<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

                      THE SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<S>                                            <C>
          For the fiscal year ended                              001-12351
              December 31, 1997                           COMMISSION FILE NUMBER
</TABLE>

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

                             METRIS COMPANIES INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                  DELAWARE                                      41-1849591
          (STATE OF INCORPORATION)                 (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>

       600 SOUTH HIGHWAY 169, SUITE 1800, ST. LOUIS PARK, MINNESOTA 55426
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (612) 525-5020
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

                          Common Stock, $.01 Par Value

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

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

As of February 27, 1998, 19,225,000 shares of the Registrant's Common Stock were
outstanding and the aggregate market value of Common Stock held by
non-affiliates of the Registrant on that date was approximately $144,680,985,
based upon the closing price on The Nasdaq Stock Market-SM- on February 27,
1998.

                      DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Annual Report to Shareholders for the year ended
December 31, 1997, are incorporated by reference in Parts II and IV.

Certain portions of the Proxy Statement for the Annual Meeting of Shareholders
of Metris Companies Inc. to be held on May 12, 1998, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1997,
are incorporated by reference in Part III.
<PAGE>
                               TABLE OF CONTENTS

PART I

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>                                                                                                          <C>
Item 1. Business...........................................................................................           2

Item 2. Properties.........................................................................................          17

Item 3. Legal Proceedings..................................................................................          17

Item 4. Submission of Matters to a Vote of Security Holders................................................          17

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................          17

Item 6. Selected Financial Data............................................................................          17

Item 7. Management's Discussion and Analysis of Financial
       Condition and Results of Operations.................................................................          17

Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................          17

Item 8. Financial Statements and Supplementary Data........................................................          18

Item 9. Changes in and Disagreements with Accountants on
       Accounting and Financial Disclosure.................................................................          50

PART III

Item 10. Directors and Executive Officers of the Registrant................................................          50

Item 11. Executive Compensation............................................................................          50

Item 12. Security Ownership of Certain Beneficial
        Owners and Management..............................................................................          50

Item 13. Certain Relationships and Related Transactions....................................................          50

PART IV

Item 14. Exhibits, Financial Statement Schedules
        and Reports on Form 8-K............................................................................          50

Signatures.................................................................................................          52

Exhibit Index..............................................................................................          54
</TABLE>
<PAGE>
PART I

ITEM 1. BUSINESS

                                    BUSINESS

    Metris Companies Inc. ("MCI" and collectively with its subsidiaries, the
"Company") is an information-based direct marketer of consumer credit products
and fee-based services and extended service plans primarily to moderate income
consumers. The Company's consumer credit products are primarily unsecured credit
cards issued by its subsidiary, Direct Merchants Credit Card Bank, National
Association ("Direct Merchants Bank"). The Company's customers and prospects
include existing customers of an affiliate, Fingerhut Corporation ("Fingerhut
Customers"), and individuals who are not Fingerhut Customers but for whom credit
bureau information is available ("External Prospects"). The Company markets its
fee-based services, including debt waiver programs, card registration, extended
service plans, third party insurance, and membership clubs to its credit card
customers, Fingerhut Customers, and customers of third party partners.

    MCI, incorporated in Delaware on August 20, 1996, is an 83% owned indirect
subsidiary of Fingerhut Companies, Inc. ("FCI"). The Company became a publicly
held company in October 1996 after completing an initial public offering. The
Company's principal direct and indirect subsidiaries are Direct Merchants Bank,
Metris Direct, Inc., Metris Funding Co. and Metris Receivables, Inc. Prior to
its name change in August 1996, Metris Direct, Inc. was known as Fingerhut
Financial Services Corporation.

HISTORY OF THE COMPANY

    MCI is an indirect subsidiary of FCI, a database marketing company that
sells a broad range of products and services via catalogs, telemarketing,
television, and other media. Fingerhut Corporation ("Fingerhut"), a wholly owned
subsidiary of FCI, has been in the direct marketing business for 50 years and is
one of the largest catalog marketers in the United States. Fingerhut sells a
broad range of general merchandise products and services to moderate income
consumers.

    Substantially all of Fingerhut's sales are made using closed-end and
revolving credit card loans issued by Fingerhut National Bank, a wholly owned
subsidiary of FCI. As customers make payments and order new products, Fingerhut
enters a variety of payment, behavioral, and other data into its database (the
"Fingerhut Database"). Fingerhut uses this database, along with sophisticated
and highly automated proprietary modeling techniques, to evaluate each
customer's creditworthiness.

THE FINGERHUT DATABASE

    The Fingerhut Database contains information on more than 31 million
individuals, including approximately 8 million customers who have made a
purchase from Fingerhut within the past 24 months. This database contains up to
3,500 potential data items in a customer record, including names, addresses,
behavioral characteristics, general demographic information and other
information provided by the customer. Fingerhut uses information in the
Fingerhut Database, along with sophisticated proprietary credit scoring models,
to produce its proprietary credit scores (the "Fingerhut Scores") for Fingerhut
Customers. The Fingerhut Database also includes Fingerhut's suppression and bad
debt file (the "Suppress File"), which contains information on approximately
11.4 million individuals about whom it has information relating to indicators of
unacceptably high risk. Fingerhut periodically updates the information in the
Fingerhut Database. Fingerhut does not report its credit information to the
credit bureaus, which means this information is not publicly available. The
Company has a contract with Fingerhut to use the information in the Fingerhut
Database for marketing its financial services products, including general

                                       2
<PAGE>
purpose credit cards. This contract expires October 2003 and is renewable
thereafter upon mutual agreement between Fingerhut and the Company unless there
has been a change in control of the Company. A change of control (the "Change of
Control") shall be deemed to have occurred if (a) any person or group (within
the meaning of Rule 13d-5 of the Securities Exchange Act of 1934, as in effect),
other than FCI, shall own beneficially or of record, shares representing more
than 25% of the aggregate ordinary voting power represented by the issued and
outstanding capital stock of the Company, (b) a majority of the seats (other
than vacant seats) on the Board of Directors of the Company shall at anytime be
occupied by persons who were neither (i) nominated by FCI, or by the Board of
Directors of the Company nor (ii) appointed by directors so nominated; or (c)
any person or group other than FCI shall otherwise directly or indirectly have
the power to exercise a controlling, or indirectly have the power to exercise a
controlling, influence over management or policies of the Company. The Spin Off
discussed more fully under "Proposed Spin Off," is not a change of control.
However, after the Spin Off, the Company cannot make any predictions as to
whether a change in control might occur.

STRATEGY

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

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

    INCREASE THE NUMBER OF FINGERHUT CUSTOMERS USING THE COMPANY'S PRODUCTS AND
SERVICES.  The Company's strategy is to continue to use its proprietary risk,
response and profitability models to solicit Fingerhut Customers for credit
cards, and to focus its cross-selling activities in order to increase the volume
of fee-based services and extended service plans purchased by these customers.

    IDENTIFY AND SOLICIT ADDITIONAL EXTERNAL PROSPECTS FOR CREDIT CARDS.  The
Company intends to continue adding moderate income consumers who are currently
not Fingerhut Customers through the use of its own internally developed risk
models. The Company has developed its own proprietary credit risk modeling
system (the "Proprietary Modeling System"). By incorporating individual credit
information from the major credit bureaus into this Proprietary Modeling System
and eliminating those individuals contained in the Suppress File, the Company
expects to generate additional customer relationships from External Prospects.

    CROSS-SELL MULTIPLE PRODUCTS AND SERVICES TO EACH CUSTOMER.  The Company
intends to maximize the profitability of each customer relationship by
cross-selling additional products, thereby leveraging its account acquisition
costs and infrastructure. Currently the Company focuses its cross-selling
efforts on selling fee-based services to its credit card customers and customers
of third parties.

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

    ACCESS ADDITIONAL CUSTOMERS BY ESTABLISHING RELATIONSHIPS WITH THIRD
PARTIES.  The Company will seek to access additional customers for the Company's
products and services by establishing relationships with third parties. In 1997,
the Company began offering card registration services to the credit card
customers of two third parties. In addition, the Company introduced a co-branded
MasterCard to customers of a third party.

                                       3
<PAGE>
    PURSUE ACQUISITIONS OF CREDIT CARD PORTFOLIOS OR OTHER BUSINESSES.  The
Company expects to continue to pursue acquisitions of credit card portfolios
and/or other businesses whose customers fit the Company's product and target
market profile or which otherwise strategically fit with the Company's business.
In September 1997, the Company acquired a $317 million credit card portfolio
from Key Bank USA, National Association ("Key"). In addition, in October 1997,
the Company acquired a $405 million credit card portfolio from Mercantile Bank
National Association ("Mercantile").

PROPOSED SPIN OFF

    On October 9, 1997, FCI announced that its Board of Directors had approved
the filing of an application with the Internal Revenue Service ("the IRS") for a
ruling on a tax-free distribution of FCI's stock of the Company (the "Spin
Off"). FCI filed the ruling request with the IRS on October 23, 1997. The
proposed Spin Off of the Company would be subject to receipt of a favorable
ruling from the IRS, approval of Fingerhut's Board of Directors and market
conditions. If approved, the Spin Off would be expected to be completed during
1998. There can be no assurance that the Spin Off will be consummated.

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

    The Spin Off may affect the cost of funds for the Company as discussed more
fully under "Funding and Liquidity."

    Each of the intercompany agreements between the Company and Fingerhut or
FCI, other than the Tax Sharing Agreement, will remain in effect after the Spin
Off is consummated. Although the Administrative Services Agreement remains in
effect in the event of the Spin Off, it is expected that, following consummation
of the Spin Off, the only continuing administrative services to be provided by
FCI to the Company will be treasury, tax, insurance, and information systems,
and that such services will continue to be provided for no longer than 18 months
following the Spin Off.

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

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

    Until such time as the proposed Spin Off may be consummated, FCI will
continue to effectively control all matters affecting the Company through its
ability to elect all the directors of the Company, including the adoption of
amendments to the Company's Certificate of Incorporation, any determination with
respect to the acquisition or disposition of assets, future issuances of the
Company's common stock or other securities of the Company, the Company's
incurrence of debt, and any dividend payable on the common stock.

                                       4
<PAGE>
BUSINESS LINES

    The Company currently operates two business lines: (i) consumer credit
products and (ii) fee-based services and extended service plans.

    CONSUMER CREDIT PRODUCTS

    PRODUCTS.  Consumer credit products currently are unsecured and secured
credit cards, including the Fingerhut co-branded
MasterCard-Registered Trademark-, the Bally Total Fitness co-branded MasterCard,
and the Direct Merchants Bank MasterCard and Visa-Registered Trademark-. In
addition, the Company has affinity programs with two other partners. In the
future, the Company may offer other co-branded credit cards and may also offer
other consumer credit products either directly or through alliances with other
companies. At December 31, 1997, the Company had approximately 2.3 million
credit card accounts with over $3.5 billion in managed credit card loans.
Fingerhut Customers represented approximately 39% of the accounts and
approximately 39% of the managed loans. According to the Nilson Report, at
December 31, 1997, the Company was the 14th largest MasterCard issuer in the
United States based on the number of cards issued, and the 22nd largest credit
card issuer in the United States based on managed credit card loan balances.

    CREDIT SCORING.  The Company acquires a Fingerhut Score for prospective
customers in the Fingerhut Database. The Company also acquires credit bureau
information, including risk scores provided by Fair, Isaac & Company ("FICO
scores"), for all Fingerhut Customers. For those Fingerhut Customers who have
FICO scores, the Company uses the Fingerhut Score to further segment Fingerhut
Customers into narrower ranges within each FICO score subsegment, allowing the
Company to better evaluate credit risk and to tailor its risk-based pricing
accordingly. Additionally, the Fingerhut Score is used to target individuals who
have no credit bureau information, and consequently no FICO scores, allowing the
Company to target Fingerhut Customers who would not typically be solicited by
other credit card issuers.

    The Company has developed a Proprietary Modeling System for External
Prospects. The Proprietary Modeling System consists of sophisticated models
which produce a credit risk score ("a "Proprietary Score") for each prospect.
The Proprietary Score, like the Fingerhut Score, segments External Prospects
into narrower ranges within each FICO score subsegment, allowing the Company to
better evaluate individual credit risk and to tailor its risk-based pricing
accordingly. The Company also uses this segmentation to exclude certain
individuals from its marketing solicitations.

    The Company generates External Prospects from lists obtained directly from
the major credit bureaus based on criteria established by the Company. The
Company establishes the range of FICO scores it plans to target for a specific
campaign and receives files from the credit bureaus which contain individual
credit records of the External Prospects who fall within this range. The files
are incorporated into the Proprietary Modeling System, which further segments
External Prospects based upon their Proprietary Scores. The mailing lists
generated from the Proprietary Modeling System are then checked against the
Suppress File and any matching names are excluded. The Company currently does
not solicit External Prospects who do not have FICO scores.

    The Company believes the Fingerhut Score and its Proprietary Modeling
System, in conjunction with the Suppress File and FICO Scores, allows it to make
prudent decisions in evaluating the credit risk of moderate income consumers.

    SOLICITATION.  Prospects for solicitation include both Fingerhut Customers
and External Prospects. They are contacted on a nationwide basis primarily
through pre-screened direct mail and telephone solicitations. The Company
receives responses to its prescreened solicitations, performs fraud screening,
verifies name and address changes, and obtains any information which may be
missing from the application. Applications are then sent to third party data
entry providers, which key the application information and process the
applications based on the criteria provided by the Company. Applications are
approved, denied or referred to the Company for exception processing. The
Company processes exceptions for,

                                       5
<PAGE>
among other things, derogatory credit bureau information and fraud warnings.
Exception applications are processed manually by credit analysts based on
policies approved by the Company's credit committee.

    PRICING.  The Company's strategy to maximize customer profitability relies
on its risk-based pricing. The specific pricing for a credit card offer is
primarily based on the prospect's risk profile prior to solicitation. A prospect
is evaluated to determine credit needs, credit risk, and existing credit
availability. A customized offer is developed that includes the most appropriate
product, brand, pricing, and credit line. The Company currently offers over 100
different pricing structures on its credit card products, with annual fees
ranging from $0 to $48 ($60 for some secured cards) and annual percentage rates
ranging from 14.9% to 26.5%, excluding the Key and Mercantile portfolio
acquisitions. After credit card accounts are opened, the Company actively
monitors customers' internal and external credit performance and periodically
recalculates behavior and risk scores. As customers evolve through the credit
lifecycle and are regularly rescored, the lending relationship can evolve to
include more competitive (or more restrictive) pricing and product
configurations.

    AGE OF PORTFOLIO.  The following table sets forth, as of December 31, 1997,
the number of total accounts and amount of outstanding loans based upon the age
of the managed accounts.

<TABLE>
<CAPTION>
                                                             LOANS           PERCENTAGE
                                                          OUTSTANDING            OF
                              NUMBER     PERCENTAGE       (DOLLARS IN          LOANS
AGE SINCE ORIGINATION       OF ACCOUNTS  OF ACCOUNTS       THOUSANDS)       OUTSTANDING
--------------------------  -----------  -----------  --------------------  ------------
<S>                         <C>          <C>          <C>                   <C>
0-6 MONTHS                     439,432         19.2%      $    406,760             11.5%
7-12 MONTHS                    280,244         12.2%           405,071             11.4%
13-18 MONTHS                   367,351         16.0%           560,640             15.8%
19-24 MONTHS                   425,510         18.6%           726,680             20.5%
25-36 MONTHS                   614,969         26.8%         1,163,068             32.8%
37+ MONTHS                     165,269          7.2%           284,717              8.0%
                            -----------  -----------       -----------      ------------
    TOTAL                    2,292,775        100.0%      $  3,546,936            100.0%
                            -----------  -----------       -----------      ------------
                            -----------  -----------       -----------      ------------
</TABLE>

    GEOGRAPHIC DISTRIBUTION.  The Company solicits credit card customers on a
national basis and, therefore, maintains a geographically diversified portfolio.
The following table shows the distribution of total accounts and amount of
outstanding loans by state, as of December 31, 1997.

<TABLE>
<CAPTION>
                                                               LOANS
                                                            OUTSTANDING        PERCENTAGE OF
                              NUMBER      PERCENTAGE        (DOLLARS IN            LOANS
STATE                       OF ACCOUNTS   OF ACCOUNTS        THOUSANDS)         OUTSTANDING
--------------------------  -----------  -------------  --------------------  ---------------
<S>                         <C>          <C>            <C>                   <C>
TEXAS                          284,431          12.4%       $    456,415              12.9%
CALIFORNIA                     255,424          11.1%            428,750              12.1%
FLORIDA                        160,182           7.0%            263,131               7.4%
NEW YORK                       139,653           6.1%            215,835               6.1%
OHIO                            86,006           3.8%            132,550               3.7%
ILLINOIS                        73,949           3.2%            117,447               3.3%
PENNSYLVANIA                    78,297           3.4%            115,729               3.3%
MISSOURI                        71,497           3.1%            110,409               3.1%
MISSISSIPPI                     67,711           3.0%             96,573               2.7%
ALL OTHERS(1)                1,075,625          46.9%          1,610,097              45.4%
                            -----------        -----         -----------             -----
    TOTAL                    2,292,775         100.0%       $  3,546,936             100.0%
                            -----------        -----         -----------             -----
                            -----------        -----         -----------             -----
</TABLE>

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

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

    THE ADAPTIVE CONTROL SYSTEM.  The Company uses First Data Resources Inc.'s
("FDR") adaptive control system (the "Adaptive Control System"), which uses
statistical models and basic account financial

                                       6
<PAGE>
information to automatically and regularly assign credit line increases and
decreases to individual customers, as well as to determine the systematic
collection steps to be taken at the various stages of delinquency. The Adaptive
Control System manages the authorization of each transaction; in addition, it
implements the collections strategies determined by the Company to be used for
non-delinquent accounts that have balances above their assigned credit line
(referred to as "overlimit" accounts).

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

    The following table sets forth information with respect to account balance
and credit limit ranges of the Company's managed portfolio, as of December 31,
1997.

<TABLE>
<CAPTION>
                                                               LOANS
                                                            OUTSTANDING        PERCENTAGE OF
                              NUMBER      PERCENTAGE        (DOLLARS IN            LOANS
CREDIT LIMIT RANGE          OF ACCOUNTS   OF ACCOUNTS        THOUSANDS)         OUTSTANDING
--------------------------  -----------  -------------  --------------------  ---------------
<S>                         <C>          <C>            <C>                   <C>
$1,000 OR LESS                 290,015          12.7%            160,416               4.5%
$1,001-$2,000                  583,925          25.5%            695,797              19.6%
$2,001-$3,500                  621,557          27.1%          1,061,868              30.0%
$3,501-$5,000                  581,169          25.3%          1,216,344              34.3%
OVER $5,000                    216,109           9.4%            412,511              11.6%
                            -----------        -----         -----------             -----
    TOTAL                    2,292,775         100.0%       $  3,546,936             100.0%
                            -----------        -----         -----------             -----
                            -----------        -----         -----------             -----
</TABLE>

<TABLE>
<CAPTION>
                                                               LOANS
                                                            OUTSTANDING        PERCENTAGE OF
                              NUMBER      PERCENTAGE        (DOLLARS IN            LOANS
ACCOUNT BALANCE RANGE       OF ACCOUNTS   OF ACCOUNTS        THOUSANDS)         OUTSTANDING
--------------------------  -----------  -------------  --------------------  ---------------
<S>                         <C>          <C>            <C>                   <C>
CREDIT BALANCE                  23,744           1.1%       $     (2,121)
NO BALANCE                     312,301          13.6%
$1,000 OR LESS                 659,815          28.8%            306,303               8.6%
$1,001-$2,000                  575,980          25.1%            858,332              24.2%
$2,001-$3,500                  475,350          20.7%          1,243,132              35.0%
OVER $3,500                    245,585          10.7%          1,141,290              32.2%
                            -----------        -----         -----------             -----
    TOTAL                    2,292,775         100.0%       $  3,546,936             100.0%
                            -----------        -----         -----------             -----
                            -----------        -----         -----------             -----
</TABLE>

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

    SERVICING, BILLING AND PAYMENT.  The Company has established a relationship
with FDR for cardholder processing services. FDR is a subsidiary of First Data
Corporation, a provider of information processing

                                       7
<PAGE>
and related services including cardholder processing (services for financial
institutions which issue credit cards to cardholders), and merchant processing
(services for financial institutions which make arrangements with merchants for
the acceptance of credit cards as methods of payment). FDR provides data
processing, credit card reissuance, statementing, inbound customer service
telephone calls and interbank settlement for the Company. Effective February
1998, the Company extended it processing services agreement with FDR for an
additional five years, expiring 2006. Applications processing and back office
support for mail inquiries and fraud management are handled internally by the
Company. In addition the Company handles in-bound customer service telephone
calls for the recently acquired Key and Mercantile portfolios.

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

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

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

    Monthly billing statements are sent to cardholders by FDR on behalf of the
Company. When an account is established, it is assigned a billing cycle.
Currently, there are 20 billing cycles and each such cycle has a separate
monthly billing date based on the respective business day the cycle represents
in each calendar month. Each month, a statement is sent to all accounts with an
outstanding balance greater than $1. Cardholders must make a minimum monthly
payment of the greater of $10, 2.0% of the outstanding balance, the finance
charge or the balance of the account if the balance is less than $10. Payment is
due upon receipt of the statement. If the minimum payment is not collected
within 25 days after the statement cycle date, the account is considered
delinquent.

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

                                       8
<PAGE>
    FEE-BASED SERVICES AND EXTENDED SERVICE PLANS

    To improve the Company's ability to attract more clients for fee-based
services, in 1997, the Company consolidated the fee-based services and extended
service plan businesses into one business line. The Company currently sells a
variety of fee-based services to its credit card customers, Fingerhut Customers
and customers of third party partners, including (i) debt waiver protection for
unemployment, disability, and death, (ii) programs such as card registration and
club memberships, (iii) extended service plans and (iv) third-party insurance.
In addition, the Company develops customized targeted mailing lists, using both
the Company's and Fingerhut's databases, for external companies to use in their
own financial services product solicitation efforts that do not directly compete
with those of the Company.

    The Company currently markets the following programs:

    ACCOUNT PROTECTION PLUS.-TM-  The Company has developed a proprietary debt
waiver program that protects customers from interest charges on the Company's
credit cards in the event that they become disabled, unemployed, or deceased. In
the event of unemployment or disability, the customer's account is "frozen" for
six months, with no payments due or interest accruing during this time. In the
event of death, the amount due, up to the credit limit, is waived and the
account is closed. Because this is an internally administered program, the
Company is responsible for all of the program's associated costs.

    ACCOUNT BENEFIT PLAN.  This debt waiver program forgives the customer's
balance due in the event of death.

    EXTENDED SERVICE PLANS.  Extended service plans provide warranty service
coverage beyond the manufacturer's warranty. In general, the Company's extended
service plans provide customers with the right to have their covered purchases
repaired, replaced, or in certain circumstances, the purchase price of the
product refunded, within certain parameters determined by the Company. Within
the warranty industry, extended service plans are available for a wide variety
of products including consumer electronics, furniture, jewelry, automotive
products, and household mechanical systems such as heating, plumbing and
electrical systems. The Company currently provides extended service plans for
consumer electronics, furniture, and jewelry ("Warrantable Products") purchased
from Fingerhut.

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

    The Company's extended service plan program for furniture is called Quality
Furniture Care-SM-. The services provided to Quality Furniture Care customers
include stain cleaning, structural defect or damage repair, or replacement if
the merchandise cannot be repaired. Customers who need to have their furniture
purchase repaired or cleaned must first notify the Company and obtain an
estimated cost for the service from a qualified repair or service provider. The
service estimate must then be given to the Company's service representatives and
a decision to go ahead with the repair or replace the product will be made by
the Company. Once repair authorization is received from the Company, the
customer, at their option, may then either pay for the service and submit the
bill to the Company for reimbursement, or the Company will pay the servicer
directly.

    Quality Jewelry Care-Registered Trademark- is the Company's extended service
plan for jewelry. The services provided to Quality Jewelry Care customers
include repair, soldering, ring sizing, and cleaning, for which the Company has
third party jewelers to perform such services. To submit a claim, the customer
must mail the item to Fingerhut which logs the item and sends it to the
jewelers. The jewelers repair the product and return it to Fingerhut, noting if
it is unrepairable. Fingerhut then returns the item to the customer after it has
been repaired or cleaned or initiates a replacement to be paid for by the
Company, typically within 4 to 6 weeks.

                                       9
<PAGE>
    Most of the Company's extended service plans continue for two years from the
date of the product purchase (three to five years in limited cases). The
customer pays Fingerhut a one-time fee for this coverage based on the price of
the product and the expected claims. The Company also offers customers the
opportunity to renew their coverage in one-year extensions, up to six years from
the date of purchase, upon payment of an additional fee for each renewal.

    When Fingerhut Customers purchase Warrantable Products, they have the option
to buy an extended service plan. For electro-mechanical products, approximately
31% of the Company's extended service plans are originated through the on-page
print advertisement located within Fingerhut's catalogs and other direct
marketing materials; the remainder are originated through telemarketing.
Substantially all of the Quality Furniture Care and Quality Jewelry Care plans
are originated through telemarketing and other direct marketing programs. In
order to maximize the efficiency of these programs, the Company has developed
proprietary targeting models to predict which customers will be most responsive
to its extended service plan direct marketing efforts.

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

    PURCHASESHIELD-SM-.  During 1997, the Company developed a new fee-based
service, PurchaseShield, which offers various levels of purchase protection to
its members. Eligible purchases made on members' credit cards are protected with
the following benefits: warranty extension, sale price protection, and product
return guarantee. In addition, PurchaseShield offers its members a household
repair rebate that can be used on existing in-home appliances. Because this is
an internally administered program, the Company receives all revenues and is
responsible for all of the program's associated costs.

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

    ACCIDENTAL DEATH INSURANCE.  The Company earns a fee from a third-party
insurance administrator for the marketing and billing of an accidental death
insurance program. The Company markets the insurance program to its credit card
customers. Although the Company markets the program, the third-party
administrator fulfills and underwrites the policies.

    MEMBERSHIP CLUBS.  The Company currently has a cooperative marketing
arrangement with a third party to market the third party's memberships in
discount clubs, in conjunction with its new credit card account acquisitions.
The Company's current arrangement with this third party enables the Company to
acquire new credit card customers at a reduced cost.

    TAILORED LIST DEVELOPMENT.  The Company currently works with several
companies to develop targeted mailing lists and earns revenue for each name that
is solicited by the companies from these mailing lists. The Company also earns
revenue from the sale of advertising space included in its monthly billing
statements.

                                       10
<PAGE>
FUNDING AND LIQUIDITY

    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 utilizes a variety of financing
sources to manage liquidity, refunding, rollover and interest rate risks.
Current funding sources are committed and/or available by counterparties to the
Company through facilities established by the Company and FCI.

    The Company finances the growth of its credit card loan portfolio through
asset securitization, bank financing, long term debt issuance, equity issuance
and cash flow from operations. The primary financing vehicle is asset
securitization. A securitization involves the transfer by the Company of credit
card loans to third party trusts, which fund the purchase by issuing fixed and
variable rate certificates of beneficial ownership interest secured by the loans
receivable to public and private investors. The Company transfers the loans to
bankruptcy remote subsidiaries, which in turn sell the receivables to the
trusts. The Company sells receivables both to a single seller master trust (the
"Metris Master Trust") as well as a bank sponsored multi-seller trust. The
Metris Master Trust is authorized to sell multiple series and classes of
certificates of beneficial ownership interests in the loans and other assets of
the trust. The bank sponsored multi-seller trust funds the receivables purchase
primarily with asset-backed floating rate commercial paper. The loans are
removed from the Company's balance sheet for financial and regulatory purposes.
For tax purposes, the financing is treated as secured debt.

    In September 1996, the Company executed a $300 million revolving credit
facility agreement with a group of banks to fund on-balance sheet loans and for
other general business purposes. The revolving credit facility is guaranteed by
FCI and is further supported by the pledge of the stock of certain subsidiaries
of the Company and certain loans and interests held therein by the Company. The
revolving credit facility contains certain financial covenants standard for
revolving credit facilities of this type, including minimum net worth, minimum
equity to managed assets ratio, maximum leverage and a limitation on
indebtedness. In addition, the FCI guarantee includes certain covenants
including minimum interest coverage, maximum leverage and minimum net worth for
FCI. Prior to September 1996, the Company borrowed from FCI.

    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. The net proceeds of $97 million were used to
reduce borrowings under the revolving 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. (the "Guarantor"), and all future subsidiaries of the Company that
guarantee any of the Company's indebtedness, including the revolving credit
facility. The guarantee is an unsecured obligation of the Guarantor and ranks
pari passu with all existing and future unsubordinated indebtedness.

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

    In anticipation of the proposed Spin Off, the Company is negotiating with
its bank lenders to refinance the $300 million revolving credit facility which
is currently guaranteed by FCI and is terminable by the lenders in the event FCI
owns less than 51% of the Company's common stock. The Company has lower
independent credit ratings than those of FCI. While the Company believes it will
be able to obtain stand-alone financing, it is expected to be on terms less
favorable than the current facility and is expected to result in approximately
$8 million in additional funding expense on an annualized basis.

                                       11
<PAGE>
    In addition, the Company's lower independent credit ratings will reduce the
cash advance rate on a portion of the sale of loans to the Metris Master Trust.
This will require approximately $40 million in additional on-balance sheet
funding by the Company to finance the unsold loans.

    The Company will also be required to restructure certain interest rate swap
agreements with counterparty banks to remove Fingerhut as a guarantor or
co-obligor. These contracts hedge fixed rate term funding of credit card loans
in one of the trusts. The notional value of these contracts is approximately
$1.3 billion. While the Company believes it will be able to restructure these
contracts, no assurances can be given that it will be able to do so on terms as
favorable as the existing agreements. The market value of these contracts at
December 31, 1997, in total, was favorable to the Company.

COMPETITION

    As a marketer of consumer credit products, the Company faces increasing
competition from numerous providers of financial services, many of which have
greater resources than the Company. In particular, the Company competes with
national, regional and local bank card issuers as well as other general purpose
credit card issuers, such as American Express and Discover. In general,
customers are attracted to credit card issuers largely on the basis of price,
credit limit and other product features; as a result, customer loyalty is often
limited. However, the Company believes that its strategy of focusing on an
underserved market and its access to information from the Fingerhut Database,
not available to other credit card issuers, will allow it to more effectively
compete in the market for moderate income cardholders.

    There are numerous competitors in the fee-based services market, including
insurance companies, financial services institutions and other membership-based
consumer services providers, many of which are larger, more capitalized and more
experienced than the Company. During the term of an agreement with Fingerhut,
the Company has the exclusive right to use the Fingerhut Database to market
these services to Fingerhut Customers. During the term of an agreement between
Fingerhut and the Company, Fingerhut will offer its customers extended service
plans provided only by the Company. As the Company attempts to expand its
business to market extended service plans to the customers of third-party
retailers, it will compete with manufacturers, financial institutions, insurance
companies and a number of independent administrators, many of which have greater
operating experience and financial resources than the Company.

REGULATION

    THE COMPANY AND DIRECT MERCHANTS BANK

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

                                       12
<PAGE>
    EXPORTATION OF INTEREST RATES AND FEES

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

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

    DIVIDENDS AND TRANSFERS OF FUNDS

    There are various federal law limitations on the extent to which Direct
Merchants Bank can finance or otherwise supply funds to the Company and its
affiliates through dividends, loans or otherwise. These limitations include:
minimum regulatory capital requirements and restrictions concerning the payment
of dividends out of net profits or surplus; Sections 23A and 23B of the Federal
Reserve Act governing transactions between a bank and its affiliates; and
general Federal regulatory oversight to prevent unsafe or unsound banking
practices. In general, Federal law prohibits a national bank such as Direct
Merchants Bank from making dividend distributions on common stock if the
dividend would exceed net profits of a specified period. In addition, Direct
Merchants Bank must get OCC approval for a dividend if such distributions are
not paid out of available earnings or if the distribution would cause the bank
to fail to meet applicable capital adequacy standards.

    COMPTROLLER OF THE CURRENCY

    CAPITAL ADEQUACY.  The Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the Federal banking agencies to implement systems
for "prompt corrective action" for insured depository institutions that are not
at least adequately capitalized. FDICIA imposes progressively more restrictive
constraints on operations, management and capital distributions, depending upon
the category in which an institution is classified. Failure to meet the capital
guidelines could also subject a bank to capital raising requirements.

    In addition, FDICIA requires the banking agencies to prescribe certain
non-capital standards for safety and soundness relating generally to operations
and management, asset quality and executive compensation. FDICIA also provides
that regulatory action may be taken against a bank that does not meet such
standards.

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

                                       13
<PAGE>
    The OCC's risk-based capital standards explicitly consider a bank's exposure
to declines in the economic value of its capital due to changes in interest
rates when evaluating a bank's capital adequacy. Interest rate risk is the
exposure of a bank's current and future earnings and equity capital arising from
adverse movements in interest rates. The evaluation will be made as a part of
the institution's regular safety and soundness examination.

    FDICIA.  FDICIA revised sections of the Federal Deposit Insurance Act
affecting bank regulation, deposit insurance and provisions for funding of the
Bank Insurance Fund administered by the FDIC. FDICIA (i) revised bank regulatory
schemes embodied in several other federal banking statutes, (ii) linked
explicitly the bank regulators' authority to intervene to the deterioration of a
bank's capital level, (iii) required each company having control of a bank to
guarantee an undercapitalized bank's compliance with a capital restoration plan,
(iv) imposed new safety and soundness standards on management and operations of
a bank, and (v) tightened audit requirements. FDICIA also required the FDIC to
implement a system of risk-based premiums for deposit insurance pursuant to
which the premiums paid by a depository institution will be based on the
probability that the FDIC will incur a loss in respect of such institution. The
FDIC adopted a system that imposes insurance premiums based upon a matrix that
takes into account a bank's capital level and supervisory rating. Given Direct
Merchants Bank's capital level and supervisory rating, Direct Merchants Bank
pays the lowest rate on deposit insurance premiums.

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

    LENDING ACTIVITIES

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

    The OCC and other federal banking agencies revised their regulations under
the CRA that affect the activities of Direct Merchants Bank. These regulations
subject limited purpose banks, including Direct Merchants Bank, to a "community
development" test for evaluating required CRA performance. The community
development performance of a limited purpose bank is evaluated pursuant to
various criteria involving community development lending, qualified investments
and community development services.

    LEGISLATION

    From time to time legislation has been proposed in Congress to limit
interest rates that could be charged on credit card accounts; however, the
Company does not anticipate any serious effort by Congress to enact such a
limitation in the current session of Congress.

    INVESTMENT IN THE COMPANY AND DIRECT MERCHANTS BANK

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

                                       14
<PAGE>
    INTERSTATE TAXATION

    Several states have passed legislation which attempts to tax the income from
interstate financial activities, including credit cards, derived from accounts
held by local state residents. Based on current interpretations of the
enforceability of such legislation, coupled with the volume of its business in
these states, the Company believes that this will not materially affect Direct
Merchants Bank.

    FAIR CREDIT REPORTING ACT

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

    It is the objective of the Company and Fingerhut to conduct their operations
in a manner which would fall outside the definition of "consumer reporting
agency" under the FCRA. If the Company or Fingerhut were to become a consumer
reporting agency, however, either would be subject to a number of complex and
burdensome regulatory requirements and restrictions, including restrictions
limiting the Company from using information from the Fingerhut Database and
furnishing information to third parties. Such restrictions could have a
significant adverse economic impact on the Company's results of operations and
future prospects.

EMPLOYEES

    As of December 31, 1997, the Company had approximately 1,300 employees
located in Illinois, Maryland, Minnesota, Oklahoma, and Utah. None of the
Company's employees are represented by a collective bargaining agreement. The
Company considers its relations with its employees to be good.

TRADEMARKS AND TRADENAMES

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

EXECUTIVE OFFICERS OF THE REGISTRANT

    The following table sets forth certain information concerning the persons
who currently serve as executive officers of MCI. Each executive officer serves
at the discretion of the Board of Directors of MCI. Ronald N. Zebeck currently
is an executive officer of FCI.

<TABLE>
<CAPTION>
NAME                          AGE                              POSITION
------------------------      ---      --------------------------------------------------------
<S>                       <C>          <C>
Ronald N. Zebeck                  43   President, Chief Executive Officer and Director

William J. Brennan                60   Senior Vice President, Sales and Account Management

Douglas B. McCoy                  51   Senior Vice President, Operations

Robert W. Oberrender              38   Senior Vice President, Chief Financial Officer

Douglas L. Scaliti                40   Senior Vice President, Marketing

Z. Jill Barclift                  40   Vice President, General Counsel

David R. Reak                     39   Vice President, Credit Risk

Jean C. Benson                    30   Director of Finance, Corporate Controller
</TABLE>

                                       15
<PAGE>
    Ronald N. Zebeck is President and Chief Executive Officer and a director of
MCI. He has been President of Metris Direct, Inc. since March 1994 and has
served as Chief Executive Officer of Direct Merchants Bank since August 1995.
Mr. Zebeck was Managing Director, GM Card Operations of General Motors
Corporation from 1991 to 1993, Vice President, Marketing and Strategic Planning
of Advanta Corporation (Colonial National Bank USA) from 1987 to 1991, Director
of Strategic Planning of TSO Financial (later Advanta Corporation) from 1986 to
1987 and held various credit card and credit-related positions at Citibank
affiliates from 1976 to 1986.

    William J. Brennan has been Senior Vice President, Sales and Account
Management of MCI since June 1997. Prior to joining the Company, he had been
Senior Vice President of Member Relations for MasterCard International Inc. from
1989 to 1997. He spent 12 years with First Interstate Bancorp, holding Senior
Vice President positions in both its bankcard and retail banking operations and,
before that, was Senior Vice President of Operations at Diners Club Inc. for 10
years.

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

    Robert W. Oberrender has been Senior Vice President, Chief Financial Officer
of MCI since December 1996. He held the position of Vice President, Chief
Financial Officer of the Company from August 1996 to December 1996. He was Vice
President, Treasurer of FCI from July 1994 to July 1996, and was Assistant
Treasurer of FCI from February 1993 until July 1994. Mr. Oberrender was Vice
President, Corporate Finance & Banking Group of Chemical Bank (now The Chase
Manhattan Bank) for more than five years before joining FCI.

    Douglas L. Scaliti has been Senior Vice President, Marketing of MCI since
December 1996. He was Vice President, Marketing of MCI from August 1996 to
November 1996 and held that position at Metris Direct, Inc. since September
1994. For the 12 years prior to joining the Company, he held several positions
at Advanta Corporation (Colonial National Bank USA): Senior Marketing Manager,
Credit Cards from 1987 to 1994, Operations Consultant, Profit Improvement from
1985 to 1987 and Credit Operations Manager from 1982 to 1985. Prior to that he
was Assistant Branch Manager of Avco Financial Services from 1980 to 1982. Mr.
Scaliti also serves on the First Data Resources Market Area Advisory Group.

    David R. Reak has been Vice President, Credit Risk of MCI since October
1996. He was Senior Director, Credit Risk of Metris Direct, Inc. from December
1995 to October 1996. For 12 years prior to joining the Company, he had several
positions at American Express, Travel Related Services Company, including:
Senior Manager, Credit Risk Management Europe and Middle East from 1994 to
December 1995, Senior Manager, Credit Risk Management U.S. Consulting Group from
1992 to 1994, and Project Manager, Credit Research and Analysis from 1990 to
1992.

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

    Jean C. Benson has been Director of Finance, Corporate Controller of MCI
since March 1997 and was Corporate Controller from August 1996 to March 1997.
Prior to that she held various finance positions

                                       16
<PAGE>
at the Company and FCI since October 1994. Prior to that she held various
positions at Deloitte & Touche LLP (public accounting), specializing in the
financial services industry from 1990 to 1994.

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

ITEM 2. PROPERTIES

    The Company currently leases its principal executive office space in St.
Louis Park, Minnesota, consisting of approximately 75,000 square feet. The lease
expires on November 30, 2000. Direct Merchants Bank leases office space in Salt
Lake City, Utah, consisting of approximately 11,700 square feet. This lease
expires on April 30, 1999. In addition, the Company leases facilities in Tulsa,
Oklahoma, White Marsh, Maryland, and Champaign, Illinois, consisting of 61,000,
52,000, and 6,000 square feet, respectively. These leases expire on December 31,
1998, September 30, 2007, and November 30, 2002, respectively. The leased
properties in Oklahoma and Maryland support the Company's collections, customer
service and back office operations. The Company believes its facilities are
suitable to its businesses and that it will be able to lease or purchase
additional facilities as needed.

ITEM 3. LEGAL PROCEEDINGS

    The Company is not involved in any legal proceeding that management believes
may have a material adverse effect on the Company's financial position or
results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1997.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    The information required by this item is set forth in the "Summary of
Consolidated Quarterly Financial Information and Stock Data" on page 57 of the
Company's Annual Report to Shareholders as of and for the year ended December
31, 1997 (the "1997 Annual Report") and is incorporated herein by reference.

    The Company made no sales of its equity securities during the period covered
by this report that were not registered under the Securities Act of 1933, as
amended.

ITEM 6. SELECTED FINANCIAL DATA

    The information required by this item is set forth under the caption
"Selected Financial Data" on page 16 of the 1997 Annual Report and is
incorporated herein by reference.

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

    The information required by this item is set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Forward Looking Statements" on pages 17 to 33 of the 1997
Annual Report and is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    The information required by this item is set forth under the captions
"Management's Discussion and Analysis--Market Risk" on pages 29 and 30 of the
1997 Annual Report and is incorporated herein by reference.

                                       17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                     METRIS COMPANIES INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
                                                                                               1997        1996
                                                                                            ----------  ----------
ASSETS:
Cash and due from banks                                                                     $   21,006  $    8,902
Federal funds sold                                                                              27,089      19,001
Short-term investments                                                                             128       4,179
                                                                                            ----------  ----------
  Cash and cash equivalents                                                                     48,223      32,082
                                                                                            ----------  ----------
Credit card loans:
  Loans held for securitization                                                                  8,795      14,164
  Retained interests in loans securitized                                                      471,831     201,165
    Less: Allowance for loan losses                                                             32,039      12,829
                                                                                            ----------  ----------
  Net credit card loans                                                                        448,587     202,500
                                                                                            ----------  ----------
Premises and equipment, net                                                                     15,464       5,163
Accrued interest and fees receivable                                                             4,310       2,942
Prepaid expenses and deferred charges                                                           18,473       4,826
Deferred income taxes                                                                           80,787      31,528
Customer base intangible                                                                        36,752         888
Other assets                                                                                    20,625       6,687
                                                                                            ----------  ----------
      TOTAL ASSETS                                                                          $  673,221  $  286,616
                                                                                            ----------  ----------
                                                                                            ----------  ----------
LIABILITIES:
Interest-bearing deposit from affiliate                                                     $           $    1,000
Short-term borrowings                                                                          144,000      54,163
Long-term debt                                                                                 100,000
Accounts payable                                                                                35,356      15,583
Other payables due to credit card securitizations, net                                         134,559      36,619
Current income taxes payable to FCI                                                              9,701       1,460
Deferred income                                                                                 49,204      23,183
Accrued expenses and other liabilities                                                          24,363      15,890
                                                                                            ----------  ----------
      TOTAL LIABILITIES                                                                        497,183     147,898
                                                                                            ----------  ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized, none issued or
  outstanding
Common stock, par value $.01 per share; 100,000,000 shares authorized, 19,225,000 shares
  issued and outstanding                                                                           192         192
Paid-in capital                                                                                107,059     107,220
Retained earnings                                                                               68,787      31,306
                                                                                            ----------  ----------
      TOTAL STOCKHOLDERS' EQUITY                                                               176,038     138,718
                                                                                            ----------  ----------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $  673,221  $  286,616
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

          See accompanying Notes to Consolidated Financial Statements

                                       18
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                 ---------------------------------
<S>                                                                              <C>         <C>         <C>
                                                                                    1997        1996       1995
                                                                                 ----------  ----------  ---------
INTEREST INCOME:
Credit card loans..............................................................  $   66,695  $   29,028  $   7,054
Federal funds sold.............................................................       1,636         867        487
Other..........................................................................         863         299         75
                                                                                 ----------  ----------  ---------
    Total interest income......................................................      69,194      30,194      7,616
INTEREST EXPENSE:
Deposit........................................................................           7          48         36
Borrowings.....................................................................      11,944       4,058      1,181
                                                                                 ----------  ----------  ---------
    Total interest expense.....................................................      11,951       4,106      1,217
                                                                                 ----------  ----------  ---------
NET INTEREST INCOME............................................................      57,243      26,088      6,399
Provision for loan losses......................................................      43,989      18,477      4,393
                                                                                 ----------  ----------  ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............................      13,254       7,611      2,006
                                                                                 ----------  ----------  ---------
OTHER OPERATING INCOME:
Net extended service plan revenues.............................................       7,911      20,420     17,779
Net securitization and credit card servicing income............................      79,533      49,921     16,003
Credit card fees, interchange and other credit card income.....................      43,731      26,028     10,639
Fee-based services revenues....................................................      55,502      29,853      6,662
                                                                                 ----------  ----------  ---------
                                                                                    186,677     126,222     51,083
                                                                                 ----------  ----------  ---------
OTHER OPERATING EXPENSE:
Credit card account and other product solicitation and marketing expenses......      30,503      29,297     23,089
Employee compensation..........................................................      35,200      23,068      2,466
Data processing services and communications....................................      20,087      12,757      3,090
Third-party servicing expense..................................................      12,711       9,207      5,300
Warranty and debt waiver underwriting and claims servicing expense.............       6,053      10,024      6,552
Credit card fraud losses.......................................................       3,240       2,276        775
Other..........................................................................      30,254      14,658      4,368
                                                                                 ----------  ----------  ---------
                                                                                    138,048     101,287     45,640
                                                                                 ----------  ----------  ---------
INCOME BEFORE INCOME TAXES.....................................................      61,883      32,546      7,449
Income taxes...................................................................      23,825      12,530      2,868
                                                                                 ----------  ----------  ---------
NET INCOME.....................................................................  $   38,058  $   20,016  $   4,581
                                                                                 ----------  ----------  ---------
                                                                                 ----------  ----------  ---------
EARNINGS PER SHARE:
Basic..........................................................................  $     1.98  $     1.21  $    0.29
Diluted........................................................................  $     1.88  $     1.17  $    0.28
SHARES USED TO COMPUTE EPS:
Basic..........................................................................      19,225      16,572     15,967
Diluted........................................................................      20,238      17,129     16,369
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       19
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                       TOTAL
                                                                          PAID-IN    RETAINED      STOCKHOLDERS'
                                                         COMMON STOCK     CAPITAL    EARNINGS         EQUITY
                                                        ---------------  ----------  ---------  -------------------
<S>                                                     <C>              <C>         <C>        <C>
BALANCE, DECEMBER 31, 1994............................     $             $       28  $   6,709      $     6,737
  Net income..........................................                                   4,581            4,581
  Contributions from FCI..............................                       60,000                      60,000
                                                               -----     ----------  ---------         --------

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
  Dividends and other.................................                         (161)      (577)            (738)
                                                               -----     ----------  ---------         --------

BALANCE, DECEMBER 31, 1997............................     $     192     $  107,059  $  68,787      $   176,038
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       20
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                         -----------------------------------------
<S>                                                                      <C>            <C>            <C>
                                                                             1997           1996          1995
                                                                         -------------  -------------  -----------
OPERATING ACTIVITIES:
Net income.............................................................  $      38,058  $      20,016  $     4,581
Adjustments to reconcile net income to net cash provided by (used in)
  operating activities:
  Provision for loan losses............................................         43,989         18,477        4,393
  Depreciation and amortization........................................         15,942          7,329        2,808
  (Gain)/net amortization of gain on securitization of credit card
    loans..............................................................         (1,376)         6,194       (7,267)
Changes in operating assets and liabilities:
  Accrued interest and fees receivable.................................         (1,368)          (719)      (2,223)
  Prepaid expenses and deferred charges................................        (23,150)        (6,045)      (6,696)
  Deferred income taxes................................................        (49,259)       (27,222)      (4,108)
  Accounts payable and accrued expenses................................         28,246          8,110       20,374
  Other payables/receivables due to/from credit card securitizations,
    net................................................................         98,670         61,542      (24,572)
  Current income taxes payable to FCI..................................          8,241         (3,718)       5,051
  Deferred income......................................................         26,021         13,096       10,084
  Other................................................................        (16,022)        (4,084)      (4,431)
                                                                         -------------  -------------  -----------
Net cash provided by (used in) operating activities....................        167,992         92,976       (2,006)
                                                                         -------------  -------------  -----------
INVESTING ACTIVITIES:
Proceeds from sales of loans...........................................      1,665,700        952,055      448,555
Net loans originated or collected......................................     (1,260,620)    (1,081,644)    (528,864)
Credit card portfolio acquisition......................................       (733,486)                    (15,469)
Net decrease in loans to FCI...........................................                                      9,375
Additions to premises and equipment....................................        (11,705)        (4,113)      (1,353)
                                                                         -------------  -------------  -----------
Net cash used in investing activities..................................       (340,111)      (133,702)     (87,756)
                                                                         -------------  -------------  -----------
FINANCING ACTIVITIES:
(Decrease) increase in interest-bearing deposit........................         (1,000)                      1,000
Net (decrease) increase in short-term borrowings.......................         89,837         (9,319)      63,482
Net proceeds from issuance of common stock.............................                        47,384
Issuance of senior notes...............................................        100,000
Cash dividends paid....................................................           (577)
Capital contributions from FCI.........................................                                     60,000
                                                                         -------------  -------------  -----------
Net cash provided by financing activities..............................        188,260         38,065      124,482
                                                                         -------------  -------------  -----------
Net increase (decrease) in cash and cash equivalents...................         16,141         (2,661)      34,720
Cash and cash equivalents at beginning of year.........................         32,082         34,743           23
                                                                         -------------  -------------  -----------
Cash and cash equivalents at end of year...............................  $      48,223  $      32,082  $    34,743
                                                                         -------------  -------------  -----------
                                                                         -------------  -------------  -----------
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       21
<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"). The
Company is an information-based direct marketer of consumer credit products and
fee-based services and extended service plans primarily to moderate-income
consumers. The Company's business is conducted through Metris Direct, Inc.,
Direct Merchants Credit Card Bank, National Association ("Direct Merchants
Bank"), Metris Funding Co. ("MFC") and Metris Receivables, Inc. ("MRI"), each a
wholly-owned direct or indirect subsidiary of MCI.

    Prior to September 1996, Metris Direct, Inc., (previously known as Fingerhut
Financial Services Corporation) operated as a division of Fingerhut Companies,
Inc. ("FCI"). During September 1996, FCI reorganized the business through the
formation of MCI. The stock of Metris Direct, Inc., Direct Merchants Bank,
DMCCB, Inc., and MRI, 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).

    In early 1995, the Company's need for cash to fund credit card loans and for
other general business purposes exceeded the cash generated by its other
businesses. Consequently, the Company borrowed funds or obtained capital from
FCI to fund its ongoing operations from early 1995 to late 1996. The
consolidated financial statements include an allocation of FCI's interest
expense for the Company's net borrowings from FCI. The consolidated financial
statements also reflect a $60 million allocation of capital from FCI to the
Company during 1995. This capital contribution was made in installments at the
beginning of each month throughout 1995, in order to maintain the Company's
equity at a level sufficient to support the growth in managed assets experienced
by the Company during 1995 (generally at approximately 10% of total managed
assets at the end of each month).

    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
expires at the end of 1998. The consolidated financial statements also reflect
the retroactive effects of intercompany agreements entered into during 1996,
including co-brand credit card, database access, data sharing and extended
service plan agreements with Fingerhut, 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

                                       22
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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.

CREDIT CARD LOANS HELD FOR SECURITIZATION

    Credit card loans held for securitization are 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 portion of its credit card loans to both
public and private investors through the Metris Master Trust (the "Trust") and a
third-party bank sponsored, commercial paper funded, multi-seller receivables
conduit (the "Conduit"). The Company retains participating interests in the
credit card loans (under "Retained interests in loans securitized") on the
consolidated balance sheets. Although the Company continues to service the
underlying 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." 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. The adoption of SFAS 125 did not have a
material effect on the Company's financial statements.

    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.

                                       23
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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 income statement. 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 and payables to the Trust or
Conduit and other assets/liabilities as a result of securitizations, including:
amounts deposited in an investor reserve account held by the Trust for the
benefit of the Trust's certificateholders; interest rate caps and swaps; accrued
interest and fees on the securitized receivables; servicing fee receivables;
recourse reserves; interest-only strip (see discussion in Note 15); and various
other receivables. These amounts are reported as "Other payables due to credit
card securitizations, net" on the consolidated balance sheets.

    The Company securitized approximately $1.7 billion and $1.0 billion of
credit card loans in 1997 and 1996, respectively. At December 31, 1997, the
Company had approximately $3.1 billion of investors' interests in securitized
loans, with expected maturities from 1998 to 2006.

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
on-balance sheet 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.

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 $47.6 million, $25.5 million, and $4.8 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Unearned
revenues and reserves for pending claims are recorded in the consolidated
balance sheets in "Accrued expenses and other liabilities" and amounted to $4.0
million and $2.5 million as of December 31, 1997 and 1996, respectively.

                                       24
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT

    Premises, furniture 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.

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.

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 over the life of the related
extended service plan contracts. The provision for service contract returns
charged against revenues for the years ended December 31, 1997, 1996 and 1995
amounted to $4.6 million, $4.5 million and $3.6 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. These media cost reimbursements were $3.6 million, $4.8 million, and
$4.2 million for the years ended December 31, 1997, 1996 and 1995, respectively.

    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

                                       25
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $9.2
million and $14.3 million as of December 31, 1997 and 1996, 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
off-balance sheet items expose the Company to interest rate risk. The Company
enters into a variety of interest rate risk management contracts such as
interest rate swap and cap agreements in the management of its interest rate
exposure. These interest rate risk management contracts are designated, and
effective, as synthetic alterations of specific assets or liabilities (or groups
of assets or liabilities) and off-balance sheet items. 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 payables
due to 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. The Company has not sold or
terminated any derivative financial instruments.

INCOME TAXES

    The Company is included in the consolidated federal income tax return and
certain state income tax returns of FCI. Based on a tax sharing agreement
between the Company and FCI, the provisions for federal and state income taxes
are computed based only on the Company's financial results as if the Company
filed its own federal and state income tax returns. Deferred taxes are based on
the temporary differences between the financial statement and tax bases of
assets and liabilities that will result in future taxable or deductible amounts
using enacted tax rates that are expected to apply for the year in which the
differences are expected to reverse.

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

                                       26
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1997, 1996 and
1995 was $9.4 million, $4.1 million, and $1.2 million, respectively. Cash paid
for income taxes for the same periods was $64.8 million, $41.6 million, and $2.0
million, respectively.

EARNINGS PER SHARE

    In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS 128, "Earnings Per Share". This Statement is effective for financial
statements issued for periods ending after December 15, 1997 and supersedes APB
Opinion No. 15, "Earnings Per Share." The Statement replaces the presentation of
primary earnings per share, ("EPS") with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement and requires companies to restate prior-period EPS for all periods in
which an income statement is presented. Basic EPS excludes dilution and is
computed by dividing net income 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. Earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to SFAS
128 requirements. The following table presents the computation of basic and
diluted weighted average shares used in the per share calculations:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                               -------------------------------
                                                                 1997       1996       1995
                                                               ---------  ---------  ---------
                                                                 (in thousands, except EPS)
<S>                                                            <C>        <C>        <C>
Income available to common stockholders......................  $  38,058  $  20,016  $   4,581
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
Weighted average common shares outstanding...................     19,225     16,572     15,967
Adjustments for dilutive securities:
Assumed exercise of outstanding stock options................      1,013        557        402
                                                               ---------  ---------  ---------
Diluted common shares........................................     20,238     17,129     16,369

Basic EPS....................................................  $    1.98  $    1.21  $    0.29
Diluted EPS..................................................       1.88       1.17       0.28
</TABLE>

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.

                                       27
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 3--ALLOWANCE FOR LOAN LOSSES

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

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                -------------------------------
                                                                  1997       1996       1995
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
Balance at beginning of year..................................  $  12,829  $   3,679  $
Allowance related to assets acquired, net.....................      4,619
Provision for loan losses.....................................     43,989     18,477      4,393
                                                                ---------  ---------  ---------
Loans charged off.............................................     30,065      9,514        720
Recoveries....................................................        667        187          6
                                                                ---------  ---------  ---------
Net loan charge-offs..........................................     29,398      9,327        714
                                                                ---------  ---------  ---------
Balance at end of year........................................  $  32,039  $  12,829  $   3,679
                                                                ---------  ---------  ---------
                                                                ---------  ---------  ---------
</TABLE>

NOTE 4--PREMISES AND EQUIPMENT

    The carrying value of premises and equipment is as follows:

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                           --------------------
                                                                             1997       1996
                                                                           ---------  ---------
<S>                                                                        <C>        <C>
Furniture and equipment..................................................  $   6,346  $   1,013
Computer software and equipment..........................................      3,733      2,784
Construction in progress.................................................      4,937      1,710
Leasehold improvements...................................................      2,439        248
                                                                           ---------  ---------
Total....................................................................     17,455      5,755
Less: Accumulated depreciation and amortization..........................      1,991        592
                                                                           ---------  ---------
Balance at end of year...................................................  $  15,464  $   5,163
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>

    Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was $1.4 million, $0.4 million, and $0.1 million, respectively.

NOTE 5--SHORT-TERM BORROWINGS

    On September 16, 1996, the Company executed a $300 million, five-year
revolving credit facility (the "Revolving Credit Facility"), with a group of
banks, guaranteed by FCI.

    The Revolving Credit Facility is guaranteed by FCI and is further supported
by the pledge of the stock of certain subsidiaries of the Company and certain
loans and interests held therein by the Company. The Revolving Credit Facility
also contains certain financial covenants standard for revolving credit
facilities of this type including minimum net worth, minimum equity to managed
assets ratio, maximum leverage, limitations on dividends and a limitation on
indebtedness. In addition, the FCI guarantee includes certain covenants
including minimum interest coverage, maximum leverage and minimum net worth for
FCI. At December 31, 1997 and 1996, the Company and FCI were in compliance with
these covenants.

                                       28
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 5--SHORT-TERM BORROWINGS (CONTINUED)
    The Company borrows under the Revolving Credit Facility, and prior to 1997,
borrowed from FCI, to fund on-balance sheet loans and for other general business
purposes. At December 31, 1997 and 1996, the Company had outstanding borrowings
of $144 million and $50 million, respectively, under the Revolving Credit
Facility and outstanding borrowings from FCI of $4.2 million at December 31,
1996. The weighted average interest rates on the Revolving Credit Facility
borrowings at December 31, 1997 and 1996 were 6.5% and 5.9%, respectively. The
weighted average interest rate on the borrowings from FCI was 7.1% at December
31, 1996.

NOTE 6--PORTFOLIO ACQUISITIONS

    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 the Conduit. The Company retains an
interest in the receivables which is financed by borrowings under the Revolving
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 the Conduit. The Company retains an interest in the receivables
which is financed by borrowings under the Revolving Credit Facility.

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. 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.

                                       29
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

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. It provides that up to 1,860,000 shares of common stock, subject to
adjustment in certain circumstances, are available for awards of stock options
or other stock-based awards. As of December 31, 1997 and 1996, 303,925 and
557,425 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. 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 1997 the Company granted 318,500 options 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 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. During 1997 the Company granted 20,000 options and at the
time of the initial public offering the Company granted 10,000 options. At
December 31, 1997 and 1996, 70,000 and 10,000 shares, respectively, were
available for grant. This plan is subject to approval by the shareholders of the
Company at the annual meeting in 1998. Because FCI will still own approximately
83% of the common stock on the record date for such meeting and FCI has stated
it will approve such plan, the Company expects this plan to be adopted.

                                       30
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 8--STOCK OPTIONS (CONTINUED)
    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:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                -------------------------------
                                                                  1997       1996       1995
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
Net earnings, as reported.....................................  $  38,058  $  20,016  $   4,581
Net earnings, pro forma.......................................  $  36,819  $  17,395  $   4,581
Diluted earnings per shares, as reported......................  $    1.88  $    1.17  $    0.28
Diluted earnings per share, pro forma.........................  $    1.82  $    1.02  $    0.28
</TABLE>

    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 1997 and 1996,
respectively: dividend yield of 0.11% and 0.17%; expected volatility of 68.2%
and 25.1%; risk-free interest rate of 6.34% and 6.48%; and expected lives of 7
years and 6.5 years. There were no options granted in 1995.

    Information regarding the Company's stock options for 1997, 1996 and 1995 is
as follows:

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                      ------------------------------------------------------------------------
                                                               1997                     1996                     1995
                                                      -----------------------  -----------------------  ----------------------
                                                                   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..............   1,408,700   $    8.93      656,075   $    2.76     656,075   $    2.76
Options exercised...................................
Options granted.....................................     338,500       40.58      752,625       14.31
Options canceled/forfeited..........................      65,000       16.00
                                                      ----------  -----------  ----------  -----------  ---------       -----
Options outstanding, end of year....................   1,682,200       15.03    1,408,700        8.93     656,075        2.76
Weighted-average fair value of options, granted
  during the year...................................                   28.29                    11.54
</TABLE>

                                       31
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 8--STOCK OPTIONS (CONTINUED)
    The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                                                                                 OPTIONS EXERCISABLE
                                           OPTIONS OUTSTANDING             --------------------------------
                                 ----------------------------------------     NUMBER
                     NUMBER        WEIGHTED-AVERAGE                         EXERCISABLE
                 OUTSTANDING AT        REMAINING        WEIGHTED-AVERAGE        AT        WEIGHTED AVERAGE
EXERCISE PRICE      12/31/97       CONTRACTUAL LIFE      EXERCISE PRICE      12/31/97      EXERCISE PRICE
---------------  --------------  ---------------------  -----------------  -------------  -----------------
<S>              <C>             <C>                    <C>                <C>            <C>
$2.76...........      752,200                5.7            $    2.76          553,327        $    2.76
$16.00-$24.00...      604,500                8.8                16.17          295,000            16.27
$24.01-$46.00...      325,500                9.7                41.24           10,000            39.00
</TABLE>

NOTE 9--EMPLOYEE BENEFIT PLANS

    In January 1997, the Company adopted a defined contribution profit sharing
plan (the "Retirement Plan") that provides retirement benefits for eligible
employees. During 1997, the Company's employees participated in the Retirement
Plan, which provides savings and investment opportunities. The Retirement Plan
stipulates that eligible employees with at least one year of service may elect
to contribute to the Retirement Plan. The Company matches a portion of employee
contributions and makes discretionary contributions based upon the Company's
financial performance. For the year ended December 31, 1997, the Company
contributed $0.9 million to the Retirement Plan.

    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 Retirement Plan and
the funds transferred to the Retirement Plan respective accounts. Direct
Merchants Bank employees were eligible to participate in the Retirement Plan as
of January 1, 1997.

NOTE 10--INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                 1997        1996       1995
                                                              ----------  ----------  ---------
<S>                                                           <C>         <C>         <C>
Current:
  Federal...................................................  $   66,496  $   38,914  $   6,238
  State.....................................................       4,663       4,035        921
Deferred....................................................     (47,334)    (30,419)    (4,291)
                                                              ----------  ----------  ---------
                                                              $   23,825  $   12,530  $   2,868
                                                              ----------  ----------  ---------
</TABLE>

                                       32
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 10--INCOME TAXES (CONTINUED)
    A reconciliation of the Company's effective income tax rate compared to the
statutory federal income tax rate is as follows:

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                          -------------------------------
                                                                            1997       1996       1995
                                                                          ---------  ---------  ---------
<S>                                                                       <C>        <C>        <C>
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%
                                                                                ---        ---        ---
</TABLE>

    The "other net" tax rate in 1997, 1996 and 1995 was composed of
miscellaneous items, none of which was individually significant.

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

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1997       1996
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Deferred income tax assets resulting from future deductible temporary
  differences:
  Allowance for loan losses and recourse reserves.......................  $  71,240  $  29,910
  Deferred revenues.....................................................     16,140      2,723
  Other.................................................................      9,344      1,592
                                                                          ---------  ---------
Total deferred tax assets...............................................  $  96,724  $  34,225
Deferred income tax liabilities resulting from future taxable temporary
  differences:
  Deferred solicitation and origination costs...........................  $   6,360  $   1,692
  Accrued interest on credit card loans.................................      8,577        578
  Other.................................................................      1,000        427
                                                                          ---------  ---------
Total deferred tax liabilities..........................................  $  15,937  $   2,697
                                                                          ---------  ---------
Net deferred tax assets.................................................  $  80,787  $  31,528
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>

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

NOTE 11--RELATED PARTY TRANSACTIONS

    FCI and its various subsidiaries have historically provided significant
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

                                       33
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 11--RELATED PARTY TRANSACTIONS (CONTINUED)
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 latest of which expires on December
31, 1998.

    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 certain periods. These
allocations of interest expense or income for each of the periods presented 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 such
periods. The interest rate used to calculate such expense or credit during such
periods was based on the average short-term borrowing rates of FCI during the
periods presented (see Note 5).

    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 intercompany agreements and 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
an escalating non-refundable license fee, payable annually, ranging from $0.5
million to $2.0 million, based on the year within the term of the agreement
($1.5 million was paid in January 1998). 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).

    Finally, the Company and FCI entered into a registration rights agreement
under which FCI has the right to require the Company to register under the
Securities Act of 1933, as amended, or to qualify for sale, any securities of
the Company that FCI owns, and the Company will be required to use reasonable
efforts to cause such registration to occur, subject to certain limitations and
conditions. The Company will bear the entire cost of the first three demand
registrations attributable to FCI, and FCI will bear one-half

                                       34
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 11--RELATED PARTY TRANSACTIONS (CONTINUED)
of the costs of any subsequent demand registrations. These costs include legal
fees and expenses of counsel for the Company, registration fees, printing
expenses and other related costs. FCI, however, will be required to pay any
underwriting discounts and commissions associated with the sale of its
securities and the fees and expenses of its own counsel.

    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 intercompany agreements mentioned above, for each of the
years reflected in the financial statements of the Company:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                -------------------------------
                                                                  1997       1996       1995
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
REVENUES:
Net extended service plan revenues............................  $   7,911  $  20,420  $  17,779
EXPENSES:
Interest expense..............................................                 3,178      1,181
Credit card account and other product solicitation and
  marketing expenses..........................................      8,432      9,335      8,204
Data processing services and communications...................      1,837      1,324        320
Third-party customer service and collections expenses.........                              500
Other affiliate cost allocations..............................      1,336        950      1,680
</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.

NOTE 12--COMMITMENTS AND CONTINGENCIES

    Commitments to extend credit to consumers represent the unused credit limits
on open credit card accounts. These commitments amounted to $4.1 billion and
$1.2 billion as of December 31, 1997 and 1996, 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. In addition, certain of these obligations have been guaranteed
by FCI. Rental expense for such operating leases for the years ended December
31, 1997, 1996 and 1995 was $3.9 million, $1.1 million and $0.2 million,
respectively.

                                       35
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

    Future minimum lease commitments at December 31, 1997 under cancelable and
non-cancelable operating leases are as follows:

<TABLE>
<S>                                                                  <C>
1998...............................................................  $   4,686
1999...............................................................      3,543
2000...............................................................      2,196
2001...............................................................        839
2002...............................................................        678
Thereafter.........................................................      2,908
                                                                     ---------
  Total minimum lease payments.....................................  $  14,850
                                                                     ---------
</TABLE>

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 with certain restrictions. 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 Act
dividend provisions.

    Direct Merchants Bank is subject to certain capital adequacy guidelines
adopted by the Office of the Comptroller of the Currency ("OCC"). The OCC
considers a range of factors when determining capital adequacy, such as the
organization's size, quality, liquidity and internal controls. At December 31,
1997 and 1996, 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 (see Note 16). Pursuant to that
indenture, 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

                                       36
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 14--CONCENTRATIONS OF CREDIT RISK (CONTINUED)
concentration of credit risk at December 31, 1997 or 1996. The following table
details the geographic distribution of the Company's retained, sold and managed
credit card loans:

<TABLE>
<CAPTION>
                                                         RETAINED       SOLD        MANAGED
                                                        ----------  ------------  ------------
<S>                                                     <C>         <C>           <C>
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
                                                        ----------  ------------  ------------
DECEMBER 31, 1996
California............................................  $   27,053  $    175,892  $    202,945
Florida...............................................      17,505       113,819       131,324
New York..............................................      17,034       110,754       127,788
Texas.................................................      16,480       107,151       123,631
Ohio..................................................       9,409        61,179        70,588
Pennsylvania..........................................       8,654        56,267        64,921
Illinois..............................................       7,989        51,940        59,929
All Others............................................     111,205       723,609       834,814
                                                        ----------  ------------  ------------
  Total...............................................  $  215,329  $  1,400,611  $  1,615,940
                                                        ----------  ------------  ------------
</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 downturns, which may make them
more likely to default on their obligations.

    At December 31, 1997, 1996 and 1995, 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

                                       37
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 assessment 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.

CREDIT CARD LOANS, NET OF ALLOWANCE FOR LOAN LOSSES

    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 PAYABLES DUE TO CREDIT CARD SECURITIZATIONS, NET

    The components of this net liability 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 trusts 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 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 estimated
fair value

                                       38
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
include: (i) interest rates on trust assets; (ii) payment rates; (iii)
anticipated charge-offs over the life of the loans under the recourse
provisions; and (iv) discount rates and are summarized as follows:

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                              ------------------------
<S>                                                                           <C>          <C>
                                                                                 1997         1996
                                                                                 -----        -----
Discount rate...............................................................          10%           9%
Payment rate (monthly)......................................................           5%           6%
Default rate (annually).....................................................          14%          12%
</TABLE>

    INTEREST RATE CAP AND SWAP AGREEMENTS

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

    OTHER AMOUNTS

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

INTEREST-BEARING DEPOSIT AND SHORT-TERM BORROWINGS

    Interest-bearing deposit and short-term borrowings are made with variable
rates of interest that adjust with changing market interest rates. Thus,
carrying value approximates fair value.

LONG-TERM DEBT

    The fair value of the long-term debt was obtained from a quoted market
price.

                                       39
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    The estimated fair values of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                              --------------------------------------------------------------------------
<S>                                           <C>               <C>                 <C>               <C>
                                                              1997                                  1996
                                              ------------------------------------  ------------------------------------

<CAPTION>
                                                                  ESTIMATED FAIR                        ESTIMATED FAIR
                                              CARRYING AMOUNT         VALUE         CARRYING AMOUNT         VALUE
                                              ----------------  ------------------  ----------------  ------------------
<S>                                           <C>               <C>                 <C>               <C>
Cash and cash equivalents...................    $     48,223        $   48,223        $     32,082        $   32,082
Credit card loans, net......................         448,587           448,587             202,500           202,500
Other payables due to credit card
  securitizations, net:
    Interest-only strip.....................           2,449             2,449               1,073             1,073
    Interest rate swap agreements in a net
      receivable position...................                            21,667                                 2,657
    Interest rate cap agreements............           3,497               170               4,143             1,989
    Other amounts...........................        (140,505)         (140,505)            (41,835)          (41,835)
Interest-bearing deposit from affiliate.....                                                 1,000             1,000
Short-term borrowings.......................         144,000           144,000              54,163            54,163
Long-term debt..............................         100,000           101,750
</TABLE>

DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

    The Company has entered into interest rate cap and swap agreements to hedge
its economic exposure to the impact of fluctuating interest rates associated
with the spread between the floating rate loans owned by the Trust and the
floating and fixed rate certificates issued by the Trust to fund the loans. In
connection with the issuance of the $513 million Trust Series 1995-1 variable
funding certificates in May 1995, the Company entered into eight-year agreements
with bank counterparties in a total notional amount of $513 million effectively
capping the potential impact to the Company of increases in the certificates'
floating interest rate at 11.2%. Also, in connection with the issuance of $513
million of additional Trust Series 1995-1 certificates related to the September
1996 amendment of Trust Series 1995-1, the Company entered into additional six
and two-thirds year agreements in a total notional amount of $513 million
effectively capping the potential impact to the Company of increases in the new
certificates' floating interest rate at 11.2%. The Company entered into interest
rate swap agreements in April 1996 and May 1997 to effectively offset the
potential impact of the fixed rate Trust Series 1996-1 and 1997-1 certificates
by paying a floating rate. Total notional amounts of these swap transactions
amounted to $605.5 million for Series 1996-1 and $722.5 million for Series
1997-1. These swaps exchanged an obligation to pay a weighted-average fixed rate
of 6.26% and 6.69%, respectively, for a one month floating rate based on
prevailing 30 day London Interday Offered Rate ("LIBOR"). The Company receives
the benefits and bears the obligations of these swap transactions, with FCI
guaranteeing the Company's performance under the swap agreements. The
obligations of the Company and the counterparties under these swap agreements
are settled on a monthly basis.

    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

                                       40
<PAGE>
                     METRIS COMPANIES INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                    (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)

NOTE 15--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 16--LONG-TERM DEBT

    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 Revolving 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 Revolving Credit
Facility. The guarantee is an unsecured obligation of the Guarantor and ranks
pari passu with all existing and future unsubordinated indebtedness.

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

                                       41
<PAGE>
                             METRIS COMPANIES INC.

                   SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

                               DECEMBER 31, 1997

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                             METRIS       GUARANTOR   NON-GUARANTOR
                                         COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                         --------------  -----------  --------------  ------------  ------------
<S>                                      <C>             <C>          <C>             <C>           <C>
ASSETS:
Cash and due from banks................    $      320     $     390     $   20,296     $             $   21,006
Federal funds sold.....................                                     27,089                       27,089
Short-term investments.................            16                          112                          128
                                         --------------  -----------  --------------                ------------
Cash and cash equivalents..............           336           390         47,497                       48,223
                                         --------------  -----------  --------------                ------------
Credit card loans:
Loans held for securitization..........         8,140                          655                        8,795
Retained interests in loans
  securitized..........................                                    471,831                      471,831
Less: Allowance for loan losses........            54                       31,985                       32,039
                                         --------------  -----------  --------------                ------------
Net credit card loans..................         8,086                      440,501                      448,587
                                         --------------  -----------  --------------                ------------
Premises and equipment, net............                      13,899          1,565                       15,464
Accrued interest and fees receivable...             9                        4,301                        4,310
Prepaid expenses and deferred
  charges..............................           138        15,075          3,260                       18,473
Deferred income taxes..................           682        12,638         67,467                       80,787
Customer base intangible...............         1,567                       35,185                       36,752
Other assets...........................         3,489         6,983         10,153                       20,625
Investment in subsidiaries.............       349,731       366,977                      (716,708)
                                         --------------  -----------  --------------  ------------  ------------
Total assets...........................    $  364,038     $ 415,962     $  609,929     $ (716,708)   $  673,221
                                         --------------  -----------  --------------  ------------  ------------
                                         --------------  -----------  --------------  ------------  ------------

LIABILITIES:
Interest-bearing deposit from
  affiliate............................    $   (1,000)    $             $    1,000     $             $
Borrowings/intercompany balances.......       177,598         7,975        (41,573)                     144,000
Long-term debt.........................       100,000                                                   100,000
Accounts payable.......................        (1,086)        7,975         28,467                       35,356
Other payables due to credit card
  securitizations, net.................           491                      134,068                      134,559
Current income taxes payable to
  (receivable from) FCI................       (90,003)         (486)       100,190                        9,701
Deferred income........................            33        35,044         14,127                       49,204
Accrued expenses and other
  liabilities..........................         1,967        15,723          6,673                       24,363
                                         --------------  -----------  --------------                ------------
Total liabilities......................       188,000        66,231        242,952                      497,183
                                         --------------  -----------  --------------                ------------
STOCKHOLDERS' EQUITY:
Common stock...........................           192         1,002          1,002         (2,004)          192
Paid-in capital........................       107,059       279,842        279,815       (559,657)      107,059
Retained earnings......................        68,787        68,887         86,160       (155,047)       68,787
                                         --------------  -----------  --------------  ------------  ------------
TOTAL STOCKHOLDERS' EQUITY.............       176,038       349,731        366,977       (716,708)      176,038
                                         --------------  -----------  --------------  ------------  ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY...............................    $  364,038     $ 415,962     $  609,929     $ (716,708)   $  673,221
                                         --------------  -----------  --------------  ------------  ------------
                                         --------------  -----------  --------------  ------------  ------------
</TABLE>

                                       42
<PAGE>
                             METRIS COMPANIES INC.

                   SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

                               DECEMBER 31, 1996

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                             METRIS       GUARANTOR   NON-GUARANTOR
                                         COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                         --------------  -----------  --------------  ------------  ------------
<S>                                      <C>             <C>          <C>             <C>           <C>
ASSETS:
Cash and due from banks................    $      215     $      83     $    8,604     $             $    8,902
Federal funds sold.....................                                     19,001                       19,001
Short-term investments.................         4,160                           19                        4,179
                                         --------------  -----------  --------------                ------------
Cash and cash equivalents..............         4,375            83         27,624                       32,082
                                         --------------  -----------  --------------                ------------
Credit card loans:
Loans held for securitization..........                                     14,164                       14,164
Retained interests in loans
  securitized..........................        14,022                      187,143                      201,165
Less: Allowance for loan losses........           111                       12,718                       12,829
                                         --------------  -----------  --------------                ------------
Net credit card loans..................        13,911                      188,589                      202,500
                                         --------------  -----------  --------------                ------------
Premises and equipment, net............                       4,669            494                        5,163
Accrued interest and fees receivable...            26                        2,916                        2,942
Prepaid expenses and deferred
  charges..............................            30           620          4,176                        4,826
Deferred income taxes..................           290           575         30,663                       31,528
Customer base intangible...............                                        888                          888
Other assets...........................         1,187             5          5,495                        6,687
Investment in subsidiaries.............       128,125       131,730                      (259,855)
                                         --------------  -----------  --------------  ------------  ------------
TOTAL ASSETS...........................    $  147,944     $ 137,682     $  260,845     $ (259,855)   $  286,616
                                         --------------  -----------  --------------  ------------  ------------
                                         --------------  -----------  --------------  ------------  ------------

LIABILITIES:
Interest-bearing deposit from
  affiliate............................    $              $             $    1,000     $             $    1,000
Short-term borrowings/ intercompany
  balances.............................        50,172        (3,372)         7,363                       54,163
Accounts payable.......................          (383)        4,466         11,500                       15,583
Other payables due to credit card
  securitizations, net.................           559                       36,060                       36,619
Current income taxes payable to/
  (receivable from) FCI................       (41,277)       (6,834)        49,571                        1,460
Deferred income........................           153         2,060         20,970                       23,183
Accrued expenses and other
  liabilities..........................             2        13,237          2,651                       15,890
                                         --------------  -----------  --------------                ------------
Total liabilities......................         9,226         9,557        129,115                      147,898
                                         --------------  -----------  --------------                ------------
STOCKHOLDERS' EQUITY:
Common Stock...........................           192         1,000          1,000         (2,000)          192
Paid-in capital........................       107,220        82,028         82,002       (164,030)      107,220
Retained earnings......................        31,306        45,097         48,728        (93,825)       31,306
                                         --------------  -----------  --------------  ------------  ------------
TOTAL STOCKHOLDERS' EQUITY.............       138,718       128,125        131,730       (259,855)      138,718
                                         --------------  -----------  --------------  ------------  ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY...............................    $  147,944     $ 137,682     $  260,845     $ (259,855)   $  286,616
                                         --------------  -----------  --------------  ------------  ------------
                                         --------------  -----------  --------------  ------------  ------------
</TABLE>

                                       43
<PAGE>
                             METRIS COMPANIES INC.

                SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

                          YEAR ENDED DECEMBER 31, 1997

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                             METRIS       GUARANTOR   NON-GUARANTOR
                                         COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                         --------------  -----------  --------------  ------------  ------------
<S>                                      <C>             <C>          <C>             <C>           <C>
INTEREST INCOME:
Credit card loans......................    $    1,063     $             $   65,632     $             $   66,695
Federal funds sold.....................                                      1,636                        1,636
Other..................................           184                          679                          863
                                         --------------               --------------                ------------
  Total interest income................         1,247                       67,947                       69,194
INTEREST EXPENSE:
Deposit................................                                          7                            7
Borrowings.............................        13,937           432         (2,425)                      11,944
                                         --------------  -----------  --------------                ------------
  Total interest expense/(income)......        13,937           432         (2,418)                      11,951
NET INTEREST INCOME/(EXPENSE)..........       (12,690)         (432)        70,365                       57,243
Provision for loan losses..............           682                       43,307                       43,989
                                         --------------  -----------  --------------                ------------
NET INTEREST INCOME/(EXPENSE) AFTER
  PROVISION FOR LOAN LOSSES............       (13,372)         (432)        27,058                       13,254
OTHER OPERATING INCOME:
Net extended service plan revenues.....                       7,911                                       7,911
Net securitization and credit card
  servicing income.....................        10,653                       68,880                       79,533
Credit card fees, interchange and other
  credit card income...................           478           (21)        43,274                       43,731
Fee-based services revenues............                         625         54,877                       55,502
                                         --------------  -----------  --------------                ------------
                                               11,131         8,515        167,031                      186,677
OTHER OPERATING EXPENSE:
Credit card account and other product
  solicitation and marketing
  expenses.............................                       1,783         28,720                       30,503
Employee compensation..................                      32,735          2,465                       35,200
Data processing services and
  communications.......................                       2,883         17,204                       20,087
Third-party servicing expense..........            51       (20,396)        33,056                       12,711
Warranty and debt waiver underwriting
  and claims servicing expense.........                         549          5,504                        6,053
Credit card fraud losses...............            27                        3,213                        3,240
Other..................................           382        12,644         17,228                       30,254
                                         --------------  -----------  --------------                ------------
                                                  460        30,198        107,390                      138,048
                                         --------------  -----------  --------------                ------------
INCOME/(LOSS) BEFORE INCOME TAXES AND
  EQUITY IN INCOME OF SUBSIDIARIES.....        (2,701)      (22,115)        86,699                       61,883
Income taxes...........................        (1,040)       (8,475)        33,340                       23,825
Equity in income of subsidiaries.......        39,719        53,359                       (93,078)
                                         --------------  -----------  --------------  ------------  ------------
NET INCOME/(LOSS)......................    $   38,058     $  39,719     $   53,359     $  (93,078)   $   38,058
                                         --------------  -----------  --------------  ------------  ------------
                                         --------------  -----------  --------------  ------------  ------------
</TABLE>

                                       44
<PAGE>
                             METRIS COMPANIES INC.

                SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

                          YEAR ENDED DECEMBER 31, 1996

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                             METRIS       GUARANTOR   NON-GUARANTOR
                                         COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                         --------------  -----------  --------------  ------------  ------------
<S>                                      <C>             <C>          <C>             <C>           <C>
INTEREST INCOME:
Credit card loans......................    $      199     $             $   28,829     $             $   29,028
Federal funds sold.....................                                        867                          867
Other..................................           105                          194                          299
                                              -------    -----------  --------------                ------------
  Total interest income................           304                       29,890                       30,194
INTEREST EXPENSE:
Deposit................................                                         48                           48
Short-term borrowings..................         7,272        (2,575)          (639)                       4,058
                                              -------    -----------  --------------                ------------
  Total interest expense/(income)......         7,272        (2,575)          (591)                       4,106
                                              -------    -----------  --------------                ------------
NET INTEREST INCOME/(EXPENSE)..........        (6,968)        2,575         30,481                       26,088
Provision for loan losses..............            83                       18,394                       18,477
                                              -------    -----------  --------------                ------------
NET INTEREST INCOME/(EXPENSE) AFTER
  PROVISION FOR LOAN LOSSES............        (7,051)        2,575         12,087                        7,611
OTHER OPERATING INCOME:
Net extended service plan revenues.....                      20,420                                      20,420
Net securitization and credit card
  servicing income.....................         3,859                       46,062                       49,921
Credit card fees, interchange and other
  credit card income...................            49           107         25,872                       26,028
Fee-based services revenues............                       1,580         28,273                       29,853
                                              -------    -----------  --------------                ------------
                                                3,908        22,107        100,207                      126,222
OTHER OPERATING EXPENSE:
Credit card account and other product
  solicitation and marketing
  expenses.............................         5,805         9,563         13,929                       29,297
Employee compensation..................                      22,076            992                       23,068
Data processing services and
  communications.......................                       1,600         11,157                       12,757
Third-party servicing expense..........             3        (6,757)        15,961                        9,207
Warranty and debt waiver underwriting
  and claims servicing expense.........                       6,463          3,561                       10,024
Credit card fraud losses...............            10                        2,266                        2,276
Other..................................             1         9,900          4,757                       14,658
                                              -------    -----------  --------------                ------------
                                                5,819        42,845         52,623                      101,287
                                              -------    -----------  --------------                ------------
INCOME/(LOSS) BEFORE INCOME TAXES AND
  EQUITY IN INCOME OF SUBSIDIARIES.....        (8,962)      (18,163)        59,671                       32,546
Income taxes...........................        (3,450)       (6,993)        22,973                       12,530
Equity in income of subsidiaries.......        25,528        36,698                       (62,226)
                                              -------    -----------  --------------  ------------  ------------
NET INCOME/(LOSS)......................    $   20,016     $  25,528     $   36,698     $  (62,226)   $   20,016
                                              -------    -----------  --------------  ------------  ------------
                                              -------    -----------  --------------  ------------  ------------
</TABLE>

                                       45
<PAGE>
                             METRIS COMPANIES INC.

                SUPPLEMENTAL CONSOLIDATING STATEMENTS OF INCOME

                          YEAR ENDED DECEMBER 31, 1995

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                             METRIS       GUARANTOR   NON-GUARANTOR
                                         COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                         --------------  -----------  --------------  ------------  ------------
<S>                                      <C>             <C>          <C>             <C>           <C>
INTEREST INCOME:
Credit card loans......................    $              $             $    7,054     $             $    7,054
Federal funds sold.....................                                        487                          487
Other..................................                                         75                           75
                                         --------------  -----------       -------                  ------------
  Total interest income................                                      7,616                        7,616
INTEREST EXPENSE:
Deposit................................                                         36                           36
Short term borrowings..................         2,145          (979)            15                        1,181
                                         --------------  -----------       -------                  ------------
  Total interest expense/(income)......         2,145          (979)            51                        1,217
                                         --------------  -----------       -------                  ------------
NET INTEREST INCOME/(EXPENSE)..........        (2,145)          979          7,565                        6,399
Provision for loan losses..............                                      4,393                        4,393
                                         --------------  -----------       -------                  ------------
NET INTEREST INCOME/(EXPENSE) AFTER
  PROVISION FOR LOAN LOSSES............        (2,145)          979          3,172                        2,006
OTHER OPERATING INCOME:
Net extended service plan revenues.....                      17,779                                      17,779
Net securitization and credit card
  servicing income.....................                                     16,003                       16,003
Credit card fees, interchange and other
  credit card income...................                          30         10,609                       10,639
Fee-based services revenues............                       1,817          4,845                        6,662
                                         --------------  -----------       -------                  ------------
                                                             19,626         31,457                       51,083
OTHER OPERATING EXPENSE:
Credit card account and other product
  solicitation and marketing
  expenses.............................        11,244         8,289          3,556                       23,089
Employee compensation..................                       1,430          1,036                        2,466
Data processing services and
  communications.......................                          34          3,056                        3,090
Third-party servicing expense..........                         500          4,800                        5,300
Warranty and debt waiver underwriting
  and claims servicing expense.........                       5,854            698                        6,552
Credit card fraud losses...............                                        775                          775
Other..................................                       3,484            884                        4,368
                                         --------------  -----------       -------                  ------------
                                               11,244        19,591         14,805                       45,640
                                         --------------  -----------       -------                  ------------
INCOME/(LOSS) BEFORE INCOME TAXES AND
  EQUITY IN INCOME OF SUBSIDIARIES.....       (13,389)        1,014         19,824                        7,449
Income taxes...........................        (5,118)          375          7,611                        2,868
Equity in income of subsidiaries.......        12,852        12,213                       (25,065)
                                         --------------  -----------       -------    ------------  ------------
NET INCOME/(LOSS)......................    $    4,581     $  12,852     $   12,213     $  (25,065)   $    4,581
                                         --------------  -----------       -------    ------------  ------------
                                         --------------  -----------       -------    ------------  ------------
</TABLE>

                                       46
<PAGE>
                             METRIS COMPANIES INC.

         SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

                          YEAR ENDED DECEMBER 31, 1997

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          METRIS       GUARANTOR   NON-GUARANTOR
                                                      COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   CONSOLIDATED
                                                      --------------  -----------  --------------  -------------
<S>                                                   <C>             <C>          <C>             <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY (USED IN) OPERATING
  ACTIVITIES........................................   $    (51,300)   $    (526)   $    219,818   $     167,992
                                                      --------------  -----------  --------------  -------------
INVESTING ACTIVITIES:
Proceeds from sales of loans........................                                   1,665,700       1,665,700
Net loans originated or collected...................          3,300                   (1,263,920)     (1,260,620)
Credit card portfolio acquisition...................                                    (733,486)       (733,486)
Additions to premises and equipment.................                     (10,515)         (1,190)        (11,705)
                                                      --------------  -----------  --------------  -------------
NET CASH PROVIDED BY (USED IN) INVESTING
  ACTIVITIES........................................          3,300      (10,515)       (332,896)       (340,111)
                                                      --------------  -----------  --------------  -------------
FINANCING ACTIVITIES:
Decrease in interest bearing deposit................         (1,000)                                      (1,000)
Net (decrease) increase in short-term borrowings....        127,425       11,348         (48,936)         89,837
Issuance of senior notes............................        100,000                                      100,000
Cash dividends paid.................................         15,350                      (15,927)           (577)
Capital contributions...............................       (197,814)                     197,814
                                                      --------------  -----------  --------------  -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES...........         43,961       11,348         132,951         188,260
                                                      --------------  -----------  --------------  -------------
Net (decrease) increase in cash and cash
  equivalents.......................................         (4,039)         307          19,873          16,141
Cash and cash equivalents at beginning of year......          4,375           83          27,624          32,082
                                                      --------------  -----------  --------------  -------------
Cash and cash equivalents at end of year............   $        336    $     390    $     47,497   $      48,223
                                                      --------------  -----------  --------------  -------------
                                                      --------------  -----------  --------------  -------------
</TABLE>

                                       47
<PAGE>
                             METRIS COMPANIES INC.

         SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

                            YEAR ENDED DECEMBER 31,

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          METRIS       GUARANTOR   NON-GUARANTOR
1996                                                  COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   CONSOLIDATED
----------------------------------------------------  --------------  -----------  --------------  -------------
<S>                                                   <C>             <C>          <C>             <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY (USED IN) OPERATING
  ACTIVITIES........................................    $  (40,660)    $  (4,991)   $    138,627   $      92,976
                                                      --------------  -----------  --------------  -------------
INVESTING ACTIVITIES:
Proceeds from sales of loans........................                                     952,055         952,055
Net loans originated or collected...................       (13,994)                   (1,067,650)     (1,081,644)
Additions to premises and equipment.................                      (3,782)           (331)         (4,113)
                                                      --------------  -----------  --------------  -------------
NET CASH (USED IN) INVESTING ACTIVITIES.............       (13,994)       (3,782)       (115,926)       (133,702)
                                                      --------------  -----------  --------------  -------------
FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings....        50,172         8,856         (68,347)         (9,319)
Net proceeds from issuance of common stock..........        47,384                                        47,384
Capital contributions...............................       (38,527)                       38,527
                                                      --------------  -----------  --------------  -------------
NET CASH PROVIDED BY (USED IN) FINANCING
  ACTIVITIES........................................        59,029         8,856         (29,820)         38,065
                                                      --------------  -----------  --------------  -------------
Net increase (decrease) in cash and cash
  equivalents.......................................         4,375            83          (7,119)         (2,661)
Cash and cash equivalents at beginning of year......                                      34,743          34,743
                                                      --------------  -----------  --------------  -------------
Cash and cash equivalents at end of year............    $    4,375     $      83    $     27,624   $      32,082
                                                      --------------  -----------  --------------  -------------
                                                      --------------  -----------  --------------  -------------
</TABLE>

<TABLE>
<CAPTION>
                                                          METRIS       GUARANTOR   NON-GUARANTOR
1995                                                  COMPANIES INC.  SUBSIDIARIES  SUBSIDIARIES   CONSOLIDATED
----------------------------------------------------  --------------  -----------  --------------  -------------
<S>                                                   <C>             <C>          <C>             <C>
OPERATING ACTIVITIES:
NET CASH PROVIDED BY (USED IN) OPERATING
  ACTIVITIES........................................    $  (15,525)    $   3,544    $      9,975   $      (2,006)
                                                      --------------  -----------  --------------  -------------
INVESTING ACTIVITIES:
Proceeds from sales of loans........................                                     448,555         448,555
Net loans originated or collected...................                                    (528,864)       (528,864)
Credit card portfolio acquisition...................                                     (15,469)        (15,469)
Net decrease in loans to FCI........................                       9,375                           9,375
Additions to premises and equipment.................                        (910)           (443)         (1,353)
                                                      --------------  -----------  --------------  -------------
NET CASH PROVIDED BY (USED IN) INVESTING
  ACTIVITIES........................................                       8,465         (96,221)        (87,756)
                                                      --------------  -----------  --------------  -------------
FINANCING ACTIVITIES:
Increase in interest-bearing deposit................                                       1,000           1,000
Net (decrease)/increase in short-term borrowings....                     (12,009)         75,491          63,482
Capital contributions...............................        15,525                        44,475          60,000
                                                      --------------  -----------  --------------  -------------
Net cash provided by (used in) financing
  activities........................................        15,525       (12,009)        120,966         124,482
                                                      --------------  -----------  --------------  -------------
Net increase in cash and cash equivalents...........                                      34,720          34,720
Cash and cash equivalents at beginning of year......                                          23              23
                                                      --------------  -----------  --------------  -------------
Cash and cash equivalents at end of year............    $              $            $     34,743   $      34,743
                                                      --------------  -----------  --------------  -------------
                                                      --------------  -----------  --------------  -------------
</TABLE>

                                       48
<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, 1997 and 1996, 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,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.

<TABLE>
<S>                             <C>  <C>
                                     /s/ KPMG PEAT MARWICK LLP
</TABLE>

KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 21, 1998

                                       49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

    None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this item with respect to directors is set forth
under "The Board: Election of Nominees" in the Company's proxy statement for the
annual meeting of shareholders to be held on May 12, 1998, which will be filed
within 120 days of December 31, 1997 (the "Proxy Statement") and is incorporated
herein by reference. The information required by this item with respect to
executive officers is, pursuant to instruction 3 of Item 401(b) of Regulation
S-K, set forth in Part I of this Form 10-K under "Business Executive Officers of
the Registrant." The information required by this item with respect to reports
required to be filed under Section 16(a) of the Securities Exchange Act of 1934
is set forth under "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item is set forth under "Arrangements and
Transactions with Fingerhut" in the Proxy Statement and is incorporated herein
by reference.

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

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

     1. Consolidated Financial Statements--See Item 8 above.

     2. Financial Statement Schedules

                                       50
<PAGE>
       All schedules to the consolidated financial statements normally required
       by Form 10-K are omitted since they are either not applicable or the
       required information is shown in the financial statements or the notes
       thereto.

 (b) Reports on Form 8-K:    8-K filed October 15, 1997 (filed pursuant to item
                             5 of Form 8-K concerning the purchase of
                             approximately 260,000 credit card accounts).
                           8-K filed November 7, 1997 (filed pursuant to item 5
                             of Form 8-K concerning the purchase of
                             approximately 240,000 credit card accounts).

 (c) Exhibits: See Exhibit Index on page 54 of this Report.

                                       51
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 26th day of
March, 1998.

                                METRIS COMPANIES INC.
                                (Registrant)

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

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

SIGNATURE                       TITLE                        DATE
------------------------------  ---------------------------  -------------------

Principal executive officer     President,                     March 26, 1998
and director:                   Chief Executive Officer
                                and Director

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

Principal financial officer:    Senior Vice President,         March 26, 1998
                                Chief Financial Officer

  /s/Robert W. Oberrender
------------------------------
Robert W. Oberrender

Principal accounting officer:   Director of Finance,           March 26, 1998
                                Corporate Controller

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

                                       52
<PAGE>
<TABLE>
<C>                             <S>                          <C>
DIRECTORS:

  /s/Theodore Deikel            Director                       March 26, 1998
------------------------------
Theodore Deikel

  /s/Michael P. Sherman         Director                       March 26, 1998
------------------------------
Michael P. Sherman

  /s/Dudley C. Mecum            Director                       March 26, 1998
------------------------------
Dudley C. Mecum

  /s/Frank D. Trestman          Director                       March 26, 1998
------------------------------
Frank D. Trestman

  /s/Lee R. Anderson, Sr.       Director                       March 26, 1998
------------------------------
Lee R. Anderson, Sr.

  /s/Derek V. Smith             Director                       March 26, 1998
------------------------------
Derek V. Smith
</TABLE>

                                       53
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                    DESCRIPTION OF EXHIBIT

<S>        <C>        <C>
ARTICLES OF INCORPORATION AND BYLAWS

3.1        Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to
           Exhibit 3.a to the Registrant's Registration Statement on Form S-1 (File No. 333-10831)).

3.2        Bylaws of the Registrant (Incorporated by reference to Exhibit 3.b to the Registrant's Registration
           Statement on Form S-1 (File No. 333-10831)).

INSTRUMENTS DEFINING RIGHTS:

4.1        Indenture dated as of November 7, 1997, among the Registrant, Metris Direct, Inc. as the Guarantor,
           and the First National Bank of Chicago, as Trustee. (Incorporated by reference to Exhibit 4.a to
           Registrant's Registration Statement on Form S-4 (File No. 333-43771)).

4.2        Exchange and Registration Rights Agreement, dated as of November 7, 1997, among the Registrant,
           Metris Direct, Inc., as Guarantor and Chase Securities, Inc., Bear Stearns & Co., Inc. and
           NationsBank Montgomery Securities, Inc. (Incorporated by reference to Exhibit 4.b and Registrant's
           Registration Statement on Form S-4 (File No. 333-43771).

4.3        Form of Security for 10% Senior Notes due 2004 originally issued by the Registrant on November 7,
           1997 (included in Exhibit 4.1).

4.4        Form of Security of 10% Senior Notes due 2004 issued in exchange for 10% Senior Notes due 2004,
           issued November 7, 1997, and to be registered under the Securities Act of 1933 (included in Exhibit
           4.1).

4.5        Form of Guarantee for 10% Senior Notes due 2004 originally issued by Metris Direct, Inc. (included in
           Exhibit 4.1).

4.6        Form of Guarantee of 10% Senior Notes due 2004 to be issued by Metris Direct, Inc. and registered
           under the Securities Act of 1933 (included in Exhibit 4.1).

MATERIAL CONTRACTS

10.1       Pooling and Servicing Agreement, dated as of May 26, 1995, among Fingerhut Financial Services
           Receivables, Inc., as Transferor, Direct Merchants Credit Card Bank, National Association, as
           Servicer, and The Bank of New York (Delaware), as Trustee (Incorporated by reference to Exhibit 10.u
           to Fingerhut Companies, Inc.'s Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter
           ended June 30, 1995).

           (i)        Amended and Restated Series 1995-1 Supplement, dated as of September 16, 1996
                      (Incorporated by reference to Exhibit 10.a(i) to Registration Statement on Form S-1 (No.
                      333-10831)).
</TABLE>

                                       54
<PAGE>
<TABLE>
<S>        <C>        <C>
           (ii)       Series 1996-1 Supplement, dated as of April 23, 1996 (Incorporated by reference to Exhibit
                      10.c(ii) to Fingerhut Companies, Inc.'s Quarterly Report on Form 10-Q (File No. 1-8668)
                      for the fiscal quarter ended March 29, 1996).

           (iii)      Amendment No. 1 to the Pooling and Servicing Agreement, dated as of June 10, 1996
                      (Incorporated by reference to Exhibit 10.a(iii) to Registration Statement on Form S-1 (No.
                      333-10831)).

           (iv)       Amendment No. 2 to the Pooling and Servicing Agreement, dated as of September 16, 1996
                      (Incorporated by reference to Exhibit 10.a(iv) to Registration Statement on Form S-1 (No.
                      333-10831)).

           (v)        Series 1997-1 Supplement, dated as of May 8, 1997 (Incorporated by reference to Exhibit
                      10.a(v) to Registrant's Quarterly Report on Form 10-Q (File No. 001-12351), for the
                      quarter ended June 30, 1997.

           (vi)       Amendment No. 3, dated as of September 30, 1997, to the Pooling and Servicing Agreement
                      (Incorporated by reference to Exhibit 4.d to Registration Statement on Form S-3 of Metris
                      Receivables, Inc. (File No. 333-36503)).

           (vii)      Series 1997-2 Supplement dated as of November 20, 1997 (Incorporated by reference to
                      Exhibit 4(g) to Registration Statement on Form 8-A of Metris Receivables, Inc. (File No.
                      0-23961)).

10.2       Amended and Restated Bank Receivables Purchase Agreement dated as of May 26, 1995, between Fingerhut
           Companies, Inc., as Buyer, and Direct Merchants Credit Card Bank, National Association, as Seller
           (Incorporated by reference to Exhibit 10.b to Registrant's Registration Statement on Form S-1 (No.
           333-10831)).

10.3       Purchase Agreement, dated as of May 26, 1995, between Fingerhut Financial Services Receivables, Inc.,
           as Buyer, and Fingerhut Companies, Inc., as Seller (Incorporated by reference to Exhibit 10.c to
           Registrant's Registration Statement on Form S-1 (No. 333-10831)).

           (i)        Assignment and Assumption Agreement, dated as of September 16, 1996, among Fingerhut
                      Companies, Inc., as assignor, Metris Companies Inc., as assignee, and Metris Receivables,
                      Inc. (Incorporated by reference to Exhibit 10.c(i) to Registrant's Registration Statement
                      on Form S-1 No. 333-10831)).

           (ii)       Amendment No. 1, dated as of September 30, 1997, to the Receivables Purchase Agreement
                      (Incorporated by reference to Exhibit 4 (j) of Metris Receivables, Inc.'s Registration
                      Statement on Form S-1 (No. 333-36503)).

10.4*      Stock Option and Valuation Rights Agreement, dated as of March 21, 1994, between Fingerhut Companies,
           Inc. and Ronald N. Zebeck (Incorporated by reference to Exhibit 10.1 to Fingerhut Companies, Inc.'s
           Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 29, 1995).
</TABLE>

                                       55
<PAGE>
<TABLE>
<S>        <C>        <C>
           (i)        Amendment, dated October 25, 1996 (Incorporated by reference to Exhibit 10.d(i) to Metris
                      Companies Inc.'s Annual Report on Form 10-K (File No. 1-12351) for the fiscal year ended
                      December 31, 1996).

           (ii)       Non-Qualified Stock Option Agreement pursuant to Metris Companies Long-Term Incentive and
                      Stock Option Plan dated as of October 25, 1996, by and between the Company and Ronald N.
                      Zebeck.

10.5*      Fingerhut Corporation Profit Sharing Plan 1989 Revision (Incorporated by reference to Exhibit 10(d)
           to Fingerhut Companies, Inc.'s Registration Statement on Form S-1 (No. 33-33923)).

10.6       Intentionally left blank.

10.7*      Fingerhut Corporation Pension Plan 1990 Revision (Incorporated by reference to Exhibit 10(f) to
           Fingerhut Companies, Inc.'s Registration Statement on Form S-1 (No. 33-33923)).

10.8*      Metris Companies Inc. Long-Term Incentive and Stock Option Plan (Incorporated by reference to Exhibit
           10.h to Registrant's Annual Report on Form 10-K (File No. 001-12351) for the year ended December 31,
           1996).

           (i)*       Form of option agreement (Incorporated by reference to Exhibit 10.h.(i) and Registrant's
                      Annual Report on Form 10-K (File No. 001-12351) for the year ended December 31, 1996).

10.9*      Metris Companies Inc. Non-Employee Director Stock Option Plan.

           (i)*       Form of option agreement.

10.10*     Metris Companies Inc. Annual Incentive Plan for Designated Corporate Officers (Incorporated by
           reference to Exhibit 10.j and Registrant's Annual Report on Form 10-K (File No. 001-12351) for the
           year ended December 31, 1996).

10.11      Co-Brand Credit Card Agreement, dated as of October 31, 1996, between the Registrant, Fingerhut
           Corporation and Direct Merchants Credit Card Bank, N.A.

10.12      Extended Service Plan Agreement, dated as of October 31, 1996, between the Registrant, Fingerhut
           Corporation, and Infochoice USA, Inc.

10.13      Database Access Agreement, dated as of October 31, 1996, between the Registrant and Fingerhut
           Corporation.

10.14      Administrative Services Agreement, dated as of October 31, 1996 between the Registrant, Fingerhut
           Companies, Inc., and Direct Merchants Credit Card Bank, N.A.

10.15      Tax Sharing Agreement, dated as of October 31, 1996, between the Registrant and Fingerhut Companies,
           Inc. (Incorporated by reference to Exhibit 10.o and Registrant's Annual Report on Form 10-K (File No.
           001-12351) for the year ended December 31, 1996).

10.16      Registration Rights Agreement, dated as of October 31, 1996, between the Registrant and Fingerhut
           Companies, Inc. (Incorporated by reference to Exhibit 10.p and Registrant's Annual Report on Form
           10-K (File No. 001-12351) for the year ended December 31, 1996).
</TABLE>

                                       56
<PAGE>
<TABLE>
<S>        <C>        <C>
10.17      Data Sharing Agreement, dated as of October 31, 1996, between Fingerhut Corporation and Direct
           Merchants Credit Card Bank, National Association.

10.18      Revolving Credit and Letter of Credit Facility Agreement, dated as of September 16, 1996
           (Incorporated by reference to Exhibit 10.s to Registrant's Registration Statement on Form S-1 (No.
           333-10831)).

           (i)        First Amendment and Revolving Credit and Letter of Credit Facility, dated as of October 6,
                      1997.

           (ii)       Second Amendment to Revolving Credit and Letter of Credit Facility, dated as of November
                      14, 1997.

10.19      Transfer and Administration Agreement, dated as of October 23, 1997, among Kitty Hawk Funding
           Corporation, Metris Funding Co., as Transferor, Direct Merchants Credit Card Bank, National
           Association as Collection Agent, and NationsBank, N.A., as Agent and Bank Investor (Incorporated by
           reference to Registrant Quarterly Report on Form 10-Q (File No. 001-12351) for the quarter ended
           September 30, 1997).

10.20      Transfer and Administration Agreement, dated as of September 30, 1997, among Kitty Hawk Funding
           Corporation, Metris Funding Co., as Transferor, Direct Merchants Credit Card Bank, National
           Association, as Collection Agent and NationsBank, as Agent and Bank Investor. (This document is being
           omitted from filing pursuant to Instruction 2 and Item 601 of Regulation S-K.).

10.21      Lease Agreement dated as of March 28, 1997 between Nottingham Village, Inc. and Metris Direct, Inc.

           (i)        Guaranty of Lease dated March 31, 1997 between Nottingham Village, Inc. and Metris
                      Companies Inc.

           (ii)       First Amendment and Lease Agreement dated as of October 15, 1997 among Nottingham Village,
                      Metris Direct, Inc. and Metris Companies Inc.

10.22      Lease Agreement, dated August 11, 1995, between The Equitable Life Assurance Society of the United
           States and Fingerhut Financial Services Corporation

           (i)        Amendment Number One to Lease Agreement dated August 1, 1996, between The Equitable Life
                      Assurance Society of the United States and Fingerhut Financial Services Corporation

           (ii)       Amendment Number Two to Lease Agreement dated January 16, 1997, between WHIOP Real Estate
                      Limited Partnership and Metris Direct, Inc.

           (iii)      Amendment Number Three to Lease Agreement dated December 4, 1997, between WHIOP Real
                      Estate Limited Partnership and Metris Direct, Inc.

           (iv)       Amendment Number Four to Lease Agreement dated January 29, 1997, between WHIOP Real Estate
                      Limited Partnership and Metris Direct, Inc.

           (v)        Tenant Estoppel Certificate to WCB Properties Limited Partnership
</TABLE>

                                       57
<PAGE>
<TABLE>
<S>        <C>        <C>
10.23      Lease Agreement, dated October 31, 1995, between Exchange Limited Partnership and Fingerhut Financial
           Services Corporation.

           (i)        Addendum to Lease Agreement, dated October 31, 1995, between 1991 Exchange Limited
                      Partnership and Fingerhut Financial Services Corporation

           (ii)       Corporate Guaranty of Lease, dated October 31, 1995, between 1991 Exchange Limited
                      Partnership and Fingerhut Financial Services Corporation

           (iii)      First Amendment to Lease Agreement, dated February 14, 1996, between 1991 Exchange Limited
                      Partnership and Fingerhut Financial Services Corporation

           (iv)       Tenant Estoppel Certificate to Eagle I Investments Limited Liability Company, Bank One,
                      Oklahoma City and 1991 Exchange Limited Partnership dated January, 1996 from Fingerhut
                      Financial Services Corporation

10.24      Lease Agreement, dated December 11, 1996, between Koger Equity, Inc. and Metris Direct, Inc.

           (i)        Lease Amendment, dated June 27, 1997, between Koger Equity, Inc. and Metris Direct, Inc.

           (ii)       Lease Amendment, dated October 15, 1997, between Koger Equity, Inc. and Metris Direct,
                      Inc.

10.25      Lease Agreement, dated March 31, 1994, between Textron Collective Investment Trust, Inc., and DMCCB,
           Inc.

           (i)        Tenant Estoppel Certificate dated March 31, 1994, to Textron Collective Investment Trust

OTHER EXHIBITS

11         Computation of Earnings Per Share.

12         Computation of Ratio of Earnings to Fixed Charges.

13         Pages 16 to 57 of the 1997 Annual Report to Shareholders. The 1997 Annual Report shall not be deemed
           to be filed with the Commission except to the extent that information is specifically incorporated
           herein by reference.

21         Subsidiaries of the Registrant.

23         Independent Auditors' Consent.

27         Financial Data Schedule.

99         Cautionary Statement Regarding Forward Looking Statements.

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