Exhibit 13

Metris Companies Inc.
1998 Annual Report, Pages 18 to 62


<TABLE>

Selected Financial Data
(In thousands, except EPS, dividends and stock prices)
                                                                     Year Ended December 31,
                                                1998          1997           1996          1995          1994
                                                ----          ----           ----          ----          ----
Income Statement Data (Managed Basis):(1)
<S>                                         <C>           <C>           <C>           <C>           <C>
Net Interest Income .....................   $  505,812    $  306,361    $  143,491    $   26,354    $      487
Provision for Loan Losses ...............      534,124       319,299       136,305        26,234
Other Operating Income ..................      346,198       212,869       126,647        52,969        14,238
Other Operating Expense .................      224,638       138,048       101,287        45,640        11,222
                                               -------       -------       -------        ------        ------

Income Before Income Taxes ..............       93,248        61,883        32,546         7,449         3,503
Tax Rate ................................         38.5%         38.5%         38.5%         38.5%         37.3%
Net Income ..............................   $   57,348    $   38,058    $   20,016    $    4,581    $    2,198
                                               -------       -------       -------        ------        ------
Per Common Share Statistics:
EPS - diluted (2) .......................   $     2.82    $     1.88    $     1.17    $     0.28    $     0.14
Stock Price (year end) ..................        50.31         34.25         24.00
Dividends Paid ..........................          .04           .03
Shares Outstanding (year end) ...........       19,260        19,225        19,225        15,967        15,967
Shares Used to Compute EPS ..............       19,968        20,238        17,129        16,369        16,270
 (diluted)                                     -------       -------       -------        ------        ------

Other Data (Managed Basis): (1)
Total Accounts ..........................        2,972         2,293         1,418           703
Year-end Loans ..........................   $5,315,042    $3,546,936    $1,615,940    $  543,619
Year-end Assets .........................    5,503,862     3,604,972     1,687,227       622,983    $    9,856
Average Loans ...........................    4,000,467     2,294,893     1,018,856       183,274
Average Interest-Earning
  Assets ................................    4,040,220     2,341,451     1,040,924       193,086         6,615
Average Assets ..........................    4,159,171     2,355,978     1,078,346       214,363         7,076
Debt ....................................      310,896       244,000        55,163        63,487
Preferred Stock .........................      201,100
Average Total Equity ....................      219,835       158,180        92,852        30,083         5,365

Net Interest Margin (3) .................         12.5%         13.1%         13.8%         13.6%          7.4%
Return on Average Assets ................          1.4%          1.6%          1.9%          2.1%         31.1%
Return on Average Total
  Equity ................................         26.1%         24.1%         21.6%         15.2%         41.0%

Loan Loss Reserves ......................   $  393,283    $  244,084    $   95,669    $   22,219
Delinquency Ratio (4) ...................          6.8%          6.6%          5.5%          4.0%
Loan Loss Reserve Ratio .................          7.4%          6.9%          5.9%          4.1%
Net Charge-off Ratio (5) ................         10.1%          8.3%          6.2%          2.2%

Fee-Based Services Revenues .............   $  106,601    $   63,413    $   50,273    $   24,441    $   14,238
</TABLE>




<PAGE>



(1) The Company analyzes its financial  performance on a managed loan portfolio
    basis  whereby  the income  statement  and  balance  sheet are  adjusted to
    reverse the effects of securitization.
(2) Earnings per share is calculated  assuming the Company was  incorporated at
    the beginning of the first year shown.
(3) Includes the Company's actual cost of funds  plus all costs associated with
    asset  securitizations, including  the interest expense paid to the
    certificate holders and amortization of the discount and fees.
(4) 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.
(5) Net charge-off ratio reflects actual principal  amounts  charged-off,  less
    recoveries, as a percentage of average managed credit card loans.


<PAGE>




METRIS COMPANIES INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


         The following discussion and analysis provides  information  management
believes to be relevant to understanding the financial  condition and results of
operations of Metris  Companies  Inc. and its  subsidiaries  (collectively,  the
"Company"),  including Direct Merchants Credit Card Bank,  National  Association
("Direct  Merchants  Bank").  This discussion should be read in conjunction with
the consolidated financial statements and the related notes thereto.


General

         We are an  information-based  direct  marketer and provider of consumer
credit products and fee-based  services  primarily to moderate income consumers.
We underwrite and offer credit cards and such fee-based  services to a sector of
consumers  traditionally  overlooked by other credit card companies and in doing
so provide  opportunities for such individuals to establish credit. Our products
are available throughout the United States.

         Our home page on the  Internet is at  www.metriscompanies.com.  You can
learn more about the Company by visiting that site.

         Business Segments

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

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

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

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

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

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

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

         Spin Off

         You will see  references in the  following  discussion of our financial
performance to the "Spin Off." Prior to September 25, 1998, Fingerhut Companies,
Inc. ("FCI")owned 83% of the Company's common stock. During the third quarter of
1998,  FCI  received  written  approval  from the  Internal  Revenue  Service to
distribute its interest in the Company to FCI's shareholders in a tax free "spin
off." FCI  executed  this Spin Off on September  25, 1998,  and at that time the
Company ceased to be a subsidiary of FCI.

Results of Operations

Year Ended December 31, 1998, Compared to Year Ended December 31, 1997

         Net income for the year ended December 31, 1998, was $57.3 million,  or
$2.82 per share,  an increase of $19.2 million over net income of $38.1 million,
or $1.88 per share, for 1997. The 51% increase in net income is the result of an
increase in net interest income and other operating  income  partially offset by
increases in the provision for loan losses and other operating  expenses.  These
increases  are largely  attributable  to the growth in average  managed loans to
$4.0 billion for 1998 from $2.3 billion for 1997, an increase of 74%, and growth
in total  credit card  accounts to 3.0 million at December  31,  1998,  from 2.3
million at December 31, 1997.

         The provision for loan losses on a managed basis was $534.1  million in
1998, compared to $319.3 million in 1997. The increase primarily reflects higher
credit card loan balances as well as an increase in net charge-offs. The managed
net charge-off rate was 10.1% for 1998, compared to 8.3% in 1997. The charge-off
ratio for the years ended December 31, 1998, and 1997, was favorably impacted by
70 and 90 basis  points,  respectively  due to  purchase  accounting  related to
portfolio acquisitions.

         Other operating  income on a managed basis increased  $133.3 million to
$346.2 million,  primarily due to credit card fees, interchange and other credit
card  income,  which  increased to $251.2  million for 1998,  up 64% over $153.6
million for 1997.  In addition,  fee-based  services  revenues  increased 68% to
$106.6  million for 1998, up from $63.4 million for 1997.  These  increases were
primarily due to the growth in total accounts and outstanding receivables in the
managed credit card loan  portfolio,  the continued  strong  performance of debt
waiver and additional club membership sales.

         Other operating expenses increased to $224.6 million in 1998,  compared
to $138.0 million in 1997. The increase in operating  costs was due to continued
investments  in the  infrastructure  of the  Company.  Even while  making  these
investments, the operating efficiency ratio improved to 26.4% in 1998 from 26.6%
in 1997.


Year Ended December 31, 1997, Compared to Year Ended December 31, 1996

         Net income for the year ended December 31, 1997, was $38.1 million,  or
$1.88 per share,  an increase of $18.1 million over net income of $20.0 million,
or $1.17 per share, for 1996. The 90% increase in net income is the result of an
increase in net interest income and other operating  income  partially offset by
increases in the provision for loan losses and other operating  expenses.  These
increases  are largely  attributable  to the growth in average  managed loans to
$2.3  billion  for 1997 from $1.0  billion for 1996,  an  increase of 125%,  and
growth in total credit card  accounts to 2.3 million at December 31, 1997,  from
1.4 million at December 31, 1996.

         The provision for loan losses on a managed basis was $319.3  million in
1997, compared to $136.3 million in 1996. The increase primarily reflects higher
credit card loan balances as well as an increase in net charge-offs. The managed
net charge-off rate was 8.3% for 1997,  compared to 6.2% in 1996. The charge-off
ratio for the year ended  December 31, 1997 was  favorably  impacted by 90 basis
points due to purchase accounting related to portfolio acquisitions.

<PAGE>


         Other  operating  income on a managed basis  increased $86.2 million to
$212.9 million,  primarily due to credit card fees, interchange and other credit
card  income,  which  increased  to $153.6  million for 1997,  up 74% over $88.3
million for 1996.  In addition,  fee-based  services  revenues  increased 26% to
$63.4  million for 1997, up from $50.3 million for 1996.  These  increases  were
primarily due to the growth in total accounts and outstanding receivables in the
managed credit card loan portfolio.

         Other operating expenses increased to $138.0 million in 1997,  compared
to $101.3 million in 1996. The increase in operating  costs was due to continued
investments  in  the  infrastructure  of the  Company.  However,  the  Company's
operating   effectiveness  as  measured  by  the  Company's   managed  operating
efficiency ratio improved to 26.6% in 1997 from 37.5% in 1996.


Managed Loan Portfolio and the Impact of Credit Card Securitizations

         Securitization

         A major  source of funding  for the  Company is the  securitization  of
credit card loans.  Securitization  requires  the Company to remove  credit card
loans sold with  limited  recourse  from the  consolidated  balance  sheet.  The
securitization  and sale of credit card loans changes the Company's  interest in
such loans from lender to servicer,  with a corresponding change in how revenues
and expenses are reported in the income statement.  For securitized  credit card
loans,  amounts that otherwise would have been recorded as net interest  income,
fee income and provision for loan losses are instead reported in other operating
income as net securitization and credit card servicing income.


         Managed Loan Portfolio

         The  Company  analyzes  its  financial  performance  on a managed  loan
portfolio  basis. To do so, the income  statement and balance sheet are adjusted
to reverse the effects of securitization.  The Company's discussion of revenues,
where applicable,  and provision for loan losses includes comparisons to amounts
reported in the Company's  consolidated  statements of income ("owned basis") as
well as on a managed basis.

         The Company's  managed loan portfolio is comprised of credit card loans
held  for  securitization,  retained  interests  in  loans  securitized  and the
investors'  share of  securitized  credit card loans.  The  investors'  share of
securitized credit card loans is not an asset of the Company, and therefore,  is
not shown on the Company's  consolidated  balance sheets.  The following  tables
summarize the Company's managed loan portfolio:
<TABLE>

                                                             December 31,
                                                  1998          1997       1996
                                                  ----          ----       ----
(Dollars in thousands)
Year-end balances:
Credit card loans:
<S>                                           <C>          <C>          <C>
  Loans held for securitization ...........   $    3,430   $    8,795   $   14,164
  Retained interests in loans securitized .      753,469      471,831      201,165
  Investors' interests in securitized loans    4,558,143    3,066,310    1,400,611
                                               ---------    ---------    ---------
Total managed loan portfolio ..............   $5,315,042   $3,546,936   $1,615,940
                                              ==========   ==========   ==========
</TABLE>





<PAGE>
<TABLE>


                                                       Year Ended December 31,
                                             -------------------------------------
                                                  1998         1997         1996
                                                  ----         ----         ----
(Dollars in thousands)
Average balances:
Credit card loans:
<S>                                           <C>          <C>          <C>
  Loans held for securitization ...........   $   52,016   $   78,264   $   28,632
  Retained interests in loans securitized .      544,364      278,554      121,177
  Investors' interests in securitized loans    3,404,087    1,938,075      869,047
                                               ---------    ---------      -------
Total managed loan portfolio ..............   $4,000,467   $2,294,893   $1,018,856
                                              ==========   ==========   ==========
</TABLE>



Impact of Credit Card Securitizations

         The  following  table  provides a summary of the effects of credit card
securitizations on selected line items of the Company's statements of income for
each of the periods presented, as well as selected financial information on both
an owned and managed loan portfolio basis:

                                                  Year Ended December 31,
                                        --------------------------------------
(Dollars in thousands)                       1998         1997           1996
                                             ----         ----           ----
Statements of Income (owned basis):
   Net interest income ..............   $   82,698    $   57,243    $   26,088
   Provision for loan losses ........       77,770        43,989        18,477
   Other operating income ...........      312,958       186,677       126,222
   Other operating expense ..........      224,638       138,048       101,287
                                        ----------    ----------    ----------
   Income before income taxes .......   $   93,248    $   61,883    $   32,546
                                        ==========    ==========    ==========

Adjustments for Securitizations:
   Net interest income ..............   $  423,114    $  249,118    $  117,403
   Provision for loan losses ........      456,354       275,310       117,828
   Other operating income ...........       33,240        26,192           425
   Other operating expense
                                        ----------    ----------    ----------
   Income before income taxes .......   $             $             $
                                        ==========    ==========    ==========
Statements of Income (managed basis):
   Net interest income ..............   $  505,812    $  306,361    $  143,491
   Provision for loan losses ........      534,124       319,299       136,305
   Other operating income ...........      346,198       212,869       126,647
   Other operating expense ..........      224,638       138,048       101,287
                                        ----------    ----------    ----------
   Income before income taxes .......   $   93,248    $   61,883    $   32,546
                                        ==========    ==========    ==========

Other Data:
Owned Basis:
   Average interest earning assets ..   $  636,133    $  403,375    $  171,877
   Return on average assets .........          7.4%          9.1%          9.6%
   Return on average total equity ...         26.1%         24.1%         21.6%
   Net interest margin (1) ..........         13.0%         14.2%         15.2%
Managed Basis:
   Average interest earning assets ..   $4,040,220    $2,341,451    $1,040,924
   Return on average assets .........          1.4%          1.6%          1.9%
   Return on average total equity ...         26.1%         24.1%         21.6%
   Net interest margin (1) ..........         12.5%         13.1%         13.8%

(1) Net  interest  margin is equal to net  interest  income  divided  by average
interest-earning assets.

         Risk Based Pricing

         The  Company  prices  credit  card offers  based on a  prospect's  risk
profile  prior to  solicitation.  The Company  evaluates a prospect to determine
credit needs,  credit risk, and existing credit availability and then develops a
customized offer that includes the most appropriate product,  brand, pricing and
credit line.  After credit card  accounts are opened,  the Company  periodically
monitors  customers'  internal and external credit  performance and periodically
recalculates  behavior,   revenue,   attrition  and  bankruptcy  predictors.  As
customers evolve through the credit life cycle and are regularly  rescored,  the
lending   relationship   can  evolve  to  include  more   competitive  (or  more
restrictive)  pricing and product  configurations.  These analyses  consider the
overall  profitability  of  accounts  using  both  credit  information  and  the
profitability from selling fee-based services to the customers.

Net Interest Income

         Net  interest  income  consists  primarily  of  interest  earned on the
Company's  credit card loans less  interest  expense on  borrowings  to fund the
loans.  Managed net interest  income for the year ended  December 31, 1998,  was
$505.8  million  compared  to $306.4  million  for the same  period in 1997,  an
increase of $199.4  million.  This  increase was primarily due to a $1.7 billion
increase  in average  managed  loans  over the  comparable  period in 1997.  The
managed net interest  margin  decreased to 12.5% for the year ended December 31,
1998,  from 13.1% for the year ended  December  31, 1997.  The  reduction in the
managed net  interest  margin was  primarily  due to  increased  charge-offs  of
finance  charges in 1998. The net interest margin on an owned basis decreased to
13.0% for the year ended  December 31,  1998,  from 14.2% for the same period in
1997  primarily  due  to  higher   financing  costs  as  a  percent  of  average
interest-earning assets.

         Managed net interest  income for the year ended  December 31, 1997, was
$306.4  million  compared  to $143.5  million  for the same  period in 1996,  an
increase of $162.9  million.  This  increase was primarily due to a $1.3 billion
increase  in average  managed  loans  over the  comparable  period in 1996.  The
average yield on managed interest-earning assets decreased to 18.6% for the year
ended  December 31, 1997,  from 19.1% for the year ended  December 31, 1996. The
acquisition of two credit card portfolios reduced the average yield for the year
ended December 31, 1997 by  approximately  0.2%. The remaining  reduction in the
average  yield was due to increased  finance  charge  charge-offs  in 1997.  The
average yield on  interest-earning  assets on an owned basis  decreased to 17.2%
for the year ended December 31, 1997, from 17.6% for the same period in 1996.


<PAGE>


         The  following  table  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, 1998, 1997 and 1996:

Analysis of Average Balances, Interest and Average Yields and Rates
<TABLE>

                                                                         Year Ended December 31,
                                              ---------------------------------------------------------------------------
                                                                 1998                                 1997
                                                                 ----                                 ----
(Dollars in thousands)                           Average                    Yield/    Average                   Yield/
                                                 Balance       Interest      Rate     Balance        Interest    Rate
Owned Basis
Assets:
Interest-earning assets:
<S>                                           <C>            <C>            <C>     <C>            <C>            <C>
Federal funds sold ........................   $    20,190    $     1,065     5.3%   $    30,049    $     1,636     5.4%
Short-term investments ....................        19,563          1,028     5.3%        16,509            863     5.2%
Credit card loans and retained
   interests in loans
   securitized ............................       596,380        111,118    18.6%       356,817         66,695    18.7%
                                                  -------        -------    ----        -------         ------    ----
Total interest-earning assets .............   $   636,133    $   113,211    17.8%   $   403,375    $    69,194    17.2%
                                                  -------        -------    ----        -------         ------    ----
Other assets ..............................       423,278                               172,739
Allowance for loan losses .................      (285,244)                             (158,211)
                                                  -------                               -------
    Total assets ..........................   $   774,167                           $   417,903
                                              ===========                           ===========

Liabilities and  Equity:
Interest-bearing liabilities ..............   $   284,038    $    30,513    10.7%   $   149,726    $    11,951     8.0%
Other liabilities .........................       270,294                               109,997
                                                  -------                               -------
Total liabilities .........................       554,332                               259,723
Stockholders' equity ......................       219,835                               158,180
                                                  -------                               -------
Total liabilities and equity ..............   $   774,167                           $   417,903
                                              ===========                           ===========

Net interest income and interest margin (1)                  $    82,698    13.0%                $    57,243    14.2%
Net interest rate spread (2) ..............                                  7.1%                                9.2%

Managed Basis

Credit card loans .........................   $ 4,000,467    $   738,675    18.5%   $ 2,294,893    $   433,334    18.9%
Total interest-earning assets .............     4,040,220        740,768    18.3%     2,341,451        435,833    18.6%
Total interest-bearing liabilities.........     3,719,960        234,956     6.3%     2,087,801        129,472     6.2%
Net interest income and interest margin (1)                      508,812    12.5%                      306,361    13.1%
Net interest rate spread (2) ..............                                 12.0%                                 12.4%
</TABLE>

(1)Net interest margin is computed by dividing net interest income by average
   total interest-earning assets.
(2)The interest rate spread is the yield on average  interest-earning  assets
   minus the funding rate on average interest-bearing liabilities.


<PAGE>


Analysis of Average Balances, Interest and Average Yields and Rates (continued)
<TABLE>

                                                                                 Year Ended December 31,
                                               -------------------------------------------------------------------------------------
                                                                     1997                                        1996
                                               -------------------------------------------------------------------------------------
(Dollars in thousands)                           Average                        Yield/        Average                       Yield/
                                                 Balance         Interest        Rate         Balance        Interest        Rate
Owned Basis
Assets:
Interest-earning assets:
<S>                                           <C>            <C>                  <C>     <C>            <C>                   <C>
Federal funds sold ........................   $    30,049    $     1,636           5.4%   $    16,299    $       867            5.3%
Short-term investments ....................        16,509            863           5.2%         5,769            299            5.2%
Credit card loans and retained
  interests in loans
  securitized .............................       356,817         66,695          18.7%       149,809         29,028           19.4%
                                                  -------         ------          ----        -------         ------           ----
    Total interest-earning assets .........   $   403,375    $    69,194          17.2%   $   171,877    $    30,194           17.6%
                                                  -------         ------          ----        -------         ------           ----
Other assets ..............................       172,739                                      91,030
Allowance for loan losses .................      (158,211)                                    (53,608)
                                                  -------                                     -------
    Total assets ..........................   $   417,903                                 $   209,299
                                              ===========                                 ===========

Liabilities and  Equity:
Interest-bearing liabilities ..............   $   149,726    $    11,951           8.0%   $    57,708   $      4,106            7.1%
Other liabilities .........................       109,997                                      58,739
                                                  -------                                     -------
Total liabilities ..........................      259,723                                    116,447
Stockholders' equity ......................       158,180                                      92,852
                                                  -------                                     -------
Total liabilities and equity ..............   $   417,903                                 $   209,299
                                              ===========                                 ===========

Net interest income and interest margin (1)                  $   57,243           14.2%                   $   26,088           15.2%
Net interest rate spread (2) ..............                                        9.2%                                        10.5%

Managed Basis
Credit card loans .........................   $ 2,294,893    $   433,334          18.9%   $ 1,018,856    $   197,467           19.4%
Total interest-earnings assets ............     2,341,451        435,833          18.6%     1,040,924        198,633           19.1%
Total interest-bearing liabilities.........     2,087,801        129,472           6.2%       926,755         55,142            5.9%
Net interest income and interest margin (1)                      306,361          13.1%                      143,491           13.8%
Net interest rate spread (2) ..............                                       12.4%                                        13.2%
</TABLE>

(1)   Net interest margin is computed by dividing net interest income by average
      total interest-earning assets.
(2)   The interest rate spread is the yield on average  interest-earning  assets
      minus the funding rate on average interest-bearing liabilities.


<PAGE>


Interest Variance Analysis

         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.  The following table
presents  the  effects  of  changes in  average  volume  and  interest  rates on
individual financial statement line items on an owned basis:
<TABLE>

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

                                                 Change due to*                    Change due to*
(Dollars in thousands)              Increase/
                                   (Decrease)     Volume       Rate     Increase    Volume       Rate

Interest Income:
<S>                                 <C>         <C>         <C>         <C>        <C>         <C>
Federal funds sold ..............   $   (571)   $   (521)   $    (50)   $    769   $    749    $     20
Short-term investments ..........        165         160           5         564        562           2
Credit card loans and retained
   interests in loans securitized     44,423      44,635        (212)     37,667     38,655        (988)
                                    --------    --------    --------    --------   --------    --------
   Total interest income ........     44,017      43,061         956      39,000     39,694        (694)
Interest expense ................     18,562      13,397       5,165       7,845      7,288         557
                                    --------    --------    --------    --------   --------    --------

Net interest income .............   $ 25,455    $ 29,664    $ (4,209)   $ 31,155   $ 32,406    $ (1,251)
                                    ========    ========    ========    ========   ========    ========
</TABLE>

* The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amounts of the change in
each.  The changes in income and expense are calculated independently for each
caption in the analysis.  The totals for the volume and rate columns are not the
sum of the individual lines.

Other Operating Income

         Other  operating  income  contributes  substantially  to the  Company's
results of operations,  representing  73%, 73% and 81% of owned revenues for the
years ended December 31, 1998, 1997 and 1996,  respectively.  Fee-based services
revenues,  particularly  from debt  waiver  products,  continue  to  provide  an
increasing  percentage of other operating income. Debt waiver products and other
fee-based  services revenues are expected to increase with growth in credit card
accounts and as the Company  continues to offer other fee-based  services to its
customer base and to customers of third  parties.  The following  table presents
other operating income on an owned basis:
<TABLE>

                                                                Year Ended December 31,
                                                           ---------------------------------
(Dollars in thousands)                                         1998        1997       1996
                                                               ----        ----      -----

Other Operating Income:
<S>                                                           <C>         <C>        <C>
Net securitization and credit card servicing income ......   $138,221   $ 79,533   $ 49,921
Credit card fees, interchange and other credit card income     68,136     43,731     26,028
Fee-based services revenues ..............................    106,601     63,413     50,273
                                                             --------   --------   --------
      Total ..............................................   $312,958   $186,677   $126,222
                                                             ========   ========   ========
</TABLE>


<PAGE>



         Other  operating  income  increased  $126.3  million for the year ended
December 31, 1998, over 1997,  primarily due to income generated from the growth
in  average  credit  card  loans.  Additionally,   fee-based  services  revenues
increased 68% to $106.6 million  because of the Company's  marketing  efforts to
cross-sell  other  products and services to its customers and customers of third
parties. Specifically, debt waiver product revenue increased by $26.2 million to
$73.8 million for the year ended December 31, 1998, as the Company  continued to
add new  credit  card  customers  with  debt  waiver  protection.  In  addition,
interchange  revenue  increased  over the prior year due to credit  card  charge
volume  increasing  to  approximately  $3.9 billion in 1998 from $2.7 billion in
1997.

         On September  28, 1998,  the SEC issued a press  release and stated the
"SEC  will  formulate  and  augment  new  and  existing   accounting  rules  and
interpretations   covering   revenue   recognition,    restructuring   reserves,
materiality, and disclosure;" for all publicly-traded companies. Until such time
as the SEC staff issues such interpretative  guidelines,  it is unclear what, if
any,  impact such  interpretative  guidance will have on the  Company's  current
accounting  practices.  However,  the potential  changes in accounting  practice
being  considered by the SEC Staff could have a material impact on the manner in
which the Company recognizes  revenue.  Any such changes would have no effect on
reported cash flow or the economic value of the Company's business.

         The fee-based services revenues reported for 1998 reflect the Company's
previously announced change in revenue  recognition.  This change was made to be
consistent with recent revenue  recognition policy changes made by others in the
Company's  industry.  This change resulted in a cumulative one-time reduction in
revenues of approximately $3.0 million and a corresponding reduction in expenses
of approximately $3.1 million, or a $68,000 increase in net income.

         Other  operating  income  increased  $60.5  million  for the year ended
December 31, 1997, over 1996,  primarily due to income generated from the growth
in average  securitized  credit card  loans.  Additionally,  fee-based  services
revenues  increased  26% to $63.4  million  because of the  Company's  marketing
efforts to cross-sell other products and services to its customers and customers
of third parties.  Specifically,  debt waiver product revenue increased by $22.1
million to $47.6  million for the year ended  December 31, 1997,  as the Company
continued  to add new credit  card  customers  with debt waiver  protection.  In
addition,  interchange  revenue increased over the prior year due to credit card
charge volume increasing to approximately $2.7 billion in 1997 from $1.7 billion
in 1996.


<PAGE>

<TABLE>


Other Operating Expense
                                                                 Year Ended December 31,
                                                             -----------------------------
(Dollars in thousands)                                         1998        1997      1996
                                                               ----        ----      ----

Other Operating Expense:
<S>                                                          <C>        <C>        <C>
Credit card account and other product solicitation and
   marketing expenses ....................................   $ 40,949   $ 30,503   $ 29,297
Employee compensation ....................................     62,627     35,200     23,068
Data processing services and communications
                                                               35,445     20,087     12,757
Third-party servicing expense ............................     11,074     12,711      9,207
Warranty and debt waiver underwriting and claims servicing
   expense ...............................................     12,279      6,053     10,024
Credit card fraud losses .................................      4,436      3,240      2,276
Other ....................................................     57,828     30,254     14,658
                                                               ------     ------     ------
      Total ..............................................   $224,638   $138,048   $101,287
                                                             ========   ========   ========
</TABLE>


         Total other  operating  expenses  for the year ended  December 31, 1998
increased  $86.6  million over 1997,  largely due to costs  associated  with the
growth of the Company's  business  activities.  Employee  compensation and other
expenses increased $27.4 million and $27.6 million,  respectively,  for the year
ended  December 31, 1998,  due to  increased  staffing  needs and use of outside
services to support the  increase in credit card  accounts,  fee-based  services
active member growth and other  functions.  Also, data  processing  services and
communications  expenses  increased $15.4 million,  largely due to the growth in
credit card accounts, transaction volumes and loan balances.

         Total other  operating  expenses for the year ended  December 31, 1997,
increased  $36.8  million over 1996,  largely due to costs  associated  with the
growth of the Company's business activities.  Also, data processing services and
communications  expenses and third-party  servicing  expenses  increased by $7.3
million and $3.5 million, respectively, largely due to the growth in credit card
accounts, transaction volumes and loan balances.

         Total other operating  expenses  include direct and allocated  expenses
from  FCI  for  administrative   services  provided  to  the  Company  under  an
administrative  services  agreement  between the Company and FCI.  Additionally,
total other operating  expenses  reflect the  retroactive  effects of additional
agreements and contracts  between the Company and FCI or its  subsidiaries  (see
Note 1 to the Consolidated Financial Statements).

Income Taxes

         The  Company's  provision  for income taxes  includes  both federal and
state  income  taxes.  Applicable  income tax expense was $35.9  million,  $23.8
million and $12.5 million for the years ended December 31, 1998,  1997 and 1996,
respectively. This tax expense represents an effective tax rate of 38.5% for the
years ended December 31, 1998, 1997 and 1996.

Asset Quality

         The Company's 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
the  Company's  various  credit  card  account  portfolios,  the  success of the
Company's collection and recovery efforts, and general economic conditions.  The
average age of the  Company's  credit card  portfolio  affects the  stability of
delinquency and loss rates of the portfolio.  The Company continues to focus its
resources on refining its credit underwriting standards for new accounts, and on
collections  and post  charge-off  recovery  efforts to minimize net losses.  At
December 31, 1998,  51% of managed  accounts and 47% of managed  loans were less
than 24 months old.  Accordingly,  the Company  believes that its loan portfolio
will experience  increasing or fluctuating levels of delinquency and loan losses
as the average age of the Company's accounts increases.

         This trend is reflected in the change in the Company's  net  charge-off
ratio.  For the year ended December 31, 1998, the Company's net charge-off ratio
was 10.1%,  compared to 8.3% and 6.2% for the years ended  December 31, 1997 and
1996,  respectively.  The charge-off ratio for the years ended December 31, 1998
and  1997 was  favorably  impacted  by  approximately  70 and 90  basis  points,
respectively,  due to purchase accounting related to the portfolio acquisitions.
The Company  believes,  consistent with its statistical  models and other credit
analysis,  that this rate will continue to fluctuate but generally rise over the
next year.

         The Company's strategy for managing loan losses consists of credit line
management and customer purchase authorizations. Loan losses are further managed
through the offering of credit lines which are generally lower than is currently
standard in the industry. Individual accounts and their related credit lines are
also continually  managed using various  marketing,  credit and other management
processes in order to continue to maximize the profitability of accounts.

         Delinquencies

         Delinquencies  not only have the  potential  to affect  earnings in the
form of net loan losses, but are also costly in terms of the personnel and other
resources  dedicated to their resolution.  Delinquency levels are monitored on a
managed  basis,  since  delinquency on either an owned or managed basis subjects
the Company to credit loss  exposure.  A credit  card  account is  contractually
delinquent if the minimum  payment is not received by the specified  date on the
cardholder's  statement.  It is the  Company's  policy  to  continue  to  accrue
interest  and  fee  income  on all  credit  card  accounts,  except  in  limited
circumstances,  until the account and all related loans, interest and other fees
are charged off. The  following  table  presents the  delinquency  trends of the
Company's credit card loan portfolio on a managed portfolio basis:

Managed Loan Delinquency
<TABLE>


                                           December 31,    % of    December 31,  % of    December 31,  % of
                                               1998       Total        1997      Total      1996       Total
                                               ----      -------    ----------   ----    ----------    ------
(Dollars in thousands)
<S>                                          <C>            <C>    <C>            <C>    <C>           <C>
Managed loan portfolio ...................   $5,315,042     100%   $3,546,936     100%   $1,615,940    100%
Loans contractually delinquent:
   30 to 59 days .........................      113,449     2.1%       72,114     2.0%       32,114     2.0%
   60 to 89 days .........................       75,049     1.4%       49,300     1.4%       20,398     1.2%
   90 or more days .......................      173,812     3.3%      111,166     3.2%       36,857     2.3%
                                                -------     ---       -------     ---        ------     ---
      Total ..............................   $  362,310     6.8%   $  232,580     6.6%   $   89,369     5.5%
                                             ==========     ===    ==========     ===    ==========     ===
</TABLE>


         The above  numbers  reflect the  continued  seasoning of the  Company's
managed loan portfolio.  In 1998 and 1997, the ratios were favorably impacted by
purchase  accounting  for  portfolio  acquisitions  by 60 basis  points for both
periods.  The  Company  intends  to  continue  to  focus  its  resources  on its
collection  efforts to  minimize  the  negative  impact to net loan  losses that
results from increased delinquency levels.


<PAGE>


         Net charge-offs

         Net charge-offs include the principal amount of losses from cardholders
unwilling or unable to pay their loan balances, as well as bankrupt and deceased
cardholders,  less current period  recoveries.  Net charge-offs  exclude accrued
finance  charges and fees,  which are charged  against the related income at the
time of charge-off.  The following  table presents the Company's net charge-offs
for the periods indicated as reported in the consolidated  financial  statements
and on a managed portfolio basis:
<TABLE>

                                                                     Year Ended December 31,
                                                           ----------------------------------------
                                                                1998          1997          1996
                                                                ----          ----          ----
(Dollars in thousands)
Owned Basis:
<S>                                                         <C>           <C>           <C>
     Average loans outstanding ..........................   $  596,380    $  356,817    $  149,809
     Net charge-offs ....................................       58,793        29,398         9,327
     Net charge-offs as a percentage
     of  average loans outstanding ......................          9.9%          8.2%          6.2%
                                                                   ===           ===           ===
Managed Basis:
     Average loans outstanding ..........................   $4,000,467    $2,294,893    $1,018,856
     Net charge-offs ....................................      405,077       191,130        62,855
     Net charge-offs as a percentage
     of average loans outstanding .......................         10.1%          8.3%          6.2%
                                                                  ====           ===           ===
</TABLE>



         Provision and allowance for loan losses

         The allowance for loan losses is maintained  for the retained  interest
in loans  securitized.  For securitized  loans,  anticipated  losses and related
provisions   for  loan  losses  are  reflected  in  the   calculations   of  net
securitization and credit card servicing income.  Provisions for loan losses are
made in amounts  necessary to maintain the allowance at a level  estimated to be
sufficient to absorb  probable  future losses of principal and earned  interest,
net of recoveries, inherent in the existing loan portfolio.

         The  provision  for loan  losses on a managed  basis for the year ended
December  31, 1998,  totaled  $534.1  million  compared to a provision of $319.3
million in 1997.  The increase in the provision for loan losses in 1998 compared
to 1997 is primarily  reflective of the large  increase in loans and the overall
seasoning  of the  portfolio.  The  following  table  presents the change in the
Company's  allowance  for loan  losses and other  ratios on a managed  portfolio
basis for the periods presented:

Analysis of Allowance for Loan Losses



<PAGE>
<TABLE>


                                                                Year Ended December 31,
                                                         -----------------------------------
(Dollars in thousands)                                       1998        1997        1996
                                                             ----        ----        ----
Managed Basis:
<S>                                                        <C>         <C>         <C>
Balance at beginning of year ...........................   $244,084    $ 95,669    $ 22,219
Allowance related to assets acquired, net ..............     20,152      20,246
Provision for loan losses ..............................    534,124     319,299     136,305
Loans charged off ......................................    420,875     195,535      64,083
Recoveries .............................................     15,798       4,405       1,228
                                                            -------     -------      ------
Net loan charge-offs ...................................    405,077     191,130      62,855
                                                            -------     -------      ------
Balance at end of year .................................   $393,283    $244,084    $ 95,669
                                                           ========    ========    ========

Ending allowance as a percent of loans .................        7.4%        6.9%        5.9%
                                                           ========    ========    ========
</TABLE>

         Management  believes the allowance for loan losses is adequate to cover
probable losses in the loan portfolio under current conditions.  However,  there
can be no  assurance  as to the future  credit  losses  that may be  incurred in
connection  with the Company's  loan  portfolio,  nor can there be any assurance
that the loan loss  allowance  that has been  established by the Company will be
sufficient to absorb such expected loan losses.  Management continually monitors
the allowance for loan losses and makes  additional  provisions to the allowance
as it deems appropriate. Derivatives Activities

         The Company uses  derivative  financial  instruments for the purpose of
managing its exposure to interest  rate risks and has a number of  procedures in
place to monitor and control both market and credit risk from these  derivatives
activities. All derivatives strategies and transactions are managed by a special
management  committee  which  must  make  quarterly  reports  to  the  Board  of
Directors.

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

Market Risk

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

         To  manage  the  Company's   direct  risk  to  market  interest  rates,
management  actively  monitors  the interest  rates and the  interest  sensitive
components  of the  Company's  owned and managed  balance  sheet to minimize the
impact  changes in interest  rates have on the fair value of assets,  net income
and cash flow.  Management  seeks to minimize  the impact of changes in interest
rates on the Company primarily by matching asset and liability repricings.

         The Company's  primary owned and managed  assets are credit card loans,
which are  virtually  all priced at rates  indexed to the  variable  Prime Rate.
Retained  interests in loans securitized and loans held for  securitization  are
funded  through a combination of cash flow from  operations,  the Company's $300
million bank credit facility, $200 million in senior notes, and equity issuance.
The $300  million  bank  credit  facility  has  pricing  that is  indexed to the
variable London Interbank  Offered Rate ("LIBOR") or a Prime Rate. The Company's
securitized  loans  are  owned  by  the  Trust  and  bank-sponsored  multiseller
receivables  conduits (the  "Conduits"),  which have committed  current  funding
indexed to variable  commercial  paper rates,  as well as term funding  which is
either  directly  indexed to LIBOR or at fixed  rates.  At  December  31,  1998,
approximately 26.1% of the Trust and Conduit funding of securitized  receivables
was funded with fixed rate certificates.

         Combining  the interest rate floor  transaction  referred to above with
the Trust and Conduit funding, in a low market interest rate environment,  84.1%
of the  funding  for the  securitized  loan  portfolio  is indexed  to  floating
commercial  paper and LIBOR rates. In a high market  interest rate  environment,
the  potentially  negative  impact on  earnings  of higher  interest  expense is
mitigated  by the  fixed  rate  funding  and the  interest  rate  cap  contracts
described above.
         The approach  used by  management  to quantify  interest rate risk is a
sensitivity  analysis which management  believes best reflects the risk inherent
in the Company's  business.  This approach  calculates  the impact on net income
from an  instantaneous  and  sustained  change  in  interest  rates by 200 basis
points.  Assuming no  counteractive  measures by  management,  a 200 basis point
increase in interest  rates  affecting  the Company's  floating  rate  financial
instruments,  including  both debt  obligations  and  loans,  will  result in an
increase in net income of  approximately  $16.7 million  relative to a base case
over the next 12 months;  while a decrease of 200 basis  points will result in a
reduction in net income of  approximately  $12.5  million.  The Company's use of
this methodology to quantify the market risk of financial instruments should not
be  construed 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 the
Company's  cardholders.  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.


Liquidity, Funding and Capital Resources

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

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

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

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

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

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

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

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

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

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

         In November 1997, the Company privately issued and sold $100 million of
10% Senior Notes due 2004 pursuant to an exemption  under the  Securities Act of
1933, as amended.  The net proceeds were used to reduce borrowings under the Old
Credit  Facility.  In January 1998, the Company  commenced an exchange offer for
the Senior  Notes  pursuant to a  registration  statement.  The terms of the new
Senior  Notes are  identical in all  material  respects to the original  private
issue.  The  Senior  Notes are  unconditionally  guaranteed  on a senior  basis,
jointly and severally,  by Metris Direct, Inc., a subsidiary of Metris Companies
Inc.,  and all future  subsidiaries  of the Company  that  guarantee  any of the
Company's  indebtedness,  including the New Credit Facility. The guarantee is an
unsecured  obligation  of Metris  Direct,  Inc.  and ranks  pari  passu with all
existing and future unsubordinated indebtedness.
         The Federal Reserve Act imposes various legal limitations on the extent
to which  banks that are members of the  Federal  Reserve  System can finance or
otherwise  supply funds to certain of their  affiliates.  In particular,  Direct
Merchants Bank is subject to certain restrictions on any extensions of credit to
the Company or its subsidiaries.  Additionally, Direct Merchants Bank is limited
in its ability to declare dividends to the Company.  Therefore, Direct Merchants
Bank's  investments  in federal  funds sold are  generally not available for the
general liquidity needs of the Company or its subsidiaries.  These  restrictions
were not  material to the  operations  of the  Company at December  31, 1998 and
1997.

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

Capital Adequacy

         During 1998, the Company improved its financial position,  as reflected
by an increase in  stockholders'  equity,  through the  completion  of a private
placement with the Lee Company as described above,  which raised net proceeds of
approximately $270 million.

         Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted  by the Office of the  Comptroller  of the  Currency  (the  "OCC"),  its
primary regulator. At December 31, 1998 and 1997, Direct Merchants Bank exceeded
the minimum  required  capital  levels and was  considered a  "well-capitalized"
depository institution under regulations of the OCC.

Newly Issued Pronouncements

         In June 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards for derivative  instruments.  It 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.  This  statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company is evaluating  the financial  impact the adoption of this  statement
will have on in its financial statements.


Year 2000

         The "Year 2000  Problem"  is a result of  software  systems or hardware
systems utilizing two digits instead of four digits to define the year. Software
or hardware with only two digit  capacity may interpret the year 00 as 1900 when
calculating  age,  length  of a phone  call,  financing  period  for a loan,  or
expiration  for a credit  card.  The  problem is not  limited to  computers  and
computer  software.  Anything  that  contains a  processor  that  utilizes  date
information  needs to be assessed to insure it will work  correctly  in the Year
2000 (i.e. heating/cooling systems, telephones, elevators, alarm systems, vaults
with  time  locks).  Vendors  must be  evaluated  to  ensure  their  compliance;
otherwise  materials  essential  to business  operation  may not be delivered on
time.

         The  Company,  like all  database  marketing  companies  and  financial
services  institutions,  depends heavily upon computer systems for all phases of
its operations.  The Company  processes data through its own systems and obtains
data and processing services from various vendors. The Company,  therefore, must
concern  itself not only with its own systems,  but also with the status of Year
2000  compliance  with respect to those vendors that provide data and processing
services to the Company.

         Most of the Company's existing  information systems are less than three
years  old and were  originally  designed  for Year  2000  compliance,  but as a
cautionary measure, the Company has begun testing such internal systems for Year
2000  compliance.  The Company has created a Year 2000 project team to identify,
address,  and monitor internal computer systems;  environmental  systems such as
heating/cooling systems, telephones, and elevators; and vendor issues related to
Year 2000 issues. The Company believes that it has adequate resources to achieve
Year 2000 compliance for its systems, which currently may be compliant,  and the
evaluation of vendors.

         The following phases are used in managing the Year 2000 project for the
Company.  These  phases are  consistent  with the OCC and the Federal  Financial
Institutions  Examination  Council  (the  "FFIEC")  recommendations  for project
organization.

         The Awareness Phase was completed in October 1997.  The goal was to
define the Year 2000 problem and gain executive level support.

         The  Assessment  Phase was  completed  in March  1998.  The goal was to
complete  an  inventory  of  possible  Year  2000  exposure  points  to  gain an
understanding of the size and complexity of the issue.

         The  Renovation  Phase began March 1998 with a targeted  completion  of
July 1999 for mission critical applications. This phase of the project cannot be
considered  successful  and  complete  until the systems  have  experienced  the
century and the leap year transitions and any problems have been addressed.  The
goal of this phase is code enhancement,  hardware and software upgrades,  system
replacements, vendor certification and other associated changes.

         The  Validation  and  Implementation  Phase  began in April 1998 with a
targeted  completion of mission critical  applications by September 1999. Again,
this phase of the project cannot be considered successful and complete until the
systems  have  experienced  the  century and the leap year  transitions  and any
problems have been addressed.  The goal of this phase is  validation/testing  of
items to ensure Year 2000 compliance,  implementation of renovated systems,  and
certification of Year 2000 compliance by business users.

The following  milestones  are a part of the Company's plan to achieve Year 2000
compliance.
<TABLE>

         ------------------------------- ----------------------------------------------------------------------------------------
<S>                                     <C>
         September 30, 1998              Completed development of a proactive customer awareness program
         ------------------------------- ----------------------------------------------------------------------------------------
         ------------------------------- ----------------------------------------------------------------------------------------
         September 30, 1998              Completed organization planning guidelines and business impact analysis for Year 2000
                                         Business Resumption Contingency Planning
         ------------------------------- ----------------------------------------------------------------------------------------
         ------------------------------- ----------------------------------------------------------------------------------------
         December 31, 1998               Contingency planning and validation for Year 2000 Business Resumption Contingency
                                         Planning is underway.
         ------------------------------- ----------------------------------------------------------------------------------------
         ------------------------------- ----------------------------------------------------------------------------------------
         March 31, 1999                  Testing with service providers for mission critical systems should be substantially
                                         complete
         ------------------------------- ----------------------------------------------------------------------------------------
         ------------------------------- ----------------------------------------------------------------------------------------
         September 30, 1999              Testing of mission-critical systems should be complete and implementation should be
                                         substantially complete.
         ------------------------------- ----------------------------------------------------------------------------------------
         ------------------------------- ----------------------------------------------------------------------------------------
         October 31, 1999                Contingency planning and validation for Year 2000 Business Resumption Contingency
                                         Planning should be complete.
         ------------------------------- ----------------------------------------------------------------------------------------
</TABLE>

         As of December 1998, the project is on schedule.  A customer  awareness
program  has  been  implemented;  a  Contingency  Planning  framework  has  been
completed and contingency planning efforts are well underway; testing of mission
critical  systems was underway by December 1998; and testing of Mission Critical
systems is targeted for completion by September 1999.

         The Company is dependent on databases  maintained  by FCI, and card and
statement  generation,  among other  services,  provided by First Data Resources
("FDR").  In  addition,  the Company is  dependent  on  MasterCard  and Visa for
clearinghouse  activities  associated with credit card use. The project team has
been  working  with  its  identified  material  vendors,   including  FCI,  FDR,
MasterCard, and Visa to determine the status of each vendor's plans for becoming
Year 2000 compliant. The project team is striving to obtain test results showing
Year 2000  compliance  by vendors by the end of the first  quarter  1999 and has
developed high level contingency plans to address non-compliance by its material
vendors, which may include replacing vendors.

         Although the Company cannot ensure  compliance by all of its vendors on
a timely  basis,  the Company  believes that it is taking  appropriate  steps to
identify exposure to Year 2000 problems and to address them on a timely basis.


<PAGE>


         The Company believes that the costs of Year 2000 compliance will not be
material  to  the  Company's   consolidated   financial  position,   results  of
operations, or cash flows.

         The most  reasonably  likely  worst case  scenario  that may impact the
Company's  results of  operations,  financial  condition  and  prospects  is the
failure  of FDR,  VISA and  MasterCard to provide  services.  The
Company's  cardholders  would be unable to use their  credit  cards or otherwise
access their accounts.  Due to several  unknown  contributing  factors,  and the
scope of the Year 2000 issue,  the impact this worst case scenario would have on
the Company's results of operations,  financial  condition and prospects,  is an
uncertainty.  The  scenarios  will be analyzed and  addressed  in the  Company's
contingency plans.

         The Company views contingency  planning from a remediation and business
resumption  perspective.  Remediation  Contingency Planning refers to mitigating
the risks  associated  with the  failure to  successfully  complete  renovation,
validation,  and implementation of mission critical systems and vendor services.
Year 2000 Business Resumption Contingency Planning is the process of identifying
core  business  processes  and critical  information  systems that support those
processes,  and  developing  plans to enable those  processes to be resumed,  or
alternatives instituted, in the event of a disruption.

         The Company has completed high level Year 2000 Remediation  Contingency
plans for mission  critical  applications  and vendors.  The  contingency  plans
include  identification  of the  product/service  provided,  the current vendor,
other vendors that could  provide the  product/service,  estimated  timeline and
cost to convert  services to another  vendor,  and any business  reasons why the
backup  vendors  could not  provide  the  services.  These  plans  are  reviewed
periodically for accuracy.

         The Company has completed a framework  that is used in developing  Year
2000 Business  Resumption  Contingency plans and has begun to document plans for
core business processes. Completion of these plans is targeted for October 1999.

Forward-Looking Statements

         This  annual   report   contains   some   forward-looking   statements.
Forward-looking  statements give our current  expectations of future events. You
will  recognize  these  statements  because  they  do  not  strictly  relate  to
historical or current facts. Such statements may use words such as "anticipate,"
"estimate,"  "expect,"  "project," "intend," "think," "believe," and other words
or terms  of  similar  meaning  in  connection  with any  discussion  of  future
performance of the Company.  For example,  these include statements  relating to
future  actions,   future  performance  of  current  or  anticipated   products,
solicitation efforts, expenses, the outcome of contingencies such as litigation,
and the impact of the capital  markets on liquidity.  From time to time, we also
may  provide  oral or  written  forward-looking  statements  in  other  material
released to the public.

         Any or all of our forward-looking  statements in this report and in any
other public  statements we make may turn out to be wrong.  They can be affected
by inaccurate  assumptions or by known or unknown risks and uncertainties.  Many
factors,  which  can not be  predicted  with  certainty,  will be  important  in
determining  future  results.  Among  such  factors  are the  Company's  limited
operating history as a stand alone entity, its limited experience in originating
and  servicing  credit card  accounts,  the lack of seasoning of its credit card
accounts which renders predictability of delinquencies more difficult,  interest
rate risks, dependence on the securitization markets, state and federal laws and
regulations, and general economic conditions that can have a major impact on the
performance of loans.  In addition,  like all  companies,  the Company must deal
with the uncertainty  surrounding  the effect of the Year 2000 problem.  Each of
these   factors  and  others  are  more  fully   discussed   under  the  caption
"Business--Risk  Factors" contained in the Company's Annual Report on Form 10-K.
As a result of these factors,  no forward-looking  statements can be guaranteed.
Actual future results may vary materially. Also, please note that the factors we
provide are those we think could cause our actual  results to differ  materially
from expected and historical results. Other factors besides those listed here or
in the Company's 10-K could also adversely affect the Company.

         We  undertake no  obligations  to publicly  update any  forward-looking
statements, whether as a result of new information,  future events or otherwise.
You are advised,  however,  to consult any further disclosure we make on related
subjects in our periodic filings with the Securities and Exchange Commission.
This discussion is provided to you as permitted by the Private Securities
Litigation Reform Act of 1995.


<PAGE>


            MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
                              AND INTERNAL CONTROL

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

         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
utilizes 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  Peat  Marwick  LLP,  whose  independent
professional  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  Board of  Directors,  composed  solely of
outside  directors,   meets   periodically  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 Committee to discuss the results of their audit
work and their findings.


/s/ Ronald N. Zebeck                    /s/ David D. Wesselink

Ronald N. Zebeck                        David D. Wesselink
President and                           Executive Vice President,
Chief Executive Officer                 Chief Financial Officer


<PAGE>



INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Metris Companies Inc.:

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

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

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




/s/ KPMG Peat Marwick

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



<PAGE>


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

<TABLE>


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

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

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


           See accompanying Notes to Consolidated Financial Statements


<PAGE>


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

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

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

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


          See accompanying Notes to Consolidated Financial Statements.



<PAGE>


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

<TABLE>

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

          See accompanying Notes to Consolidated Financial Statements.



<PAGE>


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

          See accompanying Notes to Consolidated Financial Statements.


<PAGE>



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

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

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

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

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

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

Pervasiveness of Estimates

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


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

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

Federal Funds Sold

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

Loans Held for Securitization

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


Securitization, Retained Interests in Loans Securitized and Securitization
Income

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

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

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

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

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

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


Allowance for Loan Losses

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



<PAGE>


 Property and Equipment

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


Customer Base Intangible

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


Interest Income on Credit Card Loans

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

Fee-Based Services

         Debt Waiver Products

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


Membership Programs

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

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

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


         Extended Service Plans

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

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


Credit Card Fees and Origination Costs

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

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


Solicitation Expenses

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


Credit Card Fraud Losses

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


Interest Rate Risk Management Contracts

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


Debt Issuance Costs

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


Income Taxes

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


Statements of Cash Flows

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

         Cash paid for interest  during the years ended December 31, 1998,  1997
and 1996 was $31.3 million,  $9.4 million and $4.1 million,  respectively.  Cash
paid for income taxes for the same periods was $86.1 million,  $64.8 million and
$41.6 million, respectively.


Earnings Per Share

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

                                                         Year Ended
                                                         December 31,

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

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


Comprehensive Income

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


NOTE 3 - ALLOWANCE FOR LOAN LOSSES

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

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

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

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


NOTE 4 - PROPERTY AND EQUIPMENT

         The carrying value of property and equipment is as follows:

<TABLE>
                                                                              December 31,
                                                                          1998           1997
                                                                          ----           ----

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

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


NOTE 5 - PORTFOLIO ACQUISITIONS

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

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

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


NOTE 6 - PRIVATE EQUITY PLACEMENT

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

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

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


NOTE 7 - INITIAL PUBLIC OFFERING

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


NOTE 8 - STOCK OPTIONS

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

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

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

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

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

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

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

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

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

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

<TABLE>
                                                                      Year Ended December 31,
                                                         1998                  1997              1996
                                                         ----                  ----              ----
                                                            Weighted-             Weighted-          Weighted-
                                                             Average              Average            Average
                                                             Exercise             Exercise           Exercise
                                                   Shares    Price      Shares     Price     Shares    Price

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

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

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


NOTE 9 - EMPLOYEE BENEFIT PLANS

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

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

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


NOTE 10 - INCOME TAXES

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

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

Current:
   Federal   $ 98,428    $ 66,496    $ 38,914
   State .      8,355       4,663       4,035
Deferred .    (70,883)    (47,334)    (30,419)
             --------    --------    --------
             $ 35,901    $ 23,825    $ 12,530
             --------    --------    --------

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

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

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


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

<TABLE>
                                                                     December 31,
                                                                  1998          1997

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


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


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


NOTE 11 - RELATED PARTY TRANSACTIONS

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

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

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

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

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

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

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

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

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

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

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

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


NOTE 12 - COMMITMENTS AND CONTINGENCIES

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

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

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



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



NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTED PAYMENTS

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

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

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

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


NOTE 14 - CONCENTRATIONS OF CREDIT RISK

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

                                                                              Retained      Sold        Managed

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

                                                                              Retained      Sold        Managed

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


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

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


NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

Cash and cash equivalents and accrued interest and fees receivable

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

Net retained interests in loans securitized and loans held for securitizations

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

Other receivables due from credit card securitizations, net

         The following components of this net asset are as follows:

Interest-only strip

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

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

Interest rate cap, swap, and floor agreements

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


<PAGE>



Other amounts

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

Debt

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

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

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

<TABLE>

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

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


NOTE 16 - DERIVATIVE FINANCIAL INSTRUMENTS

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

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

NOTE 17 - SEGMENTS

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

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


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

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

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

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

<TABLE>

                                                         1998
                                  Consumer
                                   Credit            Fee Based
                                  Products            Services                Reconciliation (a)        Consolidated
<S>                          <C>                  <C>                 <C>                        <C>
Interest revenue             $        740,768     $       2,754       $           (630,311)        $        113,211
Interest expense                      237,710                                     (207,197) (b)              30,513
                             ----------------     -------------       ---------------------------  ------------------
  Net interest                        503,058             2,754                   (423,114) (c)              82,698
    income

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

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

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


                                                         1997
                                  Consumer
                                    Credit             Fee-Based
                                   Products            Services               Reconciliation (a)         Consolidated

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

Other revenue                         148,869            64,000                    (26,192)                 186,677
Total revenue                         584,702            66,484                   (395,315)                 255,871
Income taxes                                                                        23,825                   23,825
Income before
  income taxes                        110,973 (d)        49,162(d)                 (98,252) (e)              61,883
Income taxes                                                                        23,825                   23,825
Total assets                 $      3,505,165     $      30,488      $          (2,996,991) (f)   $         538,662





                                                         1996
                                 Consumer
                                  Credit              Fee-Based
                                 Products             Services                 Reconciliation (a)       Consolidated


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

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

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

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

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

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

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

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

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

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


NOTE 18 - DEBT

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

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

         Metris Direct, Inc. has various  subsidiaries which have not guaranteed
the Senior Notes.  The Company has prepared  condensed  consolidating  financial
statements  of the  Company,  the  Guarantor  subsidiary  and the  non-guarantor
subsidiaries  for purposes of complying  with SEC reporting  requirements.  Such
financial  statements  are  included  in Note 18 of the  Company's  consolidated
financial  statements  included in its Annual Report on Form 10-K filed with the
SEC.


<PAGE>


                     Metris Companies Inc. and Subsidiaries
     Summary of Consolidated Quarterly Financial Information and Stock Data
            (Dollars in thousands, expect per share data) (unaudited)

<TABLE>
                                                                            1998
                                                    Fourth       Third      Second       First
                                                    Quarter     Quarter     Quarter     Quarter
Summary of Operations
<S>                                                 <C>         <C>         <C>         <C>
Interest Income ...............................     $30,838     $28,564     $27,022     $26,787
Interest Expense ..............................       8,780       8,902       6,188       6,643
                                                     ------      ------      ------      ------
Net Interest Income ...........................      22,058      19,662      20,834      20,144
Provision for Loan Losses .....................      19,184      17,154      21,390      20,042
Other Operating Income ........................      92,296      75,859      72,307      72,496
Other Operating Expense .......................      67,972      50,730      51,588      54,348
Income before Income Taxes ....................      27,198      27,637      20,163      18,250
                                                     ------      ------      ------      ------
Net Income ....................................      16,728      16,996      12,400      11,224
Preferred Dividends ...........................       1,100
                                                     ------      ------      ------      ------
Net Income Available to
 Common Stockholders ..........................     $15,628     $16,996     $12,400     $11,224
                                                    =======     =======     =======     =======


Per Common Share
Earnings per Common Share
     - Diluted ................................     $  0.79     $  0.85     $  0.62     $  0.55
Shares used to Compute
     Diluted EPS (000's) ......................      19,897      20,063      19,982      20,296
Dividends .....................................     $   .01     $   .01     $   .01     $   .01
Market Prices:
     High .....................................     $ 50.31     $ 80.13     $ 63.75     $ 46.50
     Low ......................................       17.75       46.25       44.88       32.00
     Close ....................................       50.31       46.63       63.75       43.50


                                                                              1997
                                                     Fourth       Third      Second       First
                                                     Quarter     Quarter     Quarter     Quarter
Summary of Operations

Interest Income ................................     $24,711     $17,215     $14,838     $12,430
Interest Expense ...............................       6,021       2,398       2,073       1,459
                                                      ------      ------      ------      ------
Net Interest Income ............................      18,690      14,817      12,765      10,971
Provision for Loan Losses ......................      15,400      11,106       6,429      11,054
Other Operating Income .........................      56,489      41,279      42,661      46,248
Other Operating Expense ........................      43,415      27,856      33,194      33,583
Income before Income Taxes .....................      16,364      17,134      15,803      12,582
                                                      ------      ------      ------      ------
Net Income .....................................     $10,064     $10,537     $ 9,719     $ 7,738
                                                     =======     =======     =======     =======


Per Common Share
Earnings per Common Share
     - Diluted .................................     $  0.50     $  0.52     $  0.48     $  0.38
Shares used to Compute
     Diluted EPS (000's) .......................      20,269      20,299      20,142      20,174
Dividends ......................................         .01         .01         .01
Market Prices:
     High ......................................     $ 44.06     $ 47.81     $ 32.81     $ 35.13
     Low .......................................       30.00       32.25       22.00       23.25
     Close .....................................       34.25       43.31       32.81       25.00
</TABLE>



<PAGE>


Stock Data

         The Company's  common stock,  which is traded under the symbol  "MTRS,"
has been listed on the Nasdaq Stock Market since  October 25, 1996.  As of March
2, 1999,  there were 460  holders of record and 9000  beneficial  holders of the
Company's common stock.

<PAGE>


CORPORATE INFORMATION

Corporate Offices

Executive Offices
600 South Highway 169
Interchange Tower, Suite 1800
St. Louis Park, Minnesota 55426
(612)    525-5020

Direct Merchants Credit
Card Bank, National Association
6909 East Greenway Parkway
Scottsdale, Arizona 85254

Annual Meeting
Tuesday, May 11, 1999
10:00 a.m., Hyatt Regency Minneapolis
1300 Nicollet Mall
Minneapolis, Minnesota 55403

Stock Listing
Nasdaq National Market
Stock Symbol: MTRS

Independent Auditors
KPMG Peat Marwick LLP
Minneapolis, Minnesota

Transfer Agent and Registrar
Norwest Bank Minnesota, N.A.
Minneapolis, Minnesota

Form 10-K
A copy of the  Company's  Annual  Report  on Form 10-K may be  obtained  free of
charge from the Company's Investor Relations contact:

Alfred A. Galgano
Vice President, Investor Relations
Phone:  (612) 593-4820
Fax:    (612) 593-4733


<PAGE>


BOARD OF DIRECTORS

Theodore Deikel
Chairman, Metris Companies Inc.
Chairman and Chief Executive Officer
Fingerhut Companies, Inc.

Ronald N. Zebeck
President and Chief Executive Officer

Lee R. Anderson, Sr.
Chairman and CEO
API Group, Inc.

John A. Cleary
President
John Cleary Enterprises

Dudley C. Mecum
Managing Director
Capricorn Holdings, LLC

Derek V. Smith
President & CEO
ChoicePoint, Inc.

Frank D. Trestman
President
Trestman Enterprises


Audit Committee

Dudley C. Mecum, Chairman
Lee R. Anderson
Frank D. Trestman


Compensation Committee

Frank D. Trestman, Chairman
John A. Cleary
Dudley C. Mecum
Derek V. Smith


EXECUTIVE OFFICERS

Ronald N. Zebeck
President and Chief
Executive Officer

Z. Jill Barclift
Executive Vice President, Secretary and General Counsel
EXECUTIVE OFFICERS continued

Douglas B. McCoy
Executive Vice President, Operations

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

David D. Wesselink
Executive Vice President,
Chief Financial Officer

Patrick J. Fox
Senior Vice President, Business Development

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

David R. Reak
Senior Vice President, Credit Risk

Paul T. Runice
Senior Vice President, Treasurer

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


OTHER OFFICERS

William R. Anderson
Senior Vice President, Electronic Commerce

Adolph T. Barclift
Senior Vice President,
Information Services

Matthew S. Melius
Senior Vice President,
Portfolio Marketing

Jon Mendel
Senior Vice President, Human Resources

Jean P. Vernor
Senior Vice President, Product Management