyond the
manufacturers warranty period. In general, the extended
service plans that we issue and administer provide customers
with the right to have their covered purchases repaired,
replaced, or in certain circumstances, the purchase price of the
product refunded, within limits that we determine. Extended
service plans we offer include the following:



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | PurchaseShield®is an extended service plan that offers various levels of
    purchase protection to members. Eligible purchases made on
    members credit cards are protected with the following
    benefits:



| |   |                                  
| | - | ---------------------------------
| |  | extended manufacturers warranty;
|
| |  | sale price protection; and       
|
| |  | product return guarantee.        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, PurchaseShield® offers
    members a household repair rebate that can be used on certain
    in-home electro-mechanical item repairs. This program is
    administered internally, and all revenues and expenses are our
    responsibility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | ServiceEdge®is
    an extended service plan issued and administered by us for
    consumer electronics and other electro-mechanical items.
    ServiceEdge® customers have the right to have their
    purchases repaired or replaced in the event of electrical or
    mechanical failure, or defects in materials and workmanship for
    covered events after the manufacturers warranty expires.
    This plan historically was sold to customers of Fingerhut
    Companies Inc., and is in the run-off stage. We issued and
    administered the ServiceEdge® programs over a period
    of up to three years based on the original term purchased by the
    consumer. We are responsible for all claims made during this
    period.
|
| | Home
    ServiceEdgeSMcovers
    repairs for up to 11 major home appliances and systems. It is
    marketed to homeowners or consumers who have responsibility for
    the upkeep of their kitchen and utility appliances, and home
    heating/cooling systems. The plan will assist the customer in
    locating and arranging for repair service for covered products.
    In the event that a covered product cannot be fixed, we will pay
    a set dollar amount towards replacement of the product.Home
    ServiceEdgeSM offers several different coverage
    and price point options to customers based on their individual
    need.                                                                                              

Third-Party Insurance
Products.We cooperate with a variety
of insurance companies to sell their regulated products to
Direct Merchants Bank customers. These transactions may follow
different constructs. In the simplest, the insurance company
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. When it is
in our best interest, we acquire the marketing margin associated
with product sales. In this construct, our licensed insurance
agency subsidiary, MES Insurance Agency, LLC, manages all
customer solicitation and its expense in exchange for a
commission. Lastly, in low-risk products, our captive insurance
subsidiary, ICOM Limited, re-insures the risk of the policies
sold. This may range from a minority percentage to all risk of
loss. In this situation, the administrative costs of servicing
the policies are borne by us.

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 constructs. 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.

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Competition

As a marketer of consumer lending products, we
compete with numerous providers of financial services. Our
credit card business competes with national, regional and local
bankcard issuers, as well as other general-purpose credit and
debit card issuers. In general, customers are attracted to
credit card issuers largely on the basis of price, credit limit
and other product features; as a result, customer loyalty is
often limited. However, we believe that our strategy of focusing
on the moderate-income sector and our proprietary prospect
database, proprietary models and internal credit scores allow us
to compete effectively in the market for moderate-income
cardholders. There are numerous competitors in the enhancement
services market, including insurance companies, financial
services institutions and other membership-based or
consumer-enhancement service providers.

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 FDIC and
it is subject to comprehensive regulation and periodic
examination by the 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 subject 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 subprime lender is responsible for
quantifying the amount of capital needed to offset the
additional risk in subprime lending activities, and for fully
documenting the methodology and analysis supporting the amounts
specified. Since the issuance of the expanded guidance, OCC
examiners have required Direct Merchants Bank to hold capital
against subprime portfolios in an amount that is two times
greater than what is considered appropriate for non-subprime
assets of a similar type.

In December 2002, the Federal Financial
Institutions Examination Council (FFIEC) issued
guidance on the accounting treatment of Accrued Interest
Receivables (AIR) related to credit card
securitizations. AIR typically consists of a sellers
retained interest in the investors portion of the accrued
and billed fees and finance charges and the right to finance
charges accrued but not yet billed. The guidance requires AIR to
be recorded on the balance sheet as a retained beneficial
interest. Accordingly, we reclassified accrued but unbilled
finance charges on our balance sheet from other
receivables due from securitizations, net and other
assets to retained interests in loans
securitized.

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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. At this time we
are reviewing the impact of the guidance and there can be no
assurance that adoption of the guidance will not have a material
adverse effect on our financial condition.

As part of its normal periodic examination
process, the OCC may, in its sole discretion, require banks to
modify or stop current practices based on the OCCs
interpretation of its guidelines. On April 16, 2002, Direct
Merchants Bank entered into an agreement with the OCC to
strengthen the safety and soundness of Direct Merchants
Banks operations. The agreement formalized recommendations
made and requirements imposed by the OCC following an
examination of Direct Merchants Bank that resulted in a Report
of Examination issued on April 4, 2002. Direct Merchants
Bank has worked to fully comply with the terms of the agreement.
The agreement was formally terminated by the OCC on
March 18, 2003, when we entered into an operating agreement
with the OCC designed to ensure that Direct Merchants Bank
continues to operate in a safe and sound manner. On
March 19, 2003, we filed this operating agreement with the
SEC as an exhibit to a Current Report on Form 8-K.

The operating agreement requires, among other
things, the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Bank must reduce its on-balance-sheet credit
    card receivables to no more than $550 million by
    December 31, 2003, and to zero by December 31, 2004.
    During the time the Bank is reducing these receivables, the mix
    of subprime receivables may not exceed 60% of all credit card
    receivables. As of December 31, 2002, 52.9% of the
    Banks credit card portfolio was subprime. The Bank will
    continue to sell credit card receivables on a daily basis to MCI
    under the purchase agreement currently in effect between MCI and
    the Bank.
|
| |  | The Bank must maintain minimum capital in the
    aggregate amount of (i)liquid assets deposited pursuant to the
    Liquidity Reserve Deposit Agreement discussed below;
    (ii) the capital required as a result of the 200%
    risk-weight applied to on-book subprime credit card receivables;
    and (iii) the minimum capital required under Federal law
    for a well capitalized institution for all remaining
    assets owned by the Bank.                                                                                                                      
|
| |  | The Bank must meet certain liquidity
    requirements, including maintaining, on a daily basis, liquid
    assets of not less than 100% of the deposits and other
    liabilities coming due within the next 30 days, maintaining
    marketable assets in an amount equal to or in excess of the
    Banks insured deposits, maintaining cash and cash
    equivalents in excess of 46% of outstanding CDs and entering
    into the Liquidity Reserve Deposit Agreement discussed below to
    support the Banks credit card receivables funding needs.                     
|
| |  | The Bank is required, within 60 days from
    the date of the operating agreement, to submit to the OCC a
    written strategic plan establishing objectives for the
    Banks overall risk profile, earning performance, growth,
    balance sheet mix, off-balance sheet activities, liability
    structure, capital adequacy, product line development and
    marketing segments.                                                                                                                                                                                         

The terms of the operating agreement require
Direct Merchants Bank and MCI to enter into a Capital Assurance
and Liquidity Maintenance Agreement (CALMA) which
also was executed on March 18, 2003. The effect of the
CALMA is to require MCI to make such capital infusions or
provide Direct Merchants Bank with financial assistance so as to
permit Direct Merchants Bank to meet its liquidity requirements.

The operating agreement also requires Direct
Merchants Bank, a third-party depository bank and the OCC to
execute a Liquidity Reserve Deposit Agreement (LRDA)
within 30 days of the effective date of the operating
agreement.

Direct Merchants Bank intends to comply with all
of the terms of the operating agreement in a timely manner. If
the OCC were to conclude that Bank failed to implement any
provision of the agreement, the

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OCC could pursue various enforcement options. If
any of those options were to be pursued by the OCC, we could not
assure you that it would not have a material adverse effect on
our operations or capital position.


Exportation
of Interest Rates and Fees

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

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.

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
get OCC approval prior to 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 adequacy standards. Finally, although
not a regulatory restriction, the terms of certain debt
agreements prohibit the payment of dividends in certain
circumstances.

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 the total risk-based capital,
Tier 1 risk-based capital and leveraged capital ratios as
the relevant capital measures. Such regulations establish
various degrees of corrective action to be taken when an
institution is considered undercapitalized. Under the
regulations, a well-capitalized institution must
have a Tier 1 capital ratio of at least 6%, 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
operating agreement is discussed in more detail under
Regulation on pages 20-22.

The OCCs risk-based capital standards
explicitly consider a banks exposure to declines in the
economic value of its capital due to changes in interest rates
when evaluating a banks capital adequacy.

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Interest rate risk is the exposure of a
banks current and future earnings and equity capital
arising from adverse movements in interest rates. The evaluation
will be made as a part of the institutions regular safety
and soundness examination.


FDICIA requires the FDIC to implement a system of
risk-based premiums for deposit insurance pursuant to which the
premiums paid by a depository institution will be based on the
probability that the FDIC will incur a loss in respect of such
institution. The FDIC has adopted a system that imposes
insurance premiums based 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. Direct Merchants Bank has issued jumbo CDs through
third-party registered deposit brokers and directly to the
public in increments of $100,000 or more. Under the OCC
operating agreement, the Company has agreed to reduce
receivables at Direct Merchants Bank to no more than
$550 million by December 31, 2003, and to zero by
December 31, 2004. As a result, we do not anticipate
issuing jumbo CDs 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
Soldiers and Sailors Civil Relief Act. Regulators
are authorized to impose penalties for violations of these
statutes and, in certain cases, to order Direct Merchants Bank
to pay restitution to injured cardholders. Cardholders may also
bring actions for certain alleged violations of such
regulations. Federal and state bankruptcy and debtor relief laws
also affect Direct Merchants Banks ability to collect
outstanding balances owed by cardholders who seek relief under
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

Congress has passed a financial services law that
requires many of our business groups 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 enhancement services and
credit card marketing activities and practices with third-party
companies in ways 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.

From time to time legislation has been proposed
in Congress to limit interest rates and fees that could be
charged on credit card accounts or otherwise restrict practices
of credit card issuers. If this or similar legislation is
adopted, our ability to collect on account balances or maintain
previous levels of finance charges and other fees could be
adversely affected.

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.

Consumer and
Debtor Protection Laws

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

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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.
Similarly, Congress, the OCC and/or the states may decide to
further regulate our enhancement services business.


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 passed legislation attempting
to tax 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 business in states that have passed such
legislation.

Licensing
Requirements

Several state and local government regulators
require our subsidiaries to be licensed or registered in order
to offer our enhancement services insurance and warranty
products in their states. We currently hold or are in the
process of obtaining proper licenses and registration in these
states. 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. The
FCRA explicitly excludes from the definition of consumer report
a report containing information solely as to transactions or
experiences between the consumer and the entity making the
report. An entity may share consumer reports with any of its
affiliates so long as that entity provides consumers with an
appropriate disclosure and an opportunity to opt out of such
affiliate sharing.

Our objective is to conduct our operations in a
manner that would fall outside the definition of 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 significant adverse economic impact on
us.

Employees

We have approximately 3,700 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 its
business and for private label marketing of certain of its
products. We consider these trademarks and service marks to be
readily identifiable with, and valuable to, our business.

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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.

|                    |  |     |    |  |          |                                                                         
|------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------------------
|Name                |  | Age |    |  | Position
|                    |  |     |    |  |         
|David D. Wesselink  |  |     | 60 |  |          | Chairman and Chief Executive Officer                                    
|William R. Anderson |  |     | 45 |  |          | Executive Vice President, Enhancement Services                          
|Richard G. Evans    |  |     | 54 |  |          | Executive Vice President, General Counsel and
    Secretary             
|Joseph A. Hoffman   |  |     | 45 |  |          | Executive Vice President, Consumer Credit Card
    Marketing/ Operations
|Matthew S. Melius   |  |     | 37 |  |          | Executive Vice President, Credit Risk Management                        
|Jon B. Mendel       |  |     | 51 |  |          | Executive Vice President, Human Resources                               
|Dan N. Piteleski    |  |     | 52 |  |          | Executive Vice President, Chief Information
    Officer                 
|John A. Witham      |  |     | 51 |  |          | Executive Vice President, Chief Financial Officer                       
|Scott R. Fjellman   |  |     | 37 |  |          | Senior Vice President, Treasurer                                        
|Mark P. Wagener     |  |     | 42 |  |          | Senior Vice President, Controller                                       

David D.
Wesselinkhas been Chairman and Chief
Executive Officer of the Company since December 2002.
Mr. Wesselink was previously Vice Chairman of the Company
from September 2000 to November 2002, and Executive Vice
President, 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 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 Saxon Capital, Inc. and
CFC International, Inc.

William R. Andersonhas been Executive Vice President, Enhancement Services of the
Company since February 2002. Mr. Anderson was previously
Senior Vice President, Enhancement Services of the Company from
October 1999 to January 2002, and Senior Vice President,
E-Commerce of the Company from February 1999 to September 1999.
Prior to joining the Company, Mr. Anderson was with Bank of
America as Executive Vice President and Director of Marketing
from August 1996 to January 1999. Prior to that,
Mr. Anderson was General Director of U.S. consumer
marketing and GM Card operations at General Motors Corporation.
Mr. Anderson also has served as Vice President of
Strategic Planning and Business Development for CoreStates
Financial Group, and held a variety of marketing positions with
CitiBank and Black & Decker early in his career.

Richard G.
Evanshas 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.

Joseph A. Hoffmanhas been has been Executive Vice President, Consumer Credit
Card Marketing/ Operations of the Company since October 1999.
Mr. Hoffman previously was Senior Vice President, Consumer
Credit Card Marketing of the Company from April 1998 to
September 1999. Prior to joining the Company, Mr. Hoffman
was Vice President of Marketing at Advanta Corporation from
June 1994 to April 1998, where he held a variety of positions
including Director of Brand Management and Director of Co-Brand
and Affinity Marketing. Before that, Mr. Hoffman was
Vice President, Area Director, in Citibanks Card
Product Group, which he joined in 1980. During
Mr. Hoffmans 14-year tenure with Citibank, he held a
variety of marketing and operations positions within
Citibanks Bankcard and Private Label businesses.

Matthew S.
Meliushas been Executive
Vice President, Credit Risk Management of the Company since
January 2001. Mr. Melius was previously Executive Vice
President, E-Commerce of the Company from September 2000 to
December 2000, Senior Vice President, E-Commerce from January
2000 to

25



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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.


Jon B. Mendelhas been Executive Vice President, Human Resources of the
Company since May 1998. Prior to joining us, Mr. Mendel was
Senior Vice President, Human Resources at TCF Financial
Corporation. Before that, Mr. Mendel worked for
12 years at The St. Paul Companies, advancing from a
compensation and benefits officer to Vice President, Human
Resources of the St. Paul Fire and Marine Insurance Co.
Mr. Mendel is a member of the Society of Human Resources
Management, the Twin Cities Human Resources Association and
World at Work.

Dan N.
Piteleskihas 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
has also worked in information systems at Equitable Resources
Energy Company, Inc., and American Standard.

John A. Withamhas been Executive Vice President and Chief Financial Officer of
the Company since November 2002. Mr. Witham was previously
Senior Vice President, Finance of the Company from June 2002 to
October 2002. Prior to joining the Company, Mr. Witham was
Executive Vice President, Chief Financial Officer of Bracknell
Corp. from November 2000 to October 2001. In November 2001,
Adesta 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.
Fjellmanhas 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 the Company, 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. Wagenerhas been the 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 the Company, Mr. Wagener
served for 13 years at Norwest Corporation (now Wells
Fargo & Company) in various finance/accounting
management positions, the last being 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

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

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

The factors discussed below, among others, could
cause our actual results to differ materially from those
expressed in any forward-looking statements. 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 May Not be Able to Successfully Complete
    our Strategic Initiatives

We are in the early stages of implementing our
strategic initiatives described on page 3 of this Report,
and we may not be able to complete our efforts to maintain our
capital and liquidity positions and improve our credit quality.
Among other things, we may not be able to complete the asset
sales contemplated by our strategic initiatives. The failure to
successfully execute these strategic initiatives could have a
material adverse effect on our financial results.



| |                                                                  
| | -----------------------------------------------------------------
| | We Require a High Degree of Liquidity to
    Operate Our Business

Due to its nature, our business requires a high
degree of liquidity to operate (see pages 50-55 for a more
detailed discussion on liquidity). The loss or interruption of
our normal sources of funding could adversely affect our ability
to operate. Key elements of our strategy are dependent upon us
having adequate available cash. These cash needs include:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | funding new receivables through marketing
    campaigns;                                                                            
|
| |  | additional credit enhancement due to poor
    performance of our securitized assets, including holding cash in
    the Master Trust;
|
| |  | interest and principal payments under our
    securitizations, credit agreement, existing senior notes and
    other indebtedness;  
|
| |  | ongoing operating expenses;                                                                                                         
|
| |  | maintenance of the well-capitalized
    status of Direct Merchants Bank; and                                                      
|
| |  | fees and expenses incurred in connection with the
    securitization of receivables and the servicing of them.                      

Given these cash needs, we anticipate that we
will need to enter into financing transactions on a regular
basis. We cannot assure you that we will be able to secure funds
to support our cash needs on terms as favorable as past
transactions. Any adverse change in the funding sources we use
could force us to rely on other potentially more expensive
funding sources, to the extent available, and could have other
adverse consequences. If any of our funding sources become
limited it may require us to use more expensive sources of
funding. Any material increase in our costs of financing beyond
our expectations could negatively impact us.

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| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | We Have Recently Experienced and May
    Continue to Experience Increased Delinquencies
    and Credit Losses

The delinquency rate on our consumer loans and
the rate at which our consumer loans are charged off as
uncollectible (referred to as the net charge-off
rate) have both increased significantly in recent periods.
Current economic conditions, which have been characterized by
decreased growth, higher unemployment and general economic
uncertainty, have contributed substantially to our net
charge-off rates as borrowers fail to make payments and, in some
instances, seek protection under the bankruptcy laws. The impact
of the current economic environment has been exacerbated by our
focus in lending to higher risk market segments, which include
borrowers most significantly impacted by economic downturns and
a sustained weak economy.

Contributing to our increased delinquencies and
losses during 2002 was the credit line increase program
implemented in 2001 to our existing cardholders. 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. The average balance per
charged-off account in 2001 was $3,000 compared to $4,700 in
2002.

Although we believe that expected increases in
credit losses are appropriately considered in our reserves,
actual credit losses may exceed our expectations.



| |                                                                          
| | -------------------------------------------------------------------------
| | We Are Required to Operate in Accordance
    with Our Operating Agreement

We have entered into various regulatory
agreements, including the operating agreement described on
page 21 of this Report, and our banking subsidiary Direct
Merchants Bank is generally under close scrutiny by the OCC.

Among other things, the operating agreement
requires Direct Merchants Bank to reduce its on-balance sheet
credit card receivables to zero by December 31, 2004, while
maintaining a mix of subprime credit card receivables on its
books of no more than 60% and cash and cash equivalents (as
defined under the operating agreement) must exceed 46% of
outstanding CDs. The operating agreement also requires Direct
Merchants Bank to establish and maintain minimum capital in the
aggregate amount of (i) a liquidity reserve deposit,
(ii) 200% of risk-weight applied to on-book subprime credit
card receivables and (iii) the minimum capital required
under Federal law for a well-capitalized institution
for all remaining assets owned by Direct Merchants Bank.

If we fail to adhere to the terms of the
operating agreement, Direct Merchants Bank will face significant
restrictions on growth, payments of dividends and operating
activities. Ultimately, if we fail to adhere to our regulatory
agreements or the requirements of the operating agreement, the
regulators could order Direct Merchants Bank to cease deposit
taking and lending activities, and they could also assess civil
money penalties, initiate proceedings to terminate deposit
insurance, and assume control of our banking subsidiary.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Our Banking Subsidiarys Regulators
    Can Impose Restrictions on Our Operations

Our banking subsidiarys regulators have
broad discretion to issue or revise regulations, and to issue
guidance, that may significantly affect, Direct Merchants Bank,
or the way we conduct our business. For example, the banking
regulators have issued guidelines governing subprime lending
activities that require financial institutions engaged in
subprime lending (including Direct Merchants Bank) to carry
higher levels of capital and/or credit loss reserves. In
addition, Direct Merchants Banks regulators have imposed
on us the restrictions discussed on pages 20-23, and could
impose further restrictions on our business, or increase
existing restrictions. Any new or more restrictive requirements
could include, among others, restrictions relating to: minimum
regulatory capital levels; deposit taking and rates; extensions
of credit; strategic acquisitions and asset growth; underwriting
criteria and accounting policies and practices (including
increases in allowances for credit losses and acceleration of
loss recognition for finance charges

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and fees); enhanced scrutiny and consent
requirements relating to our 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.


Any new or more restrictive requirements could
hurt our financial results, limit our growth prospects, reduce
our returns on capital and/or require us to raise additional
capital.



| |                                                                      
| | ---------------------------------------------------------------------
| | We Could be Required to Provide Support to
    Our Banking Subsidiary

Under our regulatory framework and the operating
agreement, we could be required to contribute capital or
otherwise provide support to Direct Merchants Bank in order to
maintain or meet Direct Merchants Banks capital and liquidity
needs. Providing support to our banking subsidiary would limit
our ability to expend funds at the MCI level. In addition, we
may determine to undertake capital raising strategies, such as
equity offerings, in order to raise capital to contribute to our
banking subsidiary or otherwise to support our operations. These
strategies could adversely affect our financial results and/or
stock price for a variety of reasons, including dilution to
existing equity holders.



| |                                                                     
| | --------------------------------------------------------------------
| | We Face Reduced Funding Availability and
    Increased Funding Costs

We rely heavily on the securitization of credit
card receivables and other external funding sources to fund our
business. As of December 31, 2002, 93% of our receivables
are held in the Master Trust due to securitizations. 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
were previously available to us. Future downgrades in our debt
ratings or those of our banking subsidiary, as well as further
deterioration in our asset quality, could continue to negatively
impact our funding capabilities. Economic, legal, regulatory,
accounting and tax changes can also make future securitizations
and other sources of funding more difficult, less efficient,
more expensive or unavailable.

Furthermore, even if we are able to securitize
our credit card receivables consistent with past practice, poor
performance of our securitized receivables  including
increased delinquencies and credit losses, lower payment rates
or a decrease in excess spreads below certain
thresholds  could result in a further downgrade or
withdrawal of the ratings on the outstanding securities issued
in our securitization transactions, cause early amortization of
these securities, or result in higher required credit
enhancement levels. As a result, poor performance of our
securitized receivables could and has diverted significant
amounts of cash that otherwise would be available to us. This
could jeopardize our ability to complete other securitization
transactions on acceptable terms, decrease our liquidity and
force us to rely on other potentially more expensive funding
sources, to the extent available. We cannot assure you that the
securitization market will continue to offer suitable funding
alternatives.

Brokered CDs have been a major source of funding
for us. Under the OCC operating agreement, the Company has
agreed to reduce receivables at Direct Merchants Bank to no more
than $550 million by December 31, 2003, and to zero by
December 31, 2004. As a result, we do not anticipate
issuing jumbo CDs in the foreseeable future.

Although we intend to establish new
securitization facilities and sell non-essential assets to
generate cash to run our business, we cannot assure you that we
will be able to do so on favorable terms on a timely basis, or
at all. Furthermore, disruptions or unfavorable conditions
related to one financing source may negatively affect our
ability to access other financing sources, or may increase our
financing costs. In addition, restrictions contained in our debt
agreements may adversely affect our ability to finance future
operations or capital needs or to engage in other business
activities. Finally, there is significant competition for
funding sources and many of our competitors have more capital
and higher credit ratings than we do.



| |                                                          
| | ---------------------------------------------------------
| | Interest Rate Fluctuations Can Hurt Our
    Profitability

We borrow money from institutions and,
historically, from depositors in order to lend money to our
customers. The difference between the rates we pay to borrow
money and the rates we earn on the loans

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we make to our customers (spread)
affects our earnings and the value of our assets and
liabilities. Accordingly, our business is highly sensitive to
interest rate movements that affect this spread. If the interest
rates we pay on our deposits and borrowings increase to a
greater extent than the rates our customers pay to us, or if the
interest rates that we charge customers are reduced (as a result
of competition or otherwise) to a greater extent than the
interest rates we pay on our deposits and borrowings, our
profits could be negatively affected.


We may seek to reprice the rates that we charge
our customers in order to limit changes in the spread between
the rates at which we borrow and lend money. However, these
actions could result in customers using our credit cards less
frequently, carrying smaller balances or looking to other credit
sources, which could negatively impact our earnings as accounts
and account balances decrease. We also seek to manage the risk
of interest rate fluctuations through financial instruments and
other techniques. However, these instruments and techniques may
not be successful, and we might not be able to protect against
certain risks.



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | Our Financial Results Could Be Hurt by
    Fluctuations in Our Interests in Our
    Securitizations

In connection with our securitizations, we retain
certain interests in the assets included in the securitization,
including retained subordinated interests, spread accounts and
other residual interests (these interests are described in
greater detail on pages 46-47 of this Report). The income
earned from these interests depends on many factors not within
our control, including the performance of the securitized loans,
interest paid to the holders of securitization securities,
credit losses, and transaction expenses. The value of our
interests in the securitizations will vary over time as the
amount of receivables in the securitized pool and the
performance of those loans fluctuate. The performance of the
loans included in our securitizations is subject to the same
risks and uncertainties that affect the loans that we have not
securitized, 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.



| |                                                                      
| | ---------------------------------------------------------------------
| | We Could Experience a Change in the Status
    of Our Securitizations

When we securitize our consumer loans, we record
the securitizations as sales for GAAP and for regulatory
accounting purposes. At the time of sale, we receive the cash
proceeds of the sale and the securitized loans and related
credit loss allowances are removed from our balance sheet. Under
certain circumstances, this accounting treatment could be
reversed, resulting in the return of the securitized loans and
related credit loss allowances to our balance sheet, which would
have a negative impact on our regulatory capital and ability to
fund ongoing operations. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Managed Consumer Loan Portfolio and
Impact of Securitization.

During the revolving period of a securitization,
no principal payments are made to the investors. Instead,
monthly principal payments received on the securitized loans are
used to purchase replacement loans receivable. However, certain
events, such as a deterioration in the performance of our
securitized receivables, deterioration in our financial
condition, downgrades in credit ratings, or certain breaches of
representations, warranties or covenants that we make in the
documentation relating to our securitizations, could each result
in early amortization of our securitization transactions. If an
early amortization event occurs, the sellers interest with
respect to the affected series will increase. Our recently
completed securitization transactions contain terms that are
less favorable than those contained in our past securitization
transactions, including increased subordination levels and early
amortization events relating to credit ratings, regulatory
capital, and early amortization of our other securitization
transactions.

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| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Our Target Market for Consumer Lending
    Products Has Higher Default and Bankruptcy Rates

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



| |                            
| | ---------------------------
| | Our Growth Rate Will Change

Our credit card portfolios have grown rapidly
over the last few years, and that growth has been a major
contributor to our high charge-off rate in 2002. In an effort to
reduce charge-off rates and improve profitability, we have
significantly reduced new account marketing to our market
segment, tightened credit line increases across all segments,
selectively repriced loans that exhibited increased risk levels
and limited authorizations to our riskiest customers.

We cannot assure you that we will be able to
retain existing customers or attract new customers, or that we
will be able to increase account balances for new and existing
customers. Many factors could adversely affect our ability to
retain existing customers and attract new customers, and to grow
account balances for new and existing customers. These factors
include general economic conditions, competition, higher
unemployment, our marketing initiatives, negative press reports
regarding the Company, the general interest rate environment,
our ability to retain and recruit experienced management and
operations personnel, the availability of funding, and
delinquency and credit loss rates.

Another important contributor to our growth and
earnings has been the development and expansion of enhancement
services products. If we are unable to implement new products
and features, our ability to grow will be negatively impacted.
In addition, aggregate sales of enhancement services products
cannot continue at historical levels as growth in accounts and
account balances decline, and sales of these products on a per
customer basis is not expected to continue at historical levels.



| |                            
| | ---------------------------
| | We Face Intense Competition

We face intense and increasing competition from
numerous financial services providers, many of which have
greater resources than us. In particular, 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 us. There has been a recent increase in
solicitations to moderate-income consumers, as competitors have
increasingly focused on this market. Customers are attracted to
credit card issuers largely on the basis of price, credit limit
and other product features; as a result, customer loyalty is
often limited. In addition, the 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. We also face competition from
numerous enhancement services providers, including insurance
companies, financial services institutions and other
membership-based or consumer services providers. Finally, for
customers of third-party retailers, we compete with
manufacturers, financial institutions, insurance companies and a
number of independent administrators.

Our competitors may take competitive actions such
as offering lower interest rates and fees, larger credit lines,
and incentives to customers to use our competitors credit
cards and other products and/or transfer existing balances to
our competitors credit cards. These and other competitive
practices could result in decreases in account and balance
growth, the loss of existing customers and/or reductions in
account balances, increased customer acquisition costs, and
reductions in the finance charges and fees that we charge.

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| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | We May Not be Able to Successfully Market
    Our Enhancement Services or Sign Additional
    Marketing Alliances

We offer enhancement services products to our
credit card customers and customers of third parties. Because of
the variety of offers provided and the diversity of the
customers targeted, we are uncertain about how many customers
will respond to our offers for these products. We may experience
higher than anticipated costs in connection with the internal
administration and underwriting of these enhancement services
and lower than anticipated response or retention rates.

Furthermore, we may be unable to expand the
enhancement services business or maintain historical growth and
stability levels if:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | we cannot successfully market credit cards to new
    customers;                                                                    
|
| |  | existing credit card customers close accounts
    voluntarily or involuntarily;                                                     
|
| |  | existing enhancement services customers cancel
    their services;                                                                  
|
| |  | we cannot form marketing alliances with other
    third parties or existing marketing alliances with third parties
    terminate; or
|
| |  | new or restrictive federal or state regulations
    limit our ability to market or sell enhancement services
    products.          



| |                                                                        
| | -----------------------------------------------------------------------
| | We May Not be Able to Successfully
    Integrate Portfolio Acquisitions

Our success may depend on our ability to acquire
and integrate new portfolios of credit card customers. Since our
risk-based pricing system depends on information regarding
customers, limited or unreliable historical information on
customers within an acquired portfolio may have an impact on our
ability to profitably integrate that portfolio. Our success also
depends on whether the desirable customers of an acquired
portfolio close their accounts after transfer of the portfolio.
A large attrition rate would result in a lower borrowing base
upon which to assess fees, higher costs relating to closing
accounts and less potential for marketing enhancement services
products. In addition, if customers reduce their borrowings
after the transfer of accounts, the acquired portfolio may be
less profitable than originally expected.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | Current and Proposed Regulations and
    Legislation Limit Our Business Activities, Product Offerings and
    Fees Charged

Various federal and state laws and regulations
significantly limit the activities in which we and Direct
Merchants Bank are permitted to engage. Such laws and
regulations, among other things, 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, govern the sale and terms of
products and services we offer and require that we maintain
certain licenses, qualifications, or capital requirements (see
Business  Regulation on pages 20-24
of this Report). In some cases, the precise application of these
statutes and regulations is not clear. In addition, the
regulatory framework at the state and federal levels regarding
some of our enhancement services products is evolving. The
regulatory framework affects the design or profitability of such
products and our ability to sell certain products. In addition,
numerous legislative and regulatory proposals are advanced each
year which, if adopted, could adversely affect our profitability
or further restrict the manner in which we conduct our
activities. The failure to comply with, or adverse changes in,
the laws or regulations to which our business is subject, or
adverse changes in the interpretation thereof, could adversely
affect our ability to collect receivables and generate fees on
those receivables, which could have a material adverse effect on
our business. Changes in government fiscal or monetary policies,
including changes in capital requirements and our rate of
taxation, could also adversely affect our financial results.

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| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | The Impact of Existing, Pending and
    Possible Future Privacy Laws Could Result in Lower Marketing
    Revenue and Penalties for Non-Compliance

The Federal Gramm-Leach-Bliley Act requires many
of our business groups to disclose our practices for collection
and sharing of non-public customer information. Changes to this
law, or enactment of new laws, have required and could further
require us to limit or substantially modify our enhancement
services and credit card marketing activities and practices with
third-party companies in ways that would most likely decrease
our revenue from that business. These initiatives could require
us to end substantially all of our marketing efforts with third
parties and may even adversely affect the ability of Direct
Merchants Bank to share information about its customers with
other MCI affiliates, particularly enhancement services. The
curtailment of marketing efforts directed to our customer base
and third-party customers would significantly negatively impact
our business.

The privacy laws require us to provide initial
and continuing disclosures regarding our information sharing
practices. The laws also require us to monitor these disclosures
and customer responses so that we do not unlawfully disclose
information about a customer who has directed us not to do so.
If we do not adequately manage the requirements, we may face
regulatory sanctions, including fines, and consumer class action
litigation.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Legal Proceedings and Related Costs Could
    Negatively Affect Our Financial Results

A putative class action lawsuit has been filed
against us alleging that we violated federal securities laws by
failing to timely disclose an OCC report of examination. We face
the risk of other governmental proceedings and 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. We face the potential
of litigation and compliance costs and may from time to time be
required to change specific business practices, depending on the
outcome of such litigation and other legal proceedings.
Litigation and other proceedings may result in changes to
specific business practices or the adoption of business
practices different from our competitors, as well as
payment of settlement costs, damages, and in some cases
penalties, which will affect our financial results. See
Legal Proceedings on page 35 of this Report.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | The Dispute between MasterCard, Visa and
    the U.S. Justice Department Could Have an Adverse Impact on Our
    Operations and Financial Results

In October 1998, the U.S. Department of Justice
(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 between Visa and MasterCard in violation of the
antitrust laws, in the market for general purpose credit card
products and networks. The DOJ sought relief that only member
banks dedicated to one association be permitted to
participate in the governance of that association. In addition,
the complaint challenged 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. Enforcement of the
competing networks claim has been stayed pending appeal, a
process that is expected to take two years or more.

Neither the ultimate outcome of this litigation
nor its effect on the competitive environment in the credit card
industry if the associations appeal is unsuccessful can be
predicted with any certainty. However, it is possible that the
outcome of this litigation could negatively impact our
operations and financial results in ways that we cannot
currently predict.

33



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| |                                                                
| | ---------------------------------------------------------------
| | Other Industry Risks Could Affect our
    Financial Performance

We face many industry risks that could negatively
affect our financial performance. For example, we 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, the
financial services industry as a whole is characterized by
rapidly changing technologies, and system disruptions and
failures may interrupt or delay our ability to provide services
to our customers. In particular, we face technological
challenges in the developing online credit card and financial
services market. We also face potential claims relating to the
proprietary nature of widely used technology, such as
smart cards and call center technology. The secure
transmission of confidential information over the Internet is
essential to maintain consumer confidence in certain of our
products and services. Security breaches, acts of vandalism, and
developments in computer capabilities could result in a
compromise or breach of the technology we use to protect
customer transaction data. Consumers generally are concerned
with security breaches and privacy on the Internet, and Congress
or individual states could enact new laws regulating the
electronic commerce market that could adversely affect us.

Available Information

You can find additional information regarding our
executive officers and Board of Directors in the Proxy Statement
relating to our 2003 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 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. We have entered
into sublease agreements for approximately 10,000 square feet of
the 19,000 square foot lease obligation. These leases expire in
December 2011 and March 2005, respectively. We also lease 15,000
square feet of warehouse space in Minnetonka, Minnesota, which
expires in October 2003. In addition, Direct Merchants Bank owns
a 130,000 square foot building in Scottsdale, Arizona, which
serves as Direct Merchants Banks operation center. We have
entered into an agreement to sell the Scottsdale property and
relocate Direct Merchants Banks operation center into
smaller space in Scottsdale. 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 28,000 square feet of our lease
obligation in Jacksonville. 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 to our businesses and that we will be able to lease
or purchase additional facilities as needed.

34



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Item 3.     Legal
Proceedings


In September and October 2002, three shareholder
lawsuits were filed in the United States District Court for the
District of Minnesota, naming MCI, Ronald N. Zebeck and
David Wesselink as defendants. Two of the lawsuits have been
dismissed. The plaintiff in the remaining lawsuit seeks 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 an OCC Report of Examination
until April 17, 2002. We believe the lawsuit is without
merit and defendants have moved for its dismissal.

On May 3, 2001, Direct Merchants Bank
entered into a consent order with the OCC. The consent order
required Direct Merchants Bank 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, Direct Merchants Bank 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 Direct Merchants Bank that it was in full
compliance with the consent order, and that it would not be
assessing civil money penalties.

In addition to the foregoing, we are a party to
various legal proceedings resulting from the ordinary business
activities related to our operations.

Due to the uncertainties of litigation, we cannot
assure you that we will prevail on all claims made against us in
the lawsuits that we currently fact or that additional
proceedings will not be brought.






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, 2002.






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 103-104 of this Report.

35



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##### Table of Contents








Item 6.     Selected
Financial Data


|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|-------------------------------------------------------------------------------- |  | ------------------------------------------------------ | --------- | - | --------- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - | ----------- | - | ------- | - |  |  | ----- | --
|                                                                                 |  |                                                        |           |  
|                                                                                 |  | Year Ended December 31,                                |           |   | Four-Year |  
|                                                                                 |  |                                                        |           |   | Compound  |  
|                                                                                 |  | 2002                                                   |           |   | 2001      |   |           | 2000 |  |   | 1999      |   |  | 1998 |           |   | Growth Rate |  
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|                                                                                 |  |                                                       
|                                                                                 |  | (In thousands, except EPS, dividends and stock prices) |          
|Income Statement Data:                                                           |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|Net interest income                                                              |  | $                                                      | 423,843   |   |           | $ | 530,710   |      |  | $ | 371,772   |   |  | $    | 180,328   |   |             | $ | 82,698  |   |  |  | 50.5  | % 
|Provision for loan losses                                                        |  |                                                        | 573,478   |   |           |   | 549,145   |      |  |   | 388,234   |   |  |      | 174,800   |   |             |   | 77,770  |   |  |  | 64.8  |   
|Other operating income                                                           |  |                                                        | 858,061   |   |           |   | 1,154,457 |      |  |   | 933,787   |   |  |      | 623,772   |   |             |   | 315,480 |   |  |  | 28.4  |   
|Other operating expense                                                          |  |                                                        | 758,207   |   |           |   | 714,154   |      |  |   | 594,414   |   |  |      | 488,792   |   |             |   | 227,160 |   |  |  | 35.2  |   
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|Tax rate(1)                                                                      |  |                                                        | 32.0      | % |           |   | 38.3      | %    |  |   | 38.5      | % |  |      | 54.1      | % |             |   | 38.5    | % |  |  |       |   
|Net income (loss)                                                                |  | $                                                      | (33,851   | ) |           | $ | 245,792   |      |  | $ | 195,153   |   |  | $    | 64,555    |   |             | $ | 57,348  |   |  |  | N/A   |   
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|Per Common Share Statistics:                                                     |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|Earnings (Loss) per share  diluted                                              |  | $                                                      | (1.20     | ) |           | $ | 2.47      |      |  | $ | 2.11      |   |  | $    | (1.07     | ) |             | $ | 0.94    |   |  |  | N/A   |   
|Stock price                                                                      |  |                                                        | 2.47      |   |           |   | 25.71     |      |  |   | 26.31     |   |  |      | 23.79     |   |             |   | 16.77   |   |  |  | (38.1 | )%
|Dividends paid                                                                   |  |                                                        | 0.040     |   |           |   | 0.040     |      |  |   | 0.033     |   |  |      | 0.017     |   |             |   | 0.013   |   |  |  |       |   
|Book value per common share equivalent(2)                                        |  |                                                        | 11.53     |   |           |   | 12.00     |      |  |   | 9.68      |   |  |      | 7.38      |   |             |   | 5.85    |   |  |  | 18.5  |   
|Shares outstanding (year-end)                                                    |  |                                                        | 57,168    |   |           |   | 63,419    |      |  |   | 62,243    |   |  |      | 57,919    |   |             |   | 57,779  |   |  |  |       |   
|Shares used to compute earnings                                                  |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|(Loss) per share (diluted)                                                       |  |                                                        | 59,782    |   |           |   | 99,366    |      |  |   | 92,582    |   |  |      | 57,855    |   |             |   | 59,905  |   |  |  |       |   
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|Selected Operating Data:                                                         |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|Year-end credit card loans                                                       |  | $                                                      | 846,417   |   |           | $ | 2,756,763 |      |  | $ | 1,184,269 |   |  | $    | 150,200   |   |             | $ |        |   |  |  |       |   
|Year-end assets                                                                  |  |                                                        | 2,594,346 |   |           |   | 4,228,686 |      |  |   | 3,736,025 |   |  |      | 2,045,082 |   |             |   | 945,719 |   |  |  | 28.7  | % 
|Average credit card loans                                                        |  |                                                        | 1,305,127 |   |           |   | 1,709,989 |      |  |   | 614,991   |   |  |      | 20,505    |   |             |   |        |   |  |  |       |   
|Average interest-earning assets                                                  |  |                                                        | 3,801,786 |   |           |   | 4,025,391 |      |  |   | 2,767,970 |   |  |      | 1,353,548 |   |             |   | 669,705 |   |  |  | 54.4  |   
|Average assets                                                                   |  |                                                        | 3,334,850 |   |           |   | 3,903,846 |      |  |   | 2,826,653 |   |  |      | 1,449,297 |   |             |   | 774,167 |   |  |  | 44.1  |   
|Average total equity                                                             |  |                                                        | 1,129,369 |   |           |   | 1,011,573 |      |  |   | 759,633   |   |  |      | 542,050   |   |             |   | 219,835 |   |  |  | 50.6  |   
|Year-end deposits                                                                |  |                                                        | 892,754   |   |           |   | 2,058,008 |      |  |   | 2,106,199 |   |  |      | 775,381   |   |             |   |        |   |  |  |       |   
|Year-end debt                                                                    |  |                                                        | 357,649   |   |           |   | 647,904   |      |  |   | 356,066   |   |  |      | 345,012   |   |             |   | 310,896 |   |  |  | 3.6   |   
|Year-end preferred stock                                                         |  |                                                        | 430,642   |   |           |   | 393,970   |      |  |   | 360,421   |   |  |      | 329,729   |   |             |   | 201,100 |   |  |  | 21.0  |   
|Return on average assets                                                         |  |                                                        | N/A       |   |           |   | 6.3       | %    |  |   | 6.9       | % |  |      | 4.5       | % |             |   | 7.4     | % |  |  |       |   
|Return on average total equity                                                   |  |                                                        | N/A       |   |           |   | 24.3      | %    |  |   | 25.7      | % |  |      | 11.9      | % |             |   | 26.1    | % |  |  |       |   
|Net interest margin                                                              |  |                                                        | 11.1      | % |           |   | 13.2      | %    |  |   | 13.4      | % |  |      | 13.3      | % |             |   | 12.3    | % |  |  |       |   
|Allowance for loan losses                                                        |  | $                                                      | 90,315    |   |           | $ | 410,159   |      |  | $ | 123,123   |   |  | $    | 12,175    |   |             | $ |        |   |  |  |       |   
|Allowance for loan losses as a percent of 30-day
    plus delinquent receivables |  |                                                        | 1146.7    | % |           |   | 147.7     | %    |  |   | 138.1     | % |  |      | 351.1     | % |             |   |        |   |  |  |       |   
|Delinquency ratio(3)                                                             |  |                                                        | 0.9       | % |           |   | 10.1      | %    |  |   | 7.5       | % |  |      | 2.3       | % |             |   |        |   |  |  |       |   
|Allowance for loan losses as a percent of credit
    card loans                  |  |                                                        | 10.7      | % |           |   | 14.9      | %    |  |   | 10.4      | % |  |      | 8.1       | % |             |   |        |   |  |  |       |   
|Net charge-off ratio(4)                                                          |  |                                                        | 24.9      | % |           |   | 14.5      | %    |  |   | 23.5      | % |  |      | 52.7      | % |             |   |        |   |  |  |       |   
|Selected Enhancement Services Data:                                              |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|Revenue:                                                                         |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|Credit protection                                                                |  | $                                                      | 234,636   |   |           | $ | 202,300   |      |  | $ | 149,421   |   |  | $    | 109,502   |   |             | $ | 73,773  |   |  |  | 33.5  | % 
|Membership products                                                              |  |                                                        | 92,919    |   |           |   | 57,186    |      |  |   | 75,981    |   |  |      | 31,858    |   |             |   | 13,301  |   |  |  | 62.6  |   
|Warranty/other                                                                   |  |                                                        | 56,494    |   |           |   | 80,646    |      |  |   | 40,798    |   |  |      | 33,731    |   |             |   | 22,049  |   |  |  | 26.5  |   
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|Total revenue                                                                    |  | $                                                      | 384,049   |   |           | $ | 340,132   |      |  | $ | 266,200   |   |  | $    | 175,091   |   |             | $ | 109,123 |   |  |  | 37.0  |   
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|Deferred Revenue:                                                                |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |   |         |   |  |  |       |   
|Credit protection                                                                |  | $                                                      | 16,912    |   |           | $ | 20,435    |      |  | $ | 13,294    |   |  | $    | 5,523     |   |             | $ | 4,124   |   |  |  | 42.3  |   
|Membership products                                                              |  |                                                        | 114,184   |   |           |   | 130,922   |      |  |   | 159,482   |   |  |      | 89,812    |   |             |   | 44,201  |   |  |  | 26.8  |   
|Warranty/other                                                                   |  |                                                        | 17,584    |   |           |   | 33,775    |      |  |   | 27,020    |   |  |      | 32,206    |   |             |   | 24,541  |   |  |  | (8.0  | ) 
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|Year-end deferred revenue                                                        |  | $                                                      | 148,680   |   |           | $ | 185,132   |      |  | $ | 199,796   |   |  | $    | 127,541   |   |             | $ | 72,866  |   |  |  | 19.5  |   
|                                                                                 |  |                                                        |           |   |           |   |           |      |  |   |           |   |  |      |           |   |             |  
|Year-end deferred acquisition costs                                              |  | $                                                      | 73,219    |   |           | $ | 79,400    |      |  | $ | 74,084    |   |  | $    | 45,837    |   |             | $ | 23,726  |   |  |  | 32.5  |   
|Total enrollments                                                                |  |                                                        | 3,292     |   |           |   | 3,475     |      |  |   | 4,809     |   |  |      | 3,294     |   |             |   | 2,441   |   |  |  | 7.8   |   
|Third-party enrollments                                                          |  |                                                        | 1,825     |   |           |   | 1,398     |      |  |   | 1,675     |   |  |      | 1,336     |   |             |   | 1,316   |   |  |  | 8.5   |   
|Active members                                                                   |  |                                                        | 5,094     |   |           |   | 5,775     |      |  |   | 6,067     |   |  |      | 4,902     |   |             |   | 3,619   |   |  |  | 8.9   |   



---

|    |                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    its Series C Preferred Stock.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 December 31,
    2002 versus December 31, 2001 primarily reflects the sale
    of approximately $120 million delinquent receivables during
    September and December 2002.
|   
|(4) | Net charge-off ratio 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.                                                                                                                               






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001

Net loss applicable to common stockholders for
the year ended December 31, 2002 was $71.9 million, or
$1.20 per diluted share, down from net income applicable to
common stockholders of $211.0 million, or $2.47 per diluted
share in 2001. The decrease in net income is primarily due to
the increase in the net principal charge-off rate from 14.5% in
2001 to 24.9% in 2002, and lower excess spread due to higher
default rates in the Master Trust. The annual principal default
rate in the Master Trust during 2002 was 16.4% compared to 13.2%
in 2001.

Net interest income decreased from
$530.7 million for the year ended December 31, 2001 to
$423.8 million for year ended December 31, 2002. The
decrease is due to a decrease in average interest-earning assets
of $223.6 million and a 210 basis point reduction in net
interest margin. The decrease in margin is primarily due to a
340 basis point decrease in yield resulting from a
$458.0 million reduction in average credit card loans and
retained interests in securitized loans, and a 50 basis point
reduction in the prime rate during the past year. For the year
ended December 31, 2002, 84.6% of our average
interest-earning assets were in credit card loans and retained
interests in loans securitized, compared to 91.3% for the year
ended December 31, 2001.

The provision for loan losses was
$573.5 million in 2002 compared to $549.1 million in
2001. The increase relates to the estimated required balance in
the allowance for loan losses to cover future charge-offs
inherent in our loan portfolio. Increased net principal
charge-offs, recent delinquency and collection trends, and
current economic conditions were factors considered by
management in determining the necessary balance in the allowance
for loan losses. The net principal charge-off rate was 24.9% in
2002 compared to 14.5% 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.

Other operating income decreased
$296.4 million, or 26%, to $858.1 million for the year
ended December 31, 2002. This decrease was primarily due to
a $246.1 million decrease in net securitization and credit
card servicing income to $271.3 million in 2002.The
decrease in net securitization revenue was primarily due to a
decrease in excess spread as a result of an increased default
rate on securitized receivables. Credit card fees, interchange
and other credit card income decreased to $202.7 million in
2002, compared to $296.9 million in 2001. The decrease in
credit card fees, interchange and other credit card income is
due to the reduction of our credit card portfolio primarily due
to the transfer of approximately $2.3 billion of
receivables from Direct Merchants Bank to the Master Trust. In
addition, we also amended the Master Trust core transaction
documents, which resulted in interchange income earned on
receivables held by the Master Trust to be recorded as
contribution to the excess spread earned, effective June 2002.
In 2002, $44.3 million of interchange income was earned by
the Master Trust. Enhancement services revenue increased 12.9%
to $384.0 million due primarily to a rate increase on our
debt waiver products and increased active enrollments in various
membership products. These increases were partially offset by a
decrease in ServiceEdge® revenue due to the run-off
of the ServiceEdge® portfolio and a decrease in
PurchaseShield® revenue due to decreased enrollments.

37



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##### Table of Contents



Other operating expenses increased to
$758.2 million in 2002, compared to $714.2 million in
2001. This increase was primarily due to a $15.4 million
increase in credit card account and other product solicitation
and marketing expenses, a $15.9 million increase in
enhancement services claims expense. During 2002, we recorded
approximately $17.1 million write-down of excess property,
equipment, operating leases, and the pending sale of our Arizona
building and approximately $7 million of marketing and
origination costs on our retail note program. In addition, we
recorded a $10.6 million write-down of portfolios of
charged-off loans purchased in 2001 and 2000.

Critical Accounting Policies

The Companys accounting policies are
identified on pages 68-76 of this Report, the most
significant of which are our determination of the allowance for
loan losses, valuation of retained interests, and accounting for
deferred acquisition costs and deferred revenue on enhancement
services products.



| |                          
| | -------------------------
| | 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.
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 and time
since solicitation (vintage pools), and estimate (based on
historical experience and existing economic conditions) the
dollar amount of principal, accrued finance charges and fees in
each 30-day delinquency bucket that will not be collected and,
therefore, roll into the next 30-day bucket and
ultimately charge-off. We then aggregate these pools into prime
and subprime portfolios based on the prescribed FICO score cuts,
and into several other groups such as credit counseling and
payment alternative receivables. We also isolate individual
pools subsequent to solicitation when the credit risk associated
with the pools includes higher risk segments, such as our
secured card program, accounts that are over their credit limit
by more than 10% and other programs as deemed necessary. We
separately analyze the reserve requirement on each of these
groups or portfolios. The impact on the allowance for loan
losses for accounts in suspended status under our debt waiver
benefits is included in the vintage pool roll-rate analysis.

We continually evaluate the homogenous
liquidating risk pools using 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 loss and
bankruptcy losses.

Additionally, in evaluating the adequacy of the
loan loss reserves, 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 changes 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.

38



---



##### Table of Contents





| |                                    
| | -----------------------------------
| | Valuation of Retained
    Interests

We determine the fair value of the net retained
interests in loan securitized by calculating the present value
of future expected cash flows using managements best
estimate of key assumptions including credit losses, gross
yield, interest expense, servicing fees, payment rates and a
discount rate commensurate with the risks involved. Our fair
value analysis considers cash flows associated with the current
receivable balances as of the balance sheet date. We assume no
new sales or increases in outstanding receivables in conjunction
with the accounts in the portfolio. The significant assumptions
are applied to the existing receivable balance to determine the
expected future cash flows. Our funding costs are primarily
variable based on the London Interbank Offered Rate
(LIBOR), and the income earned on our receivable
balance is substantially variable based on Prime. We assume a
flat interest rate environment and when interest rates change,
we assume our assets and liabilities will reprice in a
consistent manner.

Our estimate of the assumptions considers several
subjective factors, 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 changes 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.                                                                                                              

Furthermore, we consider the impact of
conduit/asset-backed transaction enhancement levels and
restrictions on the release of cash from the Master Trust due to
spread triggers (see page 52 of this Report for further
discussion) on the timing of our cash receipts from the Master
Trust. Significant changes in these factors could impact our
financial projections and thereby affect the valuation of the
retained interests.

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

|                                           |  |                 |       |  |      |  |       | 
|------------------------------------------ |  | --------------- | ----- |  | ---- |  | ----- | 
|                                           |  |                
|                                           |  | At December 31, |      
|                                           |  |                 |      
|                                           |  | 2002            |       |  | 2001 | 
|                                           |  |                 |       |  |      | 
|Annual discount rate                       |  |                 | 20.0% |  |      |  | 20.0% | 
|Monthly payment rate                       |  |                 | 6.8%  |  |      |  | 6.6%  | 
|Gross yield(1)                             |  |                 | 21.4% |  |      |  | 21.9% | 
|Annual interest expense and servicing fees |  |                 | 4.3%  |  |      |  | 5.3%  | 
|Annual gross principal default rate        |  |                 | 19.9% |  |      |  | 18.4% | 



---



|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes finance charges, late and overlimit fees
    and bad debt recoveries, net of finance charge and fee
    charge-offs. Gross yield for purposes of our valuation does not
    include interchange income, debt waiver fees, or cash advance
    fees.

39



---



##### Table of Contents



At December 31, 2002, the sensitivity of the
current fair value of the retained interests to immediate 10%
and 20% adverse changes are as follows (in millions):

|                                           |  |                      |     |  |                    |   |     | 
|------------------------------------------ |  | -------------------- | --- |  | ------------------ | - | --- | 
|                                           |  |                     
|                                           |  | Impact on Fair Value |    
|                                           |  |                      |    
|                                           |  | 10% Adverse Change   |     |  | 20% Adverse Change |  
|                                           |  |                      |     |  |                    |  
|Annual discount rate                       |  | $                    | 10  |  |                    | $ | 19  | 
|Monthly payment rate                       |  |                      | 209 |  |                    |   | 454 | 
|Gross yield                                |  |                      | 143 |  |                    |   | 286 | 
|Annual interest expense and servicing fees |  |                      | 27  |  |                    |   | 54  | 
|Annual gross principal default rate        |  |                      | 176 |  |                    |   | 351 | 

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.



| |                                                                
| | ---------------------------------------------------------------
| | Deferred Acquisition Costs on Enhancement
    Services Products

We defer qualifying acquisition costs associated
with our enhancement services products. These costs, which
relate directly to membership solicitations (direct response
advertising costs), principally include postage, printing,
mailing telemarketing costs, and commissions paid to third
parties. The total amount of enhancement services deferred costs
as of December 31, 2002 and 2001 were $73.2 million
and $79.4 million, respectively. If deferred acquisition
costs were to exceed forecasted future cash flows, we would make
an appropriate adjustment for impairment. The most significant
assumption used by the Company in determining the realizability
of these deferred costs is future revenues from our enhancement
services products. A significant reduction in revenues could
have a material impact on the values of these balances.



| |                     
| | --------------------
| | Debt Waiver Products

Qualifying membership acquisition costs 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 debt waiver products. Amortization of debt waiver
acquisition costs was $3.7 million for the year ended
December 31, 2002. All other debt waiver acquisition costs
are expensed as incurred. Deferred debt waiver acquisition costs
were $2.6 million as of December 31, 2002.



| |                            
| | ---------------------------
| | Membership Program Products

Qualifying membership acquisition costs are
deferred and charged to expense as membership fees are
recognized. We amortize all deferred costs on a straight-line
basis for all annually billed products, and on an accelerated
method for all monthly billed products, which approximates our
historical cancellation experience for membership program
products. Amortization of membership deferred costs was
$55.4 million, $28.0 million and $19.8 million
for the years ended December 31, 2002, 2001 and 2000,
respectively. All other membership acquisition costs are
expensed as incurred. Deferred membership acquisition costs were
$66.9 million and $66.7 million as of
December 31, 2002 and 2001, respectively.



| |                  
| | -----------------
| | Warranty Products

Qualifying warranty acquisition costs are
deferred and charged to expense as warranty product fees are
recognized. Those incremental direct acquisition costs, which
are a result of a contract that is not consummated, are charged
to expense as incurred. A successful effort conversion
percentage is applied to these incremental direct acquisition
costs, which approximates our historical successful effort rate
percentage in negotiating warranty products. We amortize these
deferred costs using an accelerated amortization methodology,
which approximates our historical cancellation experience
following the expiration of the manufacturers contractual
cancellation period for the warranty products. Amortization of
warranty acquisition costs were $12.8 million,
$15.9 million, and $10.4 million for the years ended
December 31, 2002, 2001, and 2000, respectively. All other
warranty acquisition costs are expensed as

40



---



##### Table of Contents



incurred. Deferred warranty acquisition costs
amount to $3.0 million and $12.7 million as of
December 31, 2002 and 2001, respectively.




| |                                                         
| | --------------------------------------------------------
| | Revenue Recognition on Enhancement Services
    Products



| |                     
| | --------------------
| | Debt Waiver Products

Direct Merchants Bank offers various debt waiver
products on receivables it owns as well as securitized
receivables. Direct Merchants Bank records deferred revenue when
the debt waiver customer is billed. Revenue is recognized in the
month following the completion of the cancellation period, which
is one-month. Direct Merchants Bank incurs the related claims
and marketing expenses. A reserve is maintained for future death
and finance charge claims based on Direct Merchants Banks
historical experience with settlement of such claims. Revenues
recorded for debt waiver products are included in the
consolidated statements of income under Enhancement
services revenues and were $231.0 million,
$198.2 million and $144.7 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Unearned
revenues and reserves for pending claims and incurred but not
reported claims are recorded in the consolidated balance sheets
in deferred income and accrued expenses and
other liabilities, respectively. Unearned revenues as of
December 31, 2002 were $16.9 million compared to
$20.4 million as of December 31, 2001. Reserves for
pending and incurred but not reported claims were
$8.2 million as of December 31, 2002, compared to
$5.2 million as of December 31, 2001.



| |                            
| | ---------------------------
| | Membership Program Products

We bill membership fees for enhancement services
products through financial institutions, including Direct
Merchants Bank, and other cardholder-based institutions. We
record these fees as deferred membership income upon acceptance
of membership and amortize them on a straight-line basis for all
annually billed products, and on an accelerated amortization
method for all monthly billed products over the membership
period beginning after the contractual cancellation period is
complete. A liability is established and netted against the
related receivable in the consolidated balance sheets in
other assets from inception of the membership
through the end of the cancellation period that reflects our
historical cancellation experience with these products. Gross
receivables as of December 31, 2002 on the membership
program products were $22.0 million compared to
$38.7 million as of December 31, 2001. Cancellation
reserves were $19.5 million and $29.6 million for the
years ended December 31, 2002 and 2001, respectively.
Revenues recorded for membership products are included in the
statements of income under enhancement services
revenues and were $92.9 million, $57.2 million
and $76.0 million for the years ended December 31,
2002, 2001 and 2000, respectively. Unearned revenues on
membership program products are recorded in the consolidated
balance sheets in deferred income. Unearned revenues
as of December 31, 2002 were $114.2 million compared
to $130.9 million as of December 31, 2001. Reserves
for pending and incurred but not reported claims, included in
accrued expenses and other liabilities, were
$0.1 million as of December 31, 2002, compared to
$0.2 million as of December 31, 2001.



| |                  
| | -----------------
| | Warranty Products

We coordinate the marketing activities for Direct
Merchants Bank and third-party sales of extended service plans.
We perform administrative services and retain the claims risk
for all extended service plans sold. As a result, we defer and
recognize extended service plan revenues and the incremental
direct acquisition costs on an accelerated amortization method
over the life of the related extended service plan contracts
beginning after the expiration of any manufacturers
warranty coverage. A liability is established and netted against
the related receivable in the consolidated balance sheets in
other assets from inception of the extended service
plan through the end of the cancellation period that reflects
our historical cancellation experience with these products.
Gross receivables as of December 31, 2002 on the warranty
products were $3.8 million compared to $7.0 million as
of December 31, 2001. Cancellation reserves were
$5.3 million and $6.2 million for the years ended
December 31, 2002 and 2001, respectively. Unearned revenues
on warranty products are recorded in the consolidated balance
sheets in deferred income. Unearned revenues as of
December 31, 2002 were $17.6 million compared to
$33.8 million as of

41



---



##### Table of Contents



December 31, 2001. Reserves for pending and
incurred but reported claims, included in accrued expenses
and other liabilities, were $0.7 million as of
December 31, 2002, compared to $0.5 million as of
December 31, 2001.




| |                    
| | -------------------
| | Net Interest Income

Net interest income consists primarily of
interest earned on our credit card loans and retained interests
in loans securitized, less interest expense on borrowings to
fund loans. 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,
2002, 2001 and 2000.

Table 2:     Analysis
of Average Balances, Interest and Average Yields and
Rates

|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |   |         |  |  |  |       | 
|----------------------------------------------------------------------- |  | ----------------------- | ---------- | - | -------- | - | ------- | ---- |  | ------- | ------- |  |  | -------- | --------- | - | ---- | - | ------- |  |  |  | ----- | 
|                                                                        |  |                        
|                                                                        |  | Year Ended December 31, |           
|                                                                        |  |                         |           
|                                                                        |  |                         |            |  
|                                                                        |  | 2002                    |            |   | 2001     |  
|                                                                        |  |                         |            |   |          |  
|                                                                        |  | Average                 |            |   |          |   | Yield/  |      |  | Average |         |  |  |          | Yield/    |  
|                                                                        |  | Balance                 |            |   | Interest |   |         | Rate |  |         | Balance |  |  | Interest |           |   | Rate |  
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|                                                                        |  |                        
|                                                                        |  | (Dollars in thousands)  |           
|ASSETS:                                                                
|Interest-earning assets:                                                |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |   |         |  |  |  |       | 
|Federal funds sold                                                      |  | $                       | 23,750     |   |          | $ | 403     |      |  |         | 1.7%    |  |  | $        | 63,981    |   |      | $ | 3,115   |  |  |  | 4.9%  | 
|Short-term investments                                                  |  |                         | 560,891    |   |          |   | 10,122  |      |  |         | 1.8%    |  |  |          | 286,221   |   |      |   | 12,372  |  |  |  | 4.3%  | 
|Credit card loans and retained interests in loans
    securitized       |  |                         | 3,217,145  |   |          |   | 516,834 |      |  |         | 16.1%   |  |  |          | 3,675,189 |   |      |   | 681,503 |  |  |  | 18.5% | 
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|Total interest-earning assets                                           |  | $                       | 3,801,786  |   |          | $ | 527,359 |      |  |         | 13.9%   |  |  | $        | 4,025,391 |   |      | $ | 696,990 |  |  |  | 17.3% | 
|Other assets                                                            |  |                         | 565,900    |   |          |   |        |      |  |         |        |  |  |          | 726,448   |   |      |   |        |  |  |  |      | 
|Allowance for loan losses and retained interest
    valuation allowance |  |                         | (1,032,836 | ) |          |   |        |      |  |         |        |  |  |          | (847,993  | ) |      |   |        |  |  |  |      | 
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|Total assets                                                            |  | $                       | 3,334,850  |   |          |   |        |      |  |         |        |  |  | $        | 3,903,846 |   |      |   |        |  |  |  |      | 
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|LIABILITIES AND EQUITY:                                                
|Interest-bearing liabilities:                                           |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |   |         |  |  |  |       | 
|Deposits                                                                |  | $                       | 1,406,022  |   |          | $ | 68,741  |      |  |         | 4.9%    |  |  | $        | 2,110,967 |   |      | $ | 127,918 |  |  |  | 6.1%  | 
|Debt                                                                    |  |                         | 380,728    |   |          |   | 34,775  |      |  |         | 9.1%    |  |  |          | 379,159   |   |      |   | 38,362  |  |  |  | 10.1% | 
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|Total interest-bearing liabilities                                      |  | $                       | 1,786,750  |   |          | $ | 103,516 |      |  |         | 5.8%    |  |  | $        | 2,490,126 |   |      | $ | 166,280 |  |  |  | 6.7%  | 
|Other liabilities                                                       |  |                         | 418,731    |   |          |   |        |      |  |         |        |  |  |          | 402,147   |   |      |   |        |  |  |  |      | 
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|Total liabilities                                                       |  |                         | 2,205,481  |   |          |   |        |      |  |         |        |  |  |          | 2,892,273 |   |      |   |        |  |  |  |      | 
|Stockholders equity                                                    |  |                         | 1,129,369  |   |          |   |        |      |  |         |        |  |  |          | 1,011,573 |   |      |   |        |  |  |  |      | 
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|Total liabilities and equity                                            |  | $                       | 3,334,850  |   |          |   |        |      |  |         |        |  |  | $        | 3,903,846 |   |      |   |        |  |  |  |      | 
|                                                                        |  |                         |            |   |          |   |         |      |  |         |         |  |  |          |           |   |      |  
|Net interest income and interest margin(1)                              |  |                         |           |   |          | $ | 423,843 |      |  |         | 11.1%   |  |  |          |          |   |      | $ | 530,710 |  |  |  | 13.2% | 
|Net interest rate spread(2)                                             |  |                         |           |   |          |   |        |      |  |         | 8.1%    |  |  |          |          |   |      |   |        |  |  |  | 10.6% | 
|Return on average assets                                                |  |                         |            |   |          |   |         |      |  |         | N/A     |  |  |          |           |   |      |   |         |  |  |  | 6.3%  | 
|Return on average total equity                                          |  |                         |            |   |          |   |         |      |  |         | N/A     |  |  |          |           |   |      |   |         |  |  |  | 24.3% | 



---



|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

42



---



##### Table of Contents



Table 2:     Analysis
of Average Balances, Interest and Average Yields and Rates
(continued)

|                                                                        |  |                              |           |   |          |   |         |      |  |  |       | 
|----------------------------------------------------------------------- |  | ---------------------------- | --------- | - | -------- | - | ------- | ---- |  |  | ----- | 
|                                                                        |  |                             
|                                                                        |  | Year Ended December 31, 2000 |          
|                                                                        |  |                              |          
|                                                                        |  | Average                      |           |   |          |   | Yield/  |     
|                                                                        |  | Balance                      |           |   | Interest |   |         | Rate | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|                                                                        |  |                             
|                                                                        |  | (Dollars in thousands)       |          
|ASSETS:                                                                
|Interest-earning assets:                                                |  |                              |           |   |          |   |         |      |  |  |       | 
|Federal funds sold                                                      |  | $                            | 144,780   |   |          | $ | 9,139   |      |  |  | 6.3%  | 
|Short-term investments                                                  |  |                              | 78,697    |   |          |   | 4,710   |      |  |  | 6.0%  | 
|Credit card loans and retained interests in loans
    securitized       |  |                              | 2,544,493 |   |          |   | 490,929 |      |  |  | 19.3% | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|Total interest-earning assets                                           |  | $                            | 2,767,970 |   |          | $ | 504,778 |      |  |  | 18.2% | 
|Other assets                                                            |  |                              | 753,852   |   |          |   |        |      |  |  |      | 
|Allowance for loan losses and retained interest
    valuation allowance |  |                              | (695,169  | ) |          |   |        |      |  |  |      | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|Total assets                                                            |  | $                            | 2,826,653 |   |          |   |        |      |  |  |      | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|LIABILITIES AND EQUITY:                                                
|Interest-bearing liabilities:                                           |  |                              |           |   |          |   |         |      |  |  |       | 
|Deposits                                                                |  | $                            | 1,317,718 |   |          | $ | 89,560  |      |  |  | 6.8%  | 
|Debt                                                                    |  |                              | 354,204   |   |          |   | 43,446  |      |  |  | 12.3% | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|Total interest-bearing liabilities                                      |  | $                            | 1,671,922 |   |          | $ | 133,006 |      |  |  | 8.0%  | 
|Other liabilities                                                       |  |                              | 395,098   |   |          |   |        |      |  |  |      | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|Total liabilities                                                       |  |                              | 2,067,020 |   |          |   |        |      |  |  |      | 
|Stockholders equity                                                    |  |                              | 759,633   |   |          |   |        |      |  |  |      | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|Total liabilities and equity                                            |  | $                            | 2,826,653 |   |          |   |        |      |  |  |      | 
|                                                                        |  |                              |           |   |          |   |         |      | 
|Net interest income and interest margin(1)                              |  |                              |          |   |          | $ | 371,772 |      |  |  | 13.4% | 
|Net interest rate spread(2)                                             |  |                              |          |   |          |   |        |      |  |  | 10.2% | 
|Return on average assets                                                |  |                              |           |   |          |   |         |      |  |  | 6.9%  | 
|Return on average total equity                                          |  |                              |           |   |          |   |         |      |  |  | 25.7% | 

Net interest income decreased from
$530.7 million for the year ended December 31, 2001 to
$423.8 million for year ended December 31, 2002. The
decrease is due to a decrease in average interest-earning assets
of $223.6 million and a 210 basis point reduction in net
interest margin. The decrease in margin is primarily due to a
340 basis point decrease in yield resulting from a
$458.0 million reduction in average credit card loans and
retained interests in securitized loans, and a 50 basis point
reduction in the Prime rate during the past year. As of
December 31, 2002, 84.6% of our interest-earning assets
were in credit card loans and retained interests in loans
securitized, compared to 91.3% as of December 31, 2001.

Risk-Based Pricing

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.

43



---



##### Table of Contents



Table 3:     Changes
in Net Interest Income

|                                                                  |  |                         |          |               |                         |   |         |          |               |   |            |   |  |        |         |   |      |   |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ----------------------- | -------- | ------------- | ----------------------- | - | ------- | -------- | ------------- | - | ---------- | - |  | ------ | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                                  |  |                         |          |              
|                                                                  |  | Year Ended December 31, |          |               | Year Ended December 31, |  
|                                                                  |  | 2002 vs. 2001           |          |               | 2001 vs. 2000           |  
|                                                                  |  |                         |          |               |                         |  
|                                                                  |  |                         |          |               |                         |   |         |         
|                                                                  |  |                         |          | Change Due to |                         |   |         |          | Change Due to |  
|                                                                  |  | Increase                |          |               |                         |   |         | Increase |               |   |            |  
|                                                                  |  | (Decrease)              |          |               | Volume                  |   |         | Rate     |               |   | (Decrease) |   |  | Volume |         |   | Rate |  
|                                                                  |  |                         |          |               |                         |   |         |          |               |   |            |   |  |        |         |   |      |  
|                                                                  |  |                        
|                                                                  |  | (Dollars in thousands)  |         
|Interest Income:                                                  |  |                         |          |               |                         |   |         |          |               |   |            |   |  |        |         |   |      |   |         |   |  |   |         |  
|Federal funds sold                                                |  | $                       | (2,712   | )             |                         | $ | (1,959  | )        |               | $ | (753       | ) |  | $      | (6,024  | ) |      | $ | (5,100  | ) |  | $ | (924    | )
|Short-term investments                                            |  |                         | (2,250   | )             |                         |   | 11,873  |          |               |   | (14,123    | ) |  |        | 7,662   |   |      |   | 12,421  |   |  |   | (4,759  | )
|Credit card loans and retained interests in loans
    securitized |  |                         | (164,669 | )             |                         |   | (84,937 | )        |               |   | (79,732    | ) |  |        | 190,574 |   |      |   | 218,154 |   |  |   | (27,580 | )
|                                                                  |  |                         |          |               |                         |   |         |          |               |   |            |   |  |        |         |   |      |  
|Total interest income                                             |  |                         | (169,631 | )             |                         |   | (38,717 | )        |               |   | (130,914   | ) |  |        | 192,212 |   |      |   | 229,308 |   |  |   | (37,096 | )
|Deposit interest expense                                          |  |                         | (59,177  | )             |                         |   | (42,718 | )        |               |   | (16,459    | ) |  |        | 38,358  |   |      |   | 53,914  |   |  |   | (15,556 | )
|Other interest expense                                            |  |                         | (3,587   | )             |                         |   | 159     |          |               |   | (3,746     | ) |  |        | (5,084  | ) |      |   | 3,060   |   |  |   | (8,144  | )
|                                                                  |  |                         |          |               |                         |   |         |          |               |   |            |   |  |        |         |   |      |  
|Total interest expense                                            |  |                         | (62,764  | )             |                         |   | (46,969 | )        |               |   | (15,795    | ) |  |        | 33,274  |   |      |   | 65,090  |   |  |   | (31,816 | )
|                                                                  |  |                         |          |               |                         |   |         |          |               |   |            |   |  |        |         |   |      |  
|Net interest income                                               |  | $                       | (106,867 | )             |                         | $ | 8,252   |          |               | $ | (115,119   | ) |  | $      | 158,938 |   |      | $ | 164,218 |   |  | $ | (5,280  | )
|                                                                  |  |                         |          |               |                         |   |         |          |               |   |            |   |  |        |         |   |      |  



| |              
| | -------------
| | Asset Quality

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 collection and recovery efforts,
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 and post charge-off recovery
efforts. At December 31, 2002, 49.5% of our outstanding
receivables balance was from accounts that have been with us in
excess of two years, and 22.0% of outstanding receivables were
with us in excess of four years.

We use credit line analyses, account management
and customer transaction authorization procedures to minimize
loan losses. Our 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 and payment
patterns. We continually monitor customer accounts and initiate
appropriate collection activities when an account is delinquent
or overlimit.

Delinquencies

Delinquencies not only have the potential to
affect earnings in the form of net loan losses, but they also
are costly in terms of the personnel and other resources
dedicated to their resolution. It is our policy to continue to
accrue interest and fee income on all credit card accounts,
except in limited circumstances, until we charge-off the
account. Beginning in November 2002, we stopped billing late
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 (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.
Table 4 presents the delinquency trends of our credit card
loan portfolio.

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Table 4:     Loan
Delinquency

|                                |                 |                        |         |       |       |  |      |              |      |   |           |         |         |              |      |      |       |   |           |        |        |  |      |      |      | 
|------------------------------- | --------------- | ---------------------- | ------- | ----- | ----- |  | ---- | ------------ | ---- | - | --------- | ------- | ------- | ------------ | ---- | ---- | ----- | - | --------- | ------ | ------ |  | ---- | ---- | ---- | 
|                                |                 | December 31,           |         |       | % of  |  |      | December 31, |      |   | % of      |         |         | December 31, |      |      | % of  |  
|                                |                 | 2002                   |         |       | Total |  |      | 2001         |      |   | Total     |         |         | 2000         |      |      | Total |  
|                                |                 |                        |         |       |       |  |      |              |      |   |           |         |         |              |      |      |       |  
|                                |                 |                       
|                                |                 | (Dollars in thousands) |        
|Loan portfolio                  |                 | $                      | 846,417 |       |       |  | 100% |              |      | $ | 2,756,763 |         |         |              | 100% |      |       | $ | 1,184,269 |        |        |  | 100% |     
|Loans contractually delinquent: |                 |                        |         |       |       |  |      |              |      |   |           |         |         |              |      |      |       |   |           |        |        |  |      |     
|                                | 30 to 59 days   |                        |         | 1,673 |       |  |      | 0.2%         |      |   |           | 87,603  |         |              |      | 3.2% |       |   |           | 27,837 |        |  |      | 2.3% |     
|                                | 60 to 89 days   |                        |         | 2,121 |       |  |      | 0.2%         |      |   |           | 66,647  |         |              |      | 2.4% |       |   |           | 22,074 |        |  |      | 1.9% |     
|                                | 90 or more days |                        |         | 4,082 |       |  |      | 0.5%         |      |   |           | 123,528 |         |              |      | 4.5% |       |   |           | 39,257 |        |  |      | 3.3% |     
|                                |                 |                        |         |       |       |  |      |              |      |   |           |         |         |              |      |      |       |  
|                                |                 | Total                  |         | $     | 7,876 |  |      |              | 0.9% |   |           | $       | 277,778 |              |      |      | 10.1% |   |           | $      | 89,168 |  |      |      | 7.5% | 
|                                |                 |                        |         |       |       |  |      |              |      |   |           |         |         |              |      |      |       |  

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

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 income statement line item at the time of charge-off.
We charge-off and take accounts as a loss either within
60 days after 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 and later become
contractually 120 days past due, or 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.

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. We charge-off accounts that are
identified as fraud losses no later than 90 days after the
last activity. We enter into forward flow 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.

Table 5 presents our net charge-offs for the
periods indicated as reported in the consolidated financial
statements:

Table 5:     Net
Charge-offs

|                                      |  |                         |           |  |      |   |           |      |  |   |         | 
|------------------------------------- |  | ----------------------- | --------- |  | ---- | - | --------- | ---- |  | - | ------- | 
|                                      |  |                        
|                                      |  | Year Ended December 31, |          
|                                      |  |                         |          
|                                      |  | 2002                    |           |  | 2001 |   |           | 2000 | 
|                                      |  |                         |           |  |      |   |           |      | 
|                                      |  |                        
|                                      |  | (Dollars in thousands)  |          
|Average credit card loans outstanding |  | $                       | 1,305,127 |  |      | $ | 1,709,989 |      |  | $ | 614,991 | 
|Net charge-offs                       |  |                         | 325,351   |  |      |   | 247,576   |      |  |   | 144,540 | 
|Net charge-off ratio                  |  |                         | 24.9%     |  |      |   | 14.5%     |      |  |   | 23.5%   | 
|                                      |  |                         |           |  |      |   |           |      | 

Net charge-offs for the year ended
December 31, 2002 increased $77.8 million over the year
ended December 31, 2001. The increase is due to a $101.5
million charge-off for receivables that were sold during the
year. The net charge-off ratio increased from 14.5% to 24.9% due
to the sale of the delinquent receivables, the weak economic
environment and the impact of the Companys 2001 credit
line increase program on the severity of credit losses.

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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.

The economy has exhibited a significant slowdown
over the last two years. Some of the actions we are taking to
mitigate this slowdown include expanding our collections
strategies to aggressively address any potential delinquency
increases and utilizing our recovery staff to work on
precharge-off receivables. We also leverage 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 $34.7 million or 4% of total credit card loans as of
December 31, 2002, compared to $129.9 million or 5% of
total credit card loans as of December 31, 2001.

The provision for loan losses for the year ended
December 31, 2002, totaled $573.5 million compared to
a provision of $549.1 million in 2001. The increase in the
provision for loan losses in 2002 compared to 2001 reflects an
increase in delinquencies throughout 2002, excluding the impact
of the sales of approximately $120 delinquent receivables, and
the current economic environment.

The allowance for loan losses was
$90 million as of December 31, 2002, versus
$410 million as of December 31, 2001. Our roll-rate
models, including management contingency, indicated our required
allowance for loan losses was in the range of $75 million
to $90 million as of December 31, 2002, versus $385
million to $415 million as of December 31, 2001. The
ratio of allowance for loan losses to period-end credit card
loans was 10.7% at December 31, 2002, compared to 14.9% at
December 31, 2001. The allowance for loan losses as a
percentage of 30-day plus receivables was 1,146.7% at
December 31, 2002, compared to 147.7% at December 31,
2001. The increase in the allowance as a percentage of credit
card loans and the increase in allowance as a percentage of
30-day plus receivables is primarily due to the sale of
approximately $120 million of delinquent receivables during 2002.

We believe the allowance for loan losses is
adequate to cover probable future losses inherent in the loan
portfolio under current conditions. However, we cannot give
assurance as to future credit losses that may be incurred in
connection with our loan portfolio, nor can we provide assurance
that the established allowance for loan losses will be
sufficient to absorb future losses.

Retained
Interests Valuation

We determine the fair value of our retained
interests in securitized loans by calculating the present value
of future expected cash flows using managements best
estimate of key assumptions, including credit losses,
weighted-average spreads, payment rates, and a discount rate
commensurate with the risk involved.

We record a valuation allowance to reduce the
contractual value of the retained interests in loans securitized
to fair value. Tables 6 and 7 summarize our retained interests
as of December 31, 2002, 2001 and 2000:

Table
6:     Securitized Assets

|                                       |  |              |            |  |              |   |           |              |  |   |           | 
|-------------------------------------- |  | ------------ | ---------- |  | ------------ | - | --------- | ------------ |  | - | --------- | 
|                                       |  | December 31, |            |  | December 31, |   |           | December 31, | 
|                                       |  | 2002         |            |  | 2001         |   |           | 2000         | 
|                                       |  |              |            |  |              |   |           |              | 
|Loans securitized                      |  | $            | 8,836,857  |  |              | $ | 7,895,843 |              |  | $ | 6,070,224 | 
|Retained interests                     |  |              | 1,736,912  |  |              |   | 1,339,178 |              |  |   | 2,091,138 | 
|                                       |  |              |            |  |              |   |           |              | 
|Total                                  |  | $            | 10,573,769 |  |              | $ | 9,235,021 |              |  | $ | 8,161,362 | 
|                                       |  |              |            |  |              |   |           |              | 
|Delinquencies                          |  | $            | 1,252,073  |  |              | $ | 845,390   |              |  | $ | 678,564   | 
|Delinquency percentage                 |  |              | 11.8%      |  |              |   | 9.2%      |              |  |   | 8.3%      | 
|Average net excess spread (cash basis) |  |              | 5.7%       |  |              |   | 7.8%      |              |  |   | 7.1%      | 

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Table 7:     Retained
Interests in Loans Securitized

|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |          |        |  |   |           |         | 
|------------------------------ | -------------------------- | ----------------------- | --------- | ------- | ------ | - | -------- | ------- |  | - | --------- | ------- |  | ---- | -------- | ------ |  | - | --------- | ------- | 
|                               |                            |                        
|                               |                            | Year Ended December 31, |          
|                               |                            |                         |          
|                               |                            | 2002                    |           |         | Change |   |          | 2001    |  |   | Change    |         |  | 2000 |         
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         
|Contractual retained interests |                            | $                       | 991,053   |         |        | $ | 213,644  |         |  | $ | 777,409   |         |  | $    | (30,916  | )      |  | $ | 808,325   |        
|Excess transferors interests  |                            |                         | 46,460    |         |        |   | 6,536    |         |  |   | 39,924    |         |  |      | (767,401 | )      |  |   | 807,325   |        
|                               | Finance charge receivables |                         |           | 699,399 |        |   |          | 177,554 |  |   |           | 521,845 |  |      |          | 46,357 |  |   |           | 475,488 | 
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         
|Gross retained interests       |                            | $                       | 1,736,912 |         |        | $ | 397,734  |         |  |   | 1,339,178 |         |  | $    | (751,960 | )      |  | $ | 2,091,138 |        
|Valuation allowance            |                            |                         | (986,517  | )       |        |   | (449,018 | )       |  |   | (537,499  | )       |  |      | 103,353  |        |  |   | (640,852  | )      
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         
|Net retained interests         |                            | $                       | 750,395   |         |        | $ | (51,284  | )       |  | $ | 801,679   |         |  | $    | (648,607 | )      |  | $ | 1,450,286 |        
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         

Gross retained interests in loans securitized
increased $398 million to $1.7 billion in 2002,
compared to $1.3 billion in 2001. The increase is due to
the sale of approximately $2.3 billion of receivables from
Direct Merchants Bank to the Master Trust during 2002. The
$752 million decrease in gross retained interest during
2001 was due primarily to the maturity of the bank conduit that
was accounted for as a sale under SFAS 140. As a result,
approximately $855 million of receivables that were
classified as retained interests in loans securitized as of
December 31, 2000 were classified as credit card loans in
2001. During 2002, the valuation allowance increased by
$449.0 million, of which $159.6 million was due to the
increase in the gross retained interests and $289.4 million
was due to projected decrease in excess spreads. The projected
decrease in excess spreads is primarily due to an increase in
projected gross principal default rates. The projected gross
principal default rate increased from 18.4% as of
December 31, 2001 to 19.9% as of December 31, 2002.
The increase in the projected gross principal default rate was
due to increased delinquencies in the Master Trust, increased
loss severity due to the Companys 2001 credit line
increase program and overall deterioration in the economy.
During 2001, the valuation allowance decreased
$103.4 million, of which $230.4 million was due to
lower gross retained interests. This was partially offset by
$127.1 million increase in the valuation allowance relating
to higher projected default rates.

Other Operating Income

Other operating income contributed 67% and 69% of
total revenues for the years ended December 31, 2002 and
2001, respectively. Other operating income decreased
$296.4 million for the year ended December 31, 2002
over 2001.

Net securitization and credit card servicing
income decreased $246.1 million to $271.3 million in
2002. The decrease was primarily due to a decrease in excess
spread, as a result of an increased default rate on securitized
receivables.

Credit card fees, interchange and other credit
card income was $202.7 million in 2002, a decrease of
$94.3 million from 2001. The decrease is primarily due to
the reduction in average credit card receivables due to the
transfer of approximately $2.3 billion of receivables to
the Master Trust during 2002. In addition, we amended the Master
Trust core transaction documents, which resulted in interchange
income earned on receivables held by the Master Trust to be
recorded as contribution to the excess spread earned, effective
June 2002. In 2002, $44.3 million of interchange income was
earned by the Master Trust.

Enhancement services revenues increased by
$43.9 million for the year ended December 31, 2002.
The increase was primarily due to a rate increase on our debt
waiver products and increased active enrollments in various
membership products. These increases were partially offset by a
decrease in ServiceEdge® revenue due to the run-off
of the ServiceEdge® portfolio, and a decrease in
PurchaseShield® revenue due to decreased
enrollments. Table 8 presents the breakdown of revenues and
active memberships for our enhancement services products.

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Table 8:     Enhancement
Services Revenues and Active Memberships

|         |                             |                         |   |         |         |  |   |         |         |  |   |         |         | 
|-------- | --------------------------- | ----------------------- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|         |                             |                        
|         |                             | Year Ended December 31, |  
|         |                             |                         |  
|         |                             | 2002                    |   |         | 2001    |  |   | 2000    |        
|         |                             |                         |   |         |         |  |   |         |        
|         |                             |                        
|         |                             | (Dollars in thousands)  |  
|Revenues |                             |                         |   |         |         |  |   |         |         |  |   |        
|         | Credit Protection Products  |                         | $ | 234,636 |         |  | $ | 202,300 |         |  | $ | 149,421 |        
|         | Membership Program Products |                         |   | 92,919  |         |  |   | 57,186  |         |  |   | 75,981  |        
|         | Warranty/Other              |                         |   | 56,494  |         |  |   | 80,646  |         |  |   | 40,798  |        
|         |                             |                         |   |         |         |  |   |         |        
|         |                             | Total                   |   | $       | 384,049 |  |   | $       | 340,132 |  |   | $       | 266,200 | 
|         |                             |                         |   |         |         |  |   |         |        

|                   |                             |                         |  |       |       |  |  |       |       |  |  |       |       | 
|------------------ | --------------------------- | ----------------------- |  | ----- | ----- |  |  | ----- | ----- |  |  | ----- | ----- | 
|                   |                             |                        
|                   |                             | Year Ended December 31, | 
|                   |                             |                         | 
|                   |                             | 2002                    |  |       | 2001  |  |  | 2000  |      
|                   |                             |                         |  |       |       |  |  |       |      
|                   |                             |                        
|                   |                             | (Dollars in thousands)  | 
|Active Memberships |                             |                         |  |       |       |  |  |       |       |  |  |      
|                   | Credit Protection Products  |                         |  | 905   |       |  |  | 1,125 |       |  |  | 1,178 |      
|                   | Membership Program Products |                         |  | 3,248 |       |  |  | 2,856 |       |  |  | 3,335 |      
|                   | Warranty/Other              |                         |  | 941   |       |  |  | 1,794 |       |  |  | 1,554 |      
|                   |                             |                         |  |       |       |  |  |       |      
|                   |                             | Total                   |  |       | 5,094 |  |  |       | 5,775 |  |  |       | 6,067 | 
|                   |                             |                         |  |       |       |  |  |       |      

Other Operating Expense

Total other operating expenses for the year ended
December 31, 2002 increased $44.1 million over 2001.
Employee compensation decreased $14.6 million for the year
ended December 31, 2002, due to decreased staffing needs
and fringe benefits. Credit card account and other product
solicitation and marketing expenses increased $15.4 million
over 2001, largely due to higher costs to acquire new accounts.
Enhancement services claims expense increased
$15.9 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. Other expenses increased
$8.7 million primarily due to approximately $7 million
of marketing and origination costs on our retail note program.

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.

Derivative
Activities

We use derivative financial instruments for the
purpose of managing our exposure to interest rate risks. We
entered into interest rate swap transactions through Direct
Merchants Bank. The swaps were used to convert a portion of the
fixed rate CDs to variable rate CDs and, thus, hedge the fair
market value of the CDs. The CDs experience fluctuating fair
value in rising or declining interest rate environments. By
converting the fixed payment to a variable payment, the interest
rate swaps effectively reduce the variability of the fair market
value of the CDs. As of December 31, 2002, there were no
interest rate swaps outstanding. As of December 31, 2001,
there was one swap outstanding with a fair value of
$3.3 million.

The adoption of SFAS 133 resulted in a
one-time, non-cash, after-tax charge to earnings of
$14.5 million reflected as a cumulative effect of
accounting change in the consolidated statements of income
for the year ended December 31, 2001.

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 agreement to the Trustee of the

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Master Trust for the benefit of the holders of
securities issued by the Master Trust. The purpose of the
interest rate cap is to effectively limit the interest exposure
of the Master Trust for each individual series to a maximum
based upon the LIBOR rate.


Balance Sheet
Analysis

Cash
and Cash Equivalents

Cash and cash equivalents increased
$159.6 million to $647.7 million as of
December 31, 2002, compared to $488.1 million as of
December 31, 2001. The increase is due to the transfer of
assets from Direct Merchants Bank to the Master Trust, which
created excess cash at Direct Merchants Bank.

Credit
Card Loans

Credit card loans were $846.4 million as of
December 31, 2002 compared to $2.76 billion as of
December 31, 2001. The $1.9 billion decrease is
primarily a result of the transfer of $2.3 billion of
receivables from Direct Merchants Bank to the Master Trust.

Deposits

Deposits decreased $1.2 billion to
$892.8 million as of December 31, 2002, from
$2.1 billion as of December 31, 2001. The decrease
relates to a shift in funding from CDs to off-balance sheet
asset-backed securitizations.

Under the OCC operating agreement, the Company
has agreed to reduce receivables at Direct Merchants Bank to no
more than $550 million by December 31, 2003, and to zero by
December 31, 2004. As a result, we do not anticipate
issuing jumbo CDs in the foreseeable future.

Debt

Debt decreased from $647.9 million in 2001
to $357.6 million in 2002 due to the paydown of a warehouse
financing arrangement entered into by Direct Merchants Bank in
June 2001 that was accounted for as a collateralized financing.

Deferred
Income

Deferred income decreased to $159.3 million
as of December 31, 2002, compared to $215.0 million as
of December 31, 2001. The decrease primarily relates to a
shift from annual-billed to monthly-billed enhancement services
products and the run-off of deferred revenues associated with
our ServiceEdge® product.

Stockholders
Equity

Stockholders equity was $1.1 billion
as of December 31, 2002, a decrease of $82.9 million
from December 31, 2001. The decrease primarily results from
a net loss of $33.9 million, cash dividends of
$3.7 million and $45.3 million of stock repurchases
under our stock repurchase program, partially offset by $3.0
million of stock issuances under employee benefit plans and the
forfeiture of $4.8 million of restricted stock.

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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.
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, 2002 and 2001:

Table
9:     Liquidity, Funding and Capital
Resources

|                                |  |                   |         |  |                   |   |         |              |  |   |         |  |  |       |         |  |              |   |         |  |  |   |         | 
|------------------------------- |  | ----------------- | ------- |  | ----------------- | - | ------- | ------------ |  | - | ------- |  |  | ----- | ------- |  | ------------ | - | ------- |  |  | - | ------- | 
|                                |  |                   |         | 
|                                |  | December 31, 2002 |         |  | December 31, 2001 |  
|                                |  |                   |         |  |                   |  
|                                |  | DMCCB             |         |  | Other             |   |         | Consolidated |  |   | DMCCB   |  |  | Other |         |  | Consolidated |  
|                                |  |                   |         |  |                   |   |         |              |  |   |         |  |  |       |         |  |              |  
|Cash and due from banks         |  | $                 | 58,399  |  |                   | $ | 4,414   |              |  | $ | 62,813  |  |  | $     | 106,479 |  |              | $ | 3,333   |  |  | $ | 109,812 | 
|Federal funds sold              |  |                   | 88,000  |  |                   |   |        |              |  |   | 88,000  |  |  |       | 243,772 |  |              |   |        |  |  |   | 243,772 | 
|Short-term investments          |  |                   | 322,039 |  |                   |   | 174,815 |              |  |   | 496,854 |  |  |       | 50      |  |              |   | 134,452 |  |  |   | 134,502 | 
|                                |  |                   |         |  |                   |   |         |              |  |   |         |  |  |       |         |  |              |  
|Total cash and cash equivalents |  | $                 | 468,438 |  |                   | $ | 179,229 |              |  | $ | 647,667 |  |  | $     | 350,301 |  |              | $ | 137,785 |  |  | $ | 488,086 | 
|                                |  |                   |         |  |                   |   |         |              |  |   |         |  |  |       |         |  |              |  

|                                                        |                                                                               |                   |         |            |                   |   |         |             |        |   |           |            |  |   |         |         | 
|------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------- | ------- | ---------- | ----------------- | - | ------- | ----------- | ------ | - | --------- | ---------- |  | - | ------- | ------- | 
|                                                        |                                                                               |                   |         |           
|                                                        |                                                                               | December 31, 2002 |         |            | December 31, 2001 |  
|                                                        |                                                                               |                   |         |            |                   |  
|                                                        |                                                                               |                   |         | Unused     |                   |   |         |             | Unused |  
|                                                        |                                                                               | Outstanding       |         |            | Capacity          |   |         | Outstanding |        |   | Capacity  |           
|                                                        |                                                                               |                   |         |            |                   |   |         |             |        |   |           |           
|On-balance sheet funding                                |                                                                               |                   |         |            |                   |   |         |             |        |   |           |            |  |   |         |        
|Bank conduit  June 2003                                |                                                                               | $                 |        |            |                   | $ |        |             |        | $ | 292,000   |            |  | $ | 108,000 |        
|Revolving credit line  July 2003                       |                                                                               |                   |        |            |                   |   | 162,696 |             |        |   |          |            |  |   | 164,746 |        
|Term loan  June 2003                                   |                                                                               |                   | 100,000 |            |                   |   | 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                        |                                                                               |                   | 146,824 |            |                   |   | N/A     |             |        |   | 145,924   |            |  |   | N/A     |        
|Other                                                   |                                                                               |                   | 10,825  |            |                   |   | N/A     |             |        |   | 9,980     |            |  |   | N/A     |        
|Deposits  various maturities through
    February 2007 |                                                                               |                   | 892,754 |            |                   |   | N/A     |             |        |   | 2,058,008 |            |  |   | N/A     |        
|                                                        |                                                                               |                   |         |            |                   |   |         |             |        |   |           |           
|                                                        | Subtotal                                                                      |                   |         | 1,250,403  |                   |   |         | 162,696     |        |   |           | 2,705,912  |  |   |         | 272,746 | 
|                                                       
|Off-balance sheet funding                               |                                                                               |                   |         |            |                   |   |         |             |        |   |           |            |  |   |         |        
|Metris Master Trust:                                    |                                                                               |                   |         |            |                   |   |         |             |        |   |           |            |  |   |         |        
|                                                        | Term asset back securitizations 
    various maturities through January 2009 |                   |         | 7,610,000  |                   |   |         |            |        |   |           | 7,459,250  |  |   |         |        | 
|                                                        | Bank conduits  various maturities
    through June 2003                      |                   |         | 1,177,957  |                   |   |         | 422,043     |        |   |           | 421,093    |  |   |         | 328,908 | 
|Metris facility-March 2003                              |                                                                               |                   | 48,900  |            |                   |   | 26,100  |             |        |   | 15,500    |            |  |   | 59,500  |        
|                                                        |                                                                               |                   |         |            |                   |   |         |             |        |   |           |           
|                                                        | Subtotal                                                                      |                   |         | 8,836,857  |                   |   |         | 448,143     |        |   |           | 7,895,843  |  |   |         | 388,408 | 
|                                                        |                                                                               |                   |         |            |                   |   |         |             |        |   |           |           
|                                                        | Total                                                                         |                   | $       | 10,087,260 |                   |   | $       | 610,839     |        |   | $         | 10,601,755 |  |   | $       | 661,154 | 
|                                                        |                                                                               |                   |         |            |                   |   |         |             |        |   |           |           

During 2002 and 2001, we had net proceeds of
approximately $0.9 billion and $1.8 billion,
respectively, from sales of credit card loans to the 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.

As of December 31, 2002 and 2001, we had
$7.3 million and $5.3 million, respectively, of
letters of credit issued under our revolving line of credit.
Under our credit agreement, we need to maintain, among other
items, minimum equity plus reserves to managed assets of 10%,
minimum three-month average excess spread (on each individual
series of securities issued under the Master Trust) of 1%,
minimum equity of $685 million at December 31, 2002
and a ratio of equity plus allowance for loan losses and
valuation allowance to managed 90-day plus delinquencies of
2.25. Furthermore, the Company has pledged

50



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##### Table of Contents



certain assets as collateral on the credit
agreement. As of December 31, 2002, and 2001 we were in
compliance with all financial covenants under our credit
agreement.


Our contractual cash obligations as of
December 31, 2002 were as follows:

|                                       |  |           |         |  |             |   |         |            |  |   |            |  |  |       |        |  |  |   |            | 
|-------------------------------------- |  | --------- | ------- |  | ----------- | - | ------- | ---------- |  | - | ---------- |  |  | ----- | ------ |  |  | - | ---------- | 
|                                       |  | Less Than |         |  | One to      |   |         | Four to    |  |   | Over       |  |  |      
|                                       |  | One Year  |         |  | Three Years |   |         | Five Years |  |   | Five Years |  |  | Total |       
|                                       |  |           |         |  |             |   |         |            |  |   |            |  |  |       |       
|Long-term debt                         |  | $         | 101,031 |  |             | $ | 109,530 |            |  | $ | 146,921    |  |  | $     | 167    |  |  | $ | 357,649    | 
|Operating leases                       |  |           | 14,851  |  |             |   | 20,634  |            |  |   | 15,656     |  |  |       | 26,998 |  |  |   | 78,139     | 
|Deposits                               |  |           | 388,965 |  |             |   | 256,277 |            |  |   | 247,512    |  |  |       |       |  |  |   | 892,754    | 
|Open-to-buy on credit card accounts(1) |  |           |        |  |             |   |        |            |  |   |           |  |  |       |       |  |  |   | 12,009,893 | 
|                                       |  |           |         |  |             |   |         |            |  |   |            |  |  |       |       
|Total                                  |  | $         | 504,847 |  |             | $ | 386,441 |            |  | $ | 410,089    |  |  | $     | 27,165 |  |  | $ | 13,338,435 | 
|                                       |  |           |         |  |             |   |         |            |  |   |            |  |  |       |       



---



|    |                                                                      
|--- | ---------------------------------------------------------------------
|(1) | See tables on pages 10-12 of this Report for
    further information.

The following table presents the amounts, as of
December 31, 2002, of off-balance sheet funding in the
Master Trust and the Metris facility scheduled to amortize in
future years. We base the amortization amounts on estimated
amortization periods, which are subject to change based on the
Master Trust and Metris facility performance:

|           |       |                |           |           | 
|---------- | ----- | -------------- | --------- | --------- | 
|           |       | (In thousands) |          
|2003       |       | $              | 1,826,857 |          
|2004       |       |                | 2,260,000 |          
|2005       |       |                | 2,300,000 |          
|2006       |       |                | 1,250,000 |          
|2007       |       |                | 600,000   |          
|Thereafter |       |                | 600,000   |          
|           |       |                |          
|           | Total |                | $         | 8,836,857 | 
|           |       |                |          

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

|                                           |                      |                         |           |         |      |  |        |       |  |   |           |         |  |  |        |       |  |   |           |         |  |  |        |       | 
|------------------------------------------ | -------------------- | ----------------------- | --------- | ------- | ---- |  | ------ | ----- |  | - | --------- | ------- |  |  | ------ | ----- |  | - | --------- | ------- |  |  | ------ | ----- | 
|                                           |                      |                        
|                                           |                      | Year Ended December 31, |          
|                                           |                      |                         |          
|                                           |                      |                         |           |         |      | 
|                                           |                      | 2002                    |           |         | 2001 |  |        | 2000  | 
|                                           |                      |                         |           |         |      |  |        |       | 
|                                           |                      |                         |           |         |      |  |        |       |  |  
|                                           |                      |                        
|                                           |                      | (In thousands)          |          
|Gross yield(1)                             |                      | $                       | 2,564,009 |         |      |  | 26.46% |       |  | $ | 2,035,113 |         |  |  | 27.58% |       |  | $ | 1,528,056 |         |  |  | 27.22% |      
|Annual principal defaults                  |                      |                         | 1,587,095 |         |      |  | 16.38% |       |  |   | 972,348   |         |  |  | 13.18% |       |  |   | 632,763   |         |  |  | 11.27% |      
|                                           |                      |                         |           |         |      |  |        |       |  |   |           |         |  |  |        |       |  |  
|Net portfolio yield                        |                      |                         | 976,914   |         |      |  | 10.08% |       |  |   | 1,062,765 |         |  |  | 14.40% |       |  |   | 895,293   |         |  |  | 15.95% |      
|Annual interest expense and servicing fees |                      |                         | 406,826   |         |      |  | 4.35%  |       |  |   | 451,061   |         |  |  | 6.62%  |       |  |   | 470,634   |         |  |  | 8.90%  |      
|                                           |                      |                         |           |         |      |  |        |       |  |   |           |         |  |  |        |       |  |  
|                                           | Net excess spread(2) |                         | $         | 570,088 |      |  |        | 5.73% |  |   | $         | 611,704 |  |  |        | 7.78% |  |   | $         | 424,659 |  |  |        | 7.05% | 
|                                           |                      |                         |           |         |      |  |        |       |  |   |           |         |  |  |        |       |  |  



---



|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes finance charges, late, over limit and
    cash advance fees, bad debt recoveries, interchange income and
    debt waiver fees, less finance charge and fee charge-offs.                                    
|   
|(2) | The net excess spread on a cash basis for the
    Master Trust was 2.24% for the month ended February 28,
    2003. The three-month average net excess spread on a cash basis
    was 1.91% as of February 28, 2003.

The Master Trust and the associated off-balance
sheet debt provide for early amortization if certain events
occur. These events are described in the applicable prospectus
of each securitization transaction.

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The significant events are (i) one-month and
three-month average excess spreads below certain levels,
(ii) negative transferors interest within the Master
Trust or (iii) failure to obtain funding during an
accumulation period for a maturing term asset-backed
securitization. In addition, there are various triggers within
our securitization agreements that, if broken, would restrict
the release of cash to us from the Master Trust. This restricted
cash provides additional security to the investors in the Master
Trust. We reflect cash restricted from release in the Master
Trust as other receivables due from credit card
securitizations, net in the consolidated balance sheet.
The triggers are related to the performance of the Master Trust,
specifically the average of net excess spread over a one to
three-month period.


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

|                             |  |            |             | 
|---------------------------- |  | ---------- | ----------- | 
|                             |  | Maximum    |            
|Cash Basis Net Excess Spread |  | Restricted |            
|                             |  |            |            
|greater than 5.5%            |  |            |            | 
|5.1% - 5.5%                  |  |            | 0.5% - 1.0% | 
|4.6% - 5.0%                  |  |            | 0.5% - 1.5% | 
|4.1% - 4.5%                  |  |            | 2.0% - 2.5% | 
|3.6% - 4.0%                  |  |            | 2.5% - 3.0% | 
|3.1% - 3.5%                  |  |            | 2.5% - 4.0% | 
|less than 3.0%               |  |            | 4.0% - 5.0% | 

The cash restricted from release is limited to
the amount of excess spread generated in the Master Trust on a
cash basis. During periods of lower excess spreads, the required
amount of excess spread to be restricted in the Master Trust may
not be achieved. During those periods, all excess spread
normally released to MRI will be restricted from release. Once
the maximum required amount of cash is restricted from release
or excess spreads improve, cash can again be released from the
spread accounts. Based on the performance of our Master Trust,
the amount of cash required to be restricted was
$304 million at December 31, 2002 and
$455 million at February 28, 2003. As of
December 31, 2002, $29.1 million has been restricted
from release in the Master Trust due to performance and
$21.4 million has been restricted from release in the
Master Trust due to corporate debt ratings. As of
February 28, 2003, $62.1 million has been restricted
from release in the Master Trust due to performance and
$21.4 million has been restricted from release in the
Master Trust due to corporate debt ratings (see page 54 for
discussion of corporate debt ratings). We expect all cash basis
excess spread to be restricted from release to us until the
first quarter of 2004.

In the past, Direct Merchants Bank has issued
jumbo CDs of $100,000 or more. As of December 31, 2002 and
2001, $0.9 billion and $2.1 billion of CDs were
outstanding with original maturities ranging from six months to
five years. These CDs pay fixed interest rates ranging from 1.1%
to 7.6% and 2.4% to 7.6% at December 31, 2002 and 2001,
respectively. Under the OCC operating agreement, the Company has
agreed to reduce receivables at Direct Merchants Bank to no more
than $550 million by December 31, 2003, and to zero by
December 31, 2004. As a result, we do not anticipate issuing
jumbo CDs in the foreseeable future.

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The weighted-average interest rate on outstanding
funding as of December 31, 2002 and 2001 was as follows:

|                    |  |                   |       |  |                   |  |       | 
|------------------- |  | ----------------- | ----- |  | ----------------- |  | ----- | 
|                    |  | December 31, 2002 |       |  | December 31, 2001 | 
|                    |  |                   |       |  |                   | 
|Bank conduit  2003 |  |                   |      |  |                   |  | 2.4%  | 
|Term loan  2003    |  |                   | 4.7%  |  |                   |  | 5.4%  | 
|Senior notes  2004 |  |                   | 10.0% |  |                   |  | 10.0% | 
|Senior notes  2006 |  |                   | 11.4% |  |                   |  | 11.5% | 
|Other               |  |                   | 9.0%  |  |                   |  | 8.9%  | 
|Deposits            |  |                   | 5.1%  |  |                   |  | 5.1%  | 
|Master Trust        |  |                   | 2.1%  |  |                   |  | 3.0%  | 
|Metris facility     |  |                   | 1.9%  |  |                   |  | 2.3%  | 

The 70 basis point decrease in the
weighted-average interest rate on the term loan and the 90 basis
point decrease in the weighted-average interest rate on the
Master Trust were primarily due to the decrease in LIBOR, which
is the base rate for these funding vehicles, and the maturity of
the 1997-1 asset-backed securitization, which had fixed rate
funding at 6.9%, in April 2002. As the base rate, LIBOR
decreased from 1.9% as of December 31, 2001, to 1.4% as of
December 31, 2002.

The Company has $430.6 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 shares 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 2002, the premium amount
would be equal to approximately 54.4% of those future dividends.
Assuming conversion of the Series C Preferred Stock into
common stock, THL Partners would own approximately 40.5% of the
Company on a diluted basis at December 31, 2002. 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 Internal Revenue Service (IRS)
has recently completed its examination of the Companys tax
returns through December 31, 1998. The IRS has proposed
adjustments to increase the Companys federal income tax by
$42.9 million, plus interest of more than $15 million,
pertaining to the Companys treatment of certain credit
card fees as original issue discount (OID). 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 receivables for tax purposes.
Cumulatively through the year ended December 31, 2002, the
Company has deferred more than $212 million in federal
income tax under the OID rules.

The Company believes its treatment of the fees is
appropriate and continues to work with the IRS to resolve the
proposed adjustments. The Companys position on the
treatment of credit card fees is consistent with that of many
other U.S. credit card issuers. We do not expect any additional
tax to be paid or settlement to be reached over the next twelve
months. However, both the timing and amount of the final
resolution of this matter is uncertain.

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##### Table of Contents



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.

Since the later part of 2002, our corporate debt
ratings, the Master Trust ratings and the ratings of Direct
Merchants Bank have been downgraded. These downgrades reflect
the losses we experienced in 2002, as well as deteriorating
performance in the 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.

Our deposits and secured/unsecured debt are 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 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 and Direct
Merchants Bank:

|                      |                       |         |  |     |                   |  |  |       |  |  |  |     | 
|--------------------- | --------------------- | ------- |  | --- | ----------------- |  |  | ----- |  |  |  | --- | 
|                      |                       | Moodys |  |     | Standard & Poors |  |  | Fitch | 
|                      |                       |         |  |     |                   |  |  |       | 
|Metris Companies Inc. |                       |         |  |     |                   |  |  |       |  |  |  |    
|                      | Senior unsecured debt |         |  | B3  |                   |  |  | CCC+  |  |  |  | CCC | 
|                      | Credit facility       |         |  | B2  |                   |  |  | B-    |  |  |  | CCC | 
|Direct Merchants Bank |                       |         |  |     |                   |  |  |       |  |  |  |    
|                      | Short-term deposits   |         |  | Ba2 |                   |  |  |       |  |  |  | B   | 
|                      | Long-term deposits    |         |  | Ba1 |                   |  |  |       |  |  |  | B   | 

Moodys, S&P and Fitch have a
negative outlook for us and our debt ratings. The
rating agencies cited concerns about our funding and liquidity
challenges, earnings and asset quality.

During the first quarter of 2003, we continue to
experience pressure on our liquidity position. As part of our
commitment to meet the goals under our strategic plan,
management is implementing measures to maintain strong levels of
liquidity.

On March 17, 2003 we obtained a
$425 million extension through March 2004 of an
$850 million conduit which was scheduled to mature in June
of 2003. We also secured a $425 million conduit through
March 2004, which will replace conduits and warehouse facilities
scheduled to mature during March through May 2003. Furthermore,
these conduits will provide for the financing of a term
asset-backed securitization that is scheduled to mature in July
2003. The availability of funding under these facilities is
subject to various conditions, including a net reduction of
receivables in the Master Trust and a minimum three-month
average excess spread of 1%. In connection with the
transactions, we also terminated our $170 million revolving
line of credit.

On March 18, 2003 the Company and Direct
Merchants Bank entered into an operating agreement with the OCC.
The operating agreement requires, among other things, the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Bank must reduce its on-balance-sheet credit
    card receivables to no more than $550 million by
    December 31, 2003 and to zero by December 31, 2004.
    During the time the Bank is reducing these receivables, the mix
    of subprime receivables may not exceed 60% of all credit card
    receivables. As of December 31, 2002, 52.9% of the
    Banks credit card portfolio was subprime. The Bank will
    continue to sell credit card receivables on a daily basis to MCI
    under the purchase agreement currently in effect between MCI and
    the Bank.

54



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Bank must maintain minimum capital in the
    aggregate amount of (i)liquid assets deposited pursuant to the
    Liquidity Reserve Deposit Agreement discussed below;
    (ii) the capital required as a result of the 200%
    risk-weight applied to on-book subprime credit card receivables;
    and (iii) the minimum capital required under Federal law
    for a well capitalized institution for all remaining
    assets owned by the Bank.                                                                                                 
|
| |  | The Bank must meet certain liquidity
    requirements, including maintaining, on a daily basis, liquid
    assets of not less than 100% of the deposits and other
    liabilities coming due within the next 30 days, maintaining
    marketable assets in an amount equal to or in excess of the
    Banks insured deposits, maintaining cash and cash
    equivalents in excess of 46% of outstanding CDs and entering
    into the Liquidity Reserve Deposit Agreement discussed below to
    support the Banks credit card receivables funding needs.
|
| |  | The terms of the operating agreement required
    Direct Merchants Bank and MCI to enter into a Capital Assurance
    and Liquidity Maintenance Agreement (CALMA) which
    also was executed on March 18, 2003. The effect of the
    CALMA is to require MCI to make such capital infusions or
    provide Direct Merchants Bank with financial assistance so as to
    permit Direct Merchants Bank to meet its liquidity requirements.                                                                                                               
|
| |  | The operating agreement requires Direct Merchants
    Bank, a third-party depository bank and the OCC to execute a
    Liquidity Reserve Deposit Agreement (LRDA) within
    30 days of the effective date of the operating agreement.                                                                                                                                                                                                                                                                                                                   

Upon entering into the operating agreement,
Direct Merchants Bank declared and paid a dividend of
$155 million to us on March 19, 2003. Furthermore, the
agreement allows Direct Merchants Bank to declare and pay future
dividends without prior approval by the OCC, provided such
dividends are in compliance with OCC regulations.

During the past fiscal year, we had in place a
$270 million term loan and revolving credit facility. In
connection with the conduit transactions discussed above, all
availability under the $170 million revolving portion of
this facility was terminated as of March 18, 2003, with the
exception of the $7.3 million of outstanding letters of
credit. Term loans of $100 million remain outstanding under
the facility and mature on June 30, 2003. In order to
refinance the facility in part, on March 31, 2003, 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. The backup facility
carries an interest rate of 12% per annum plus an option to earn
an additional meaningful economic return based on the
performance of the Companys managed receivables through
December 31, 2004. The backup facility would be repayable
in full on March 1, 2004. THL Fund IVs
obligation to loan funds to the Company is subject to a number
of conditions, including the requirement that the Company
receive an opinion or opinions satisfactory to THL Fund IV
that the new credit facility is fair, from a financial point of
view to the Company and to the holders of the Companys
outstanding notes. There can be no assurance that these
conditions will be met.

As previously noted, during 2003 we have
contractual cash obligations of $505 million, off-balance
sheet funding scheduled to amortize of $1.8 billion and
will require funding for a $610 million term asset-backed
securitization maturing in January 2004. In addition, we will
need cash to fund new receivables, for the reduction of credit
card loans at Direct Merchants Bank to no more than
$550 million at December 31, 2003 (required under our
operating agreement) and for general operating needs. We have
historically utilized a variety of funding vehicles, as well as
ongoing cash generated from operations, to finance credit card
receivable growth, maturing debt obligations and general
operating needs. During the next year we intend to shrink the
size of the credit receivables in the Master Trust by
approximately $2.1 billion 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 bank conduits
or the issuance of new asset-backed securities. We believe we
have adequate liquidity for meeting anticipated cash needs,
although no assurance can be given to that effect.

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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. Such
restrictions limit Direct Merchants Banks ability to lend
to MCI and its affiliates. Additionally, Direct Merchants Bank
is limited in its ability to pay dividends to us in accordance
with the national bank dividend provisions.

Direct Merchants Bank is subject to certain
capital adequacy guidelines adopted by the OCC. At
December 31, 2002 and 2001, 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, as illustrated in the table below.

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. Direct Merchants 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 the following
table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of
Tier 1 leverage capital (as defined) to average assets (as
defined). Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material adverse effect on our financial statements.

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

|                                             |  |        |         |            |             |       |            |             |  |   |         |  |  |        |      |  |       |   |         |  |  |  |       | 
|-------------------------------------------- |  | ------ | ------- | ---------- | ----------- | ----- | ---------- | ----------- |  | - | ------- |  |  | ------ | ---- |  | ----- | - | ------- |  |  |  | ----- | 
|                                             |  |        |         |            |             |       |            |             |  |  
|                                             |  |        |         |            |             | To be |            |             | 
|                                             |  |        |         | Adequately |             |       | To be Well |            
|                                             |  | Actual |         |            | Capitalized |       |            | Capitalized | 
|                                             |  |        |         |            |             |       |            |             | 
|As of December 31, 2002                      |  | Amount |         |            | Ratio       |       |            | Amount      |  |   | Ratio   |  |  | Amount |      |  | Ratio |  
|                                             |  |        |         |            |             |       |            |             |  |   |         |  |  |        |      |  |       |  
|Total capital
    (to risk-weighted assets)  |  | $      | 402,891 |            |             |       | 30.9%      |             |  | $ | 104,465 |  |  |        | 8.0% |  |       | $ | 130,581 |  |  |  | 10.0% | 
|Tier 1 capital
    (to risk-weighted assets) |  |        | 385,658 |            |             |       | 29.5%      |             |  |   | 52,233  |  |  |        | 4.0% |  |       |   | 78,349  |  |  |  | 6.0%  | 
|Tier 1 capital
    (to average assets)       |  |        | 385,658 |            |             |       | 24.4%      |             |  |   | 63,219  |  |  |        | 4.0% |  |       |   | 79,024  |  |  |  | 5.0%  | 

|                                             |  |        |         |            |             |       |            |             |  |   |         |  |  |        |      |  |       |   |         |  |  |  |       | 
|-------------------------------------------- |  | ------ | ------- | ---------- | ----------- | ----- | ---------- | ----------- |  | - | ------- |  |  | ------ | ---- |  | ----- | - | ------- |  |  |  | ----- | 
|                                             |  |        |         |            |             |       |            |             |  |  
|                                             |  |        |         |            |             | To be |            |             | 
|                                             |  |        |         | Adequately |             |       | To be Well |            
|                                             |  | Actual |         |            | Capitalized |       |            | Capitalized | 
|                                             |  |        |         |            |             |       |            |             | 
|As of December 31, 2001                      |  | Amount |         |            | Ratio       |       |            | Amount      |  |   | Ratio   |  |  | Amount |      |  | Ratio |  
|                                             |  |        |         |            |             |       |            |             |  |   |         |  |  |        |      |  |       |  
|Total capital
    (to risk-weighted assets)  |  | $      | 346,907 |            |             |       | 13.0%      |             |  | $ | 213,733 |  |  |        | 8.0% |  |       | $ | 267,166 |  |  |  | 10.0% | 
|Tier 1 capital
    (to risk-weighted assets) |  |        | 308,186 |            |             |       | 11.5%      |             |  |   | 106,867 |  |  |        | 4.0% |  |       |   | 160,300 |  |  |  | 6.0%  | 
|Tier 1 capital
    (to average assets)       |  |        | 308,186 |            |             |       | 11.2%      |             |  |   | 110,573 |  |  |        | 4.0% |  |       |   | 138,216 |  |  |  | 5.0%  | 

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. The
OCC has regulatory authority

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to evaluate the safety and soundness of Direct
Merchants Bank under these more stringent guidelines. The OCC
has required Direct Merchants Bank, to maintain two times the
normal minimum capital on those credit card loans that qualify
as subprime loans (FICO score of 660 and below) and maintain a
minimum capital ratio of 10%. Under these guidelines, Direct
Merchants Banks total capital ratio as of
December 31, 2002 was 23.3%.


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 owned and managed 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 repricings.

Our primary managed assets are credit card loans,
which 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, asset securitizations, bank loans,
subsidiary bank deposits, long-term debt and equity issuances.
Our securitized loans are owned by the Master Trust and
bank-sponsored single-seller and multi-seller receivables
conduits within the Master Trust, which have committed funding
primarily indexed to variable commercial paper rates and LIBOR.
Our $270 million bank credit facility consists of a $170
million revolving credit facility that is indexed to Prime rate
and a $100 million term loan that is indexed to LIBOR. Effective
March 17, 2003, the $170 million revolving credit facility
was terminated. The long-term debt is at fixed interest rates.
At December 31, 2002, none of the securities issued out of
the Master Trust and conduit funding of securitized receivables
was funded with fixed rate securities, compared to 8.8% at
December 31, 2001.

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. Assuming that we take no
counteractive measures, as of December 31, 2002, a
200-basis-point increase in interest rates affecting our
floating rate financial instruments, including both debt
obligations and loans, would result in a decrease in net income
of approximately $11.0 million relative to a base case over
the next 12 months, compared to an approximate
$34.6 million increase as of December 31, 2001
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 $55.0 million as of December 31, 2002,
and an increase of $7.0 million as of December 31,
2001.

The year-over-year changes in the sensitivity to
a 200 basis point increase and decrease in the market interest
rate is mainly due to increased loan balances in fixed rate
price programs, such as forbearance programs, promotional rate
programs and introductory rate programs, as well as floors
placed on interest rates charged to customers in 2002. You
should not construe our use of this methodology to quantify the
market risk of financial instruments as an endorsement of its
accuracy or the accuracy of the related assumptions. In
addition, this methodology does not take into account the
indirect impact interest rates may have on the payment
performance of our cardholders, or the fact that LIBOR and Prime
rates may not move in tandem in an increasing or decreasing rate
environment. The quantitative information about market risk is
necessarily limited because it does not take into account
operating transactions or other costs associated with managing
immediate changes in interest rates.

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Newly Issued Pronouncements

On January 1, 2002, we adopted SFAS
No. 142, Goodwill and Other Intangible
Assets,which establishes accounting and reporting
standards for goodwill and other intangible assets. It requires
enterprises to test these assets for impairment upon the
adoption of SFAS No. 142, as well as on an annual basis,
and reduce the carrying amount of these assets if they are found
to be impaired. Goodwill and other intangible assets with an
indefinite useful life will no longer be amortized. Other
intangible assets with an estimable useful life will continue to
be amortized over their useful lives. The adoption of the
standard did not have a material impact on our financial
statements.

On January 1, 2002, we adopted SFAS
No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,which supersedes FASB Statement No. 121, and
provides a single accounting model for long-lived assets to be
disposed of. The adoption of the standard did not have a
material impact on our financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 62,
Amendment of FASB Statement No. 13, and Technical
Corrections.SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or
loss from continuing operations rather than as extraordinary
items as previously required under SFAS No. 4. SFAS
No. 145 also amends SFAS No. 13 to require that
certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when
the original lessee remains a secondary obligor or guarantor.
Accordingly, most gains or losses from extinguishments of debt
for fiscal years beginning after May 15, 2002 shall not be
reported as extraordinary. Upon adoption, any gain or loss on
extinguishment of debt previously classified as an extraordinary
item in prior periods presented must be reclassified to conform
with the provisions of SFAS No. 145. SFAS
No. 145s amendment and technical correction to SFAS
No. 13 is effective for all transactions occurring after
May 15, 2002. There was not a material impact on our financial
statements upon adoption of SFAS No. 145.

In July 2002, FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities.The statement addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring).SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when a liability is incurred.
Under Issue No. 94-3, a liability for an exit cost as
generally defined in Issue No. 94-3 was recognized at the
date of an entitys commitment to an exit plan. The
provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31,
2002. We do not expect a material impact on our financial
statements upon adoption of SFAS No. 146.

In November 2002, FASB issued Interpretation
No. 45, Guarantors Accounting for
Guarantees.The Interpretation requires certain
guarantees to be recognized and initially measured at fair
value. The interpretation applies to contracts or
indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on
changes in an underlying that is related to an asset, liability,
or an equity security of the guaranteed party. The requirements
of Interpretation No. 45 are effective for financial
statements ending after December 15, 2002. The initial
recognition and initial measurement provisions of the
Interpretation are applied, on a prospective basis only, to
guarantees issued after December 31, 2002, irrespective of
the guarantors fiscal year-end. There was not a material
impact on our financial statements upon adoption of
Interpretation No. 45.

In December 2002, 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. The
Interpretation also requires

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disclosures about variable interest entities that
the 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 beginning after June 15, 2003.
Interpretation No. 46 provides a specific exemption for
entities qualifying as Qualified Special Purpose Entities as
described in SFAS No. 140. All of our non-consolidated
entities are Qualified Special Purpose Entities under the
definition in SFAS No. 140. We do not expect the adoption
of this Interpretation to have a material impact on our
financial statements.


In December 2002, the FFIEC issued guidance on
the accounting treatment of Accrued Interest Receivables
(AIR) related to credit card securitizations. AIR
typically consists of a sellers retained interest in the
investors portion of the accrued and billed fees and
finance charges and the right to finance charges accrued but not
yet billed. The guidance requires AIR to be recorded on the
balance sheet as a retained beneficial interest. Accordingly, we
reclassified accrued but unbilled finance charges on our balance
sheet from other receivables due from securitizations,
net and other assets to retained
interests in loans securitized.

In January 2003, FASB issued SFAS No. 148
Accounting for Stock-Based Compensation-Transition and
Disclosure, which amends FASB Statement 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.There was not a material impact on our financial
statements upon adoption of SFAS No. 148.

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. At this time we
are reviewing the impact of the guidance and there can be no
assurance that adoption of the guidance will not have a material
adverse effect on our financial condition.

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, or expectations of
management; 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 include, but are
not limited to, our high liquidity requirement; factors that
affect delinquency rates, credit loss rates and charge-off rates
of our credit card receivables; changes in the cost and/or
availability of funding to us due to changes in the deposit,
credit card or securitization markets; changes in the way we are
perceived in such markets and/or conditions relating to existing
or future financing commitments; the success and impact of our
existing or modified strategic initiatives; the effects of
government policy and regulation, whether of general
applicability or specific to us, including restrictions and/or
limitations relating to our minimum capital requirements,
deposit taking abilities, reserving methodologies, dividend
policies and payments, growth, and/or underwriting criteria;
changes in

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accounting rules, policies, practices and/or
procedures; product development; consumer loan portfolio growth;
competition; legal and regulatory proceedings, including the
impact of ongoing litigation; interest rates; one-time charges;
extraordinary items; and general economic conditions.


These and other risks and uncertainties are
described under the heading Risk Factors in
pages 26-34 of this Report, and are also discussed in other
parts of this Report, including Legal Proceedings
(page 35) and Managements Discussion and
Analysis of Financial Condition and Results of Operations
(pages 37-57). Although we have 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. We undertake no obligation to
update any forward-looking statements, whether as a result of
new information, future events or otherwise.

Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000

Net income applicable to common stockholders for
the year ended December 31, 2001 was $211.0 million,
or $2.47 per diluted share, up from net income applicable to
common stockholders of $163.5 million, or $2.11 per diluted
share in 2000. The increase in net income results from an
increase in net interest income and other operating income
partially offset by increases in the provision for loan losses
and other operating expenses.

The provision for loan losses was
$549.1 million in 2001 compared to $388.2 million in
2000. The increase relates to the estimated required balance in
the allowance for loan losses to cover future charge-offs
inherent in our loan portfolio. Increased credit card loans,
increased net principal charge-offs, recent delinquency and
collection trends, and current economic conditions were factors
considered by management in determining the necessary balance in
the allowance for loan losses. The net principal charge-off rate
was 14.5% in 2001 compared to 23.5% in 2000. The decrease in the
net principal charge-off rate is due to run-off of our secured
portfolio. The delinquency ratio was 10.1% in 2001 compared to
7.5% in 2000.

Other operating income increased
$220.7 million, or 24%, to $1.2 billion for the year
ended December 31, 2001. This increase was primarily due to
an increase in net securitization and credit card servicing
income of $73.1 million to $517.4 million in 2001. The
increase was primarily due to an increase in servicing revenue
and the change in retained interests valuation expense needed to
record the retained interests at fair value. Servicing revenue
increased approximately $30 million to $159 million
for the year ended December 31, 2001 caused by an increase
of the approximately $1.2 billion in average securitized
receivables. The retained interests valuation expense decreased
$27.3 million for the year ended December 31, 2001
versus the year ended December 31, 2000. Enhancement
services revenues increased 28% to $340.1 million in 2001, up
from $266.2 million in 2000. These increases were primarily
due to the growth in total credit card accounts, an increase in
outstanding receivables in the securitized credit card loan
portfolio, development of new third-party relationships and the
creation of new products.

Other operating expenses increased to
$714.2 million in 2001, compared to $594.4 million in
2000. This increase was primarily due to continued investments
in our infrastructure in order to service the growth in our
credit card loan portfolio, an increase in overall marketing
expenditures and increased amortization on purchased portfolio
premiums.

On January 1, 2001, we adopted Statement of
Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities,which establishes accounting and reporting
standards for derivative instruments. SFAS 133 requires
enterprises to recognize all derivatives as either assets or
liabilities in the statement of financial position and to
measure those instruments at fair value. 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 $14.5 million
reflected as a Cumulative effect of accounting
change in the consolidated statements of income for the
year ended December 31, 2001.

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During the quarter ended March 31, 2000 we
adopted Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements,for our debt waiver products. This SAB
formalized the accounting for services sold where the right to a
full refund exists, requiring all companies to defer recognition
of revenues until the cancellation period is complete.
Previously, we recognized half of the revenues in the month
billed and half in the following month. We now recognize all of
the revenue the month following completion of the cancellation
period. This change resulted in a one-time, non-cash net charge
to earnings of $3.4 million, which is reflected as a
Cumulative effect of accounting change in the
consolidated statements of income for the year ended
December 31, 2000. Because we have applied the provisions
of this SAB to our membership programs since 1998, before the
SEC formalized its guidance, we did not have to adjust our
enhancement services revenues.

Selected Operating Data  Managed
Basis

In addition to analyzing the Companys
performance on an owned basis, we analyze the Companys
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.

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 the overall financial condition and
results of operations of the Company.

Table 10:                        Selected
Operating Data  Managed Basis

|                                |  |                         |            |  |           |   |            |      |  |   |           |  |  |      |           |  |             |   |           |  |  |  |      | 
|------------------------------- |  | ----------------------- | ---------- |  | --------- | - | ---------- | ---- |  | - | --------- |  |  | ---- | --------- |  | ----------- | - | --------- |  |  |  | ---- | 
|                                |  |                         |            | 
|                                |  | Year Ended December 31, |            |  | Four-Year |  
|                                |  |                         |            |  | Compound  |  
|                                |  | 2002                    |            |  | 2001      |   |            | 2000 |  |   | 1999      |  |  | 1998 |           |  | Growth Rate |  
|                                |  |                         |            |  |           |   |            |      |  |   |           |  |  |      |           |  |             |  
|                                |  |                         |            | 
|                                |  | (Dollars in thousands)  |            |  |          
|Selected Operating Data:        |  |                         |            |  |           |   |            |      |  |   |           |  |  |      |           |  |             |   |           |  |  |  |      | 
|Total credit card accounts      |  |                         | 3,929      |  |           |   | 4,929      |      |  |   | 4,464     |  |  |      | 3,680     |  |             |   | 2,972     |  |  |  | 7.2  | 
|Year-end loans                  |  | $                       | 11,420,186 |  |           | $ | 11,991,784 |      |  | $ | 9,345,631 |  |  | $    | 7,343,272 |  |             | $ | 5,359,905 |  |  |  | 20.8 | 
|Year-end assets                 |  |                         | 11,431,203 |  |           |   | 12,124,528 |      |  |   | 9,806,249 |  |  |      | 7,563,394 |  |             |   | 5,503,862 |  |  |  | 20.1 | 
|Average loans                   |  |                         | 11,850,927 |  |           |   | 10,419,280 |      |  |   | 8,081,638 |  |  |      | 6,053,811 |  |             |   | 4,034,038 |  |  |  | 30.9 | 
|Average interest-earning assets |  |                         | 12,435,568 |  |           |   | 10,769,482 |      |  |   | 8,305,115 |  |  |      | 6,190,267 |  |             |   | 4,073,792 |  |  |  | 32.2 | 
|Average assets                  |  |                         | 11,972,958 |  |           |   | 10,656,156 |      |  |   | 8,332,500 |  |  |      | 6,269,760 |  |             |   | 4,159,171 |  |  |  | 30.3 | 
|Return on average assets        |  |                         | N/A        |  |           |   | 2.3%       |      |  |   | 2.3%      |  |  |      | 1.0%      |  |             |   | 1.4%      |  |  |  |      | 
|Equity to managed assets        |  |                         | 9.3%       |  |           |   | 9.4%       |      |  |   | 9.0%      |  |  |      | 8.2%      |  |             |   | 7.9%      |  |  |  |      | 
|Net interest margin(1)          |  |                         | 14.3%      |  |           |   | 13.9%      |      |  |   | 12.9%     |  |  |      | 13.4%     |  |             |   | 12.4%     |  |  |  |      | 
|Delinquency ratio(2)            |  |                         | 11.0%      |  |           |   | 9.4%       |      |  |   | 8.2%      |  |  |      | 7.6%      |  |             |   | 6.8%      |  |  |  |      | 
|Net charge-off ratio(3)         |  |                         | 15.5%      |  |           |   | 10.9%      |      |  |   | 9.6%      |  |  |      | 9.0%      |  |             |   | 10.0%     |  |  |  |      | 



---



|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes MCIs actual cost of funds plus all
    costs associated with asset securitizations, including the
    interest expense paid to certificate holders and amortization of
    the discount and fees.
|   
|(2) | 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.                                            
|   
|(3) | Net charge-off ratio reflects actual principal
    amounts charged-off, less recoveries, as a percentage of average
    managed credit card loans.                                                         

61



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##### Table of Contents



Table 11:                        Managed
Loan Portfolio

|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |   |           |         |         |  |      |      |      | 
|-------------------------------------------------------------------- | --------------- | ---------------------- | ---------- | ------- | --------- |  | ----- | ---- | ----- | - | ---------- | ------- | --------- | ---- | ----- | ---- | ----- | - | --------- | ------- | ------- |  | ---- | ---- | ---- | 
|                                                                     |                 |                       
|                                                                     |                 | December 31,           |           
|                                                                     |                 |                        |           
|                                                                     |                 |                        |            | % of    |           |  |       |      | % of  |   |            |         |           | % of |      
|                                                                     |                 | 2002                   |            |         | Total     |  |       | 2001 |       |   | Total      |         |           | 2000 |       |      | Total |  
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  
|                                                                     |                 |                       
|                                                                     |                 | (Dollars in thousands) |           
|Credit card loans                                                    |                 | $                      | 846,417    |         |           |  |       |      |       | $ | 2,756,763  |         |           |      |       |      |       | $ | 1,184,269 |         |         |  |      |     
|Retained interests in loans securitized                              |                 |                        | 1,736,912  |         |           |  |       |      |       |   | 1,339,178  |         |           |      |       |      |       |   | 2,091,138 |         |         |  |      |     
|Investors interests in securitized loans
    accounted for as sales |                 |                        | 8,836,857  |         |           |  |       |      |       |   | 7,895,843  |         |           |      |       |      |       |   | 6,070,224 |         |         |  |      |     
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  
|Total managed loan portfolio                                         |                 | $                      | 11,420,186 |         |           |  |       |      |       | $ | 11,991,784 |         |           |      |       |      |       | $ | 9,345,631 |         |         |  |      |     
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  
|Loans contractually Delinquent:                                      |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |   |           |         |         |  |      |     
|                                                                     | 30 to 59 days   |                        |            | 359,223 |           |  |       | 3.1% |       |   |            | 375,887 |           |      |       | 3.1% |       |   |           | 228,238 |         |  |      | 2.4% |     
|                                                                     | 60 to 89 days   |                        |            | 285,448 |           |  |       | 2.5% |       |   |            | 274,278 |           |      |       | 2.3% |       |   |           | 173,531 |         |  |      | 1.9% |     
|                                                                     | 90 or more days |                        |            | 615,278 |           |  |       | 5.4% |       |   |            | 473,003 |           |      |       | 4.0% |       |   |           | 365,963 |         |  |      | 3.9% |     
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  
|                                                                     |                 | Total                  |            | $       | 1,259,949 |  |       |      | 11.0% |   |            | $       | 1,123,168 |      |       |      | 9.4%  |   |           | $       | 767,732 |  |      |      | 8.2% | 
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  
|Average balances:                                                    |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |   |           |         |         |  |      |     
|Credit card loans                                                    |                 | $                      | 1,305,127  |         |           |  |       |      |       | $ | 1,709,989  |         |           |      |       |      |       | $ | 614,991   |         |         |  |      |     
|Retained interests in loans securitized                              |                 |                        | 1,912,018  |         |           |  |       |      |       |   | 1,965,200  |         |           |      |       |      |       |   | 1,929,502 |         |         |  |      |     
|Investors interests in securitized loans
    accounted for as sales |                 |                        | 8,633,782  |         |           |  |       |      |       |   | 6,744,091  |         |           |      |       |      |       |   | 5,537,145 |         |         |  |      |     
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  
|Total managed loan portfolio                                         |                 | $                      | 11,850,927 |         |           |  |       |      |       | $ | 10,419,280 |         |           |      |       |      |       | $ | 8,081,638 |         |         |  |      |     
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  
|Net charge-offs                                                      |                 | $                      | 1,840,786  |         |           |  | 15.5% |      |       | $ | 1,140,151  |         |           |      | 10.9% |      |       | $ | 778,921   |         |         |  | 9.6% |     
|                                                                     |                 |                        |            |         |           |  |       |      |       |   |            |         |           |      |       |      |       |  

The 160-basis-point increase during 2002 in the
managed delinquency rates over 2001 primarily reflects declining
receivables, a deterioration in the economy and the impact of
our 2001 credit line increase program. The credit line increase
program added pressure to our cardholders due to increased
average outstanding balances, which require higher monthly
payments. This, along with a deteriorating economy, has made
collection efforts more difficult, resulting in higher
delinquencies.

Managed net charge-offs increased
$700.6 million in 2002 primarily due to the impact of the
2001 credit line increase program and deterioration in the
economy.

We charge-off bankrupt accounts within 60 days of
formal notification. Charge-offs due to bankruptcies were
$654.5 million, representing 33.7% of total managed gross
charge-offs as of December 31, 2002 and
$455.0 million, representing 36.0% of total managed gross
charge-offs as of December 31, 2001. In addition to those
bankrupt accounts that were charged-off, we received formal
notification of $106.3 million and $58.7 million of managed
bankrupt accounts as of December 31, 2002 and 2001,
respectively.

Total managed loans decreased $571.6 million
to $11.4 billion as of December 31, 2002, compared to
$12.0 billion as of December 31, 2001. This was
primarily due to a reduction in credit lines and tighter
underwriting standards implemented in 2002. The amount of credit
card receivables in debt forbearance programs was
$860.1 million or 7.5% of total managed loans as of
December 31, 2002, compared with

62



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$837.2 million or 7.0% of managed loans as
of December 31, 2001. All delinquent receivables in debt
forbearance programs are included in Table 11.


Table 12:                        Analysis
of Average Balances, Interest and Average Yields and
Rates

|                                           |  |                         |            |  |          |   |           |      |  |         |         |  |  |          |            |  |      |   |           |  |  |  |       | 
|------------------------------------------ |  | ----------------------- | ---------- |  | -------- | - | --------- | ---- |  | ------- | ------- |  |  | -------- | ---------- |  | ---- | - | --------- |  |  |  | ----- | 
|                                           |  |                        
|                                           |  | Year Ended December 31, |           
|                                           |  |                         |           
|                                           |  |                         |            | 
|                                           |  | 2002                    |            |  | 2001     |  
|                                           |  |                         |            |  |          |  
|                                           |  | Average                 |            |  |          |   | Yield/    |      |  | Average |         |  |  |          | Yield/     | 
|                                           |  | Balance                 |            |  | Interest |   |           | Rate |  |         | Balance |  |  | Interest |            |  | Rate |  
|                                           |  |                         |            |  |          |   |           |      |  |         |         |  |  |          |            |  |      |  
|                                           |  |                        
|                                           |  | (Dollars in thousands)  |           
|Managed Basis                              |  |                         |            |  |          |   |           |      |  |         |         |  |  |          |            |  |      |   |           |  |  |  |       | 
|                                           |  |                         |            |  |          |   |           |      |  |         |         |  |  |          |            |  |      |  
|Credit card loans                          |  | $                       | 11,850,927 |  |          | $ | 2,089,070 |      |  |         | 17.6%   |  |  | $        | 10,419,280 |  |      | $ | 1,957,913 |  |  |  | 18.8% | 
|Total interest-earning Assets              |  |                         | 12,435,568 |  |          |   | 2,099,595 |      |  |         | 16.9%   |  |  |          | 10,769,482 |  |      |   | 1,973,400 |  |  |  | 18.3% | 
|Total interest-bearing liabilities         |  |                         | 10,420,532 |  |          |   | 321,981   |      |  |         | 3.1%    |  |  |          | 9,234,217  |  |      |   | 480,465   |  |  |  | 5.2%  | 
|Net interest income and interest margin(1) |  |                         |           |  |          |   | 1,777,614 |      |  |         | 14.3%   |  |  |          |           |  |      |   | 1,492,935 |  |  |  | 13.9% | 
|Net interest rate spread(2)                |  |                         |           |  |          |   |          |      |  |         | 13.8%   |  |  |          |           |  |      |   |          |  |  |  | 13.1% | 

|                                           |  |                         |           |  |          |   |           |      |  |  |       | 
|------------------------------------------ |  | ----------------------- | --------- |  | -------- | - | --------- | ---- |  |  | ----- | 
|                                           |  |                        
|                                           |  | Year Ended December 31, |          
|                                           |  |                         |          
|                                           |  |                        
|                                           |  | 2000                    |          
|                                           |  |                         |          
|                                           |  | Average                 |           |  |          |   | Yield/    |     
|                                           |  | Balance                 |           |  | Interest |   |           | Rate | 
|                                           |  |                         |           |  |          |   |           |      | 
|                                           |  |                        
|                                           |  | (Dollars in thousands)  |          
|Managed Basis                              |  |                         |           |  |          |   |           |      |  |  |       | 
|                                           |  |                         |           |  |          |   |           |      | 
|Credit card loans                          |  | $                       | 8,081,638 |  |          | $ | 1,582,503 |      |  |  | 19.6% | 
|Total interest-earnings assets             |  |                         | 8,305,115 |  |          |   | 1,596,352 |      |  |  | 19.2% | 
|Total interest-bearing liabilities         |  |                         | 7,209,068 |  |          |   | 521,477   |      |  |  | 7.2%  | 
|Net interest income and Interest margin(1) |  |                         |          |  |          |   | 1,074,875 |      |  |  | 12.9% | 
|Net interest rate spread(2)                |  |                         |          |  |          |   |          |      |  |  | 12.0% | 



---



|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

Managed net interest income for the year ended
December 31, 2002 was $1.8 billion, compared to
$1.5 billion for the same period in 2001. Net interest
income consists primarily of interest earned on our credit card
loans less interest expense on borrowing to fund the loans. The
increase is due to a $1.7 billion increase in average
interest-earning assets and a 40 basis point increase in
net interest margin.

63



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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

METRIS COMPANIES INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                              |                                                |                        |           |           |      |   |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------- | --------- | --------- | ---- | - | --------- | --------- | 
|                                                                                                                                                              |                                                |                       
|                                                                                                                                                              |                                                | December 31,           |          
|                                                                                                                                                              |                                                |                        |          
|                                                                                                                                                              |                                                | 2002                   |           |           | 2001 |  
|                                                                                                                                                              |                                                |                        |           |           |      |  
|                                                                                                                                                              |                                                |                       
|                                                                                                                                                              |                                                | (Dollars in thousands, |          
|                                                                                                                                                              |                                                | except per-share data) |          
|ASSETS:                                                                                                                                                      
|Cash and due from banks                                                                                                                                       |                                                | $                      | 62,813    |           |      | $ | 109,812   |          
|Federal funds sold                                                                                                                                            |                                                |                        | 88,000    |           |      |   | 243,772   |          
|Short-term investments                                                                                                                                        |                                                |                        | 496,854   |           |      |   | 134,502   |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|Cash and cash equivalents                                                                                                                                     |                                                |                        | 647,667   |           |      |   | 488,086   |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|Retained interests in loans securitized                                                                                                                       |                                                |                        | 1,736,912 |           |      |   | 1,339,178 |          
|Less: Valuation allowance                                                                                                                                     |                                                |                        | 986,517   |           |      |   | 537,499   |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|Net retained interests in loans securitized                                                                                                                   |                                                |                        | 750,395   |           |      |   | 801,679   |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|Credit card loans                                                                                                                                             |                                                |                        | 846,417   |           |      |   | 2,756,763 |          
|Less: Allowance for loan losses                                                                                                                               |                                                |                        | 90,315    |           |      |   | 410,159   |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|Net credit card loans                                                                                                                                         |                                                |                        | 756,102   |           |      |   | 2,346,604 |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|Property and equipment, net                                                                                                                                   |                                                |                        | 83,831    |           |      |   | 114,913   |          
|Purchased portfolio premium, net                                                                                                                              |                                                |                        | 64,579    |           |      |   | 94,793    |          
|Other receivables due from credit card
    securitizations, net                                                                                               |                                                |                        | 116,785   |           |      |   | 114,456   |          
|Other assets                                                                                                                                                  |                                                |                        | 174,987   |           |      |   | 268,155   |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|                                                                                                                                                              | Total assets                                   |                        | $         | 2,594,346 |      |   | $         | 4,228,686 | 
|                                                                                                                                                              |                                                |                        |           |           |      |  
|LIABILITIES:                                                                                                                                                 
|Deposits                                                                                                                                                      |                                                | $                      | 892,754   |           |      | $ | 2,058,008 |          
|Debt                                                                                                                                                          |                                                |                        | 357,649   |           |      |   | 647,904   |          
|Accounts payable                                                                                                                                              |                                                |                        | 53,589    |           |      |   | 83,475    |          
|Deferred income                                                                                                                                               |                                                |                        | 159,267   |           |      |   | 215,031   |          
|Accrued expenses and other liabilities                                                                                                                        |                                                |                        | 72,062    |           |      |   | 82,313    |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|                                                                                                                                                              | Total liabilities                              |                        |           | 1,535,321 |      |   |           | 3,086,731 | 
|                                                                                                                                                              |                                                |                        |           |           |      |  
|Stockholders Equity:                                                                                                                                         |                                                |                        |           |           |      |   |           |          
|Convertible preferred stock  Series C,
    par value $.01 per share; 10,000,000 shares authorized,
    1,156,086 and 1,057,638 shares issued and outstanding |                                                |                        | 430,642   |           |      |   | 393,970   |          
|Common stock, par value $.01 per share;
    300,000,000 shares authorized, 64,223,231 and 64,224,878 shares
    issued                                        |                                                |                        | 642       |           |      |   | 642       |          
|Paid-in capital                                                                                                                                               |                                                |                        | 227,376   |           |      |   | 232,413   |          
|Unearned compensation                                                                                                                                         |                                                |                        |          |           |      |   | (4,980    | )        
|Treasury stock  7,055,300 and 806,300
    shares                                                                                                             |                                                |                        | (58,308   | )         |      |   | (13,014   | )        
|Retained earnings                                                                                                                                             |                                                |                        | 458,673   |           |      |   | 532,924   |          
|                                                                                                                                                              |                                                |                        |           |           |      |  
|                                                                                                                                                              | Total stockholders equity                     |                        |           | 1,059,025 |      |   |           | 1,141,955 | 
|                                                                                                                                                              |                                                |                        |           |           |      |  
|                                                                                                                                                              | Total liabilities and stockholders
    equity |                        | $         | 2,594,346 |      |   | $         | 4,228,686 | 
|                                                                                                                                                              |                                                |                        |           |           |      |  

See accompanying Notes to Consolidated Financial
Statements.

64



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##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                                                       |                                                                          |                         |          |       |      |   |           |       |   |   |         |       |  
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------- | -------- | ----- | ---- | - | --------- | ----- | - | - | ------- | ----- | -
|                                                                                       |                                                                          |                        
|                                                                                       |                                                                          | Year Ended December 31, |         
|                                                                                       |                                                                          |                         |         
|                                                                                       |                                                                          | 2002                    |          |       | 2001 |   |           | 2000  |  
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|                                                                                       |                                                                          |                        
|                                                                                       |                                                                          | (Dollars in thousands,  |         
|                                                                                       |                                                                          | except per-share data)  |         
|Interest Income:                                                                       |                                                                          |                         |          |       |      |   |           |       |   |   |         |      
|Credit card loans and retained interests in loans
    securitized                      |                                                                          | $                       | 516,834  |       |      | $ | 681,503   |       |   | $ | 490,929 |      
|Federal funds sold                                                                     |                                                                          |                         | 403      |       |      |   | 3,115     |       |   |   | 9,139   |      
|Other                                                                                  |                                                                          |                         | 10,122   |       |      |   | 12,372    |       |   |   | 4,710   |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Total interest income                                                                  |                                                                          |                         | 527,359  |       |      |   | 696,990   |       |   |   | 504,778 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Deposit interest expense                                                               |                                                                          |                         | 68,741   |       |      |   | 127,918   |       |   |   | 89,560  |      
|Other interest expense                                                                 |                                                                          |                         | 34,775   |       |      |   | 38,362    |       |   |   | 43,446  |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Total interest expense                                                                 |                                                                          |                         | 103,516  |       |      |   | 166,280   |       |   |   | 133,006 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Net Interest Income                                                                    |                                                                          |                         | 423,843  |       |      |   | 530,710   |       |   |   | 371,772 |      
|Provision for loan losses                                                              |                                                                          |                         | 573,478  |       |      |   | 549,145   |       |   |   | 388,234 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Net Interest Income After Provision for Loan
    Losses                                |                                                                          |                         | (149,635 | )     |      |   | (18,435   | )     |   |   | (16,462 | )    
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Other Operating Income:                                                                |                                                                          |                         |          |       |      |   |           |       |   |   |         |      
|Net securitization and credit card servicing
    income                                |                                                                          |                         | 271,348  |       |      |   | 517,399   |       |   |   | 444,254 |      
|Credit card fees, interchange and other credit
    card income                         |                                                                          |                         | 202,664  |       |      |   | 296,926   |       |   |   | 223,333 |      
|Enhancement services revenues                                                          |                                                                          |                         | 384,049  |       |      |   | 340,132   |       |   |   | 266,200 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|                                                                                       |                                                                          |                         | 858,061  |       |      |   | 1,154,457 |       |   |   | 933,787 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Other Operating Expense:                                                               |                                                                          |                         |          |       |      |   |           |       |   |   |         |      
|Credit card account and other product
    solicitation and marketing expenses          |                                                                          |                         | 190,259  |       |      |   | 174,883   |       |   |   | 144,481 |      
|Employee compensation                                                                  |                                                                          |                         | 210,826  |       |      |   | 225,463   |       |   |   | 178,592 |      
|Data processing services and communications                                            |                                                                          |                         | 83,874   |       |      |   | 90,222    |       |   |   | 86,166  |      
|Enhancement services claims expense                                                    |                                                                          |                         | 51,542   |       |      |   | 35,628    |       |   |   | 26,431  |      
|Credit card fraud losses                                                               |                                                                          |                         | 8,647    |       |      |   | 9,068     |       |   |   | 8,886   |      
|Purchased portfolio premium amortization                                               |                                                                          |                         | 30,220   |       |      |   | 30,277    |       |   |   | 19,275  |      
|Occupancy and equipment                                                                |                                                                          |                         | 48,013   |       |      |   | 47,572    |       |   |   | 35,563  |      
|Mastercard/ Visa assessment and fees                                                   |                                                                          |                         | 13,869   |       |      |   | 16,522    |       |   |   | 14,712  |      
|Asset impairments and lease write-offs                                                 |                                                                          |                         | 27,736   |       |      |   |          |       |   |   |        |      
|Other                                                                                  |                                                                          |                         | 93,221   |       |      |   | 84,519    |       |   |   | 80,308  |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|                                                                                       |                                                                          |                         | 758,207  |       |      |   | 714,154   |       |   |   | 594,414 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Income (Loss) Before Income Taxes and
    Cumulative Effect of Accounting Changes      |                                                                          |                         | (49,781  | )     |      |   | 421,868   |       |   |   | 322,911 |      
|Income taxes                                                                           |                                                                          |                         | (15,930  | )     |      |   | 161,577   |       |   |   | 124,320 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Income (Loss) Before Cumulative Effect of
    Accounting Changes                       |                                                                          |                         | (33,851  | )     |      |   | 260,291   |       |   |   | 198,591 |      
|Cumulative effect of accounting changes (net of
    income taxes of $9,000 and $2,180) |                                                                          |                         |         |       |      |   | 14,499    |       |   |   | 3,438   |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Net Income (Loss)                                                                      |                                                                          |                         | (33,851  | )     |      |   | 245,792   |       |   |   | 195,153 |      
|Convertible preferred stock dividends                                                  |                                                                          |                         | 38,009   |       |      |   | 34,771    |       |   |   | 31,624  |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Net Income (Loss) Applicable to Common
    Stockholders                                |                                                                          | $                       | (71,860  | )     |      | $ | 211,021   |       |   | $ | 163,529 |      
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Earnings (Loss) per share:                                                             |                                                                          |                         |          |       |      |   |           |       |   |   |         |      
|                                                                                       | Basicincome (loss)before cumulative
    effect of accounting changes    |                         | $        | (1.20 | )    |   | $         | 2.67  |   |   | $       | 2.23  |  
|                                                                                       | Basiccumulative effect of accounting changes                            |                         |          |      |      |   |           | (0.15 | ) |   |         | (0.04 | )
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|                                                                                       | Basic-net income (loss)                                                  |                         |          | (1.20 | )    |   |           | 2.52  |   |   |         | 2.19  |  
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|                                                                                       | Dilutedincome (loss) before cumulative
    effect of accounting changes |                         |          | (1.20 | )    |   |           | 2.62  |   |   |         | 2.15  |  
|                                                                                       | Diluted-cumulative effect of accounting changes                          |                         |          |      |      |   |           | (0.15 | ) |   |         | (0.04 | )
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|                                                                                       | Diluted-net income(loss)                                                 |                         |          | (1.20 | )    |   |           | 2.47  |   |   |         | 2.11  |  
|                                                                                       |                                                                          |                         |          |       |      |   |           |       |  
|Shares used to compute earnings (loss) per
    share:                                  |                                                                          |                         |          |       |      |   |           |       |   |   |         |      
|Basic                                                                                  |                                                                          |                         | 59,782   |       |      |   | 97,641    |       |   |   | 89,234  |      
|Diluted                                                                                |                                                                          |                         | 59,782   |       |      |   | 99,366    |       |   |   | 92,582  |      
|Dividends declared and paid per common
    share                                       |                                                                          | $                       | 0.040    |       |      | $ | 0.040     |       |   | $ | 0.033   |      

See accompanying Notes to Consolidated Financial
Statements.

65



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##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |         |         |   |   |         |         |   |   |           |         |  
|-------------------------- | --------------------------------------------------------- | --------------------------------- | ----- | -- | --------- |  | ------ | ------ | - | - | ------- | ------ |  | -------- | --- | --- | ------------ | - | ------- | -------- | - | - | ------------- | ------ | - | ------ | ------- | ------- | - | - | ------- | ------- | - | - | --------- | ------- | -
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |    
|                           |                                                           | Number of Shares                  |       |    |           |  |        |        |   |   |         |        |  |          |     |     |             
|                           |                                                           | Outstanding                       |       |    |           |  |        |        |   |   |         |        |  |          |     |     | Total        |  
|                           |                                                           |                                   |       |    | Preferred |  |        | Common |   |   | Paid-In |        |  | Unearned |     |     | Treasury     |   |         | Retained |   |   | Stockholders |       
|                           |                                                           | Preferred                         |       |    | Common    |  |        | Stock  |   |   | Stock   |        |  | Capital  |     |     | Compensation |   |         | Stock    |   |   | Earnings      |        |   | Equity |        
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        
|                           |                                                           |                                  
|                           |                                                           | (Dollars and shares in thousands) |      
|BALANCE, DECEMBER 31, 1999 |                                                           |                                   | 885   |    |           |  | 57,919 |        |   | $ | 329,729 |        |  | $        | 386 |     |              | $ | 130,772 |          |   | $ |              |        |   | $      |        |         |   | $ | 162,914 |         |   | $ | 623,801   |        
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        
|                           | Net income                                                |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | 195,153 |   |   |           | 195,153 |  
|                           | Cash dividends                                            |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | (2,942  | ) |   |           | (2,942  | )
|                           | June 2000 three-for-two stock split                       |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     | 201 |              |   |         | (201     | ) |   |               |       |   |        |         |        |   |   |         |        |   |   |           |        |  
|                           | Preferred dividends in kind                               |                                   |       | 83 |           |  |        |       |   |   |         | 30,692 |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | (30,692 | ) |   |           |        |  
|                           | Issuance of common stock under employee benefit
    plans |                                   |       |   |           |  |        | 4,324  |   |   |         |       |  |          |     | 35  |              |   |         | 67,506   |   |   |               |       |   |        |         |        |   |   |         |        |   |   |           | 67,541  |  
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        
|BALANCE, DECEMBER 31, 2000 |                                                           |                                   | 968   |    |           |  | 62,243 |        |   | $ | 360,421 |        |  | $        | 622 |     |              | $ | 198,077 |          |   | $ |              |        |   | $      |        |         |   | $ | 324,433 |         |   | $ | 883,553   |        
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        
|                           | Net income                                                |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | 245,792 |   |   |           | 245,792 |  
|                           | Cash dividends                                            |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | (3,752  | ) |   |           | (3,752  | )
|                           | Common stock repurchased                                  |                                   |       |   |           |  |        | (806   | ) |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         | (13,014 | ) |   |         |        |   |   |           | (13,014 | )
|                           | Preferred dividends in kind                               |                                   |       | 90 |           |  |        |       |   |   |         | 33,549 |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | (33,549 | ) |   |           |        |  
|                           | Issuance of common stock under employee benefit
    plans |                                   |       |   |           |  |        | 1,518  |   |   |         |       |  |          |     | 15  |              |   |         | 27,927   |   |   |               |       |   |        |         |        |   |   |         |        |   |   |           | 27,942  |  
|                           | Deferred compensation                                     |                                   |       |   |           |  |        | 464    |   |   |         |       |  |          |     | 5   |              |   |         | 6,409    |   |   |               | (8,108 | ) |        |         |        |   |   |         |        |   |   |           | (1,694  | )
|                           | Amortization of restricted stock                          |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               | 3,128  |   |        |         |        |   |   |         |        |   |   |           | 3,128   |  
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        
|BALANCE, DECEMBER 31, 2001 |                                                           |                                   | 1,058 |    |           |  | 63,419 |        |   | $ | 393,970 |        |  | $        | 642 |     |              | $ | 232,413 |          |   | $ | (4,980        | )      |   | $      | (13,014 | )       |   | $ | 532,924 |         |   | $ | 1,141,955 |        
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        
|                           | Net loss                                                  |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | (33,851 | ) |   |           | (33,851 | )
|                           | Cash dividends                                            |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | (3,728  | ) |   |           | (3,728  | )
|                           | Common stock repurchased                                  |                                   |       |   |           |  |        | (6,249 | ) |   |         |       |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         | (45,294 | ) |   |         |        |   |   |           | (45,294 | )
|                           | Preferred dividends in kind                               |                                   |       | 98 |           |  |        |       |   |   |         | 36,672 |  |          |     |    |              |   |         |         |   |   |               |       |   |        |         |        |   |   |         | (36,672 | ) |   |           |        |  
|                           | Issuance of common stock under employee benefit
    plans |                                   |       |   |           |  |        | 462    |   |   |         |       |  |          |     | 4   |              |   |         | 2,975    |   |   |               |       |   |        |         |        |   |   |         |        |   |   |           | 2,979   |  
|                           | Deferred compensation                                     |                                   |       |   |           |  |        | 76     |   |   |         |       |  |          |     | 1   |              |   |         | 967      |   |   |               | (968   | ) |        |         |        |   |   |         |        |   |   |           |        |  
|                           | Amortization of restricted stock                          |                                   |       |   |           |  |        |       |   |   |         |       |  |          |     |    |              |   |         |         |   |   |               | 1,808  |   |        |         |        |   |   |         |        |   |   |           | 1,808   |  
|                           | Forfeiture of restricted stock                            |                                   |       |   |           |  |        | (540   | ) |   |         |       |  |          |     | (5  | )            |   |         | (8,979   | ) |   |               | 4,140  |   |        |         |        |   |   |         |        |   |   |           | (4,844  | )
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        
|BALANCE, DECEMBER 31, 2002 |                                                           |                                   | 1,156 |    |           |  | 57,168 |        |   | $ | 430,642 |        |  | $        | 642 |     |              | $ | 227,376 |          |   | $ |              |        |   | $      | (58,308 | )       |   | $ | 458,673 |         |   | $ | 1,059,025 |        
|                           |                                                           |                                   |       |    |           |  |        |        |   |   |         |        |  |          |     |     |              |   |         |          |   |   |               |        |   |        |        

See accompanying Notes to Consolidated Financial
Statements.



66



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##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                             |                                                            |                         |            |         |      |   |            |         |   |   |            |         |  
|-------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------- | ---------- | ------- | ---- | - | ---------- | ------- | - | - | ---------- | ------- | -
|                                                                                             |                                                            |                        
|                                                                                             |                                                            | Year Ended December 31, |           
|                                                                                             |                                                            |                         |           
|                                                                                             |                                                            | 2002                    |            |         | 2001 |   |            | 2000    |  
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|                                                                                             |                                                            |                        
|                                                                                             |                                                            | (Dollars in thousands)  |           
|Operating Activities:                                                                        |                                                            |                         |            |         |      |   |            |         |   |   |            |        
|Net income (loss)                                                                            |                                                            | $                       | (33,851    | )       |      | $ | 245,792    |         |   | $ | 195,153    |        
|Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                            |                         |            |         |      |   |            |         |   |   |            |        
|Cumulative effect of accounting changes                                                      |                                                            |                         |           |         |      |   | 14,499     |         |   |   | 3,438      |        
|Depreciation and amortization                                                                |                                                            |                         | 130,013    |         |      |   | 106,703    |         |   |   | 76,256     |        
|Provision for loan losses                                                                    |                                                            |                         | 573,478    |         |      |   | 549,145    |         |   |   | 388,234    |        
|Retained interests valuation income                                                          |                                                            |                         | (118,953   | )       |      |   | (131,992   | )       |   |   | (104,710   | )      
|Asset impairments and lease write-offs                                                       |                                                            |                         | 27,736     |         |      |   |           |         |   |   |           |        
|Changes in operating assets and liabilities, net:                                            |                                                            |                         |            |         |      |   |            |         |   |   |            |        
|                                                                                             | Other receivables due from credit card
    securitizations |                         |            | (23,680 | )    |   |            | (5,583  | ) |   |            | 55,240  |  
|                                                                                             | Accounts payable and accrued expenses                      |                         |            | (43,476 | )    |   |            | 6,446   |   |   |            | 45,877  |  
|                                                                                             | Deferred income                                            |                         |            | (55,764 | )    |   |            | (20,476 | ) |   |            | 60,403  |  
|                                                                                             | Other                                                      |                         |            | 43,871  |      |   |            | 45,878  |   |   |            | (53,058 | )
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Net cash provided by operating activities                                                    |                                                            |                         | 499,374    |         |      |   | 810,412    |         |   |   | 666,833    |        
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Investing Activities:                                                                        |                                                            |                         |            |         |      |   |            |         |   |   |            |        
|Proceeds from transfers of portfolios to the
    Metris Master Trust                         |                                                            |                         | 2,087,097  |         |      |   | 553,180    |         |   |   |           |        
|Net proceeds from sales and repayments of
    securitized loans                              |                                                            |                         | (1,145,947 | )       |      |   | 1,272,438  |         |   |   | 551,911    |        
|Net loans (originated) collected                                                             |                                                            |                         | 211,458    |         |      |   | (2,617,045 | )       |   |   | (1,976,341 | )      
|Proceeds from sales of credit card portfolios to
    third parties                           |                                                            |                         | 16,278     |         |      |   |           |         |   |   |           |        
|Credit card portfolio acquisitions                                                           |                                                            |                         |           |         |      |   | (290,774   | )       |   |   | (195,597   | )      
|Additions to premises and equipment                                                          |                                                            |                         | (6,159     | )       |      |   | (5,706     | )       |   |   | (85,007    | )      
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Net cash provided by (used in) investing
    activities                                      |                                                            |                         | 1,162,727  |         |      |   | (1,087,907 | )       |   |   | (1,705,034 | )      
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Financing Activities:                                                                        |                                                            |                         |            |         |      |   |            |         |   |   |            |        
|Proceeds from issuance of debt                                                               |                                                            |                         | 51,745     |         |      |   | 387,000    |         |   |   | 11,054     |        
|Repayment of debt                                                                            |                                                            |                         | (342,000   | )       |      |   | (95,162    | )       |   |   |           |        
|Net (decrease) increase in deposits                                                          |                                                            |                         | (1,165,254 | )       |      |   | (48,191    | )       |   |   | 1,330,818  |        
|Cash dividends paid                                                                          |                                                            |                         | (3,728     | )       |      |   | (3,752     | )       |   |   | (2,942     | )      
|Increase in common equity                                                                    |                                                            |                         | 2,011      |         |      |   | 17,260     |         |   |   | 26,278     |        
|Repurchase of common stock                                                                   |                                                            |                         | (45,294    | )       |      |   | (13,014    | )       |   |   |           |        
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Net cash provided by (used in) financing
    activities                                      |                                                            |                         | (1,502,520 | )       |      |   | 244,141    |         |   |   | 1,365,208  |        
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Net increase (decrease) in cash and cash
    equivalents                                     |                                                            |                         | 159,581    |         |      |   | (33,354    | )       |   |   | 327,007    |        
|Cash and cash equivalents at beginning of year                                               |                                                            |                         | 488,086    |         |      |   | 521,440    |         |   |   | 194,433    |        
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Cash and cash equivalents at end of year                                                     |                                                            | $                       | 647,667    |         |      | $ | 488,086    |         |   | $ | 521,440    |        
|                                                                                             |                                                            |                         |            |         |      |   |            |         |  
|Supplemental disclosures and cash flow
    information:                                      |                                                            |                         |            |         |      |   |            |         |   |   |            |        
|Cash paid (received) during the year for:                                                    |                                                            |                         |            |         |      |   |            |         |   |   |            |        
|                                                                                             | Interest                                                   |                         |            | 106,394 |      |   |            | 165,241 |   |   |            | 81,724  |  
|                                                                                             | Income taxes                                               |                         |            | (32,996 | )    |   |            | 25,718  |   |   |            | 75,384  |  
|Tax benefit from employee stock option exercises                                             |                                                            |                         | 174        |         |      |   | 8,989      |         |   |   | 31,174     |        

See accompanying Notes to Consolidated Financial
Statements.

67



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##### Table of Contents



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, including Direct Merchants Credit Card Bank,
National Association (Direct Merchants Bank), which
may be referred to as we, us,
our and the Company. We are an
information-based direct marketer of consumer lending products
and enhancement services, primarily to moderate-income
consumers. We issue credit cards through our wholly owned
subsidiary, Direct Merchants Bank, the 11th largest bankcard
issuer in the United States. We also offer consumer products
through our enhancement services business unit, including credit
protection, third-party insurance, warranty products, and
membership program products, and list syndication products.

We have eliminated all significant intercompany
balances and transactions in consolidation. We have reclassified
certain prior-year amounts to conform with the current
years presentation.

Pervasiveness
of Estimates

We have prepared the consolidated financial
statements in accordance with accounting principles generally
accepted in the United States of America, 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 are our
determination of the adequacy of the allowance for loan losses,
which is discussed under note 2, and our determination of
the fair value of retained interests from assets securitized,
which is discussed under note 17. The significant factors
susceptible to future change that have an impact on these
estimates include default rates, net interest spreads and
overall economic conditions. As a result, the actual losses in
our loan portfolio and the fair value of our retained interests
as of December 31, 2002 and 2001 could materially differ
from these estimates.

Note 2  Significant Accounting
Policies

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

Federal Funds
Sold 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 our obligations under the Community Reinvestment
Act, and fulfill the credit needs of our local community.

Credit Card
Loans

Credit card loans presented on our consolidated
balance sheet 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 and 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
sheet with the related credit card loans. Accrued interest which
has not yet been billed to the cardholder is estimated and
classified on the consolidated balance sheet 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

68



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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

against the applicable income statement line
items. A loan is placed on non-accrual status prior to being
charged-off if the cardholder is placed in a credit counseling
or similar payment program, and as part of that program no
interest or fees are being charged. Beginning in November 2002,
we stopped late fee billings after an account becomes
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
loans 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
portfolio premium would also be written off unless we retain
ownership of the cardholder account. To the extent that the
loans 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, 2002 and 2001.

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, including accrued finance
charges and fees, 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 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 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 using 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 loss and
bankruptcy losses.

Additionally, in evaluating the adequacy of the
loan loss reserves, 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.                                

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

We defer direct credit card origination costs
associated with successful credit card solicitations that we
incur in transactions with independent third parties, and
certain other costs that we incur in connection with loan
underwriting and the preparation and processing of loan
documents. These deferred credit card origination costs and
cardholders annual membership fees are netted and amortized to
interest income on a straight-line basis over the
cardholders privilege period, generally 12 months.
These net deferred fees 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.

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 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.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Securitization, Retained Interests in Loans
    Securitized and Securitization Income

We publicly and privately securitize a
significant portion of our credit card loans to investors
through the Master Trust and third-party, single-seller and
multi-seller receivables conduits. We have recorded these
transactions as sales or financings in accordance with Statement
of Financial Accounting Standards (SFAS)
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.If the transaction qualifies as a sale under SFAS
No. 140, we remove the applicable credit card loans from
the consolidated balance sheet. We retain participating
interests in the sold credit card loans under Retained
interests in loans securitized on the consolidated balance
sheets. Our retained interests in loans securitized are
subordinate to the interests of investors in the Master Trust
and conduit portfolios. Retained interests include contractual
subordinated interests, excess transferors interests and
accrued finance charges on securitized loans. Income is earned
on our retained interest in the form of a

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

two-percent servicing fee and excess spread on
the Master Trust, both of which are reflected in Net
Securitization and Credit Card Servicing Income on the
consolidated statements of income. The Company accrues servicing
fee income and excess spread revenue on a monthly basis.

SFAS No. 140 requires us to initially
measure the related financial and servicing assets or
liabilities at fair value, if practicable, by allocating the
previous carrying amount between the assets sold, if any, and
retained interests, if any, based on their relative fair values
at the date of the transfer. The proceeds from sold receivables
are distributed by the Master Trust to us. The proceeds are
consideration for the receivables transferred and the servicing
of such receivables. These proceeds are netted against our
payments to the Master Trust as interest to security holders and
the amortization of capitalized costs incurred to complete the
transaction are recorded as net securitization and credit
card servicing income.

The Company determines the fair value of the net
retained interests by calculating the present value of future
expected cash flows using managements best estimate of key
assumptions including credit losses, weighted-average spreads,
payment rates and a discount rate commensurate with the risks
involved. Our fair value analysis considers cash flows
associated with the current receivable balances as of the
balance sheet date. We assume no new sales or increases in
outstanding receivables in conjunction with the accounts in the
portfolio. The significant assumptions are applied to the
existing receivable balance to determine the expected future
cash flows. Our funding costs are primarily variable based on
LIBOR and the income earned on our receivable balance is
substantially variable based on Prime. We assume a flat interest
rate environment and when interest rates change, we assume our
assets and liabilities will reprice in a consistent manner.

Our estimate of the assumptions considers several
subjective factors, 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.                                                                                                      

Furthermore, we consider the impact of
conduit/asset-back transaction enhancement levels and
restriction on the release of cash from the Master Trust due to
spread triggers on the timing of our cash receipts from the
Master Trust. Significant changes in these factors could impact
our financial projections and thereby affect the valuation of
the retained interests. Any adjustments to our valuation reserve
as a result of this analysis is reflected in Net
Securitization and Credit Card Servicing Income on the
consolidated statements of income.

We have various receivables from the Master Trust
or conduits and other assets as a result of securitizations,
including: amounts deposited in accounts held by the Master
Trust for the benefit of the Master Trusts security
holders; amounts due from interest rate caps and floors;
servicing fee receivables and various other receivables. These
amounts are reported as Other receivables due from credit
card securitizations, net on the consolidated balance
sheets.

All of our non-consolidated entities are
Qualified Special Purpose Entities under the definition in SFAS
No. 140.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Debt Issuance
Costs

Debt issuance costs are the costs related to
issuing new debt securities and establishing new securitizations
under the Master Trust or conduits. We capitalize these costs
and amortize them to expense over the term of the new debt
security or estimated life of the Master Trust financing.

Property and
Equipment

We record property and equipment at cost and
depreciate them on a straight-line basis over their 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 as other operating expenses. 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 loan balances net of reserves and discounts.
The premium is amortized over the estimated account life,
generally seven years, based on the expected account attrition.
The recoverability of the premium is evaluated quarterly. Such
evaluation is based on undiscounted cash flow projections.

Enhancement
Services

Debt Waiver
Products

Direct Merchants Bank offers various debt waiver
products on receivables owned by the Bank as well as securitized
receivables. The Bank records deferred revenue when the debt
waiver customer is billed. Revenue is recognized in the month
following the completion of the cancellation period, which is
one-month. The Bank incurs the related claims and marketing
expenses. A reserve is maintained for future death and finance
charge claims based on experience with settlement of such
claims. Revenues recorded for debt waiver products are included
in the consolidated statements of income under Enhancement
services revenues and were $231.0 million,
$198.2 million and $144.7 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Unearned
revenues and reserves for pending and incurred but not reported
claims are recorded in the consolidated balance sheets in
Deferred income and Accrued expenses and other
liabilities, respectively. Unearned revenues were
$16.9 million and $20.4 million as of
December 31, 2002 and 2001, respectively. Reserves for
pending and incurred but not reported claims were
$8.2 million as of December 31, 2002, and
$5.2 million as of December 31, 2001.

During the quarter ended March 31, 2000, we
adopted Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements, for our debt waiver products. This SAB
formalized the accounting for services sold where the right to a
full refund exists, requiring all companies to defer recognition
of revenues until the cancellation period is complete.
Previously, we recognized half of the revenues in the month
billed and half in the following month. We now recognize all of
the revenue the month following completion of the cancellation
period. This change resulted in a one-time, non-cash net charge
to earnings of $3.4 million, which is reflected as a
Cumulative effect of accounting change in the
consolidated statements of income for the year ended
December 31, 2000.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Qualifying membership acquisition costs 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 was $3.7 million for the year
ended December 31, 2002. All other debt waiver acquisition
costs are expensed as incurred. Deferred debt waiver acquisition
costs were $2.6 million as of December 31, 2002.

Membership
Program Products

We bill membership fees for enhancement services
products through financial institutions, including Direct
Merchants Bank, and other cardholder-based institutions. We
record these fees as deferred membership income upon acceptance
of membership and amortize them on a straight-line basis for all
annually billed products, and on an accelerated amortization
method for all monthly billed products over the membership
period beginning after the contractual cancellation period is
complete. A liability is established and netted against the
related receivable in the consolidated balance sheets in
other assets from inception of the membership
through the end of the cancellation period that reflects our
historical cancellation experience with these products. Gross
receivables as of December 31, 2002 on the membership
program products were $22.0 million compared to
$38.7 million as of December 31, 2001. Cancellation
reserves were $19.5 million and $29.6 million for the
years ended December 31, 2002 and 2001, respectively.
Revenues recorded for membership products are included in the
statements of income under enhancement services
revenues and were $92.9 million, $57.2 million
and $76.0 million for the years ended December 31,
2002, 2001 and 2000, respectively. Unearned revenues on
membership program products are recorded in the consolidated
balance sheets in deferred income. Unearned revenues
as of December 31, 2002 were $114.2 million compared
to $130.9 million as of December 31, 2001. Reserves
for pending and incurred but not reported claims, included in
accrued expenses and other liabilities, were
$0.1 million as of December 31, 2002, compared to
$0.2 million as of December 31, 2001.

Qualifying membership acquisition costs are
deferred and charged to expense as membership fees are
recognized. We amortize all deferred costs on a straight-line
basis for all annually billed products, and on an accelerated
method for all monthly billed products, which approximates our
historical cancellation experience for the membership program
products. Amortization of membership deferred costs was
$55.4 million, $28.0 million and $19.8 million
for the years ended December 31, 2002, 2001 and 2000,
respectively. All other membership acquisition costs are
expensed as incurred. Deferred membership acquisition costs were
$66.9 million and $66.7 million as of
December 31, 2002 and 2001, respectively.

Warranty
Products

We coordinate the marketing activities for Direct
Merchants Bank and third-party sales of extended service plans.
We perform administrative services and retain the claims risk
for all extended service plans sold. As a result, we defer and
recognize extended service plan revenues and the incremental
direct acquisition costs on an accelerated amortization method
over the life of the related extended service plan contracts
beginning after the expiration of any manufacturers
warranty coverage. A liability is established and netted against
the related receivable in the consolidated balance sheets in
other assets from inception of the extended service
plan through the end of the cancellation period that reflects
our historical cancellation experience with these products.
Gross receivables as of December 31, 2002 on the warranty
products were $3.8 million compared to $7.0 million as
of December 31, 2001. Cancellation reserves were
$5.3 million and $6.2 million for the years ended
December 31, 2002 and 2001, respectively. Unearned revenues
on warranty products are recorded in the consolidated balance
sheets in deferred income. Unearned revenues as of
December 31, 2002 were $17.6 million compared to
$33.8 million as of December 31, 2001. Reserves for
pending and incurred but not reported claims, included in
accrued expenses and other liabilities, were
$0.7 million as of December 31, 2002, compared to
$0.5 million as of December 31, 2001.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Qualifying warranty acquisition costs are
deferred and charged to expense as warranty product fees are
recognized. Those incremental direct acquisition costs, which
are a result of a contract that is not consummated, are charged
to expense as incurred. A successful effort conversion
percentage is applied to these incremental direct acquisition
costs, which approximates our historical successful effort rate
percentage in negotiating warranty products. We amortize these
deferred costs using an accelerated amortization methodology,
which approximates our historical cancellation experience
following the expiration of the manufacturers contractual
cancellation period for the warranty products. Amortization of
warranty acquisition costs amount to $12.8 million,
$15.9 million, and $10.4 million for the years ended
December 31, 2002, 2001, and 2000, respectively. All other
warranty acquisition costs are expensed as incurred. Deferred
warranty acquisition costs amount to $3.0 million and
$12.7 million as of December 31, 2002 and 2001,
respectively.

We discontinue the billing of enhancement
services products to Direct Merchant Bank customers that are
more than 60 days past due (except for debt waiver which
bills customers until 120 days past due) or over their
credit limit. The impact of uncollectible fees associated with
enhancement service products is included in determining the
adequacy of the allowance for loan losses and the retained
interests valuation allowance.

Interest Rate
Risk Management Contracts

We enter into interest rate cap transactions
related to each series of securities issued from the Master
Trust. We assign all of our right, title, and interest under the
interest rate cap agreement to the Trustee of the Master Trust
for the benefit of the holders of securities issued by the
Master Trust. The purpose of the interest rate cap is to
effectively limit the interest rate exposure of the Master Trust
for each individual series to a maximum London Interbank Offered
Rate (LIBOR) rate. The cost of these interest rate
caps are recorded on the balance sheet as retained interests and
are amortized over the life of the securitization using the
straight line method.

Income
Taxes

Deferred taxes are based on the temporary
differences between the financial statement and the tax bases of
assets and liabilities that will result in future taxable or
deductible amounts. The deferred taxes are based on the enacted
rate that is expected to apply when the temporary differences
reverse. 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.

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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:

|                                                                                                       |  |                         |         |   |      |   |         |      |  |   |         | 
|------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | 
|                                                                                                       |  |                        
|                                                                                                       |  | Year Ended December 31, |        
|                                                                                                       |  |                         |        
|                                                                                                       |  | 2002                    |         |   | 2001 |   |         | 2000 | 
|                                                                                                       |  |                         |         |   |      |   |         |      | 
|                                                                                                       |  |                        
|                                                                                                       |  | (In thousands)          |        
|Income (loss) before cumulative effect of
    accounting changes                                       |  | $                       | (33,851 | ) |      | $ | 260,291 |      |  | $ | 198,591 | 
|Preferred dividends                                                                                    |  |                         | 38,009  |   |      |   | 34,771  |      |  |   | 31,624  | 
|Net income (loss) applicable to common
    stockholders before cumulative effect of accounting changes |  |                         | (71,860 | ) |      |   | 225,520 |      |  |   | 166,967 | 
|Cumulative effect of accounting changes, net                                                           |  |                         |        |   |      |   | 14,499  |      |  |   | 3,438   | 
|                                                                                                       |  |                         |         |   |      |   |         |      | 
|Net income (loss) applicable to common
    stockholders                                                |  | $                       | (71,860 | ) |      | $ | 211,021 |      |  | $ | 163,529 | 
|                                                                                                       |  |                         |         |   |      |   |         |      | 
|Weighted average common shares outstanding                                                             |  |                         | 59,782  |   |      |   | 62,962  |      |  |   | 60,070  | 
|Adjustment for:                                                                                        |  |                         |         |   |      |   |         |      |  |   |         | 
|Assumed conversion of convertible preferred
    stock(1)                                               |  |                         |        |   |      |   | 34,679  |      |  |   | 29,164  | 
|                                                                                                       |  |                         |         |   |      |   |         |      | 
|Basic common shares                                                                                    |  |                         | 59,782  |   |      |   | 97,641  |      |  |   | 89,234  | 
|Assumed exercise of outstanding stock options(1)                                                       |  |                         |        |   |      |   | 1,725   |      |  |   | 3,348   | 
|                                                                                                       |  |                         |         |   |      |   |         |      | 
|Diluted common shares                                                                                  |  |                         | 59,782  |   |      |   | 99,366  |      |  |   | 92,582  | 
|                                                                                                       |  |                         |         |   |      |   |         |      | 



---



|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The earnings per share calculation for the year
    ended December 31, 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.

Pro forma information regarding net income and
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

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amortized to expense over the options
vesting periods. Our net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:

|                                                                                                                                               |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                               |  |                        
|                                                                                                                                               |  | Year Ended December 31, |        
|                                                                                                                                               |  |                         |        
|                                                                                                                                               |  | 2002                    |         |   | 2001 |   |         | 2000 | 
|                                                                                                                                               |  |                         |         |   |      |   |         |      | 
|Net income (loss), as reported                                                                                                                 |  | $                       | (33,851 | ) |      | $ | 245,792 |      |  | $ | 195,153 |  
|Deduct: Annual stock-based employee compensation
    expense determined based on the fair value for all awards, net
    of related tax effects |  |                         | (18,141 | ) |      |   | (16,847 | )    |  |   | (15,071 | )
|                                                                                                                                               |  |                         |         |   |      |   |         |      | 
|Pro forma net income (loss)                                                                                                                    |  |                         | (51,992 | ) |      |   | 228,945 |      |  |   | 180,082 |  
|                                                                                                                                               |  |                         |         |   |      |   |         |      | 
|Earnings (loss) per share:                                                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Basic-as reported                                                                                                                              |  |                         | (1.20   | ) |      |   | 2.52    |      |  |   | 2.19    |  
|                                                                                                                                               |  |                         |         |   |      |   |         |      | 
|Basic-pro forma                                                                                                                                |  |                         | (1.51   | ) |      |   | 2.34    |      |  |   | 2.02    |  
|                                                                                                                                               |  |                         |         |   |      |   |         |      | 
|Diluted-as reported                                                                                                                            |  |                         | (1.20   | ) |      |   | 2.47    |      |  |   | 2.11    |  
|                                                                                                                                               |  |                         |         |   |      |   |         |      | 
|Diluted-pro forma                                                                                                                              |  |                         | (1.51   | ) |      |   | 2.30    |      |  |   | 1.95    |  
|                                                                                                                                               |  |                         |         |   |      |   |         |      | 
|Weighted-average assumptions in option valuation:                                                                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Risk-free interest rates                                                                                                                       |  |                         | 3.7     | % |      |   | 4.9     | %    |  |   | 6.4     | %
|Dividend yields                                                                                                                                |  |                         | 1.6     | % |      |   | 0.2     | %    |  |   | 0.1     | %
|Stock volatility factor                                                                                                                        |  |                         | 92.9    | % |      |   | 52.2    | %    |  |   | 58.4    | %
|Expected life of options (in years)                                                                                                            |  |                         | 6.0     |   |      |   | 6.0     |      |  |   | 6.0     |  

The above pro forma amounts may not be
representative of the effects on reported net earnings for
future years.

Comprehensive
Income

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

Note 3  Securitization
Activity

During 2002 and 2001, we sold credit card loan
receivables in securitization transactions. In those
securitizations, we retained servicing responsibilities and
subordinated interests. We receive annual servicing fees of two
percent of the outstanding principal balance. Our subordinated
interests give us rights to future cash flows arising in the
Master Trust after the investors in the Master Trust have
received their invested amount and interest thereon. The
investors and related securitization trusts have no recourse to
our assets. Because our retained interests are subordinate to
investors interests. Their value is subject to credit and
interest rate risk associated with the transferred financial
assets.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Securitization activity for the years ended
December 31, 2002 and 2001, is as follows:

|                                                             |                     |      |           |            |      |   |           |            | 
|------------------------------------------------------------ | ------------------- | ---- | --------- | ---------- | ---- | - | --------- | ---------- | 
|                                                             |                     | 2002 |           |            | 2001 |  
|                                                             |                     |      |           |            |      |  
|Credit card loans                                            |                     | $    | 846,417   |            |      | $ | 2,756,763 |           
|Retained interests in loans securitized                      |                     |      | 1,736,912 |            |      |   | 1,339,178 |           
|Investors interests in loans securitized                    |                     |      | 8,836,857 |            |      |   | 7,895,843 |           
|                                                             |                     |      |           |            |      |  
|                                                             | Total managed loans |      | $         | 11,420,186 |      |   | $         | 11,991,784 | 
|                                                             |                     |      |           |            |      |  
|Managed loans more than 30-days contractually
    delinquent |                     | $    | 1,259,949 |            |      | $ | 1,123,168 |           
|Managed loans charged-off, net of recoveries                 |                     |      | 1,840,786 |            |      |   | 1,140,151 |           

|                                                                                                        |       |                         |            |           |      |   |           |           | 
|------------------------------------------------------------------------------------------------------- | ----- | ----------------------- | ---------- | --------- | ---- | - | --------- | --------- | 
|                                                                                                        |       |                        
|                                                                                                        |       | Year Ended December 31, |           
|                                                                                                        |       |                         |           
|                                                                                                        |       | 2002                    |            |           | 2001 |  
|                                                                                                        |       |                         |            |           |      |  
|Cash flow to/from the Company:                                                                          |       |                         |            |           |      |   |           |          
|Proceeds from transfers of portfolios to the
    Master Trust                                           |       | $                       | 2,087,097  |           |      | $ | 553,180   |          
|Net proceeds from sales and repayments of
    securitized loans                                         |       |                         | (1,145,947 | )         |      |   | 1,272,438 |          
|Proceeds from principal receivables collections
    reinvested in revolving credit card securitizations |       |                         | 5,490,499  |           |      |   | 4,181,887 |          
|Servicing fees received                                                                                 |       |                         | 192,325    |           |      |   | 147,518   |          
|Cash flows received from net excess spread                                                              |       |                         | 570,088    |           |      |   | 611,704   |          
|                                                                                                        |       |                         |            |           |      |  
|                                                                                                        | Total |                         | $          | 7,194,062 |      |   | $         | 6,766,727 | 
|                                                                                                        |       |                         |            |           |      |  

Note 4  Allowance for Loan
Losses

Activity in the allowance for loan losses is as
follows:

|                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                |  |                        
|                                                                |  | Year Ended December 31, |         
|                                                                |  |                         |         
|                                                                |  | 2002                    |          |   | 2001 |   |          | 2000 | 
|                                                                |  |                         |          |   |      |   |          |      | 
|Balance at beginning of year                                    |  | $                       | 410,159  |   |      | $ | 123,123  |      |  | $ | 12,175   |  
|Allowance related to assets acquired                            |  |                         |         |   |      |   | 14,106   |      |  |   | 5,963    |  
|Allowance related to assets transferred to the
    Master Trust |  |                         | (567,971 | ) |      |   | (28,639  | )    |  |   | (138,709 | )
|Provision for loan losses(1)                                    |  |                         | 573,478  |   |      |   | 549,145  |      |  |   | 388,234  |  
|Principal receivables charged-off(2)                            |  |                         | (345,785 | ) |      |   | (275,057 | )    |  |   | (150,099 | )
|Recoveries                                                      |  |                         | 20,434   |   |      |   | 27,481   |      |  |   | 5,559    |  
|                                                                |  |                         |          |   |      |   |          |      | 
|Net loans charged-off                                           |  |                         | (325,351 | ) |      |   | (247,576 | )    |  |   | (144,540 | )
|                                                                |  |                         |          |   |      |   |          |      | 
|Balance at end of year                                          |  | $                       | 90,315   |   |      | $ | 410,159  |      |  | $ | 123,123  |  
|                                                                |  |                         |          |   |      |   |          |      | 



---



|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes provision for credit card loans and
    retained interests in loans securitized.                                                                                                            
|   
|(2) | Principal receivables charged-off for the year
    ended December 31, 2002 include a $101.5 million
    charge-off related to the sales of delinquent receivables in
    September and December 2002.

Credit card loans greater than 30 days
contractually past due for the years ended December 31,
2002, 2001 and 2000 were $7.9 million, $277.8 million,
and $89.2 million, respectively.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 5  Retained Interests

Activity in retained interests is as follows:

|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |          |        |  |   |           |         | 
|------------------------------ | -------------------------- | ----------------------- | --------- | ------- | ------ | - | -------- | ------- |  | - | --------- | ------- |  | ---- | -------- | ------ |  | - | --------- | ------- | 
|                               |                            |                        
|                               |                            | Year Ended December 31, |          
|                               |                            |                         |          
|                               |                            | 2002                    |           |         | Change |   |          | 2001    |  |   | Change    |         |  | 2000 |         
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         
|Contractual retained interests |                            | $                       | 991,053   |         |        | $ | 213,644  |         |  | $ | 777,409   |         |  | $    | (30,916  | )      |  | $ | 808,325   |        
|Excess transferors interest   |                            |                         | 46,460    |         |        |   | 6,536    |         |  |   | 39,924    |         |  |      | (767,401 | )      |  |   | 807,325   |        
|                               | Finance charge receivables |                         |           | 699,399 |        |   |          | 177,554 |  |   |           | 521,845 |  |      |          | 46,357 |  |   |           | 475,488 | 
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         
|Gross retained interests       |                            | $                       | 1,736,912 |         |        | $ | 397,734  |         |  | $ | 1,339,178 |         |  | $    | (751,960 | )      |  | $ | 2,091,138 |        
|Valuation allowance            |                            |                         | (986,517  | )       |        |   | (449,018 | )       |  |   | (537,499  | )       |  |      | 103,353  |        |  |   | (640,852  | )      
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         
|Net retained interests         |                            | $                       | 750,395   |         |        | $ | (51,284  | )       |  | $ | 801,679   |         |  | $    | (648,607 | )      |  | $ | 1,450,286 |        
|                               |                            |                         |           |         |        |   |          |         |  |   |           |         |  |      |         

Activity in the valuation allowance for retained
interests is as follows:

|                                                                |  |                         |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                |  |                        
|                                                                |  | Year Ended December 31, |         
|                                                                |  |                         |         
|                                                                |  | 2002                    |          |   | 2001 |   |          | 2000 | 
|                                                                |  |                         |          |   |      |   |          |      | 
|Balance at beginning of year                                    |  | $                       | 537,499  |   |      | $ | 640,852  |      |  | $ | 606,853  |  
|Allowance related to assets transferred to the
    Master Trust |  |                         | 567,971  |   |      |   | 28,639   |      |  |   | 138,709  |  
|Retained interests valuation income                             |  |                         | (118,953 | ) |      |   | (131,992 | )    |  |   | (104,710 | )
|                                                                |  |                         |          |   |      |   |          |      | 
|Balance at end of year                                          |  | $                       | 986,517  |   |      | $ | 537,499  |      |  | $ | 640,852  |  
|                                                                |  |                         |          |   |      |   |          |      | 

Note 6  Property and
Equipment

The carrying value of property and equipment is
as follows:

|                                                |  |                 |         |  |      |   |         | 
|----------------------------------------------- |  | --------------- | ------- |  | ---- | - | ------- | 
|                                                |  |                
|                                                |  | At December 31, |        
|                                                |  |                 |        
|                                                |  | 2002            |         |  | 2001 |  
|                                                |  |                 |         |  |      |  
|Furniture and equipment                         |  | $               | 40,870  |  |      | $ | 48,707  | 
|Computer software and equipment                 |  |                 | 71,640  |  |      |   | 65,407  | 
|Buildings and land                              |  |                 | 24,143  |  |      |   | 28,031  | 
|Leasehold improvements                          |  |                 | 16,389  |  |      |   | 18,561  | 
|                                                |  |                 |         |  |      |  
|Total                                           |  | $               | 153,042 |  |      | $ | 160,706 | 
|Less: Accumulated depreciation and amortization |  |                 | 69,211  |  |      |   | 45,793  | 
|                                                |  |                 |         |  |      |  
|Balance at end of year                          |  | $               | 83,831  |  |      | $ | 114,913 | 
|                                                |  |                 |         |  |      |  

Depreciation and amortization expense for the
years ended December 31, 2002, 2001 and 2000, was
$25.6 million, $24.7 million and $16.0 million,
respectively.

In 2002, furniture and equipment was written down
by $5.1 million due to excess capacity. Subsequent to
year-end we entered into a letter of intent to sell our interest
in an Arizona facility, as well as related furniture and
equipment. The transaction is expected to result in a loss of
approximately $5.7 million, which reflects the write-down
of the building and furniture and equipment to the sales price.
Accordingly, we have classified the land, building, improvements
and equipment as held for sale and halted applicable
depreciation.

78



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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 7  Purchased Portfolio
Premium

The carrying value of the purchased portfolio
premium was $64.6 million and $94.8 million as of
December 31, 2002 and 2001, net of accumulated amortization
of $124.2 million and $94.0 million, respectively.
Amortization expense for the years ended December 31, 2002,
2001 and 2000, was $30.2 million, $30.3 million, and
$19.3 million, respectively. The purchased portfolio
premium is analyzed for impairment using the undiscounted cash
flow method. As of December 31, 2002 and 2001 the purchased
portfolio premium was not impaired.

Note 8  Portfolio Acquisitions and
Sales

In 2001, Direct Merchants Bank purchased two
credit card portfolios that consisted of approximately 170,000
active accounts and approximately $290 million in
receivables. There were no portfolio acquisitions during 2002.

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 9  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 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 41.0% of those future
dividends for conversions in 2001 and would be 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 38,977,613 shares, or approximately 40.5%,
outstanding common stock on a diluted basis as of
December 31, 2002. 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, 2002, the Series C
Preferred Stock could have been converted into 30,647,631
shares, or 34.9%, of our common stock on a diluted basis, with
the excess Series C Preferred Stock converting into
8,329,982 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.

79



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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, the 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 10  Stock Options

We offer 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 programs. In 2002, the
Board of Directors recommended, and the shareholders approved,
an increase in the number of shares reserved for issuance under
the plan to 19.0 million shares of common stock for awards
of stock options or other stock-based awards, subject to
adjustment in certain circumstances. As of December 31,
2002, 2.3 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 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.

During 2002, 2001 and 2000, we granted
2.1 million, 2.7 million and 4.2 million options,
respectively, to officers and employees.

We also issue restricted stock grants under the
stock option plan to our executive officers. As of
December 31, 2002, no shares had been granted to any
executive officer except our former Chairman and Chief Executive
Officer. The restricted stock has a five year cliff vesting
period. A total of 76,041 shares were issued in 2002 and 72,558
shares of restricted stock were granted in 2001, with an
approximate aggregate market value in 2002 and 2001 of
$1.0 million and $1.8 million respectively, at the
time of the grants. Restricted stock vests on the fifth
anniversary of the date of grant provided the employee remains
employed though that date. As of the date restricted stock is
granted, deferred compensation is recorded as

80



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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Upon our termination of our former Chairman and
Chief Executive Officer in December 2002, 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 offer the Metris Companies Inc.
Non-Employee Director Stock Option Planwhich provides up to
750,000 shares of common stock for awards of options, subject to
adjustments in certain circumstances. During 2002, 2001 and
2000, we granted 100,000, 89,000 and 82,500 options,
respectively. At December 31, 2002, 186,000 shares were
available for grant.

Information regarding our stock option plans for
2002, 2001 and 2000, is as follows:

|                                                                   |  |                         |            |           |       |   |       |        |           |  |            |  |  |           |       |  |       |  |            |  |  |   |       | 
|------------------------------------------------------------------ |  | ----------------------- | ---------- | --------- | ----- | - | ----- | ------ | --------- |  | ---------- |  |  | --------- | ----- |  | ----- |  | ---------- |  |  | - | ----- | 
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31, |           
|                                                                   |  |                         |           
|                                                                   |  |                         |            |           |       |  
|                                                                   |  | 2002                    |            |           | 2001  |   |       | 2000   |          
|                                                                   |  |                         |            |           |       |   |       |        |          
|                                                                   |  |                         |            | Weighted- |       |   |       |        | Weighted- |  |            |  |  | Weighted- |      
|                                                                   |  |                         |            | Average   |       |   |       |        | Average   |  |            |  |  | Average   |      
|                                                                   |  |                         |            | Exercise  |       |   |       |        | Exercise  |  |            |  |  | Exercise  |      
|                                                                   |  | Shares                  |            |           | Price |   |       | Shares |           |  | Price      |  |  | Shares    |       |  | Price | 
|                                                                   |  |                         |            |           |       |   |       |        |           |  |            |  |  |           |       |  |       | 
|Options outstanding, beginning of year                             |  |                         | 10,604,136 |           |       | $ | 19.73 |        |           |  | 9,907,062  |  |  | $         | 17.67 |  |       |  | 10,129,614 |  |  | $ | 9.72  | 
|Options exercised                                                  |  |                         | 49,899     |           |       |   | 13.67 |        |           |  | 1,383,358  |  |  |           | 11.81 |  |       |  | 4,212,537  |  |  |   | 5.46  | 
|Options granted                                                    |  |                         | 2,180,885  |           |       |   | 12.09 |        |           |  | 2,832,838  |  |  |           | 25.01 |  |       |  | 4,348,685  |  |  |   | 24.78 | 
|Options canceled/forfeited                                         |  |                         | 1,005,678  |           |       |   | 11.45 |        |           |  | 752,406    |  |  |           | 27.06 |  |       |  | 358,700    |  |  |   | 22.64 | 
|                                                                   |  |                         |            |           |       |   |       |        |           |  |            |  |  |           |       |  |       | 
|Options outstanding, end of year                                   |  |                         | 11,729,444 |           |       |   | 19.05 |        |           |  | 10,604,136 |  |  |           | 19.73 |  |       |  | 9,907,062  |  |  |   | 17.67 | 
|                                                                   |  |                         |            |           |       |   |       |        |           |  |            |  |  |           |       |  |       | 
|Weighted-average fair value of options granted
    during the year |  |                         |           |           |       | $ | 8.19  |        |           |  |           |  |  | $         | 13.57 |  |       |  |           |  |  | $ | 14.55 | 

The following table summarizes information about
stock options outstanding at December 31, 2002:

|               |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |           |  |  |   |       | 
|-------------- |  | ------------------- | ---------- | --------- | ------------------- |  | --------- | -------- |  | - | ----------- | --------- |  | -------- | --------- |  |  | - | ----- | 
|               |  |                     |            |           |                     | 
|               |  | Options Outstanding |            |           |                    
|               |  |                     |            |           | Options Exercisable | 
|               |  |                     |            | Weighted- |                     |  |           |          |  |  
|               |  |                     |            | Average   |                     |  | Weighted- |          |  |   |             | Weighted- | 
|               |  | Number              |            |           | Remaining           |  |           | Average  |  |   | Number      |           |  | Average  |          
|               |  | Outstanding         |            |           | Contractual         |  |           | Exercise |  |   | Exercisable |           |  | Exercise |          
|Exercise Price |  | at 12/31/02         |            |           | Life                |  |           | Price    |  |   | at 12/31/02 |           |  | Price    |          
|               |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |          
|$ 2.25-$16.77  |  |                     | 5,116,908  |           |                     |  | 7.1       |          |  | $ | 12.29       |           |  |          | 2,718,261 |  |  | $ | 12.14 | 
|$17.10-$24.42  |  |                     | 3,900,000  |           |                     |  | 7.3       |          |  |   | 22.06       |           |  |          | 2,134,845 |  |  |   | 21.89 | 
|$24.67-$38.88  |  |                     | 2,712,536  |           |                     |  | 7.9       |          |  |   | 27.47       |           |  |          | 514,534   |  |  |   | 29.37 | 
|               |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |          
|               |  |                     | 11,729,444 |           |                     |  | 7.4       |          |  | $ | 19.05       |           |  |          | 5,367,640 |  |  | $ | 17.67 | 
|               |  |                     |            |           |                     |  |           |          |  |   |             |           |  |          |          

Employee
Stock Purchase Plan

We offer 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 $1.8 million
and $2.2 million to purchase 374,166 and 111,967 shares of
common stock under the ESPP for 2002 and 2001, respectively. We
are

81



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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

authorized to issue up to 2.5 million shares
of common stock to employees under the plan, and as of
December 31, 2002, 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
$0.1 million and $0.2 million to purchase 27,946 and
9,886 shares of common stock under the NQ ESPP for 2002 and
2001, 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, 2002, 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 or higher,
excluding corporate officers designated by the Board of
Directors, who participates in the Metris Management
Incentive Bonus Planis 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 make a match of $1 for every $3 contributed by the
participant. The participants contributions are vested
immediately and our matching contributions vest after three
years. No contributions were made to the plan in 2002. Employees
contributed approximately $1.0 million to purchase 73,722
restricted stock units under the plans for 2001. 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,
2002, approximately 243,578 of the authorized shares were
available for future issuance.

We provide 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 Officersare 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 make a match of $1 for every $3 contributed by the
participant. The participants contributions are vested
immediately and our matching contributions vest after three
years. No contributions were made to the plan in 2002. Employees
contributed approximately $0.3 million to purchase 22,498
restricted stock units under the plans for 2001. 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,
2002, approximately 372,669 of the authorized shares were
available for future issuance.

Note 11  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, 2002, 2001
and 2000 we contributed $2.7 million, $2.0 million and
$1.4 million to the 401(k) Plan, respectively.

The Company also offered a Non-Qualified
Deferred Compensation Planfor a select group of management
or highly compensated employees. The plan provides saving and
investment opportunities to those individuals who elect 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.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Subsequent to year-end, 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
$0.9 million and $0.7 million of expense in 2002 and
2001, respectively, related to the SERP. Our liability was
$3.8 million and $3.1 million at December 31, 2002 and
2001, 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.

Note 12  Income Taxes

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

|                 |         |                         |         |         |      |   |         |        |  |   |         |        | 
|---------------- | ------- | ----------------------- | ------- | ------- | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                 |         |                        
|                 |         | Year Ended December 31, |        
|                 |         |                         |        
|                 |         | 2002                    |         |         | 2001 |   |         | 2000   | 
|                 |         |                         |         |         |      |   |         |        | 
|Current:         |         |                         |         |         |      |   |         |        |  |   |         |       
|                 | Federal |                         | $       | (45,964 | )    |   | $       | 41,795 |  |   | $       | 77,185 | 
|                 | State   |                         |         | (126    | )    |   |         | 5,604  |  |   |         | 7,867  | 
|                 |         |                         |         |         |      |   |         |        | 
|                 |         |                         | (46,090 | )       |      |   | 47,399  |        |  |   | 85,052  |       
|Deferred Federal |         |                         | 29,312  |         |      |   | 109,564 |        |  |   | 31,686  |       
|                 | State   |                         |         | 848     |      |   |         | 4,614  |  |   |         | 7,582  | 
|                 |         |                         |         |         |      |   |         |        | 
|                 |         |                         | 30,160  |         |      |   | 114,178 |        |  |   | 39,268  |       
|                 |         |                         |         |         |      |   |         |        | 
|Total            |         | $                       | (15,930 | )       |      | $ | 161,577 |        |  | $ | 124,320 |       
|                 |         |                         |         |         |      |   |         |        | 

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

|                                           |  |                         |      |   |      |  |      |      |  |  |      |  
|------------------------------------------ |  | ----------------------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                           |  |                        
|                                           |  | Year Ended December 31, |     
|                                           |  |                         |     
|                                           |  | 2002                    |      |   | 2001 |  |      | 2000 | 
|                                           |  |                         |      |   |      |  |      |      | 
|Statutory federal income tax rate          |  |                         | 35.0 | % |      |  | 35.0 | %    |  |  | 35.0 | %
|State income taxes, net of federal benefit |  |                         | (0.7 | ) |      |  | 1.5  |      |  |  | 2.8  |  
|Other, net                                 |  |                         | (2.3 | ) |      |  | 1.8  |      |  |  | 0.7  |  
|                                           |  |                         |      |   |      |  |      |      | 
|Effective income tax rate                  |  |                         | 32.0 | % |      |  | 38.3 | %    |  |  | 38.5 | %
|                                           |  |                         |      |   |      |  |      |      | 

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Our deferred tax assets and liabilities are as
follows:

|                                                                                                        |                                                                          |                 |         |         |      |   |         |         | 
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------- | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                                        |                                                                          |                
|                                                                                                        |                                                                          | At December 31, |        
|                                                                                                        |                                                                          |                 |        
|                                                                                                        |                                                                          | 2002            |         |         | 2001 |  
|                                                                                                        |                                                                          |                 |         |         |      |  
|Deferred income tax assets resulting from future
    deductible and taxable temporary differences:      |                                                                          |                 |         |         |      |   |         |        
|                                                                                                        | Allowance for loan losses and retained interests
    valuation allowance |                 | $       | 164,621 |      |   | $       | 210,271 | 
|                                                                                                        | Deferred revenues                                                        |                 |         | 59,042  |      |   |         | 72,944  | 
|                                                                                                        | Other                                                                    |                 |         | 61,551  |      |   |         | 31,632  | 
|                                                                                                        |                                                                          |                 |         |         |      |  
|Total deferred tax assets                                                                               |                                                                          |                 | 285,214 |         |      |   | 314,847 |        
|Deferred income tax liabilities resulting from
    future taxable and deductible temporary differences: |                                                                          |                 |         |         |      |   |         |        
|                                                                                                        | Accrued interest on credit card loans                                    |                 |         | 212,250 |      |   |         | 213,899 | 
|                                                                                                        | Deferred marketing costs                                                 |                 |         | 35,689  |      |   |         | 37,524  | 
|                                                                                                        | Other                                                                    |                 |         | 35,268  |      |   |         | 31,257  | 
|                                                                                                        |                                                                          |                 |         |         |      |  
|Total deferred tax liabilities                                                                          |                                                                          |                 | 283,207 |         |      |   | 282,680 |        
|                                                                                                        |                                                                          |                 |         |         |      |  
|Net deferred tax assets                                                                                 |                                                                          | $               | 2,007   |         |      | $ | 32,167  |        
|                                                                                                        |                                                                          |                 |         |         |      |  

We believe, based on our operating earnings in
prior years, expected reversal of taxable temporary differences,
and to a lesser degree reliance on expectations for operating
earnings in future years, the deferred tax assets are fully
realizable.

Note 13  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%. Mr. Zebeck was terminated
effective December 15, 2002. The terms of the loan
agreement provide that if he remained employed by us until
May 17, 2004, or if his employment by us is terminated
before that date due to (a) his death or disability, or
(b) for any reason other than for cause, we will pay him a
bonus equal to (1) the amount of interest accrued on the
loan, plus (2) the gross-up amount of taxes relating to his
receipt of the interest amount. At the time of
Mr. Zebecks termination, we reserved the right to
treat his termination as for cause. Accordingly, whether
Mr. Zebeck is entitled to the bonus described in this
paragraph will depend on the resolution of the basis for his
termination.

Note 14  Commitments and
Contingencies

Commitments to extend credit to consumers
represent the unused credit limits on open credit card accounts.
These commitments were $12.0 billion and $15.7 billion
as of December 31, 2002 and 2001, 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.

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METRIS COMPANIES INC. AND
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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2002, 2001, and 2000, was
$23.8 million, $21.8 million and $18.1 million,
respectively. In 2002, we recognized $6.4 million of
expense due to excess capacity related to certain operating
leases.

Future minimum lease commitments at
December 31, 2002, under cancelable and non-cancelable
operating leases are as follows:

|           |                              |  |        |        | 
|---------- | ---------------------------- |  | ------ | ------ | 
|2003       |                              |  | 14,851 |       
|2004       |                              |  | 11,382 |       
|2005       |                              |  | 9,252  |       
|2006       |                              |  | 7,850  |       
|2007       |                              |  | 7,806  |       
|Thereafter |                              |  | 26,998 |       
|           |                              |  |       
|           | Total minimum lease payments |  | $      | 78,139 | 
|           |                              |  |       

We are a party to various legal proceedings
resulting from the ordinary business activities relating to our
operations. In July 2000 an Amended Complaint was filed in
Hennepin County District Court in Minneapolis, Minnesota against
MCI and its subsidiaries, Metris Direct Inc. and Direct
Merchants Bank. The complaint sought damages in unascertained
amounts and purported to be a class action complaint on behalf
of all cardholders who were issued a credit card by Direct
Merchants Bank and were allegedly assessed fees or charges that
the cardholder did not authorize. Specifically, the complaint
alleged violations of the Minnesota Prevention of Consumer Fraud
Act, the Minnesota Deceptive Trade Practices Act and breach of
contract. A class action settlement was signed by the Judge on
May 30, 2002 and entered on June 4, 2002, whereby we
will pay approximately $5.6 million for attorneys
fees and costs incurred by attorneys for the plaintiffs in
separate lawsuits filed in Arizona, California and Minnesota in
2000 and 2001. We recorded a $5.6 million accrual during
2001 to reflect the proposed settlement. Under the terms of the
settlement, we denied any wrongdoing or liability. A final order
approving the settlement was signed by the judge on May 30,
2002, and entered on June 4, 2002. No appeal was filed. We
implemented the terms of settlement beginning September 4,
2002.

In September and October 2002, three shareholder
lawsuits were filed in the United States District Court for the
District of Minnesota, naming MCI, Ronald N. Zebeck and David
Wesselink as defendants. Two of the lawsuits have been
dismissed. The plaintiff in the remaining lawsuit seeks 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
(ROE) until April 17, 2002. Metris believes
that the lawsuit is without merit and has moved for its
dismissal.

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

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

In May 2001, the OCC also indicated that it was
considering whether or not to pursue an assessment of civil
money penalties and gave us the opportunity to provide
information to the OCC bearing on whether imposing a penalty
would be appropriate and the severity of any penalty. The
statutory provisions pursuant to which a civil money penalty
could be assessed give the OCC broad discretion in determining
whether or not a penalty will be assessed and, if so, the amount
of the penalty. In October 2002, the OCC made a determination
not to assess civil money penalties.

On April 16, 2002, Direct Merchants Bank
entered into an agreement with the OCC intended to strengthen
the safety and soundness of Direct Merchants Banks
operations. The agreement formalized recommendations made and
requirements imposed by the OCC following an examination of
Direct Merchants Bank that resulted in a Report of Examination
issued on April 4, 2002. On March 18, 2003, the OCC
terminated the agreement.

Note 15  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 Formal Agreement.

Direct Merchants Bank is subject to certain
capital adequacy guidelines adopted by the OCC. At
December 31, 2002 and 2001, 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.

Note 16  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,
2002 or 2001.

We target our consumer lending products primarily
to moderate-income consumers. Primary risks associated with
lending to this market are that they may be more sensitive to
future economic downturn, which may make them more likely to
default on their obligations.

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 $447.3 million or 52.9% of the credit card

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SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

portfolio as of December 31, 2002, compared
to $1.6 billion or 59.2% of the credit card portfolio as of
December 31, 2001.

Note 17  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.

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

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 and
other securitization related assets are estimated by discounting
the expected future cash flows from the 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,
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.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |     
| | ----
| | 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.

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

|                                                                                                                |  |                 |         |  |            |   |         |          |  |   |            |  |  |   |           | 
|--------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- |  | ---------- | - | ------- | -------- |  | - | ---------- |  |  | - | --------- | 
|                                                                                                                |  |                
|                                                                                                                |  | At December 31, |        
|                                                                                                                |  |                 |        
|                                                                                                                |  |                 |         | 
|                                                                                                                |  | 2002            |         |  | 2001       |  
|                                                                                                                |  |                 |         |  |            |  
|                                                                                                                |  | Carrying        |         |  | Estimated  |   |         | Carrying |  |   | Estimated  | 
|                                                                                                                |  | Amount          |         |  | Fair Value |   |         | Amount   |  |   | Fair Value | 
|                                                                                                                |  |                 |         |  |            |   |         |          |  |   |            | 
|Cash and cash equivalents                                                                                       |  | $               | 647,667 |  |            | $ | 647,667 |          |  | $ | 488,086    |  |  | $ | 488,086   | 
|Credit card loans, net                                                                                          |  |                 | 756,102 |  |            |   | 756,102 |          |  |   | 2,346,604  |  |  |   | 2,346,604 | 
|Net retained interests in loans securitized and
    other receivables due from credit card securitizations, net |  |                 | 867,180 |  |            |   | 867,180 |          |  |   | 916,135    |  |  |   | 916,135   | 
|Interest rate swap agreements                                                                                   |  |                 |        |  |            |   |        |          |  |   | 3,293      |  |  |   | 3,293     | 
|Debt                                                                                                            |  |                 | 357,649 |  |            |   | 341,580 |          |  |   | 647,904    |  |  |   | 633,005   | 
|Deposits                                                                                                        |  |                 | 892,754 |  |            |   | 911,141 |          |  |   | 2,058,008  |  |  |   | 2,067,697 | 

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

|                                           |  |                 |       |  |      |  |       | 
|------------------------------------------ |  | --------------- | ----- |  | ---- |  | ----- | 
|                                           |  |                
|                                           |  | At December 31, |      
|                                           |  |                 |      
|                                           |  | 2002            |       |  | 2001 | 
|                                           |  |                 |       |  |      | 
|Annual discount rate                       |  |                 | 20.0% |  |      |  | 20.0% | 
|Monthly payment rate                       |  |                 | 6.8%  |  |      |  | 6.6%  | 
|Gross yield(1)                             |  |                 | 21.4% |  |      |  | 21.9% | 
|Annual interest expense and servicing fees |  |                 | 4.3%  |  |      |  | 5.3%  | 
|Annual gross principal default rate        |  |                 | 19.9% |  |      |  | 18.4% | 



---



|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes finance charges, late and overlimit fees
    and bad debt recoveries, net of finance charge and fee
    charge-offs. Gross yield for purposes of our valuation does not
    include interchange income, debt waiver fees, or cash advance
    fees.

At December 31, 2002, the sensitivity of the
current fair value of the retained interests to immediate
10 percent and 20 percent adverse changes are as
follows (in millions):

|                                           |  |                      |     |  |                    |   |     | 
|------------------------------------------ |  | -------------------- | --- |  | ------------------ | - | --- | 
|                                           |  |                     
|                                           |  | Impact on Fair Value |    
|                                           |  |                      |    
|                                           |  | 10% adverse change   |     |  | 20% adverse change |  
|                                           |  |                      |     |  |                    |  
|Annual discount rate                       |  | $                    | 10  |  |                    | $ | 19  | 
|Monthly payment rate                       |  |                      | 209 |  |                    |   | 454 | 
|Gross yield                                |  |                      | 143 |  |                    |   | 286 | 
|Annual interest expense and servicing fees |  |                      | 27  |  |                    |   | 54  | 
|Annual gross principal default rate        |  |                      | 176 |  |                    |   | 351 | 

88



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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The actual rates for loans securitized are as
follows:

|                                    |  |              |       |  |              |  |       | 
|----------------------------------- |  | ------------ | ----- |  | ------------ |  | ----- | 
|                                    |  | December 31, |       |  | December 31, | 
|                                    |  | 2002         |       |  | 2001         | 
|                                    |  |              |       |  |              | 
|Annual gross principal default rate |  |              | 16.4% |  |              |  | 13.2% | 
|Monthly payment rate                |  |              | 6.6%  |  |              |  | 6.6%  | 
|Gross yield(2)                      |  |              | 23.1% |  |              |  | 24.5% | 



---



|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes finance charges, late and overlimit fees
    and bad debt recoveries, net of finance charge and fee
    charge-offs. Gross yield for purposes of our valuation does not
    include interchange income, debt waiver fees, or cash advance
    fees.

We believe these sensitivity analyses may not
accurately reflect the potential impact on the asset values as
they do not consider potential offsetting positive impacts that
would occur in the portfolio.

Note 18  Derivative Financial
Instruments

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

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 December 31, 2002, there were no interest
rate swaps outstanding.

As of the adoption of SFAS No. 133 or their
inception, all four 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 is being amortized over the life of the CDs as
an adjustment to interest expense. Additionally,
$3.5 million was recognized as income in 2001 related to
the ineffective portion of the swaps.

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 $14.5 million, reflected as a
Cumulative effect of accounting change in the
consolidated statements of income for the year ended
December 31, 2001.

Note 19  Segments

We operate in two principal areas: consumer
lending products and enhancement services. Our consumer lending
products are primarily unsecured and secured credit cards,
including the Direct Merchants Bank MasterCard® and
Visa®. Our credit cardholders include customers obtained
from third-party lists and other consumers for whom general
credit bureau information is available.

We market our enhancement services products,
including (1) debt waiver protection for unemployment,
disabilities, death and family leave; (2) membership
programs such as card registration, purchase

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

protection and other club memberships; and
(3) third-party insurance, directly to our credit card
customers and customers of third parties. We currently issue and
administer our extended service plans sold through a third-party
retailer, and the customer pays the retailer directly.

We have presented the segment information
reported below on a managed basis. We use this basis to review
segment performance and to make operating decisions. In doing
so, the income statement and balance sheet are adjusted to
reverse the effects of securitizations. Presentation on a
managed basis is not in conformity with accounting principles
generally accepted in the United States of America. The
elimination column in the segment table includes adjustments to
present the information on an owned basis as reported in the
financial statements of this Annual Report on Form 10-K.

We do not allocate the expenses, assets and
liabilities attributable to corporate functions to the operating
segments, such as employee compensation, data processing
services and communications, third-party servicing expenses, and
other expenses including occupancy, depreciation and
amortization, professional fees, and other general and
administrative expenses. We include these expenses in the
reconciliation of the income before income taxes, extraordinary
loss and cumulative effect of accounting changes for the
reported segments to the consolidated total. We do not allocate
capital expenditures for leasehold improvements, capitalized
software and furniture and equipment to operating segments.
There were no operating assets located outside of the United
States for the periods presented.

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

2002

|                                                                                 |  |          |            |     |             |   |         |                |  |   |                |   |  |              |          |     |  |   |           |  
|-------------------------------------------------------------------------------- |  | -------- | ---------- | --- | ----------- | - | ------- | -------------- |  | - | -------------- | - |  | ------------ | -------- | --- |  | - | --------- | -
|                                                                                 |  | Consumer |            |     |             |   |         |                |  |   |               
|                                                                                 |  | Lending  |            |     | Enhancement |   |         | Securitization |  |   | Other          |   |  |             
|                                                                                 |  | Products |            |     | Services    |   |         | Adjustments(a) |  |   | Adjustments(b) |   |  | Consolidated |         
|                                                                                 |  |          |            |     |             |   |         |                |  |   |                |   |  |              |         
|Interest income                                                                  |  | $        | 2,099,595  |     |             | $ | 2,521   |                |  | $ | (1,572,236     | ) |  | $            | (2,521   | )   |  | $ | 527,359   |  
|Interest expense                                                                 |  |          | 324,502    |     |             |   |        |                |  |   | (218,465       | ) |  |              | (2,521   | )   |  |   | 103,516   |  
|                                                                                 |  |          |            |     |             |   |         |                |  |   |                |   |  |              |         
|Net interest income                                                              |  |          | 1,775,093  |     |             |   | 2,521   |                |  |   | (1,353,771     | ) |  |              |         |     |  |   | 423,843   |  
|Other operating income                                                           |  |          | 516,724    |     |             |   | 384,049 |                |  |   | (42,712        | ) |  |              |         |     |  |   | 858,061   |  
|Total revenue                                                                    |  |          | 2,291,817  |     |             |   | 386,570 |                |  |   | (1,396,483     | ) |  |              |         |     |  |   | 1,281,904 |  
|Income (loss) before income taxes and cumulative
    effect of accounting change |  |          | 217,098    | (c) |             |   | 240,880 | (c)            |  |   |               |   |  |              | (507,759 | )   |  |   | (49,781   | )
|Total assets                                                                     |  | $        | 10,532,765 |     |             | $ | 123,179 |                |  | $ | (8,836,857     | ) |  | $            | 775,259  | (d) |  | $ | 2,594,346 |  

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2001

|                                                                          |  |          |            |     |             |   |         |                |  |   |                |   |  |              |          |     |  |   |           | 
|------------------------------------------------------------------------- |  | -------- | ---------- | --- | ----------- | - | ------- | -------------- |  | - | -------------- | - |  | ------------ | -------- | --- |  | - | --------- | 
|                                                                          |  | Consumer |            |     |             |   |         |                |  |   |               
|                                                                          |  | Lending  |            |     | Enhancement |   |         | Securitization |  |   | Other          |   |  |             
|                                                                          |  | Products |            |     | Services    |   |         | Adjustments(a) |  |   | Adjustments(b) |   |  | Consolidated |         
|                                                                          |  |          |            |     |             |   |         |                |  |   |                |   |  |              |         
|Interest income                                                           |  | $        | 1,973,400  |     |             | $ | 12,308  |                |  | $ | (1,276,410     | ) |  | $            | (12,308  | )   |  | $ | 696,990   | 
|Interest expense                                                          |  |          | 492,773    |     |             |   |        |                |  |   | (314,185       | ) |  |              | (12,308  | )   |  |   | 166,280   | 
|                                                                          |  |          |            |     |             |   |         |                |  |   |                |   |  |              |         
|Net interest income                                                       |  |          | 1,480,627  |     |             |   | 12,308  |                |  |   | (962,225       | ) |  |              |         |     |  |   | 530,710   | 
|Other operating income                                                    |  |          | 612,683    |     |             |   | 340,132 |                |  |   | 201,642        |   |  |              |         |     |  |   | 1,154,457 | 
|Total revenue                                                             |  |          | 2,093,310  |     |             |   | 352,440 |                |  |   | (760,583       | ) |  |              |         |     |  |   | 1,685,167 | 
|Income before income taxes and cumulative effect
    of accounting change |  |          | 684,663    | (c) |             |   | 231,780 | (c)            |  |   |               |   |  |              | (494,575 | )   |  |   | 421,868   | 
|Total assets                                                              |  | $        | 11,395,934 |     |             | $ | 138,420 |                |  | $ | (7,895,843     | ) |  | $            | 590,175  | (d) |  | $ | 4,228,686 | 

2000

|                                                                          |  |          |           |     |             |   |         |                |  |   |                |   |  |              |          |     |  |   |           | 
|------------------------------------------------------------------------- |  | -------- | --------- | --- | ----------- | - | ------- | -------------- |  | - | -------------- | - |  | ------------ | -------- | --- |  | - | --------- | 
|                                                                          |  | Consumer |           |     |             |   |         |                |  |   |               
|                                                                          |  | Lending  |           |     | Enhancement |   |         | Securitization |  |   | Other          |   |  |             
|                                                                          |  | Products |           |     | Services    |   |         | Adjustments(a) |  |   | Adjustments(b) |   |  | Consolidated |         
|                                                                          |  |          |           |     |             |   |         |                |  |   |                |   |  |              |         
|Interest income                                                           |  | $        | 1,596,352 |     |             | $ | 11,848  |                |  | $ | (1,091,574     | ) |  | $            | (11,848  | )   |  | $ | 504,778   | 
|Interest expense                                                          |  |          | 533,325   |     |             |   |        |                |  |   | (388,471       | ) |  |              | (11,848  | )   |  |   | 133,006   | 
|                                                                          |  |          |           |     |             |   |         |                |  |   |                |   |  |              |         
|Net interest income                                                       |  |          | 1,063,027 |     |             |   | 11,848  |                |  |   | (703,103       | ) |  |              |         |     |  |   | 371,772   | 
|Other operating income                                                    |  |          | 494,155   |     |             |   | 266,200 |                |  |   | 173,432        |   |  |              |         |     |  |   | 933,787   | 
|Total revenue                                                             |  |          | 1,557,182 |     |             |   | 278,048 |                |  |   | (529,671       | ) |  |              |         |     |  |   | 1,305,559 | 
|Income before income taxes and cumulative effect
    of accounting change |  |          | 560,772   | (c) |             |   | 176,756 | (c)            |  |   |               |   |  |              | (414,617 | )   |  |   | 322,911   | 
|Total assets                                                              |  | $        | 9,013,828 |     |             | $ | 154,236 |                |  | $ | (6,070,224     | ) |  | $            | 638,185  | (d) |  | $ | 3,736,025 | 




|    |                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | This column reflects adjustments to the
    Companys internal financial statements, which are prepared
    on a managed basis, to eliminate investors interests in
    securitized loans.                                                                                                                                                            
|   
|(b) | The adjustments column includes: intercompany
    eliminations and amounts not allocated to segments.                                                                                                                                                                                                                                                  
|   
|(c) | Income before income taxes and cumulative effect
    of accounting changes, includes intercompany commissions paid by
    the enhancement services segment to the consumer lending
    products segment for successful marketing efforts to cardholders
    of $2.4 million, $12.4 million and $18.3 million
    for 2002, 2001 and 2000, respectively.
|   
|(d) | Total assets include the assets attributable to
    corporate functions not allocated to operating segments and the
    removal of investors interests in securitized loans to
    present total assets on an owned basis.                                                                                                                            

Note 20  Stockholders
Equity

On February 6, 2001, the Companys
Board of Directors authorized a share repurchase program of up
to $200 million of its outstanding common stock over a
period ending December 31, 2002. The amount of shares the
Company can repurchase in a calendar year is limited under its
various debt agreements. In 2002, the Company was limited to
repurchasing approximately $98.3 million of shares. As of
December 31, 2002, 7.1 million shares had been
repurchased under the program for $58.3 million.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the years ended December 31, 2002 and
December 31, 2001, we paid cash dividends of
$3.7 million. Under our credit facility agreement, we can
not make dividend payments in an aggregate amount in any fiscal
year that exceed 40% of consolidated net income for the prior
fiscal year.

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 21  Debt and
Deposits

We have a warehouse financing facilities
accounted for as collateralized financings under SFAS
No. 140 which is included in Debt on the
consolidated balance sheet. The financing conduits had a
capacity of $100 million and $400 million as of
December 31, 2002 and 2001, respectively, and a variable
interest rate based on LIBOR. As of December 31, 2002 and
2001, there was zero and $292 million, respectively outstanding
on the conduit. Subsequent to year-end, all financing conduits
were terminated.

Our credit facility consists of a
$170 million revolving credit facility which matures in
July 2003, and a $100 million term loan which matures in
June 2003. At December 31, 2002 and 2001, we had
outstanding borrowings of $100 million under the term loan
facility with weighted-average interest rates of 4.7% and 5.4%
respectively, and outstanding letters of credit of
$7.3 million and $5.3 million, respectively. At
December 31, 2002, we were in compliance with all financial
covenants under these agreements.

As of December 31, 2002, we had
$150 million of 10.125% Senior Notes due 2006 outstanding.
The carrying value of theses Senior Notes is $146.8 million
as of December 31, 2002. These Senior Notes were issued at
a discount of $6.3 million to yield an effective interest rate
of 11%. The Senior Notes due 2006 and credit facility are
unconditionally guaranteed on a senior basis, jointly and
severally, by Metris Direct, Inc., magnUS Services, Inc.
(formerly Metris Recovery Services, Inc.), Metris Card Services,
LLC and Metris Credit Card Services, Inc. (the
Guarantors). Any subsidiaries we form in the future
will 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. We also have a $10.0 million 9.19% term
loan due 2005 used to fund Company equipment. As of
December 31, 2002 and 2001 we were in compliance with all
financial covenants under our credit agreements.

Our debt outstanding as of December 31,
2002, matures as follows:

|           |                        |   |         |         | 
|---------- | ---------------------- | - | ------- | ------- | 
|2003       |                        | $ | 101,031 |        
|2004       |                        |   | 100,979 |        
|2005       |                        |   | 8,551   |        
|2006       |                        |   | 146,841 |        
|2007       |                        |   | 80      |        
|Thereafter |                        |   | 167     |        
|           |                        |   |        
|           | Total debt outstanding |   | $       | 357,649 | 
|           |                        |   |        

Direct Merchants Bank has issued certificates of
deposit of $100,000 or more from 1999 to 2002. As of
December 31, 2002 and 2001, $0.9 billion and
$2.1 billion of CDs were outstanding with original
maturities ranging from six months to five years. These CDs pay
fixed interest rates ranging from 1.1% to 7.6% and 2.4% to 7.6%
at December 31, 2002 and 2001, respectively.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Our deposits outstanding as of December 31,
2002 and 2001, mature as follows:

|                                        |  |      |         |           |      |  |      |      |           |   |           |  |  |  |      | 
|--------------------------------------- |  | ---- | ------- | --------- | ---- |  | ---- | ---- | --------- | - | --------- |  |  |  | ---- | 
|                                        |  |      |         | Weighted- |      |  |      |      | Weighted- |  
|                                        |  |      |         | Average   |      |  |      |      | Average   |  
|                                        |  |      |         | Interest  |      |  |      |      | Interest  |  
|                                        |  | 2002 |         |           | Rate |  |      | 2001 |           |   | Rate      | 
|                                        |  |      |         |           |      |  |      |      |           |   |           | 
|Three months or less                    |  | $    | 97,822  |           |      |  | 4.9% |      |           | $ | 404,955   |  |  |  | 5.8% | 
|Over three months through twelve months |  |      | 291,143 |           |      |  | 4.8% |      |           |   | 811,802   |  |  |  | 5.3% | 
|Over one year through three years       |  |      | 256,277 |           |      |  | 5.1% |      |           |   | 567,897   |  |  |  | 5.2% | 
|Over three years                        |  |      | 247,512 |           |      |  | 5.3% |      |           |   | 273,354   |  |  |  | 5.9% | 
|                                        |  |      |         |           |      |  |      |      |           |   |           | 
|Total deposits                          |  | $    | 892,754 |           |      |  | 5.1% |      |           | $ | 2,058,008 |  |  |  | 5.4% | 
|                                        |  |      |         |           |      |  |      |      |           |   |           | 

The Company, at the request of the OCC, has
agreed to reduce receivables at Direct Merchants Bank to no more
than $550 million at December 31, 2003 and zero at
December 31, 2004. As a result, we do not anticipate
issuing jumbo CDs in the foreseeable future.

We have various indirect subsidiaries which do
not guarantee Company debt. We have prepared condensed
consolidating financial statements of the Company, the 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.

Note 22  Subsequent
Events

On March 18, 2003, we entered into an
operating agreement with the OCC designed to ensure that Direct
Merchants Bank continues to operate in a safe and sound manner.
This operating agreement formally terminates our April 16,
2002 agreement with the OCC, which is discussed in
Footnote 14.

The operating agreement requires, among other
things, the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Bank must reduce its on-balance-sheet credit
    card receivables to no more than $550 million by
    December 31, 2003 and to zero by December 31, 2004.
    During the time the Bank is reducing these receivables, the mix
    of subprime receivables may not exceed 60% of all credit card
    receivables. As of December 31, 2002, 52.9% of the
    Banks credit card portfolio was subprime. The Bank will
    continue to sell credit card receivables on a daily basis to MCI
    under the purchase agreement currently in effect between MCI and
    the Bank.
|
| |  | The Bank must maintain minimum capital in the
    aggregate amount of (i) liquid assets deposited pursuant to
    the Liquidity Reserve Deposit Agreement discussed below;
    (ii) the capital required as a result of the 200%
    risk-weight applied to on-book subprime credit card receivables;
    and (iii) the minimum capital required under Federal law
    for a well capitalized institution for all remaining
    assets owned by the Bank.                                                                                                                    
|
| |  | The Bank must meet certain liquidity
    requirements, including maintaining, on a daily basis, liquid
    assets of not less than 100% of the deposits and other
    liabilities coming due within the next 30 days, maintaining
    marketable assets in an amount equal to or in excess of the
    Banks insured deposits, maintaining cash and cash
    equivalents in excess of 46% of outstanding CDs, and entering
    into the Liquidity Reserve Deposit Agreement discussed below to
    support the Banks credit card receivables funding needs.                   
|
| |  | The Bank is required, within 60 days from
    the date of the operating agreement, to submit to the OCC a
    written strategic plan establishing objectives for the
    Banks overall risk profile, earning                                                                                                                                                                                                                                                                                                                                                                  

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METRIS COMPANIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |  |                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | performance, growth, balance sheet mix,
    off-balance sheet activities, liability structure, capital
    adequacy, product line development and marketing segments.

The terms of the operating agreement required
Direct Merchants Bank and MCI to enter into a Capital Assurance
and Liquidity Maintenance Agreement (CALMA) which
also was executed on March 18, 2003. The effect of the
CALMA is to require MCI to make such capital infusions or
provide Direct Merchants Bank with financial assistance so as to
permit Direct Merchants Bank to meet its liquidity requirements.

The operating agreement requires Direct Merchants
Bank, a third-party depository bank and the OCC to execute a
Liquidity Reserve Deposit Agreement (LRDA) within
30 days of the effective date of the operating agreement.

If the OCC were to conclude that the Bank failed
to implement any provision of the agreement, the OCC could
pursue various enforcement options.

Upon signing this agreement Direct Merchants Bank
declared and paid a $155 million dividend to us.

On March 17, 2003 we secured a
$425 million extension through March 2004 of an
$850 million conduit which was scheduled to mature in June
of 2003. We also secured a $425 million conduit through
March 2004, which will replace conduits and warehouse facilities
scheduled to mature during March through May 2003. The
availability of funding under these facilities is subject to
various conditions, including a net reduction of receivables in
the Master Trust. Maturities of the conduits can accelerate in
certain instances, including if net excess spreads in the Master
Trust fall below certain levels. We also terminated our
$170 million revolving line of credit.

On March 31, 2003, 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. The backup facility carries an
interest rate of 12% per annum plus an option to earn an
additional meaningful economic return based on the performance
of the Companys managed receivables through
December 31, 2004. The backup facility would be repayable
in full on March 1, 2004. During the past fiscal year we
had in place a $270 million term loan and revolving credit
facility. In connection with the conduit transactions discussed
above, all availability under the $170 million revolving
portion of this facility was terminated as of March 18,
2003, with the exception of $7.3 million of outstanding
letters of credit. Term loans of $100 million remain
outstanding under the facility and mature on June 30, 2003.
We may refinance these loans with the backup facility provided
by THL Fund IV. THL Fund IVs obligation to provide
this facility is subject to a number of conditions.

94



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METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING BALANCE
SHEETS

December 31, 2002


|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |            |   |  |   |           | 
|--------------------------------------------------------------- |  | ---------------------- | --------- | - | ------------ | - | --------- | ------------- |  | - | ------------ | - |  | ------------ | ---------- | - |  | - | --------- | 
|                                                                |  | Metris                 |           |   | Guarantor    |   |           | Non-Guarantor |  |   |              |   | 
|                                                                |  | Companies Inc.         |           |   | Subsidiaries |   |           | Subsidiaries  |  |   | Eliminations |   |  | Consolidated |           
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|                                                                |  |                       
|                                                                |  | (Dollars in thousands) |          
|ASSETS:                                                        
|Cash and cash equivalents                                       |  | $                      | (3,795    | ) |              | $ | 8,088     |               |  | $ | 643,374      |   |  | $            |           |   |  | $ | 647,667   | 
|Net retained interests in loans securitized                     |  |                        |          |   |              |   |          |               |  |   | 750,395      |   |  |              |           |   |  |   | 750,395   | 
|Net credit card loans                                           |  |                        | 3,814     |   |              |   |          |               |  |   | 752,288      |   |  |              |           |   |  |   | 756,102   | 
|Property and equipment, net                                     |  |                        |          |   |              |   | 56,728    |               |  |   | 27,103       |   |  |              |           |   |  |   | 83,831    | 
|Purchased portfolio premium                                     |  |                        | 129       |   |              |   |          |               |  |   | 64,450       |   |  |              |           |   |  |   | 64,579    | 
|Other receivables due from credit card
    securitizations, net |  |                        | 13        |   |              |   |          |               |  |   | 116,772      |   |  |              |           |   |  |   | 116,785   | 
|Other assets                                                    |  |                        | 10,098    |   |              |   | 45,865    |               |  |   | 180,153      |   |  |              | (61,129    | ) |  |   | 174,987   | 
|Investment in subsidiaries                                      |  |                        | 1,606,930 |   |              |   | 1,578,574 |               |  |   |             |   |  |              | (3,185,504 | ) |  |   |          | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total assets                                                    |  | $                      | 1,617,189 |   |              | $ | 1,689,255 |               |  | $ | 2,534,535    |   |  | $            | (3,246,633 | ) |  | $ | 2,594,346 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|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    |               |  |   | 146,097      |   |  |              | (3,511     | ) |  |   | 159,267   | 
|Accrued expenses and other liabilities                          |  |                        | 167,865   |   |              |   | 44,961    |               |  |   | (132,260     | ) |  |              | (8,504     | ) |  |   | 72,062    | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total liabilities                                               |  |                        | 558,164   |   |              |   | 82,325    |               |  |   | 955,961      |   |  |              | (61,129    | ) |  |   | 1,535,321 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total stockholders equity                                      |  |                        | 1,059,025 |   |              |   | 1,606,930 |               |  |   | 1,578,574    |   |  |              | (3,185,504 | ) |  |   | 1,059,025 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total liabilities and stockholders
    equity                  |  | $                      | 1,617,189 |   |              | $ | 1,689,255 |               |  | $ | 2,534,535    |   |  | $            | (3,246,633 | ) |  | $ | 2,594,346 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           

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METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING BALANCE
SHEETS

December 31, 2001


|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |            |   |  |   |           | 
|--------------------------------------------------------------- |  | ---------------------- | --------- | - | ------------ | - | --------- | ------------- |  | - | ------------ | - |  | ------------ | ---------- | - |  | - | --------- | 
|                                                                |  | Metris                 |           |   | Guarantor    |   |           | Non-Guarantor |  |   |              |   | 
|                                                                |  | Companies Inc.         |           |   | Subsidiaries |   |           | Subsidiaries  |  |   | Eliminations |   |  | Consolidated |           
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|                                                                |  |                       
|                                                                |  | (Dollars in thousands) |          
|ASSETS:                                                        
|Cash and cash equivalents                                       |  | $                      | 17,613    |   |              | $ | 1,505     |               |  | $ | 468,968      |   |  | $            |           |   |  | $ | 488,086   | 
|Net retained interests in loans securitized                     |  |                        |          |   |              |   |          |               |  |   | 801,679      |   |  |              |           |   |  |   | 801,679   | 
|Net credit card loans                                           |  |                        | 1,656     |   |              |   |          |               |  |   | 2,344,948    |   |  |              |           |   |  |   | 2,346,604 | 
|Property and equipment, net                                     |  |                        |          |   |              |   | 78,425    |               |  |   | 36,488       |   |  |              |           |   |  |   | 114,913   | 
|Purchased portfolio premium                                     |  |                        | 248       |   |              |   |          |               |  |   | 94,545       |   |  |              |           |   |  |   | 94,793    | 
|Other receivables due from credit card
    securitizations, net |  |                        | 34        |   |              |   | 644       |               |  |   | 113,778      |   |  |              |           |   |  |   | 114,456   | 
|Other assets                                                    |  |                        | (21,786   | ) |              |   | 55,731    |               |  |   | 240,468      |   |  |              | (6,258     | ) |  |   | 268,155   | 
|Investment in subsidiaries                                      |  |                        | 1,900,528 |   |              |   | 1,745,701 |               |  |   |             |   |  |              | (3,646,229 | ) |  |   |          | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total assets                                                    |  | $                      | 1,898,293 |   |              | $ | 1,882,006 |               |  | $ | 4,100,874    |   |  | $            | (3,652,487 | ) |  | $ | 4,228,686 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|LIABILITIES:                                                   
|Deposits                                                        |  | $                      | (1,000    | ) |              | $ |          |               |  | $ | 2,059,008    |   |  | $            |           |   |  | $ | 2,058,008 | 
|Debt                                                            |  |                        | 345,924   |   |              |   | 171       |               |  |   | 301,809      |   |  |              |           |   |  |   | 647,904   | 
|Accounts payable                                                |  |                        | 3,070     |   |              |   | 15,461    |               |  |   | 68,073       |   |  |              | (3,129     | ) |  |   | 83,475    | 
|Deferred income                                                 |  |                        | 3,270     |   |              |   | 30,615    |               |  |   | 184,275      |   |  |              | (3,129     | ) |  |   | 215,031   | 
|Accrued expenses and other liabilities                          |  |                        | 405,074   |   |              |   | (64,769   | )             |  |   | (257,992     | ) |  |              |           |   |  |   | 82,313    | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total liabilities                                               |  |                        | 756,338   |   |              |   | (18,522   | )             |  |   | 2,355,173    |   |  |              | (6,258     | ) |  |   | 3,086,731 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total stockholders equity                                      |  |                        | 1,141,955 |   |              |   | 1,900,528 |               |  |   | 1,745,701    |   |  |              | (3,646,229 | ) |  |   | 1,141,955 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           
|Total liabilities and stockholders
    equity                  |  | $                      | 1,898,293 |   |              | $ | 1,882,006 |               |  | $ | 4,100,874    |   |  | $            | (3,652,487 | ) |  | $ | 4,228,686 | 
|                                                                |  |                        |           |   |              |   |           |               |  |   |              |   |  |              |           

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METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF
INCOME

Year Ended December 31, 2002


|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |          |   |  |   |          |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | ---- | ------- | ------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                                                                                       |  |                        |         |   |              | Non- |         |              |  |   |             
|                                                                                                                       |  | Metris                 |         |   | Guarantor    |      |         | Guarantor    |  |   |              |   | 
|                                                                                                                       |  | Companies Inc.         |         |   | Subsidiaries |      |         | Subsidiaries |  |   | Eliminations |   |  | Consolidated |         
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|                                                                                                                       |  |                       
|                                                                                                                       |  | (Dollars in thousands) |        
|Net Interest Income (Expense)                                                                                          |  | $                      | (30,582 | ) |              | $    | 293     |              |  | $ | 454,132      |   |  | $            |         |   |  | $ | 423,843  |  
|Provision for loan losses                                                                                              |  |                        | (603    | ) |              |      |        |              |  |   | 519,456      |   |  |              | 54,625   |   |  |   | 573,478  |  
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|Net Interest Income (Expense) After Provision
    for Loan Losses                                                      |  |                        | (29,979 | ) |              |      | 293     |              |  |   | (65,324      | ) |  |              | (54,625  | ) |  |   | (149,635 | )
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|Other Operating Income:                                                                                                |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |          |   |  |   |          |  
|Net securitization and credit card servicing
    income                                                                |  |                        | 3,168   |   |              |      |        |              |  |   | 268,180      |   |  |              |         |   |  |   | 271,348  |  
|Credit card fees, interchange and other credit
    card income                                                         |  |                        | 1,748   |   |              |      | 94,941  |              |  |   | 206,237      |   |  |              | (100,262 | ) |  |   | 202,664  |  
|Enhancement services revenues                                                                                          |  |                        |        |   |              |      | 58,664  |              |  |   | 385,052      |   |  |              | (59,667  | ) |  |   | 384,049  |  
|Intercompany allocations                                                                                               |  |                        | 166     |   |              |      | 266,604 |              |  |   | 45,742       |   |  |              | (312,512 | ) |  |   |         |  
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|                                                                                                                       |  |                        | 5,082   |   |              |      | 420,209 |              |  |   | 905,211      |   |  |              | (472,441 | ) |  |   | 858,061  |  
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|Other Operating Expense:                                                                                               |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |          |   |  |   |          |  
|Credit card account and other product
    solicitation and marketing expenses                                          |  |                        | 16      |   |              |      | 111,387 |              |  |   | 199,048      |   |  |              | (120,192 | ) |  |   | 190,259  |  
|Employee compensation                                                                                                  |  |                        | (1,101  | ) |              |      | 183,701 |              |  |   | 28,226       |   |  |              |         |   |  |   | 210,826  |  
|Data processing services and communications                                                                            |  |                        | 52      |   |              |      | (92,080 | )            |  |   | 184,702      |   |  |              | (8,800   | ) |  |   | 83,874   |  
|Enhancement services claims expense                                                                                    |  |                        |        |   |              |      | 1,335   |              |  |   | 50,207       |   |  |              |         |   |  |   | 51,542   |  
|Credit card fraud losses                                                                                               |  |                        | 177     |   |              |      |        |              |  |   | 8,470        |   |  |              |         |   |  |   | 8,647    |  
|Purchased portfolio premium amortization                                                                               |  |                        | 120     |   |              |      |        |              |  |   | 33,726       |   |  |              | (3,626   | ) |  |   | 30,220   |  
|Occupancy and Equipment                                                                                                |  |                        |        |   |              |      | 45,523  |              |  |   | 2,490        |   |  |              |         |   |  |   | 48,013   |  
|Mastercard/ Visa assessment and fees                                                                                   |  |                        |        |   |              |      |        |              |  |   | 13,869       |   |  |              |         |   |  |   | 13,869   |  
|Asset impairments and lease write-offs                                                                                 |  |                        |        |   |              |      | 20,936  |              |  |   | 6,800        |   |  |              |         |   |  |   | 27,736   |  
|Other                                                                                                                  |  |                        | 7,037   |   |              |      | 74,360  |              |  |   | 21,215       |   |  |              | (9,391   | ) |  |   | 93,221   |  
|Intercompany allocations                                                                                               |  |                        | 80      |   |              |      | 92,814  |              |  |   | 219,618      |   |  |              | (312,512 | ) |  |   |         |  
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|                                                                                                                       |  |                        | 6,381   |   |              |      | 437,976 |              |  |   | 768,371      |   |  |              | (454,521 | ) |  |   | 758,207  |  
|Income (Loss) Before Income Taxes, Equity in
    Income of Subsidiaries and Cumulative Effect of Accounting
    Change |  |                        | (31,278 | ) |              |      | (17,474 | )            |  |   | 71,516       |   |  |              | (72,545  | ) |  |   | (49,781  | )
|Income taxes                                                                                                           |  |                        | (10,009 | ) |              |      | (5,592  | )            |  |   | 22,886       |   |  |              | (23,215  | ) |  |   | (15,930  | )
|Equity in income of subsidiaries                                                                                       |  |                        | (12,582 | ) |              |      | (700    | )            |  |   |             |   |  |              | 13,282   |   |  |   |         |  
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|Income (Loss) Before Cumulative Effect of
    Accounting Change                                                        |  |                        | (33,851 | ) |              |      | (12,582 | )            |  |   | 48,630       |   |  |              | (36,048  | ) |  |   | (33,851  | )
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|Cumulative effect of accounting change, net                                                                            |  |                        |        |   |              |      |        |              |  |   |             |   |  |              |         |   |  |   |         |  
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         
|Net Income (Loss)                                                                                                      |  | $                      | (33,851 | ) |              | $    | (12,582 | )            |  | $ | 48,630       |   |  | $            | (36,048  | ) |  | $ | (33,851  | )
|                                                                                                                       |  |                        |         |   |              |      |         |              |  |   |              |   |  |              |         

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METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF
INCOME

Year Ended December 31, 2001


|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |          |   |  |   |           |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | ------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | --------- | -
|                                                                                                                |  | Metris                 |         |   | Guarantor    |   |         | Non-Guarantor |  |   |              |   | 
|                                                                                                                |  | Companies Inc.         |         |   | Subsidiaries |   |         | Subsidiaries  |  |   | Eliminations |   |  | Consolidated |         
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|                                                                                                                |  |                       
|                                                                                                                |  | (Dollars in thousands) |        
|Net Interest Income (Expense)                                                                                   |  | $                      | 8,583   |   |              | $ | (7,480  | )             |  | $ | 529,607      |   |  | $            |         |   |  | $ | 530,710   |  
|Provision for loan losses                                                                                       |  |                        | 2,402   |   |              |   |        |               |  |   | 546,743      |   |  |              |         |   |  |   | 549,145   |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|Net Interest Income (Expense) After Provision
    for Loan Losses                                               |  |                        | 6,181   |   |              |   | (7,480  | )             |  |   | (17,136      | ) |  |              |         |   |  |   | (18,435   | )
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|Other Operating Income:                                                                                         |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |          |   |  |   |           |  
|Net securitization and credit card servicing
    income                                                         |  |                        | 9,511   |   |              |   |        |               |  |   | 507,888      |   |  |              |         |   |  |   | 517,399   |  
|Credit card fees, interchange and other credit
    card income                                                  |  |                        | (5,551  | ) |              |   | 31,508  |               |  |   | 270,969      |   |  |              |         |   |  |   | 296,926   |  
|Enhancement services revenues                                                                                   |  |                        |        |   |              |   | 57,836  |               |  |   | 282,296      |   |  |              |         |   |  |   | 340,132   |  
|Intercompany allocations                                                                                        |  |                        | 153     |   |              |   | 229,642 |               |  |   | (229,795     | ) |  |              |         |   |  |   |          |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|                                                                                                                |  |                        | 4,113   |   |              |   | 318,986 |               |  |   | 831,358      |   |  |              |         |   |  |   | 1,154,457 |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|Other Operating Expense:                                                                                        |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |          |   |  |   |           |  
|Credit card account and other product
    solicitation and marketing expenses                                   |  |                        |        |   |              |   | 12,642  |               |  |   | 162,241      |   |  |              |         |   |  |   | 174,883   |  
|Employee compensation                                                                                           |  |                        | 1,101   |   |              |   | 197,645 |               |  |   | 26,717       |   |  |              |         |   |  |   | 225,463   |  
|Data processing services and communications                                                                     |  |                        | 3       |   |              |   | (90,538 | )             |  |   | 180,757      |   |  |              |         |   |  |   | 90,222    |  
|Enhancement services claims expense                                                                             |  |                        |        |   |              |   | 877     |               |  |   | 34,751       |   |  |              |         |   |  |   | 35,628    |  
|Credit card fraud losses                                                                                        |  |                        | 1       |   |              |   | 5       |               |  |   | 9,062        |   |  |              |         |   |  |   | 9,068     |  
|Purchased portfolio premium amortization                                                                        |  |                        |        |   |              |   |        |               |  |   | 30,277       |   |  |              |         |   |  |   | 30,277    |  
|Occupancy and equipment                                                                                         |  |                        |        |   |              |   | 43,326  |               |  |   | 4,246        |   |  |              |         |   |  |   | 47,572    |  
|Mastercard/ Visa assessment and fees                                                                            |  |                        |        |   |              |   |        |               |  |   | 16,522       |   |  |              |         |   |  |   | 16,522    |  
|Other                                                                                                           |  |                        | (393    | ) |              |   | 84,204  |               |  |   | 708          |   |  |              |         |   |  |   | 84,519    |  
|Intercompany allocations                                                                                        |  |                        | 127     |   |              |   | 57,355  |               |  |   | (57,482      | ) |  |              |         |   |  |   |          |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|                                                                                                                |  |                        | 839     |   |              |   | 305,516 |               |  |   | 407,799      |   |  |              |         |   |  |   | 714,154   |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|Income Before Income Taxes, Equity in Income
    of Subsidiaries and Cumulative Effect of Accounting
    Change |  |                        | 9,455   |   |              |   | 5,990   |               |  |   | 406,423      |   |  |              |         |   |  |   | 421,868   |  
|Income taxes                                                                                                    |  |                        | 3,621   |   |              |   | 2,294   |               |  |   | 155,662      |   |  |              |         |   |  |   | 161,577   |  
|Equity in income of subsidiaries                                                                                |  |                        | 239,958 |   |              |   | 236,262 |               |  |   |             |   |  |              | (476,220 | ) |  |   |          |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|Income Before Cumulative Effect of Accounting
    Change                                                        |  |                        | 245,792 |   |              |   | 239,958 |               |  |   | 250,761      |   |  |              | (476,220 | ) |  |   | 260,291   |  
|Cumulative effect of accounting change, net                                                                     |  |                        |        |   |              |   |        |               |  |   | 14,499       |   |  |              |         |   |  |   | 14,499    |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         
|Net Income                                                                                                      |  | $                      | 245,792 |   |              | $ | 239,958 |               |  | $ | 236,262      |   |  | $            | (476,220 | ) |  | $ | 245,792   |  
|                                                                                                                |  |                        |         |   |              |   |         |               |  |   |              |   |  |              |         

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##### Table of Contents



METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF
INCOME

YEAR ENDED DECEMBER 31, 2000


|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |          |          |   |   |         |         | 
|---------------------------------------------------------------------------------------------------------------------- | ----------------- | ---------------------- | ------- | ------- | ------------ | - | ------- | ------------- |  | - | ------------ | ------- |  | ------------ | -------- | -------- | - | - | ------- | ------- | 
|                                                                                                                       |                   | Metris                 |         |         | Guarantor    |   |         | Non-Guarantor |  |   |              |         | 
|                                                                                                                       |                   | Companies Inc.         |         |         | Subsidiaries |   |         | Subsidiaries  |  |   | Eliminations |         |  | Consolidated |         
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|                                                                                                                       |                   |                       
|                                                                                                                       |                   | (Dollars in thousands) |        
|Net Interest (Expense) Income                                                                                          |                   | $                      | (76,200 | )       |              | $ | (4,685  | )             |  | $ | 452,657      |         |  | $            |         |          |   | $ | 371,772 |        
|Provision for loan losses                                                                                              |                   |                        | (4      | )       |              |   |        |               |  |   | 388,238      |         |  |              |         |          |   |   | 388,234 |        
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|Net Interest (Expense) Income After Provision
    for Loan Losses                                                      |                   |                        | (76,196 | )       |              |   | (4,685  | )             |  |   | 64,419       |         |  |              |         |          |   |   | (16,462 | )      
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|Other Operating Income:                                                                                                |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |          |          |   |   |         |        
|Net securitization and credit card servicing
    income                                                                |                   |                        | 3,544   |         |              |   | (3      | )             |  |   | 440,713      |         |  |              |         |          |   |   | 444,254 |        
|Credit card fees, interchange and other credit
    card income                                                         |                   |                        | 504     |         |              |   | 633     |               |  |   | 222,196      |         |  |              |         |          |   |   | 223,333 |        
|Enhancement services revenues                                                                                          |                   |                        |        |         |              |   | 54,747  |               |  |   | 211,453      |         |  |              |         |          |   |   | 266,200 |        
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|                                                                                                                       |                   |                        | 4,048   |         |              |   | 55,377  |               |  |   | 874,362      |         |  |              |         |          |   |   | 933,787 |        
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|Other Operating Expense:                                                                                               |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |          |          |   |   |         |        
|Credit card account and other product
    solicitation and marketing expenses                                          |                   |                        |        |         |              |   | 21,917  |               |  |   | 122,564      |         |  |              |         |          |   |   | 144,481 |        
|Employee compensation                                                                                                  |                   |                        |        |         |              |   | 147,567 |               |  |   | 31,025       |         |  |              |         |          |   |   | 178,592 |        
|Data processing services and communications                                                                            |                   |                        |        |         |              |   | (82,227 | )             |  |   | 168,393      |         |  |              |         |          |   |   | 86,166  |        
|Enhancement services claims expense                                                                                    |                   |                        |        |         |              |   | 1,353   |               |  |   | 25,078       |         |  |              |         |          |   |   | 26,431  |        
|Credit card fraud losses                                                                                               |                   |                        | 5       |         |              |   |        |               |  |   | 8,881        |         |  |              |         |          |   |   | 8,886   |        
|Purchased portfolio premium amortization                                                                               |                   |                        |        |         |              |   |        |               |  |   | 19,275       |         |  |              |         |          |   |   | 19,275  |        
|Occupancy and equipment                                                                                                |                   |                        |        |         |              |   | 29,700  |               |  |   | 5,863        |         |  |              |         |          |   |   | 35,563  |        
|Mastercard/ Visa assessment and fees                                                                                   |                   |                        |        |         |              |   | 19      |               |  |   | 14,693       |         |  |              |         |          |   |   | 14,712  |        
|Other                                                                                                                  |                   |                        | (119    | )       |              |   | 28,093  |               |  |   | 52,334       |         |  |              |         |          |   |   | 80,308  |        
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|                                                                                                                       |                   |                        | (114    | )       |              |   | 146,422 |               |  |   | 448,106      |         |  |              |         |          |   |   | 594,414 |        
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|Income (Loss) Before Income Taxes, Equity in
    Income of Subsidiaries and Cumulative Effect of Accounting
    Change |                   |                        | (72,034 | )       |              |   | (95,730 | )             |  |   | 490,675      |         |  |              |         |          |   |   | 322,911 |        
|Income taxes                                                                                                           |                   |                        | (27,733 | )       |              |   | (38,485 | )             |  |   | 190,538      |         |  |              |         |          |   |   | 124,320 |        
|Equity in income of subsidiaries                                                                                       |                   |                        | 239,454 |         |              |   | 296,699 |               |  |   |             |         |  |              | (536,153 | )        |   |   |        |        
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|Income (Loss) Before Cumulative Effect of
    Accounting Change                                                        |                   |                        | 195,153 |         |              |   | 239,454 |               |  |   | 300,137      |         |  |              | (536,153 | )        |   |   | 198,591 |        
|Cumulative effect of accounting change, net                                                                            |                   |                        |        |         |              |   |        |               |  |   | 3,438        |         |  |              |         |          |   |   | 3,438   |        
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         
|                                                                                                                       | Net Income (Loss) |                        | $       | 195,153 |              |   | $       | 239,454       |  |   | $            | 296,699 |  |              | $        | (536,153 | ) |   | $       | 195,153 | 
|                                                                                                                       |                   |                        |         |         |              |   |         |               |  |   |              |         |  |              |         

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METRIS COMPANIES INC.

SUPPLEMENTAL CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS

Year Ended December 31, 2002


|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |          |   |  |   |            |  
|------------------------------------------------------------------ |  | ---------------------- | -------- | - | ------------ | - | -------- | ------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                                                   |  | Metris                 |          |   | Guarantor    |   |          | Non-Guarantor |  |   |              |   | 
|                                                                   |  | Companies Inc.         |          |   | Subsidiaries |   |          | Subsidiaries  |  |   | Eliminations |   |  | Consolidated |         
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         
|                                                                   |  |                       
|                                                                   |  | (Dollars in thousands) |         
|Operating Activities:                                              |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |          |   |  |   |            |  
|Net cash provided by operating activities                          |  | $                      | (311,744 | ) |              | $ | 129,813  |               |  | $ | 674,353      |   |  | $            | 6,952    |   |  | $ | 499,374    |  
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         
|Investing Activities:                                              |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |          |   |  |   |            |  
|Net proceeds from sales and repayments of
    securitized loans    |  |                        |         |   |              |   |         |               |  |   | 941,150      |   |  |              |         |   |  |   | 941,150    |  
|Net loans (originated) collected                                   |  |                        | (1,555   | ) |              |   |         |               |  |   | 213,013      |   |  |              |         |   |  |   | 211,458    |  
|Proceeds from sales of credit card portfolios to
    third parties |  |                        |         |   |              |   |         |               |  |   | 16,278       |   |  |              |         |   |  |   | 16,278     |  
|(Additions to) dispositions of premises and
    equipment          |  |                        |         |   |              |   | (9,170   | )             |  |   | 3,011        |   |  |              |         |   |  |   | (6,159     | )
|Investment in subsidiaries                                         |  |                        | 293,598  |   |              |   | 167,127  |               |  |   |             |   |  |              | (460,725 | ) |  |   |           |  
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         
|Net cash provided by (used in) investing
    activities            |  |                        | 292,043  |   |              |   | 157,957  |               |  |   | 1,173,452    |   |  |              | (460,725 | ) |  |   | 1,162,727  |  
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         
|Financing Activities:                                              |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |          |   |  |   |            |  
|Net (decrease) increase in debt                                    |  |                        | 45,304   |   |              |   | (171     | )             |  |   | (292,388     | ) |  |              | (43,000  | ) |  |   | (290,255   | )
|Net decrease in deposits                                           |  |                        |         |   |              |   |         |               |  |   | (1,165,254   | ) |  |              |         |   |  |   | (1,165,254 | )
|Cash dividends paid                                                |  |                        | (3,728   | ) |              |   |         |               |  |   |             |   |  |              |         |   |  |   | (3,728     | )
|Net (decrease) increase in common equity                           |  |                        | 2,011    |   |              |   | (281,016 | )             |  |   | (215,757     | ) |  |              | 496,773  |   |  |   | 2,011      |  
|Repurchase of common stock                                         |  |                        | (45,294  | ) |              |   |         |               |  |   |             |   |  |              |         |   |  |   | (45,294    | )
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         
|Net cash (used in) provided by financing
    activities            |  |                        | (1,707   | ) |              |   | (281,187 | )             |  |   | (1,673,399   | ) |  |              | 453,773  |   |  |   | (1,502,520 | )
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         
|Net (decrease) increase in cash and
    cash equivalents           |  |                        | (21,408  | ) |              |   | 6,583    |               |  |   | 174,406      |   |  |              |         |   |  |   | 159,581    |  
|Cash and cash equivalents at beginning of year                     |  |                        | 17,613   |   |              |   | 1,505    |               |  |   | 468,968      |   |  |              |         |   |  |   | 488,086    |  
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         
|Cash and cash equivalents at end of year                           |  | $                      | (3,795   | ) |              | $ | 8,088    |               |  | $ | 643,374      |   |  | $            |         |   |  | $ | 647,667    |  
|                                                                   |  |                        |          |   |              |   |          |               |  |   |              |   |  |              |         

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METRIS COMPANIES INC.

SUPPLEMENTAL CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2001


|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------- | -------- | - | ------------ | - | -------- | ------------- |  | - | ----------- | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                                                |  | Metris                 |          |   |              |   |          |               |  |   |            
|                                                                |  | Companies              |          |   | Guarantor    |   |          | Non-Guarantor |  |   |             |   | 
|                                                                |  | Inc.                   |          |   | Subsidiaries |   |          | Subsidiaries  |  |   | Elimination |   |  | Consolidated |         
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|                                                                |  |                       
|                                                                |  | (Dollars in thousands) |         
|Operating Activities:                                           |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|Net cash provided by operating activities                       |  | $                      | 272,965  |   |              | $ | 236,601  |               |  | $ | 777,066     |   |  | $            | (476,220 | ) |  | $ | 810,412    |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Investing Activities:                                           |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|Net proceeds from sales and repayments of
    securitized loans |  |                        |         |   |              |   |         |               |  |   | 1,825,618   |   |  |              |         |   |  |   | 1,825,618  |  
|Net loans (originated) collected                                |  |                        | 1,131    |   |              |   |         |               |  |   | (2,618,176  | ) |  |              |         |   |  |   | (2,617,045 | )
|Credit card portfolio acquisitions                              |  |                        |         |   |              |   |         |               |  |   | (290,774    | ) |  |              |         |   |  |   | (290,774   | )
|(Additions to) dispositions of premises and
    equipment       |  |                        |         |   |              |   | (18,258  | )             |  |   | 12,552      |   |  |              |         |   |  |   | (5,706     | )
|Investments in subsidiaries                                     |  |                        | (311,610 | ) |              |   | (303,406 | )             |  |   |            |   |  |              | 615,016  |   |  |   |           |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Net cash provided by (used in)
    investing activities         |  |                        | (310,479 | ) |              |   | (321,664 | )             |  |   | (1,070,780  | ) |  |              | 615,016  |   |  |   | (1,087,907 | )
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Financing Activities:                                           |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|Net (decrease) increase in debt                                 |  |                        | (10,243  | ) |              |   | 8,623    |               |  |   | 293,458     |   |  |              |         |   |  |   | 291,838    |  
|Net decrease in deposits                                        |  |                        |         |   |              |   |         |               |  |   | (48,191     | ) |  |              |         |   |  |   | (48,191    | )
|Cash dividends paid                                             |  |                        | (3,752   | ) |              |   |         |               |  |   |            |   |  |              |         |   |  |   | (3,752     | )
|Net (decrease) increase in common equity                        |  |                        | 17,267   |   |              |   | 67,287   |               |  |   | 71,502      |   |  |              | (138,796 | ) |  |   | 17,260     |  
|Repurchase of common stock                                      |  |                        | (13,014  | ) |              |   |         |               |  |   |            |   |  |              |         |   |  |   | (13,014    | )
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Net cash (used in) provided by
    financing activities         |  |                        | (9,742   | ) |              |   | 75,910   |               |  |   | 316,769     |   |  |              | (138,796 | ) |  |   | 244,141    |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Net (decrease) increase in cash and
    Cash equivalents        |  |                        | (47,256  | ) |              |   | (9,153   | )             |  |   | 23,055      |   |  |              |         |   |  |   | (33,354    | )
|Cash and cash equivalents at beginning of year                  |  |                        | 64,869   |   |              |   | 10,658   |               |  |   | 445,913     |   |  |              |         |   |  |   | 521,440    |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Cash and cash equivalents at end of year                        |  | $                      | 17,613   |   |              | $ | 1,505    |               |  | $ | 468,968     |   |  | $            |         |   |  | $ | 488,086    |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         

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##### Table of Contents



METRIS COMPANIES INC.

SUPPLEMENTAL CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS

Year Ended December 31, 2000


|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------- | -------- | - | ------------ | - | -------- | ------------- |  | - | ----------- | - |  | ------------ | -------- | - |  | - | ---------- | -
|                                                                |  | Metris                 |          |   |              |   |          |               |  |   |            
|                                                                |  | Companies              |          |   | Guarantor    |   |          | Non-Guarantor |  |   |             |   | 
|                                                                |  | Inc.                   |          |   | Subsidiaries |   |          | Subsidiaries  |  |   | Elimination |   |  | Consolidated |         
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|                                                                |  |                       
|                                                                |  | (Dollars in thousands) |         
|Operating Activities:                                           |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|Net cash provided by operating activities                       |  | $                      | 160,614  |   |              | $ | 283,108  |               |  | $ | 759,264     |   |  | $            | (536,153 | ) |  | $ | 666,833    |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Investing Activities:                                           |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|Net proceeds from sales and repayments of
    securitized loans |  |                        |         |   |              |   |         |               |  |   | 551,911     |   |  |              |         |   |  |   | 551,911    |  
|Net loans originated                                            |  |                        | (417     | ) |              |   |         |               |  |   | (1,975,924  | ) |  |              |         |   |  |   | (1,976,341 | )
|Credit card portfolio acquisitions                              |  |                        |         |   |              |   |         |               |  |   | (195,597    | ) |  |              |         |   |  |   | (195,597   | )
|(Additions to) dispositions of premises and
    equipment       |  |                        |         |   |              |   | (54,552  | )             |  |   | (30,455     | ) |  |              |         |   |  |   | (85,007    | )
|Investments in subsidiaries                                     |  |                        | (336,303 | ) |              |   | (404,912 | )             |  |   |            |   |  |              | 741,215  |   |  |   |           |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Net cash provided by (used in) investing
    activities         |  |                        | (336,720 | ) |              |   | (459,464 | )             |  |   | (1,650,065  | ) |  |              | 741,215  |   |  |   | (1,705,034 | )
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Financing Activities:                                           |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |          |   |  |   |            |  
|Net (decrease) increase in debt                                 |  |                        | 242,667  |   |              |   | (47,376  | )             |  |   | (184,237    | ) |  |              |         |   |  |   | 11,054     |  
|Net decrease in deposits                                        |  |                        |         |   |              |   |         |               |  |   | 1,330,818   |   |  |              |         |   |  |   | 1,330,818  |  
|Cash dividends paid                                             |  |                        | (2,942   | ) |              |   |         |               |  |   |            |   |  |              |         |   |  |   | (2,942     | )
|Net (decrease) increase in common equity                        |  |                        | (42,369  | ) |              |   | 234,081  |               |  |   | 39,628      |   |  |              | (205,062 | ) |  |   | 26,278     |  
|Repurchase of common stock                                      |  |                        |         |   |              |   |         |               |  |   |            |   |  |              |         |   |  |   |           |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Net cash (used in) provided by financing
    activities         |  |                        | 197,356  |   |              |   | 186,705  |               |  |   | 1,186,209   |   |  |              | (205,062 | ) |  |   | 1,365,208  |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Net (decrease) increase in cash and cash
    equivalents        |  |                        | 21,250   |   |              |   | 10,349   |               |  |   | 295,408     |   |  |              |         |   |  |   | 327,007    |  
|Cash and cash equivalents at beginning of year                  |  |                        | 43,619   |   |              |   | 309      |               |  |   | 150,505     |   |  |              |         |   |  |   | 194,433    |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         
|Cash and cash equivalents at end of year                        |  | $                      | 64,869   |   |              | $ | 10,658   |               |  | $ | 445,913     |   |  | $            |         |   |  | $ | 521,440    |  
|                                                                |  |                        |          |   |              |   |          |               |  |   |             |   |  |              |         

102



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##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

SUMMARY OF CONSOLIDATED QUARTERLY FINANCIAL
INFORMATION AND

STOCK DATA


|                                                        |         |                                               |         |        |         |   |         |         |   |   |         |        |   |   |         |        | 
|------------------------------------------------------- | ------- | --------------------------------------------- | ------- | ------ | ------- | - | ------- | ------- | - | - | ------- | ------ | - | - | ------- | ------ | 
|                                                        |         |                                              
|                                                        |         | 2002                                          |        
|                                                        |         |                                               |        
|                                                        |         | Fourth                                        |         |        | Third   |   |         | Second  |   |   | First   |       
|                                                        |         | Quarter                                       |         |        | Quarter |   |         | Quarter |   |   | Quarter |       
|                                                        |         |                                               |         |        |         |   |         |         |   |   |         |       
|                                                        |         |                                              
|                                                        |         | (Dollars in thousands, except per-share data) |        
|                                                        |         | (unaudited)                                   |        
|Summary of Operations:                                  |         |                                               |         |        |         |   |         |         |   |   |         |        |   |   |         |       
|Interest income                                         |         | $                                             | 124,108 |        |         | $ | 112,491 |         |   | $ | 137,228 |        |   | $ | 153,532 |       
|Interest expense                                        |         |                                               | 21,144  |        |         |   | 23,252  |         |   |   | 26,955  |        |   |   | 32,165  |       
|                                                        |         |                                               |         |        |         |   |         |         |   |   |         |       
|Net Interest Income                                     |         |                                               | 102,964 |        |         |   | 89,239  |         |   |   | 110,273 |        |   |   | 121,367 |       
|Provision for loan losses                               |         |                                               | 128,100 |        |         |   | 138,197 |         |   |   | 152,811 |        |   |   | 154,370 |       
|Other Operating Income                                  |         |                                               | 149,915 |        |         |   | 222,519 |         |   |   | 193,406 |        |   |   | 292,221 |       
|Other Operating Expense(1)                              |         |                                               | 198,559 |        |         |   | 175,736 |         |   |   | 209,524 |        |   |   | 174,388 |       
|                                                        |         |                                               |         |        |         |   |         |         |   |   |         |       
|Income (Loss) Before Income Taxes                       |         |                                               | (73,780 | )      |         |   | (2,175  | )       |   |   | (58,656 | )      |   |   | 84,830  |       
|Income taxes                                            |         |                                               | (25,290 | )      |         |   | (848    | )       |   |   | (22,282 | )      |   |   | 32,490  |       
|                                                        |         |                                               |         |        |         |   |         |         |   |   |         |       
|Net Income (Loss)                                       |         |                                               | (48,490 | )      |         |   | (1,327  | )       |   |   | (36,374 | )      |   |   | 52,340  |       
|Preferred Stock Dividends                               |         |                                               | 9,822   |        |         |   | 9,605   |         |   |   | 9,394   |        |   |   | 9,188   |       
|                                                        |         |                                               |         |        |         |   |         |         |   |   |         |       
|Net Income (Loss) Applicable to Common
    Stockholders |         | $                                             | (58,312 | )      |         | $ | (10,932 | )       |   | $ | (45,768 | )      |   | $ | 43,152  |       
|                                                        |         |                                               |         |        |         |   |         |         |   |   |         |       
|Per Common Share:                                       |         |                                               |         |        |         |   |         |         |   |   |         |        |   |   |         |       
|Earnings (Loss) per Share:                              |         |                                               |         |        |         |   |         |         |   |   |         |        |   |   |         |       
|                                                        | Basic   |                                               | $       | (1.02  | )       |   | $       | (0.19   | ) |   | $       | (0.74  | ) |   | $       | 0.55   | 
|                                                        | Diluted |                                               |         | (1.02  | )       |   |         | (0.19   | ) |   |         | (0.74  | ) |   |         | 0.54   | 
|Shares used to Compute EPS (000s):                     |         |                                               |         |        |         |   |         |         |   |   |         |        |   |   |         |       
|                                                        | Basic   |                                               |         | 57,199 |         |   |         | 58,311  |   |   |         | 61,503 |   |   |         | 96,032 | 
|                                                        | Diluted |                                               |         | 57,199 |         |   |         | 58,311  |   |   |         | 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  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fourth quarter 2002, included approximately
    $17.1 million write-down of excess property, equipment,
    operating leases, and pending sale of our Arizona building and
    approximately $7 million of marketing and origination costs
    on our retail note program. In addition, we recorded a
    $1.1 million write-down on portfolios of charged-off loans
    purchased in 2001 and 2000.

103



---



##### Table of Contents



Metris Companies Inc. and
Subsidiaries

SUMMARY OF CONSOLIDATED QUARTERLY

FINANCIAL INFORMATION AND STOCK DATA


|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |        |  |   |         |        | 
|-------------------------------------------------------------------------- | ---------- | --------------------------------------------- | ------- | ------ | ------- | - | ------- | ------- |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                                           |            |                                              
|                                                                           |            | 2001                                          |        
|                                                                           |            |                                               |        
|                                                                           |            | Fourth                                        |         |        | Third   |   |         | Second  |  |   | First   |       
|                                                                           |            | Quarter                                       |         |        | Quarter |   |         | Quarter |  |   | Quarter |       
|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |       
|                                                                           |            |                                              
|                                                                           |            | (Dollars in thousands, except per-share data) |        
|                                                                           |            | (unaudited)                                   |        
|Summary of Operations:                                                     |            |                                               |         |        |         |   |         |         |  |   |         |        |  |   |         |       
|Interest income                                                            |            | $                                             | 175,847 |        |         | $ | 179,207 |         |  | $ | 172,207 |        |  | $ | 169,729 |       
|Interest expense                                                           |            |                                               | 31,984  |        |         |   | 42,148  |         |  |   | 44,313  |        |  |   | 47,835  |       
|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |       
|Net Interest Income                                                        |            |                                               | 143,863 |        |         |   | 137,059 |         |  |   | 127,894 |        |  |   | 121,894 |       
|Provision for loan losses                                                  |            |                                               | 230,221 |        |         |   | 116,513 |         |  |   | 114,682 |        |  |   | 87,729  |       
|Other Operating Income                                                     |            |                                               | 365,640 |        |         |   | 283,180 |         |  |   | 277,449 |        |  |   | 228,188 |       
|Other Operating Expense                                                    |            |                                               | 164,625 |        |         |   | 189,376 |         |  |   | 188,930 |        |  |   | 171,223 |       
|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |       
|Income Before Income Taxes and Cumulative Effect
    of Accounting Change  |            |                                               | 114,657 |        |         |   | 114,350 |         |  |   | 101,731 |        |  |   | 91,130  |       
|Income taxes                                                               |            |                                               | 43,915  |        |         |   | 43,614  |         |  |   | 38,963  |        |  |   | 35,085  |       
|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |       
|Income Before Cumulative Effect of Accounting
    Change                   |            |                                               | 70,742  |        |         |   | 70,736  |         |  |   | 62,768  |        |  |   | 56,045  |       
|Cumulative Effect of Accounting Change
    (Net of Income Taxes of $9,000) |            |                                               |        |        |         |   |        |         |  |   |        |        |  |   | 14,499  |       
|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |       
|Net Income                                                                 |            |                                               | 70,742  |        |         |   | 70,736  |         |  |   | 62,768  |        |  |   | 41,546  |       
|Preferred Stock Dividends                                                  |            |                                               | 8,987   |        |         |   | 8,788   |         |  |   | 8,593   |        |  |   | 8,403   |       
|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |       
|Net Income Applicable to Common Stockholders                               |            | $                                             | 61,755  |        |         | $ | 61,948  |         |  | $ | 54,175  |        |  | $ | 33,143  |       
|                                                                           |            |                                               |         |        |         |   |         |         |  |   |         |       
|                                                                          
|Per Common Share:                                                          |            |                                               |         |        |         |   |         |         |  |   |         |        |  |   |         |       
|Earnings per Share:                                                        |            |                                               |         |        |         |   |         |         |  |   |         |        |  |   |         |       
|                                                                           | Basic(1)   |                                               | $       | 0.73   |         |   | $       | 0.72    |  |   | $       | 0.64   |  |   | $       | 0.43   | 
|                                                                           | Diluted(1) |                                               |         | 0.72   |         |   |         | 0.70    |  |   |         | 0.63   |  |   |         | 0.42   | 
|Shares used to Compute EPS (000s):                                        |            |                                               |         |        |         |   |         |         |  |   |         |        |  |   |         |       
|                                                                           | Basic      |                                               |         | 97,610 |         |   |         | 98,846  |  |   |         | 97,633 |  |   |         | 96,660 | 
|                                                                           | Diluted    |                                               |         | 98,727 |         |   |         | 101,026 |  |   |         | 99,841 |  |   |         | 98,445 | 
|Cash Dividends:                                                            |            | $                                             | 0.010   |        |         | $ | 0.010   |         |  | $ | 0.010   |        |  | $ | 0.010   |       
|Market Prices:                                                             |            |                                               |         |        |         |   |         |         |  |   |         |        |  |   |         |       
|                                                                           | High       |                                               | $       | 28.10  |         |   | $       | 38.65   |  |   | $       | 33.71  |  |   | $       | 31.63  | 
|                                                                           | Low        |                                               |         | 15.10  |         |   |         | 20.00   |  |   |         | 20.13  |  |   |         | 20.32  | 
|                                                                           | Close      |                                               |         | 25.71  |         |   |         | 24.75   |  |   |         | 33.71  |  |   |         | 20.78  | 



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings per share for the first quarter reflects
    the $14.5 million one-time, non-cash accounting impact from
    the adoption of SFAS 133.

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 14,
2003, there were approximately 746 holders of record and
approximately 18,650 beneficial holders of our common stock.

104



---



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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.

|                                                       |  |                                                                       
|------------------------------------------------------ |  | ----------------------------------------------------------------------
|/s/ DAVID D. WESSELINK                                 |  | /s/ JOHN A. WITHAM                                                    
|                                                       |  |                                                                       
|David D. WesselinkChairman and Chief Executive Officer |  | John A. WithamExecutive Vice President and
    Chief Financial Officer

105



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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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 18 to the consolidated
financial statements, the Company changed its method of
accounting for derivative financial instruments in 2001. As
discussed in Note 2 to the consolidated financial
statements, the Company changed its method of recognizing
revenue for its debt waiver products in 2000.



| |                       
| | ----------------------
| | /s/ KPMG LLP          
| |                       
| | KPMG LLP              
| | Minneapolis, Minnesota
| | March 31, 2003        

106



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##### Table of Contents








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


None






PART III







Item 10.     Directors
and Executive Officers of the Registrant


The information required by this item with
respect to directors is set forth under Proposal One:
Election of Directors, in the Companys Proxy
Statement for the Annual Meeting of Shareholders to be held on
May 6, 2003, which was filed within 120 days of
December 31, 2002 and is incorporated herein by reference.
The information required by this item with respect to executive
officers is, pursuant to instruction 3 of Item 401(b) of
Regulation S-K, set forth in Part I of this
Form 10-K under Executive Officers of the
Registrant. The information required by this item with
respect to reports required to be filed under Section 16(a)
of the Securities Exchange Act of 1934 is set forth under
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement and is incorporated
herein by reference.






Item 11.     Executive
Compensation


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






Item 12.     Security
Ownership of Certain Beneficial Owners and
Management


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

The following table provides information as of
December 31, 2002 with respect to our common shares
issuable under equity compensation plans approved by security
holders:

|                                                            |       |                   |            |            |                   |               |                 |                    |  |  |           |           | 
|----------------------------------------------------------- | ----- | ----------------- | ---------- | ---------- | ----------------- | ------------- | --------------- | ------------------ |  |  | --------- | --------- | 
|                                                            |       |                   |            |            |                   | Number of     |                
|                                                            |       |                   |            |            |                   | securities    |                
|                                                            |       |                   |            |            |                   | remaining     |                
|                                                            |       |                   |            |            |                   | available for |                
|                                                            |       | Number of         |            |            |                   |               | future issuance |                   
|                                                            |       | securities to be  |            |            |                   |               | under equity    |                   
|                                                            |       | issued upon       |            |            | Weighted-average  |               |                 | compensation plans | 
|                                                            |       | exercise of       |            |            | exercise price of |               |                 | (excluding         | 
|                                                            |       | outstanding       |            |            | outstanding       |               |                 | securities         | 
|                                                            |       | options, warrants |            |            | options, warrants |               |                 | reflected in       | 
|                                                            |       | and rights        |            |            | and rights        |               |                 | column (a))        | 
|Plan Category                                               |       | (a)               |            |            | (b)               |               |                 | (c)                | 
|                                                            |       |                   |            |            |                   |               |                 |                    | 
|Equity compensation plans approved by security
    holders  |       |                   |            |           
|Long-Term Incentive Plan                                    |       |                   | 11,245,444 |            |                   | $             | 19.02           |                    |  |  | 2,261,137 |          
|Metris Companies Inc. Board Stock Option Plan               |       |                   | 484,000    |            |                   | $             | 19.75           |                    |  |  | 186,000   |          
|Management Stock Purchase Plan                              |       |                   | 187,967    |            |                   | $             | 13.22           |                    |  |  | 243,578   |          
|Annual Incentive Plan for Designated Corporate
    officers |       |                   | 71,978     |            |                   | $             | 14.83           |                    |  |  | 372,669   |          
|Employee Stock Purchase Plan                                |       |                   |           |            |                   | $             | 0.00            |                    |  |  | 1,923,187 |          
|Non-qualified Employee Stock Purchase Plan                  |       |                   |           |            |                   | $             | 0.00            |                    |  |  | 462,168   |          
|                                                            | Total |                   |            | 11,989,389 |                   |               |                 |                    |  |  |           | 5,448,739 | 

We do not have any equity compensation plans that
have not been approved by security holders as of
December 31, 2002.

107



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##### Table of Contents








Item 13.     Certain
Relationships and Related Transactions


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

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






Item 14.     Controls
and Procedures


Within the 90-day period prior to the filing of
this Report, an evaluation was performed 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), of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures. Based on that evaluation, the Companys
management, including the CEO and CFO, have concluded that the
Companys disclosure controls and procedures are effective
in ensuring that information required to be disclosed in the
reports it files under the Securities Exchange Act of 1934 are
recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules
and forms. There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect internal controls subsequent to the
evaluation date.






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.

(b) Reports on Form 8-K: During the
three months ended December 31, 2002, through the date of
this Report, the Company filed the following six Current Reports
on Form 8-K:



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Form 8-K filed October 18, 2002, relating to the
    Companys third quarter 2002 financial results.                                                           
|
| | Form 8-K filed October 26, 2002, relating to the
    Companys Renewable Unsecured Subordinated Notes.                                                         
|
| | Form 8-K filed December 18, 2002, relating to the
    termination of the Companys former chairman and chief
    executive officer.                            
|
| | Form 8-K filed January 23, 2003, relating to the
    Companys workforce reduction.                                                                            
|
| | Form 8-K filed February 28, 2003, correcting the
    Companys prior announcement regarding payment of a
    dividend.                                         
|
| | Form 8-K filed March 19, 2003, relating to the
    Companys funding agreements and operating agreement with
    the Office of the Comptroller of the Currency.

(c) Exhibits: See Exhibit Index on
page 113 of this Report.

108



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##### Table of Contents








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 31st day of March,
2003.



| |                      
| | ---------------------
| | 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.

|                                             |  |                                                       |  |                |  | 
|-------------------------------------------- |  | ----------------------------------------------------- |  | -------------- |  | 
|                                             |  |                                                       |  |               
|Signature                                    |  | Title                                                 |  | Date          
|                                             |  |                                                       |  |               
|                                            
|Principal executive officer:                 |  |                                                       |  |               
|                                            
|/s/ DAVID D. WESSELINKDavid D. Wesselink     |  | Chairman of the Board,
    Chief Executive Officer    |  | March 31, 2003
|                                            
|Principal financial officer:                 |  |                                                       |  |               
|                                            
|/s/ JOHN A. WITHAMJohn A. Witham             |  | Executive Vice President,
    Chief Financial Officer |  | March 31, 2003
|                                            
|Principal accounting officer:                |  |                                                       |  |               
|                                            
|/s/ MARK P. WAGENERMark P. Wagener           |  | Senior Vice President, Controller                     |  | March 31, 2003
|                                            
|Directors:                                   |  |                                                       |  |               
|                                            
|/s/ LEE R. ANDERSON, SR.Lee R. Anderson, Sr. |  | Director                                              |  | March 31, 2003
|                                            
|/s/ C. HUNTER BOLLC. Hunter Boll             |  | Director                                              |  | March 31, 2003
|                                            
|/s/ JOHN A. CLEARYJohn A. Cleary             |  | Director                                              |  | March 31, 2003
|                                            
|/s/ THOMAS M. HAGERTYThomas M. Hagerty       |  | Director                                              |  | March 31, 2003
|                                            
|/s/ DAVID V. HARKINSDavid V. Harkins         |  | Director                                              |  | March 31, 2003

109



---



##### Table of Contents



|                                       |  |          |  |                |  | 
|-------------------------------------- |  | -------- |  | -------------- |  | 
|                                       |  |          |  |               
|Signature                              |  | Title    |  | Date          
|                                       |  |          |  |               
|                                      
|/s/ WALTER M. HOFFWalter M. Hoff       |  | Director |  | March 31, 2003
|                                      
|/s/ THOMAS H. LEEThomas H. Lee         |  | Director |  | March 31, 2003
|                                      
|/s/ EDWARD B. SPENOEdward B. Speno     |  | Director |  | March 31, 2003
|                                      
|/s/ FRANK D. TRESTMANFrank D. Trestman |  | Director |  | March 31, 2003
|                                      
|/s/ RONALD N. ZEBECKRonald N. Zebeck   |  | Director |  | March 31, 2003

110



---



##### Table of Contents



CERTIFICATION

I, David D. Wesselink, certify that:

1. I have reviewed this Annual Report on
Form 10-K of Metris Companies Inc. Registrant;

2. Based on my knowledge, this Annual Report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this Annual
Report;

4. The Registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    Registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this Annual Report is being prepared;
|
| | b) evaluated the effectiveness of the
    Registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this Annual
    Report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this Annual Report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The Registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the Registrants auditors and the Audit
Committee of the Registrants Board of Directors (or
persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the Registrants ability to record, process,
    summarize and report financial data and have identified for the
    Registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the Registrants internal controls; and                                                                                                                                                    

6. The Registrants other certifying
officers and I have indicated in this Annual Report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                     
| | ------------------------------------
| | Date: March 31, 2003                
|
| | /s/ DAVID D. WESSELINK              
| |                                     
| | David D. Wesselink                  
| | Chairman and Chief Executive Officer
| | (Principal Executive Officer)       

111



---



##### Table of Contents



CERTIFICATION

I, John A. Witham, certify that:

1. I have reviewed this Annual Report on
Form 10-K of Metris Companies Inc. Registrant;

2. Based on my knowledge, this Annual Report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this Annual
Report;

4. The Registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    Registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this Annual Report is being prepared;
|
| | b) evaluated the effectiveness of the
    Registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this Annual
    Report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this Annual Report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The Registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the Registrants auditors and the Audit
Committee of the Registrants Board of Directors (or
persons performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the Registrants ability to record, process,
    summarize and report financial data and have identified for the
    Registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the Registrants internal controls; and                                                                                                                                                    

6. The Registrants other certifying
officers and I have indicated in this Annual Report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                                         
| | --------------------------------------------------------
| | Date: March 31, 2003                                    
|
| | /s/ JOHN A. WITHAM                                      
| |                                                         
| | John A. Witham                                          
| | Executive Vice President and Chief Financial
    Officer
| | (Principal Financial Officer)                           

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EXHIBIT INDEX


|                             |     |  |                        |                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                  
|---------------------------- | --- |  | ---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                      |     |  |                       
|Number                       |     |  | Description of Exhibit
|                             |     |  |                       
|                             |     |  |                        |                                                                                                                                                                                                                                                                                                                                                                        
|Charter Documents:          
|                            
|                             | 3.1 |  |                        | Amended and Restated Certificate of Incorporation
    of the Company (incorporated by reference to Exhibit 3.1 to
    the Companys Registration Statement on Form 8-A (File
    No. 1-12351)).                                                                                                                                                                        
|                            
|                             | 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 B
    Perpetual Preferred Stock (incorporated by reference to
    Exhibit 4.1 of MCIs Current Report on Form 8-K
    dated December 22, 1998 (File No. 1-12351)).                                                                                                                                                                
|                            
|                             | 4.3 |  |                        | Certificate of Designation of Series C
    Perpetual Preferred Stock (incorporated by reference to
    Exhibit 4.2 of 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)).                                                                                                                                                                
|                            
|                             | 4.4 |  |                        | 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)).                                                                                                                                     
|                            
|                             | 4.5 |  |                        | 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)).                                                                                                                   
|                            
|                             | 4.6 |  |                        | 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)).                                                                                                                                                                                                       

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|                   |      |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                 
|------------------ | ---- |  | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit            |      |  |                       
|Number             |      |  | Description of Exhibit
|                   |      |  |                       
|                   |      |  |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                   | 4.7  |  |                        | 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)).                                                                                    
|                  
|                   |      |  |                        | (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)).               
|                  
|                   | 4.8  |  |                        | 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)).                                                                                         
|                  
|                   | 4.9  |  |                        | Base Indenture, dated as of October 25,
    2002, between MCI and U.S. Bank National Association, as
    Trustee (incorporated by reference to Exhibit 4.1 to
    MCIs Current Report on Form 8-K dated
    October 28, 2002 (File No. 1-12351)).                                                                                                                                                                                                    
|                  
|                   |      |  |                        | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | First Supplemental Indenture, dated as of
    October 25, 2002 between MCI and U.S. Bank National
    Association, as Trustee (incorporated by reference to
    Exhibit 4.2 to MCIs Current Report on Form 8-K
    dated October 28, 2002 (File No. 1-12351)).                                                                                                                 
|                  
|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).                                                    

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|        |       |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- | - | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |   |                       
|Number  |       |   | Description of Exhibit
|        |       |   |                       
|        |       |   |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 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  |   |                        | Amended and Restated Credit Agreement, dated as
    of July 21, 2000, among MCI; the Lenders from time to time
    parties thereto; The Chase Manhattan Bank, as Administrative
    Agent; Bank of America, N.A., as Syndicate Agent; Deutsche Bank
    AG, New York Branch, as Co-Documentation Agent; U.S. Bank
    National Association, as Co-Documentation Agent; and Barclays
    Bank PLC, as Co-Agent (incorporated by reference to MCIs
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2000 (File No. 1-12351)).
|       
|        |       |   |                        | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | Amendment No. 1, dated as of July 10,
    2001, to the Amended and Restated Credit Agreement, among MCI;
    the Lenders from time to time parties thereto; The Chase
    Manhattan Bank, as Administrative Agent; Bank of America, N.A.,
    as Syndication Agent; Deutsche Bank AG, New York Branch, as
    Co-Documentation Agent; U.S. Bank National Association, as
    Co-Documentation Agent; and Barclays Bank PLC, as Co-Agent
    (incorporated by reference to Exhibit 10.6(a) to MCIs
    Annual Report on Form 10-K for the year ended
    December 31, 2001 (File No. 1-12351)). 
|       
|        |       |   |                        | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | Amendment No. 2, dated as of March 17,
    2003, to the Amended and Restated Credit Agreement, among MCI;
    the Lenders from time to time parties thereto; The Chase
    Manhattan Bank, as Administrative Agent; Bank of America, N.A.,
    as Syndication Agent; Deutsche Bank AG, New York Branch, as
    Co-Documentation Agent; U.S. Bank National Association, as
    Co-Documentation Agent; and Barclays Bank PLC, as Co-Agent
    (incorporated by reference to Exhibit 10.6(b) to MCIs
    Annual Report on Form 10-K for the year ended
    December 31, 2002 (File No. 1-12351)).
|       
|        | 10.7* |   |                        | 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)).                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10.8* |   |                        | 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)).                                                                                                                                                                                                                                                                                                                                                                                     

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|               |       |   |                        |                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                  
|-------------- | ----- | - | ---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit        |       |   |                       
|Number         |       |   | Description of Exhibit
|               |       |   |                       
|               |       |   |                        |                                                                                                                                                                                                                                                                                                                  
|               | 10.9* |   |                        | MCI Amended and Restated Annual Incentive Bonus
    Plan for Designated Corporate Officers (incorporated by
    reference to Exhibit 10.5 to MCIs Registration
    Statement on Form S-4/ A (File No. 333-86695)).                                                                                              
|              
|               | 10.10 | * |                        | 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)).                                
|              
|               | 10.11 |   |                        | Formal Agreement, dated as of April 16,
    2002, between Direct Merchants Bank 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 April 17, 2002 (File No. 1-12351)).                                           
|              
|               | 10.12 |   |                        | Operating Agreement, dated as of March 18,
    2003, between MCI and the Office of the Comptroller of the
    Currency (Incorporated by reference to Exhibit 99.2 to
    MCIs Current Report on Form 8-K dated March 19,
    2003 (File No. 1-12351)).                                                          
|              
|               | 10.13 |   |                        | 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)).                                               
|              
|               | 10.14 |   |                        | 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)).
|              
|               | 10.15 |   |                        | Metris Companies Inc. Term Loan Commitment Letter
    dated March 31, 2003 between Thomas H. Lee Partners,
    L.P. and Metris Companies Inc. (incorporated by reference to
    Exhibit 10.15 to MCIs Annual Report on Form 10-K
    for the year ended December 31, 2002 (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.                                                                                                                                                                                                                                                                                   
|              
|               | 99.1  |   |                        | Certification of Principal Executive Officer
    Pursuant to Section 1350 of Chapter 63 of
    Title 18 of the United States Code.                                                                                                                                                                               
|              
|               | 99.2  |   |                        | Certification of Principal Financial Officer
    Pursuant to Section 1350 of Chapter 63 of
    Title 18 of the United States Code.                                                                                                                                                                               




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

116