##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


|                          |  |                       
|------------------------- |  | ----------------------
|For the fiscal year ended |  | 001-12351             
|December 31, 2004         |  | Commission file number



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Metris Companies Inc.

(Exact name of registrant as specified in its
charter)


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

10900 Wayzata Boulevard, Minnetonka, Minnesota
55305-1534

(Address of principal executive
offices)


(952) 525-5020

(Registrants telephone number)


Securities registered pursuant to
Section 12(b) of the Act:

|                             |  |                                          
|---------------------------- |  | -----------------------------------------
|Title of Each Class          |  | Name of Each Exchange on Which Registered
|                             |  |                                          
|Common Stock, $.01 Par Value |  | New York Stock Exchange, Inc.            

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

None


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

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

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

The aggregate
market value of the common Stock held by non-affiliates of the
Registrant as of June 30, 2004 was approximately
$499,229,238 based upon the last sales price of $8.69 on the
New York Stock Exchange on that date.

As of
February 28, 2005, 58,164,100 shares of the
Registrants Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of
the Proxy Statement for the Annual Meeting of Stockholders of
Metris Companies Inc. to be held on May 11, 2005, which
will be filed with the Securities and Exchange Commission
(SEC) within 120 days after December 31,
2004, are incorporated by reference in Part III.



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TABLE OF CONTENTS

|                                                                                  |  |                                                                                                                        |     |      |     | 
|--------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- | --- | ---- | --- | 
|                                                                                  |  |                                                                                                                        |     | Page
|                                                                                  |  |                                                                                                                        |     |     
|PART I                                                                           
|Item 1.                                                                           |  | Business                                                                                                               |     |      | 3   | 
|Item 2.                                                                           |  | Properties                                                                                                             |     |      | 27  | 
|Item 3.                                                                           |  | Legal Proceedings                                                                                                      |     |      | 27  | 
|Item 4.                                                                           |  | Submission of Matters to a Vote of Security
    Holders                                                                |     |      | 28  | 
|                                                                                 
|PART II                                                                          
|Item 5.                                                                           |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Repurchases of Equity
    Securities |     |      | 28  | 
|Item 6.                                                                           |  | Selected Financial Data                                                                                                |     |      | 29  | 
|Item 7.                                                                           |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                              |     |      | 30  | 
|Item 7A.                                                                          |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                         |     |      | 56  | 
|Item 8.                                                                           |  | Financial Statements and Supplementary Data                                                                            |     |      | 57  | 
|Item 9.                                                                           |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure                               |     |      | 100 | 
|Item 9A.                                                                          |  | Controls and Procedures                                                                                                |     |      | 100 | 
|Item 9B.                                                                          |  | Other Information                                                                                                      |     |      | 100 | 
|                                                                                 
|PART III                                                                         
|Item 10.                                                                          |  | Directors and Executive Officers of the Registrant                                                                     |     |      | 100 | 
|Item 11.                                                                          |  | Executive Compensation                                                                                                 |     |      | 101 | 
|Item 12.                                                                          |  | Security Ownership of Certain Beneficial Owners
    and Management                                                     |     |      | 101 | 
|Item 13.                                                                          |  | Certain Relationships and Related Transactions                                                                         |     |      | 101 | 
|Item 14.                                                                          |  | Principal Accountant Fees and Services                                                                                 |     |      | 101 | 
|                                                                                 
|PART IV                                                                          
|Item 15.                                                                          |  | Exhibits and Financial Statement Schedules                                                                             |     |      | 101 | 
|                                                                                  |  |                                                                                                                        |     |      |     | 
|Signatures                                                                        |  |                                                                                                                        | 102 |     
|Exhibit Index                                                                     |  |                                                                                                                        | 108 |     
|Change of Control Severance Agreement - David D. Wesselink                       
|Change of Control Severance Agreement - Matthew S. Melius                        
|Amendment No. 1 to Change of Control Agreement - Matthew S. Melius               
|Change of Control Severance Agreement - Richard G. Evans                         
|Change of Control Severance Agreement - William A. Houlihan                      
|Amendment No. 1 to Change of Control Agreement - William A. Houlihan             
|Change of Control Severance Agreement - Dan N. Piteleski                         
|Change of Control Severance Agreement - Mark P. Wagener                          
|Form of Change of Control Severance Agreement                                    
|First Amendment to the Senior Secured Credit Agreement                           
|Second Amendment to the Senior Secured Credit Agreement                          
|Form of Restricted Stock Unit Agreement                                          
|Supplemental Executive Retirment Master Plan Document                            
|Computation of Ratio of Earnings to Fixed Charges                                
|Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends        
|Subsidiaries of MCI                                                              
|Consent of Independent Registered Public Accounting Firm                         
|Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
|Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
|Certification of Principal Executive Officer Pursuant to Section 1350            
|Certification of Principal Financial Officer Pursuant to Section 1350            



FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains
certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, which are subject to the safe harbor
created by those sections. Forward-looking statements include,
without limitation: expressions of the belief,
anticipation, intent, or
expectations of management; statements and
information as to our strategies and objectives; statements as
to industry trends or future results of operations of the
Company and its subsidiaries; and other statements that are not
historical fact. Forward-looking statements may be identified by
the use of terminology such as may,
will, believes, does not
believe, no reason to believe,
expects, plans, intends,
estimates, anticipated or
anticipates and similar expressions, as they relate
to the Company or our management. Forward-looking statements are
based on certain assumptions by management and are subject to
risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements.

These risks and uncertainties include, but are
not limited to, risks associated with Direct Merchants
Banks ability to comply with its agreements with
regulators regarding the safety and soundness of its operations;
the effect of government policy and regulation, whether of
general applicability or specific to us, including restrictions
and/or limitations relating to our minimum capital requirements,
reserving

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methodologies, dividend policies and payments,
growth, and/or underwriting criteria; the effects of litigation
involving us and of the previously announced SEC investigation;
the higher delinquency rate, credit loss rate, charge-off rate
and bankruptcy rate of our target market of middle-market
consumers; our high liquidity requirement; interest rate risks;
competition; dependence on the securitization markets and other
funding sources to fund our business, including the refinancing
of existing indebtedness; the effect of the restatement of our
financial statements discussed herein; the effect of changes in
the credit card market as the result of recent judicial
decisions with respect to MasterCard and Visa; and general
economic conditions that can have a negative impact on our
financial performance.


These and other risks and uncertainties are
described under the heading Risk Factors in
pages 21-27 of this Report, and are also discussed in other
parts of this Report, including Legal Proceedings(pages 27-28), Managements Discussion and
Analysis of Financial Condition and Results of Operations(pages 30-56) and Quantitative and Qualitative
Disclosures About Market Risk(page 56). Although we
have attempted to list comprehensively the major risks and
uncertainties, other factors may in the future prove to be
important in causing actual results to differ materially from
those contained in any forward-looking statement. Readers are
cautioned not to place undue reliance on any forward-looking
statement, which speaks only as of the date thereof, and are
reminded that they are not guarantees of our future performance.
We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future
events or otherwise.

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PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

Metris Companies Inc. (MCI) was
incorporated in Delaware on August 20, 1996, and completed
an initial public offering in October 1996. We are listed on the
New York Stock Exchange under the symbol MXT. MCIs
principal subsidiaries are Direct Merchants Credit Card Bank,
National Association (Direct Merchants Bank or
Bank), Metris Direct, Inc. and Metris Receivables,
Inc. (MRI). MCI and its subsidiaries are referred to
in this report as we, us,
our, and the Company.

Our consumer lending products are primarily
unsecured credit cards, including Direct Merchants Bank
MasterCard® and Visa® credit cards. We also offer
agent bank and co-branded credit cards through partnerships with
other companies. Our credit cards generate consumer loans
through Direct Merchants Bank. We also sell other consumer
lending related products and services, such as credit protection
products. We utilize our various legal entities as follows:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct Merchants Bank owns all credit card
    accounts and sells receivables on accounts assigned to the
    Metris Master Trust on a daily basis to MCI.                 
|
| |  | MCI sells receivables daily to MRI, one of our
    special purpose entity subsidiaries, which then sells them to
    our off balance sheet entity, the Metris Master Trust.
|
| |  | The Metris Master Trust owns the receivables and
    finances them with borrowings under our conduit and asset-backed
    term securitizations.                            

As of December 31, 2004, the Metris Master
Trust had $6.5 billion in receivables and $5.3 billion
of asset-backed securitization and conduit borrowings
outstanding. MRI owns the Retained interests in loans
securitized and Other receivables due from
securitizations, net which totaled $852.2 million as
of December 31, 2004. As of December 31, 2004, MCI had
a $1.3 billion investment in subsidiaries, external
Debt of $373.6 million, Convertible
preferred stock of $514.5 million and Total
stockholders equity of $947.3 million. The
assets of Direct Merchants Bank were $336.2 million as of
December 31, 2004, including $54.6 million in net
credit card loans.

Direct Merchants Bank engages only in credit card
operations. It does not accept demand deposits or deposits that
the depositor may withdraw by check or similar means for payment
to third parties or others; it does not accept any savings or
time deposits of less than $100,000, except for deposits pledged
as collateral for extensions of credit; it maintains only one
office that accepts deposits; and it does not engage in the
business of making commercial loans. Therefore, it does not fall
under the Bank Holding Company Act of 1956 (BHCA) as
amended.

We generate income from our consumer lending
products through:



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | excess spread (defined as portfolio yield
    collections, less principal charge-offs, financing costs and
    servicing costs) on credit card loans sold to the Metris Master
    Trust;                
|
| |  | servicing fees on securitized receivables;                                                                                                                                                               
|
| |  | interest and other finance charges assessed on
    outstanding credit card loans that we own;                                                                                                            
|
| |  | interchange fees and credit card fees (including
    annual, cash advance, returned-check, credit protection
    products, overlimit and late fees) on outstanding credit card
    loans that we own; and
|
| |  | commissions from third parties for marketing
    their products to our cardholders.                                                                                                                      

The primary expenses of our business are:



| |   |                                
| | - | -------------------------------
| |  | the costs of funding the loans;
|
| |  | provisions for loan losses; and

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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | operating expenses, including employee
    compensation, account solicitation, marketing, and data
    processing expenses.

Profitability is affected by a number of factors,
including:



| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | credit quality (delinquencies, bankruptcies and
    charge-offs);   
|
| |  | payment rates;                                                      
|
| |  | yield earned on loans;                                              
|
| |  | cost of funds and related financing transaction
    costs;          
|
| |  | cash restricted from release from the Metris
    Master Trust;      
|
| |  | response and approval rates to our solicitation
    efforts;        
|
| |  | the size of our managed (owned and securitized)
    loan portfolios;
|
| |  | credit card usage;                                                  
|
| |  | credit card cancellations;                                          
|
| |  | fraud losses;                                                       
|
| |  | cardholder servicing expenses; and                                  
|
| |  | operating expenses.                                                 

In 2004, we had net income of $33.7 million,
compared to a net loss of $147.7 million in 2003, and a net
loss of $1.6 million in 2002. Over the past two years, we
have focused on strengthening the long-term operations of our
business. During this time period we have emphasized tighter
underwriting on new account originations, stricter credit line
management on existing and new credit card accounts, better
pricing on offerings and improved collections infrastructure. We
have begun to see improved operating results as evidenced by
improvements in default rates, delinquencies and payment rates
of our credit card accounts in 2004. These improved operating
results and our stronger liquidity position are enabling us to
focus on growing our business again. We steadily increased our
new account originations throughout 2004. We are comfortable
with increasing our new account originations, in part, due to
the continued strong results we are experiencing in our 2003 and
2004 vintages. This new account growth will remain focused on
our traditional target market, the middle-market consumer. We
will continue to leverage our account origination strategies,
increase our efforts to penetrate the Hispanic customer segment,
increase our partnership and third-party marketing efforts, and
test additional products, channels and incremental prospects.

Business Strategy and Marketing

Products

Our credit card products are primarily unsecured
consumer credit cards, including the Direct Merchants Bank
MasterCard® and Visa® credit cards. We also offer
agent bank and co-branded credit cards through partnerships with
other companies. At December 31, 2004, we had approximately
2.2 million gross active accounts with approximately
$6.6 billion in managed credit card receivables. As of
December 31, 2004, MCI was the 11th largest
bankcard issuer in the United States based on total managed
receivables, according to the Nilson Report.

When we refer to managed loans or
other managed data, we are using information that
includes the loan balances, delinquencies and credit losses
related to securitized loans, and related finance charge and fee
income, even though those balances, delinquencies, losses,
charges and income are not on our financial statements as a
result of the way in which we treat securitizations under
accounting principles generally accepted in the United States of
America (GAAP). Although securitized loans have been
removed from our balance sheet, we retain interests in them that
affect our financial performance.

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Therefore, we use managed financial information,
which is not in compliance with GAAP, to supplement our GAAP
information in analyzing our business. For more information
regarding managed financial information, please see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Managed
Financial Information.


In addition to consumer credit cards, we sell
credit protection products through Direct Merchants Bank and
insurance products through a third party provider. These
products are sold to Direct Merchants Bank credit cardholders.
Our Account Protection PlusSM and
Account Benefit PlanSM are sold exclusively to
Direct Merchants Bank credit cardholders. These products include
the following:



| |                              
| | -----------------------------
| | Account Protection
    PlusSM

For a customer who has purchased this product,
Direct Merchants Bank will waive the balance of the
customers credit card account in the event of the
cardholders death. The product further protects the credit
card account in the event of involuntary unemployment,
disability or the need to take an employer approved
leave-of-absence. In these situations, the customers
credit card account is frozen with no payments due
or interest accruing up to the maximum period of time
permissible for each event.



| |                           
| | --------------------------
| | Account Benefit
    PlanSM

For a customer who has purchased this product,
Direct Merchants Bank will waive the balance of the
customers credit card account in the event of the
cardholders death.



| |                      
| | ---------------------
| | Credit Life Insurance

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

Other
Insurance Products

We cooperate with a variety of insurance
companies to sell their regulated products to Direct Merchants
Bank credit card customers. Our arrangements with these
insurance companies generally follow one of two formats:



| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The insurance company pays us a fee for access to
    a select list of Direct Merchants Bank cardholders. We provide
    support during the solicitation and billing process.                                                            
|
| |  | Our licensed insurance agency subsidiary, MES
    Insurance Agency, LLC, manages the solicitation of customers for
    the third-party insurance products and may pay the expenses of
    that solicitation in exchange for a commission.

With lower-risk products, ICOM Limited may
reinsure all or a portion of the risk of the third-party
insurance policies that are sold. In that situation, ICOM
Limited bears the administrative costs of servicing the policies.

Finally, we also have relationships with a
variety of third-party partners that sell their products to
Direct Merchants Bank customers. These relationships have
various structures. In general, the partner pays us a fee to
solicit a select list of cardholders and the opportunity to
leverage Direct Merchants Banks name during the
solicitation and billing processes, both of which we support.

Target Market

We primarily target middle-market, creditworthy
customers who are generally underserved and undermarketed by
many large, prime and super-prime oriented credit card issuers.
We originate new loans

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by selectively recruiting higher quality
customers from the most attractive parts of each market segment.
We believe we can leverage distinctive competencies in
marketing, underwriting, and servicing to better meet our
customers needs and be competitive in these market
segments in our target group. We focus on a mix of subprime and
prime customers with a primary target FICO score ranging between
600 and 700. Our cardholders have reported an average household
income of $45,000 and approximately 60% own their own home.


Pricing

Through risk-based pricing, we price credit card
offers based on a prospects risk profile. We evaluate a
prospect to determine credit needs, credit risk and existing
credit availability, and then develop a customized offer that
includes product, brand, pricing and credit line. We have
numerous pricing structures for our credit card products. We
continually test different pricing offers to prospects. The
Company pursues strategies to ensure that the pricing offered to
prospects is competitive in order to reduce adverse selection.
For further information on portfolio yield please refer to
Off Balance Sheet Arrangementson pages 43-45 of
this Report.

Each cardholder is subject to an agreement
governing the terms and conditions of his or her credit card
account (cardholder agreement). Pursuant to the
cardholder agreement, we reserve the right to change or
terminate certain terms, conditions, services and features of
the account (including periodic finance charges, late fees,
returned-check charges and any other charges, and the minimum
payment), subject to the conditions set forth in the cardholder
agreement.

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

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

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



| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a late fee with respect to any unpaid monthly
    balance if we do not receive the required minimum monthly
    payment by the due date and the account is less than or equal to
    120 days contractually past due;                                       
|
| |  | a cash advance fee for most cash advances;                                                                                                                                                                                                                  
|
| |  | a fee with respect to each check submitted by a
    cardholder in payment of an account that the cardholders
    bank does not honor; and                                                                                                                  
|
| |  | an overlimit charge consistent with the
    cardholder agreement if, at any time during the billing cycle,
    the total amount owed exceeds the cardholders credit limit
    and the account is less than or equal to 120 days
    contractually past due.

Late, overlimit and cash advance fees,
represented approximately 16% of total billed fees and finance
charges in 2004.

Our customers and prospects are generally credit
users. Over 90% of our existing customers carry a balance each
month, generating finance charge billings. On average, our
customers utilize approximately 50% of the credit lines assigned
to them.

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| |                 
| | ----------------
| | Age of Portfolio

As of December 31, 2004, we had
$68.2 million of owned credit card loans held primarily by
Direct Merchants Bank, and $6.5 billion of credit card
loans held in the Metris Master Trust, for a total of
$6.6 billion in managed credit card loans. Currently, we
assign all new eligible accounts to the Metris Master Trust
shortly after the time of origination.

The following tables set forth, as of
December 31, 2004 and 2003, the number of managed credit
card accounts and the amount of outstanding loans based on the
age of the accounts. Accounts in acquired portfolios are
presented based on when the account was originated by the
previous credit card issuer.

|                      |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |       |  
|--------------------- | ----- | ---------------------- | ------- | ----------- |  | ----------- | ---- | ------------- | - | - | --------- | --------- |  |  | ---- | ----- | -
|                      |       | Number of              |         |             |  |             |      | Percentage of
|                      |       | Active                 |         | Percentage  |  | Loans       |      | Loans        
|Age Since Origination |       | Accounts               |         | of Accounts |  | Outstanding |      | Outstanding  
|                      |       |                        |         |             |  |             |      |              
|                      |       |                       
|                      |       | (Dollars in thousands)
|2004                  |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|0-5 months            |       |                        | 207,723 |             |  |             | 9.5  | %             |   | $ | 240,077   |           |  |  | 3.7  | %    
|6-12 months           |       |                        | 125,940 |             |  |             | 5.8  | %             |   |   | 212,655   |           |  |  | 3.2  | %    
|13-24 months          |       |                        | 202,347 |             |  |             | 9.3  | %             |   |   | 420,166   |           |  |  | 6.4  | %    
|25-36 months          |       |                        | 241,133 |             |  |             | 11.1 | %             |   |   | 672,955   |           |  |  | 10.2 | %    
|37-48 months          |       |                        | 283,819 |             |  |             | 13.0 | %             |   |   | 863,216   |           |  |  | 13.1 | %    
|49-60 months          |       |                        | 298,792 |             |  |             | 13.7 | %             |   |   | 845,716   |           |  |  | 12.9 | %    
|61-72 months          |       |                        | 177,156 |             |  |             | 8.1  | %             |   |   | 658,963   |           |  |  | 10.0 | %    
|73-84 months          |       |                        | 156,450 |             |  |             | 7.2  | %             |   |   | 700,687   |           |  |  | 10.7 | %    
|84+ months            |       |                        | 483,810 |             |  |             | 22.3 | %             |   |   | 1,965,785 |           |  |  | 29.8 | %    
|                      |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|                      | Total |                        |         | 2,177,170   |  |             |      | 100.0         | % |   | $         | 6,580,220 |  |  |      | 100.0 | %
|                      |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|2003                  |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|0-5 months            |       |                        | 141,952 |             |  |             | 5.7  | %             |   | $ | 202,144   |           |  |  | 2.5  | %    
|6-12 months           |       |                        | 111,208 |             |  |             | 4.5  | %             |   |   | 210,728   |           |  |  | 2.6  | %    
|13-24 months          |       |                        | 325,546 |             |  |             | 13.1 | %             |   |   | 851,758   |           |  |  | 10.5 | %    
|25-36 months          |       |                        | 389,651 |             |  |             | 15.7 | %             |   |   | 1,151,872 |           |  |  | 14.2 | %    
|37-48 months          |       |                        | 430,712 |             |  |             | 17.3 | %             |   |   | 1,205,802 |           |  |  | 14.8 | %    
|49-60 months          |       |                        | 242,135 |             |  |             | 9.8  | %             |   |   | 916,561   |           |  |  | 11.3 | %    
|61-72 Months          |       |                        | 208,704 |             |  |             | 8.4  | %             |   |   | 971,615   |           |  |  | 11.9 | %    
|73-84 months          |       |                        | 153,404 |             |  |             | 6.2  | %             |   |   | 707,002   |           |  |  | 8.7  | %    
|84+ months            |       |                        | 478,469 |             |  |             | 19.3 | %             |   |   | 1,914,349 |           |  |  | 23.5 | %    
|                      |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|                      | Total |                        |         | 2,481,781   |  |             |      | 100.0         | % |   | $         | 8,131,831 |  |  |      | 100.0 | %
|                      |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      

As of December 31, 2004, the percentage of
accounts and percentage of outstanding balances greater than two
years since origination were 75.4% and 86.7%, respectively on a
managed basis, compared to 76.7% and 84.4% as of
December 31, 2003.

Credit Process

We use internally and externally developed models
to supplement our evaluation of consumers. These models help
segment prospects into unique credit groups within each FICO
score range, allowing us to better evaluate individual credit
risk and to tailor our product and pricing accordingly.

We believe that our proprietary models give us a
competitive advantage in evaluating the credit risk of
middle-market consumers. We monitor the performance of the
proprietary models and continually re-evaluate the effectiveness
of these models in segmenting credit risk, which results in
further refinements in our targeting and selection strategy. By
monitoring each vintage pool we are able to optimize the use of

7



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our models to determine the best product and
pricing for each segment and to further identify other segments
from which the company can suppress in future mailings. Over
time, we believe we will capture additional information on the
behaviors of customers, which will allow us to increase the
effectiveness of our proprietary prospect models.


We process applications based on policies
approved by the Banks credit policy committee. Upon
receipt of an application for credit, we pull updated credit
bureau reports, perform fraud screening, verify name and address
changes and attempt to obtain information that may be missing.
We then make a credit decision and approve, decline, or begin
exception processing.

When we approve a credit application, we use
automated decisioning to determine credit worthiness and
proprietary strategies to establish initial credit lines based
upon the individuals credit profile.

Portfolio Management

After credit card accounts are opened, we
regularly monitor customers internal and external credit
performance and re-calculate credit risk, profitability and
attrition scores.

We manage credit lines based on the results of a
behavioral scoring analysis, and in accordance with credit
policies established by the Banks credit policy committee.
These analytical models automatically and regularly assign
credit line increases and decreases to individual customers, as
well as determine the systematic collection steps to be taken
while a credit card account is in delinquency. We use these
models to manage the authorization of each transaction, as well
as the collections strategies used for non-delinquent accounts
with balances above their assigned credit lines. We may, at any
time and without prior notice to a cardholder, prevent or
restrict further credit card use by the cardholder, usually as a
result of poor payment performance or our concern over the
creditworthiness of the cardholder.

Over the past three years we have taken steps to
lower the credit lines of our existing cardholders. We have
actively lowered customer credit lines by eliminating
open-to-buy on higher-risk segments, closing and purging
inactive accounts and reducing the number of customers eligible
for credit line increases. This has limited customer spending
and reduced our severity of credit loss. The average outstanding
cardholder balance in our managed portfolio was approximately
$3,000 and $3,300 as of December 31, 2004 and 2003,
respectively. In addition to the actions we have taken to manage
the credit lines of our existing account relationships, we have
lowered the initial credit lines assigned to our new
cardholders. Beginning in 2003, the majority of our new
cardholders receive initial credit lines that were significantly
lower than similar offers received in 2001 and 2002.

8



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The following tables set forth information with
respect to credit limit and account balance ranges of our
managed loan portfolio as of December 31, 2004 and 2003.

|                   |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |      |  
|------------------ | ----- | ---------------------- | ------- | ----------- |  | ----------- | --------- | ----------- |  | ---------- | ---- | ----- | - | - | --------- | --------- |  |  | ---- | ---- | -
|                   |       | Number of              |         |             |  | Percentage  |           |             |  |           
|                   |       | Active                 |         | Loans       |  | of Loans    |           |             |  | Percentage
|Credit Limit Range |       | Accounts               |         | Outstanding |  | Outstanding |           | Open to Buy |  | Utilized  
|                   |       |                        |         |             |  |             |           |             |  |           
|                   |       |                       
|                   |       | (Dollars in thousands)
|2004               |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|$1,000 or less     |       |                        | 240,101 |             |  | $           | 139,294   |             |  |            | 2.1  | %     |   | $ | 79,195    |           |  |  | 63.3 | %   
|$1,001-$2,000      |       |                        | 229,526 |             |  |             | 271,511   |             |  |            | 4.1  | %     |   |   | 175,005   |           |  |  | 60.4 | %   
|$2,001-$3,500      |       |                        | 359,545 |             |  |             | 677,541   |             |  |            | 10.3 | %     |   |   | 532,706   |           |  |  | 55.6 | %   
|$3,501-$5,000      |       |                        | 363,008 |             |  |             | 951,810   |             |  |            | 14.5 | %     |   |   | 892,109   |           |  |  | 51.2 | %   
|$5,001-$10,000     |       |                        | 710,127 |             |  |             | 2,863,436 |             |  |            | 43.5 | %     |   |   | 3,039,026 |           |  |  | 48.2 | %   
|Over $10,000       |       |                        | 274,863 |             |  |             | 1,676,628 |             |  |            | 25.5 | %     |   |   | 1,962,502 |           |  |  | 45.7 | %   
|                   |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|                   | Total |                        |         | 2,177,170   |  |             | $         | 6,580,220   |  |            |      | 100.0 | % |   | $         | 6,680,543 |  |  |      | 49.3 | %
|                   |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|2003               |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|$1,000 or Less     |       |                        | 226,062 |             |  | $           | 155,407   |             |  |            | 1.9  | %     |   | $ | 52,512    |           |  |  | 74.2 | %   
|$1,001-$2,000      |       |                        | 234,626 |             |  |             | 307,815   |             |  |            | 3.8  | %     |   |   | 139,211   |           |  |  | 68.3 | %   
|$2,001-$3,500      |       |                        | 365,072 |             |  |             | 729,675   |             |  |            | 9.0  | %     |   |   | 494,401   |           |  |  | 59.2 | %   
|$3,501-$5,000      |       |                        | 415,609 |             |  |             | 1,096,342 |             |  |            | 13.5 | %     |   |   | 1,050,366 |           |  |  | 50.7 | %   
|$5,001-$10,000     |       |                        | 885,162 |             |  |             | 3,609,807 |             |  |            | 44.3 | %     |   |   | 3,784,545 |           |  |  | 48.5 | %   
|Over $10,000       |       |                        | 355,250 |             |  |             | 2,232,785 |             |  |            | 27.5 | %     |   |   | 2,454,652 |           |  |  | 47.3 | %   
|                   |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|                   | Total |                        |         | 2,481,781   |  |             | $         | 8,131,831   |  |            |      | 100.0 | % |   | $         | 7,975,687 |  |  |      | 50.1 | %
|                   |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     

|                      |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |      |  
|--------------------- | ----- | ---------------------- | ------- | ----------- |  | ----------- | --------- | ----------- |  | ---------- | ---- | ----- | - | - | --------- | --------- |  |  | ---- | ---- | -
|                      |       | Number of              |         |             |  | Percentage  |           |             |  |           
|                      |       | Active                 |         | Loans       |  | of Loans    |           |             |  | Percentage
|Account Balance Range |       | Accounts               |         | Outstanding |  | Outstanding |           | Open to Buy |  | Utilized  
|                      |       |                        |         |             |  |             |           |             |  |           
|                      |       |                       
|                      |       | (Dollars in thousands)
|2004                  |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|Credit balance        |       |                        | 41,840  |             |  | $           | (3,564    | )           |  |            |     |       |   | $ | 167,098   |           |  |  | (2.2 | )%  
|No balance            |       |                        | 108,592 |             |  |             |          |             |  |            |     |       |   |   | 2,336,398 |           |  |  |     |     
|$1,000 or Less        |       |                        | 602,132 |             |  |             | 259,661   |             |  |            | 3.9  | %     |   |   | 1,979,106 |           |  |  | 11.5 | %   
|$1,001-$2,000         |       |                        | 332,337 |             |  |             | 495,275   |             |  |            | 7.5  | %     |   |   | 686,467   |           |  |  | 41.6 | %   
|$2,001-$3,500         |       |                        | 364,979 |             |  |             | 994,907   |             |  |            | 15.2 | %     |   |   | 619,399   |           |  |  | 61.2 | %   
|$3,501-$5,000         |       |                        | 258,055 |             |  |             | 1,098,549 |             |  |            | 16.7 | %     |   |   | 383,909   |           |  |  | 73.6 | %   
|$5,001-$10,000        |       |                        | 380,685 |             |  |             | 2,687,435 |             |  |            | 40.8 | %     |   |   | 461,510   |           |  |  | 84.7 | %   
|Over $10,000          |       |                        | 88,550  |             |  |             | 1,047,957 |             |  |            | 15.9 | %     |   |   | 46,656    |           |  |  | 95.0 | %   
|                      |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|                      | Total |                        |         | 2,177,170   |  |             | $         | 6,580,220   |  |            |      | 100.0 | % |   | $         | 6,680,543 |  |  |      | 49.3 | %
|                      |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|2003                  |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|Credit balance        |       |                        | 43,630  |             |  | $           | (3,635    | )           |  |            |     |       |   | $ | 196,351   |           |  |  | (1.9 | )%  
|No balance            |       |                        | 128,112 |             |  |             |          |             |  |            |     |       |   |   | 2,670,706 |           |  |  |     |     
|$1,000 or Less        |       |                        | 617,805 |             |  |             | 263,716   |             |  |            | 3.2  | %     |   |   | 2,324,414 |           |  |  | 10.1 | %   
|$1,001-$2,000         |       |                        | 359,497 |             |  |             | 537,162   |             |  |            | 6.6  | %     |   |   | 855,609   |           |  |  | 38.3 | %   
|$2,001-$3,500         |       |                        | 413,268 |             |  |             | 1,134,138 |             |  |            | 14.0 | %     |   |   | 793,850   |           |  |  | 58.4 | %   
|$3,501-$5,000         |       |                        | 309,213 |             |  |             | 1,317,303 |             |  |            | 16.2 | %     |   |   | 483,970   |           |  |  | 72.6 | %   
|$5,001-$10,000        |       |                        | 489,724 |             |  |             | 3,457,882 |             |  |            | 42.5 | %     |   |   | 589,313   |           |  |  | 84.8 | %   
|Over $10,000          |       |                        | 120,532 |             |  |             | 1,425,265 |             |  |            | 17.5 | %     |   |   | 61,474    |           |  |  | 95.1 | %   
|                      |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     
|                      | Total |                        |         | 2,481,781   |  |             | $         | 8,131,831   |  |            |      | 100.0 | % |   | $         | 7,975,687 |  |  |      | 50.1 | %
|                      |       |                        |         |             |  |             |           |             |  |            |      |       |   |   |           |           |  |  |      |     

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As of December 31, 2004, on a managed basis,
25.5% of the outstanding receivable balances relate to
cardholders with credit limits in excess of $10,000, compared to
27.5% as of December 31, 2003. On a managed basis, 69.0% of
the receivable balance was outstanding to cardholders with
credit limits in excess of $5,000 as of December 31, 2004,
compared to 71.8% as of December 31, 2003. The decline in
the percentage of accounts with credit limits above $5,000 and
$10,000 is a result of higher balance, lower credit quality
accounts charging off and these accounts being replaced with new
accounts that have lower initial credit lines.

The Federal Financial Institutions Examination
Council (FFIEC) has issued guidelines to further
segregate a credit card issuers loan portfolio between
subprime loans and prime loans. The banking regulators deem
subprime loans to have higher credit risk and therefore require
higher levels of capital and allowance for loan losses. The
amount of subprime receivables (defined as loans to consumers
who have a FICO credit score of 660 or less) in our portfolio
was $4.0 billion or 60.7% of the managed credit card
portfolio as of December 31, 2004, compared to
$4.9 billion or 61.2% of the managed credit card portfolio
as of December 31, 2003.

Servicing, Billing and Payment

We have established a relationship with First
Data Resources, Inc. (FDR) for cardholder processing
services. FDR is a subsidiary of First Data Corporation, a
provider of information processing and related services,
including cardholder processing (services for financial
institutions that issue credit cards to consumers) and merchant
processing (services for financial institutions that make
arrangements with merchants for the acceptance of credit cards
as methods of payment).

FDR provides the following services to us:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | data processing;                                             
|
| |  | credit card reissuance;                                      
|
| |  | issuance of monthly statements to our credit
    cardholders;
|
| |  | interbank settlements; and                                   
|
| |  | point-of-sale authorization referrals.                       

We handle the following functions internally:



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

We handle inbound customer service telephone
calls for our customer base. In addition, we process a portion
of our customer payments, including all payments with
exceptions. All other payments are processed by Remitco LLC.
Prior to October 18, 2004, all other payments were
processed by Household Credit Services.

FDR sends monthly billing statements to Direct
Merchants Bank cardholders on our behalf. When we establish an
account, we assign a billing cycle to that account. Each cycle
has a separate monthly billing date based on the business day of
the calendar month on which the cycle begins. Each month we send
a statement to all cardholders whose accounts have an
outstanding balance greater than $1. Non charged-off account
cardholders must make a minimum monthly payment, generally the
greater of:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | $15;                                                           
|
| |  | 2.5% of the outstanding balance;                               
|
| |  | the finance charge; or                                         
|
| |  | the balance of the account if the balance is less
    than $15;

plus, in each case, any past-due amount.

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

To monitor accounts and authorizations for
potential fraudulent activity, we utilize a fraud detection
system. This product scores authorizations based on a calculated
fraud risk. Accounts suspected as fraud via the scoring model or
rules-based queues are reviewed and may be blocked if activity
cannot be verified with the cardholder. This process targets
typical credit card fraud types, including lost and/ or stolen
cards, non-receipt of cards, fraudulent applications,
counterfeit card, account takeover, cardholder not present, and
check kiting fraud.

Delinquency, Collections and
Charge-offs

We consider an account delinquent if we do not
receive the minimum payment by the payment due date. Past due
accounts are re-aged to current status only after we receive at
least three minimum payments or the equivalent cumulative
amount. Accounts can only be re-aged to current status once
every 12 months and two times every five years. Accounts
entering long-term fixed payment forbearance programs may
receive a re-age upon entering the debt management program
(workout re-age). Workout re-ages can only occur
after receipt of at least three consecutive minimum monthly
payments, or the equivalent cumulative amount as defined by the
debt management program. Workout re-ages can only occur once in
five years.

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



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | within 60 days of formal notification of
    bankruptcy filing;                                                                                                          
|
| |  | at the end of the month during which most
    unsecured accounts become contractually 180 days past due;                                                                 
|
| |  | at the end of the month during which unsecured
    accounts that have entered into a debt management or other
    similar program become contractually 120 days past due;
|
| |  | at the end of the month during which secured
    accounts become contractually 120 days past due;                                                                        
|
| |  | no later than 90 days from discovery of
    fraud losses; or                                                                                                             
|
| |  | within 120 days of notification of the death
    of a cardholder.                                                                                                        

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

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

In early 2003 we replaced a substantial portion
of the collections management team, updated the technology used
in our collections operations and initiated new training
programs for all levels of collections personnel. We also
implemented a new collections program that incorporates specific
requirements for staffing, dialer strategies, and a new
collections call model. In addition, reporting and performance
standards were enhanced to ensure that management is held
accountable for future performance. We believe these actions
have contributed to the reduction in our default rates.

Funding and Liquidity

We securitize consumer loans in order to fund our
business. Our securitizations involve selling pools of both
current and future receivable balances on credit card accounts.
We retain the rights to service

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these receivables, and collect a fee for doing
so. Our securitizations are treated either as sales or
collateralized borrowing agreements in accordance with GAAP. The
securitized receivables in transactions that are accounted for
as sales are removed from our balance sheet, although we
generally hold retained interests in the receivables following
the sale, as described below. We primarily securitize
receivables by selling the receivables to the Metris Master
Trust, which in turn issues asset-backed securities in public or
private transactions or multi-seller commercial paper conduits.


The Metris Master Trust was formed in May 1995
pursuant to a pooling and servicing agreement, as amended. MRI,
one of our special purpose entity subsidiaries, transfers
receivables in designated accounts to the Metris Master Trust.
The Metris Master Trust may, and does from time to time, issue
securities that represent undivided interests in the receivables
in the Metris Master Trust. These securities are issued by
series, and each series typically has multiple classes. Each
series, or class within a series, may have different terms. The
different classes of an individual series are structured to
obtain specific debt ratings. As of December 31, 2004, 12
series of publicly and privately issued securities were
outstanding. MRI currently retains the most subordinated class
of securities in each series, and all other classes are issued
to nonaffiliated third parties. These securities are interests
in the Metris Master Trust only and are not obligations of MRI,
MCI, Direct Merchants Bank or any other subsidiary of the
Company. The interest in the Metris Master Trust not represented
by any series of securities issued by the Metris Master Trust
also belongs to MRI and is known as the transferors
interest.

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



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the one- or three-month average of portfolio
    yield collections, less principal charge-offs, financing costs
    and servicing costs (excess spread) droping below
    levels below 1.0%;
|
| |  | the existence of negative excess
    transferors interest within the Metris Master
    Trust; or                                                                                             
|
| |  | the failure to obtain funding prior to an
    accumulation period for a maturing term asset-backed
    securitization.                                                                        

New receivables in designated accounts cannot be
funded using principal payments allocated to a series that is in
early amortization. We currently do not have, nor have we ever
had, any series that is, or was, in early amortization.

In addition, there are various triggers within
our securitization agreements that, if broken, would restrict
the release of cash to us from the Metris Master Trust. This
restricted cash provides additional security to the investors in
the securities issued by the Metris Master Trust. The triggers
are usually related to the performance of the Metris Master
Trust, specifically the average of excess spread over a one- to
three-month period.

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

We ensure flexibility in our current funding
program by maintaining bank-sponsored commercial paper conduits
within the Metris Master Trust. These conduits purchase an
interest in receivables arising

12



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in designated accounts. These transactions also
feature a revolving period in which principal payments on
receivables allocated to the conduits are returned to us and
reinvested in new receivables. These agreements also have early
amortization triggers. Finance charge and fee collections are
used to pay certain obligations, including interest on the
principal amount of the conduits investment in the
applicable receivables, servicing fees and recouping
charge-offs. After such allocation, remaining finance charge and
fee collections, if any, are returned to us.


Additional information regarding asset
securitization is set forth under Liquidity, Funding, and
Capital Resourceson pages 45-49 of this Report.

Competition

As a marketer of consumer lending products, we
compete with numerous providers of financial services. We
compete with national, regional and local bankcard issuers, as
well as other general-purpose credit and debit card issuers. In
general, we believe customers are attracted to credit card
products largely on the basis of price, credit limit and other
product features; as a result, customer loyalty is often
limited. However, we believe that our strategy of focusing on
the middle-market sector, supported by our use of a proprietary
prospect database, proprietary models and custom decision logic,
allows us to compete effectively for middle-market consumers.

13



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| |                        
| | -----------------------
| | Geographic Distribution

We solicit credit card customers on a national
basis and, therefore, maintain a geographically diversified
portfolio. The following tables show the distribution of managed
accounts and amount of managed outstanding loans by state as of
December 31, 2004 and 2003.

|              |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |       |  
|------------- | ----- | ---------------------- | ------- | ----------- |  | ----------- | ---- | ------------- | - | - | --------- | --------- |  |  | ---- | ----- | -
|              |       | Number of              |         |             |  |             |      | Percentage of
|              |       | Active                 |         | Percentage  |  | Loans       |      | Loans        
|State         |       | Accounts               |         | of Accounts |  | Outstanding |      | Outstanding  
|              |       |                        |         |             |  |             |      |              
|              |       |                       
|              |       | (Dollars in thousands)
|2004          |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|California    |       |                        | 283,331 |             |  |             | 13.0 | %             |   | $ | 786,678   |           |  |  | 12.0 | %    
|New York      |       |                        | 200,859 |             |  |             | 9.2  | %             |   |   | 577,375   |           |  |  | 8.8  | %    
|Texas         |       |                        | 175,326 |             |  |             | 8.1  | %             |   |   | 542,834   |           |  |  | 8.2  | %    
|Florida       |       |                        | 166,671 |             |  |             | 7.6  | %             |   |   | 479,064   |           |  |  | 7.3  | %    
|Illinois      |       |                        | 90,805  |             |  |             | 4.2  | %             |   |   | 270,205   |           |  |  | 4.1  | %    
|New Jersey    |       |                        | 82,179  |             |  |             | 3.8  | %             |   |   | 224,013   |           |  |  | 3.4  | %    
|Ohio          |       |                        | 79,194  |             |  |             | 3.6  | %             |   |   | 258,531   |           |  |  | 3.9  | %    
|Pennsylvania  |       |                        | 76,530  |             |  |             | 3.5  | %             |   |   | 234,723   |           |  |  | 3.6  | %    
|Michigan      |       |                        | 57,858  |             |  |             | 2.7  | %             |   |   | 184,490   |           |  |  | 2.8  | %    
|Georgia       |       |                        | 57,095  |             |  |             | 2.6  | %             |   |   | 184,795   |           |  |  | 2.8  | %    
|Virginia      |       |                        | 54,399  |             |  |             | 2.5  | %             |   |   | 169,491   |           |  |  | 2.6  | %    
|All others(1) |       |                        | 852,923 |             |  |             | 39.2 | %             |   |   | 2,668,021 |           |  |  | 40.5 | %    
|              |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|              | Total |                        |         | 2,177,170   |  |             |      | 100.0         | % |   | $         | 6,580,220 |  |  |      | 100.0 | %
|              |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|2003          |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|California    |       |                        | 348,561 |             |  |             | 14.0 | %             |   | $ | 1,037,152 |           |  |  | 12.8 | %    
|New York      |       |                        | 228,546 |             |  |             | 9.2  | %             |   |   | 703,760   |           |  |  | 8.7  | %    
|Texas         |       |                        | 202,996 |             |  |             | 8.2  | %             |   |   | 670,671   |           |  |  | 8.2  | %    
|Florida       |       |                        | 185,481 |             |  |             | 7.5  | %             |   |   | 585,417   |           |  |  | 7.2  | %    
|Illinois      |       |                        | 101,535 |             |  |             | 4.1  | %             |   |   | 328,168   |           |  |  | 4.0  | %    
|New Jersey    |       |                        | 90,470  |             |  |             | 3.6  | %             |   |   | 263,383   |           |  |  | 3.2  | %    
|Ohio          |       |                        | 88,103  |             |  |             | 3.6  | %             |   |   | 315,623   |           |  |  | 3.9  | %    
|Pennsylvania  |       |                        | 84,013  |             |  |             | 3.4  | %             |   |   | 283,261   |           |  |  | 3.5  | %    
|Michigan      |       |                        | 64,418  |             |  |             | 2.6  | %             |   |   | 224,117   |           |  |  | 2.8  | %    
|Georgia       |       |                        | 63,400  |             |  |             | 2.6  | %             |   |   | 225,482   |           |  |  | 2.8  | %    
|Virginia      |       |                        | 61,935  |             |  |             | 2.5  | %             |   |   | 211,491   |           |  |  | 2.6  | %    
|All others(1) |       |                        | 962,323 |             |  |             | 38.7 | %             |   |   | 3,283,306 |           |  |  | 40.3 | %    
|              |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      
|              | Total |                        |         | 2,481,781   |  |             |      | 100.0         | % |   | $         | 8,131,831 |  |  |      | 100.0 | %
|              |       |                        |         |             |  |             |      |               |   |   |           |           |  |  |      |      



---



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

Regulation



| |                              
| | -----------------------------
| | MCI and Direct Merchants Bank

Direct Merchants Bank is a limited purpose credit
card bank chartered as a national banking association. It is a
member of the Federal Reserve System. Its deposits are insured
by the Bank Insurance Fund, which is administered by the Federal
Deposit Insurance Corporation (FDIC), and it is
subject to comprehensive regulation and periodic examination by
the Office of the Comptroller of the Currency

14



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##### Table of Contents



(OCC), its primary regulator. It is
also subject to regulation by the FDIC, as a back-up regulator.
Direct Merchants Bank is not a bank as defined under
the BHCA, as amended, because it:




| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | engages only in credit card operations;                                                                                                              
|
| |  | does not accept demand deposits or deposits that
    the depositor may withdraw by check or similar means for payment
    to third parties or others;
|
| |  | does not accept any savings or time deposits of
    less than $100,000, except for deposits pledged as collateral
    for extensions of credit;      
|
| |  | maintains only one office that accepts
    deposits; and                                                                                             
|
| |  | does not engage in the business of making
    commercial loans.                                                                                      

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

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

The United States Supreme Court has held that
national banks may also impose late payment fees, overlimit
fees, annual fees, cash advance fees and membership fees allowed
by the laws of the state where the national bank is located on
borrowers in other states without regard to the laws of those
other states. The Supreme Court based its opinion largely on its
deference to a regulation adopted by the OCC that has been
interpreted to permit national banks to export interest rates.

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

In January 2003, the FFIEC issued guidance with
respect to various account management practices for institutions
engaged in credit card lending. The guidance provides
requirements for certain operational and accounting policies,
which are designed to bring consistency in practice between
institutions engaged in credit card lending. Beginning in 2003,
we began implementing the guidance and believe we are now in
compliance with most aspects. In addition, we developed and have
been executing against a multi-phased approach to address the
receivable amortization aspects of this guidance. We expect to
utilize various methods to ensure reasonable receivable
amortization of our accounts, including but not limited to:
limiting consecutive fee billings; implementing a fee billing
cap; reducing customers interest rates; and increasing the
required minimum payment due. The impact of fully implementing
the account management guidance, while not expected to be
significant, is unknown at this time.

The Bank and MCI have entered into a Capital
Assurance and Liquidity Maintenance Agreement
(CALMA). The CALMA requires MCI to make such capital
infusions or provide the Bank with financial assistance so as to
permit the Bank to meet its liquidity requirements. Direct
Merchants Bank has entered into a Liquidity Reserve Deposit
Agreement (LRDA) under which the Bank has
established restricted deposits with third-party depository
banks for the purpose of supporting the Banks funding
needs. These deposits are invested in short-term liquid
investments and are classified on the balance sheets

15



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##### Table of Contents



as Liquidity reserve deposit. As of
December 31, 2004, the balance of the liquidity reserve
deposit was $79.7 million.


The Bank and MCI have a Modified Operating
Agreement with the OCC that requires, among other things, that:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Bank must maintain minimum capital at the
    dollar amount reported on its September 30, 2003 Call
    Report ($213 million), unless otherwise approved by the OCC.                             
|
| |  | The Bank may continue to pay dividends in
    accordance with applicable statutory and regulatory
    requirements, provided capital remains at the required level.                                  
|
| |  | The Bank must maintain liquid assets at the
    greater of $35 million or 100% of the average highest daily
    funding requirement for managed receivables ($31.5 million
    at December 31, 2004).
|
| |  | The Bank must comply with the terms of the LRDA
    and CALMA.                                                                                                                                       
|
| |  | MCI must comply with the terms of the CALMA.                                                                                                                                                         

We believe that the Bank and MCI are currently in
compliance with all terms of the Modified Operating Agreement.
If the OCC were to conclude that the Bank or MCI failed to
adhere to any provisions of the Modified Operating Agreement,
the OCC could pursue various enforcement options. If any of
these options were to be pursued by the OCC, it could have a
material adverse effect on our operations or capital position.



| |                                     
| | ------------------------------------
| | Dividends and Transfers of
    Funds

There are various federal law limitations on the
extent to which Direct Merchants Bank can finance or otherwise
supply funds to MCI and its affiliates through dividends, loans
or otherwise. These limitations include:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | minimum regulatory capital requirements;                                                                        
|
| |  | restrictions concerning the payment of dividends
    out of net profits or surplus; and                         
|
| |  | Sections 23A and 23B of the Federal
    Reserve Actgoverning transactions between a bank and its
    affiliates.

In general, federal law prohibits a national bank
such as Direct Merchants Bank from making dividend distributions
on common stock if the dividend would exceed currently available
undistributed profits. In addition, a national bank such as
Direct Merchants Bank must obtain OCC approval prior to paying a
dividend if distribution would exceed current year net income
combined with retained earnings from the prior two years. Due to
the dividend paid by the Bank in March of 2003, Direct Merchants
Bank was required to obtain prior approval from the OCC in order
to pay dividends during the years ended December 31, 2004
and 2003. In addition, Direct Merchants Bank cannot pay a
dividend if the distribution would cause it to fail to meet
applicable capital adequacy standards. During the years ended
December 31, 2004 and 2003, the Bank paid dividends in the
amount of $66.0 million and $190.8 million,
respectively. Subsequent to December 31, 2004, the Bank
paid $15.0 million in dividends.



| |                 
| | ----------------
| | Capital Adequacy

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

The OCC has adopted regulations that define the
five capital categories (well-capitalized,
adequately-capitalized, undercapitalized,
significantly-undercapitalized and critically-undercapitalized)
identified by FDICIA, using the total risk-based capital,
Tier 1 risk-based capital and leveraged capital ratios as
the relevant capital measures. Such regulations establish
various degrees of corrective action to be taken when

16



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##### Table of Contents



an institution is considered undercapitalized.
Under the regulations, a well-capitalized
institution must have a Tier 1 capital ratio of at least
6%, a total capital ratio of at least 10%, a leverage ratio of
at least 5% and not be subject to a capital directive order.
Under these guidelines, Direct Merchants Bank is considered
well-capitalized. The Modified Operating Agreement prescribes
minimum capital levels as well. The Modified Operating Agreement
is discussed in more detail under MCI and Direct Merchants
Bankon pages 14-16.


FDICIA requires the FDIC to implement a system of
risk-based premiums for deposit insurance pursuant to which the
premiums paid by a depository institution will be based on the
probability that the FDIC will incur a loss relative to such
institution. The FDIC has adopted a system that imposes
insurance premiums based on a matrix that takes into account a
banks capital level and supervisory rating.

The Bank sold all insured certificates of deposit
on September 30, 2003, and we do not anticipate that the
Bank will issue certificates of deposit in the foreseeable
future. As of December 31, 2004 all remaining deposits are
related to our secured card product.

As previously noted, the Modified Operating
Agreement requires us to maintain a minimum of $213 million
in capital at Direct Merchants Bank. We continue to work with
the OCC to periodically re-evaluate minimum capital levels given
our current performance and overall liquidity position. Any
future reduction in minimum capital levels would require
approval by the OCC.



| |                   
| | ------------------
| | Lending Activities

Direct Merchants Banks activities as a
credit card lender also are subject to regulation under various
federal consumer protection laws, including, but not limited to,
the Truth-in-Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Community
Reinvestment Act (CRA) and the Service Member
Civil Relief Act. Regulators are authorized to impose
penalties for violations of these statutes and, in certain
cases, to order Direct Merchants Bank to pay restitution to
injured cardholders. Cardholders may also bring actions for
certain alleged violations of these regulations. Federal and
state bankruptcy and debtor relief laws also affect Direct
Merchants Banks ability to collect outstanding balances
owed by cardholders who seek relief under those statutes.

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



| |                                                     
| | ----------------------------------------------------
| | Legislation; Consumer and Debtor Protection
    Laws

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

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

Various federal and state consumer protection
laws limit our ability to offer and extend credit. In addition,
Congress and the states may decide to further regulate the
credit card industry by enacting new laws or amendments to
existing laws to reduce finance charges or other fees or charges
applicable to credit

17



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##### Table of Contents



card and other consumer revolving loan accounts.
These laws may adversely affect our ability to collect on
account balances or maintain established levels of periodic rate
finance charges and other fees and charges with respect to the
accounts.




| |                    
| | -------------------
| | Interstate Taxation

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



| |                                     
| | ------------------------------------
| | Insurance Licensing
    Requirements

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



| |                          
| | -------------------------
| | Fair Credit Reporting Act

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

Our objective is to conduct our operations in a
manner such that we fall outside the definition of a
consumer reporting agency under the FCRA. If we were
to become a consumer reporting agency, we would be subject to a
number of complex and burdensome regulatory requirements and
restrictions. Such restrictions could have a significant adverse
economic impact on us.

In late 2003, Congress passed significant changes
to the FCRA. The FTC is primarily responsible for drafting and
implementing new regulations for these changes, which affect
credit reporting agencies, creditors and others. Numerous new
requirements were imposed during 2004, and more are scheduled
for 2005. These changes may affect Direct Merchants Banks
credit selection, granting and other operational policies and
procedures in the future.

Regulatory Investigations

In August 2003, we received notification from the
SEC that we are the subject of a formal, nonpublic
investigation. We believe that this investigation initially
related primarily to our treatment of the Allowance for
loan losses in 2001 and subsequent years, our 2001 credit
line increase program and other related matters. On
December 9, 2003, we received notification that the scope
of the investigation had been expanded to include matters
related to our valuation of Retained interests in loans
securitized. The Company subsequently received additional
SEC subpoenas and requests for information on related and other
financial accounting issues, as well as the above matters. The
SEC has advised us that this is a fact-finding inquiry and that
it has not reached any conclusions related to this matter. We
have responded fully to the SEC in its investigation. The SEC
has informed us that it is reviewing the information and
documents that we have submitted. The SEC also has taken
testimony from certain of our current and former officers and
directors in connection with its investigation. At this time we
cannot predict what the results of the investigation will be. If
the SEC determines that we or our officers or directors have
violated federal securities laws or the SECs rules and
regulations, we could be subject to an SEC enforcement action,
including potential fines and penalties, which could materially
adversely affect our results of

18



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##### Table of Contents



operations or financial condition. We cannot
provide assurance that the resolution of the SEC investigation
will not necessitate further amendments or restatements to our
previously filed reports. We do not believe, however, that we or
our officers or directors have violated any such laws, rules or
regulations.


In August 2003, we received correspondence
indicating that we were the subject of an OCC investigation,
together with a subpeona requiring us to produce certain
documents. We understood that investigation to be related to
executive compensation and reimbursement. In January 2005, we
received notification from the OCC that the Order of
Investigation had been terminated and there were no findings
against MCI, the Bank or any of their current or former officers
or directors.

Employees

We have approximately 2,200 employees located in
Arizona, Florida, Maryland, Minnesota and Oklahoma. None of our
employees is represented by a collective bargaining agreement.

Trademarks, Trade Names and Service
Marks

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

Executive Officers

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

|                     |  |     |    |          |  |                                                                                                             
|-------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|David D. Wesselink   |  |     | 62 |          |  | Chairman and Chief Executive Officer                                                                        
|Richard G. Evans     |  |     | 56 |          |  | Executive Vice President, General Counsel and
    Secretary                                                 
|William A. Houlihan  |  |     | 49 |          |  | Executive Vice President, Chief Financial Officer                                                           
|Matthew S. Melius    |  |     | 39 |          |  | Executive Vice President, Operations; and
    President and Chief Executive Officer of Direct Merchants Bank
|Dan N. Piteleski     |  |     | 54 |          |  | Executive Vice President, Chief Information
    Officer                                                     
|Scott R. Fjellman    |  |     | 39 |          |  | Senior Vice President, Treasurer                                                                            
|Jeffrey D. Grosklags |  |     | 34 |          |  | Senior Vice President, Investor and Public
    Relations                                                    
|Mark P. Wagener      |  |     | 44 |          |  | Senior Vice President, Controller                                                                           

David D. Wesselinkhas been Chairman and Chief Executive Officer of the Company
since December 2002. Mr. Wesselink previously was Vice
Chairman of the Company from September 2000 to December 2002,
and Executive Vice President and Chief Financial Officer of the
Company from December 1998 to August 2000. Prior to joining the
Company, Mr. Wesselink had been Senior Vice President and
Chief Financial Officer of Advanta Corporation since 1993. Prior
to Advanta Corporation, Mr. Wesselink held several
positions at Household Finance Corp. and Household
International, Inc. from 1971 to 1993, including Senior Vice
President from 1986 to 1993, and Chief Financial Officer from
1982 to 1993. Mr. Wesselink also is a director of
MasterCard Incorporated (U.S. Region Board), Saxon Capital,
Inc., CFC International, Inc., American Financial Services
Association and Central College.

Richard G. Evanshas
been Executive Vice President, General Counsel and Secretary of
the Company since June 2001. Prior to joining the Company,
Mr. Evans was Executive Vice President, General Counsel

19



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##### Table of Contents



and Director of Green Tree Financial Corp. from
1985 to 1999. Prior to Green Tree, Mr. Evans served as
Special Assistant Attorney General for the State of Minnesota
from 1974 to 1984.


William A. Houlihanhas been Executive Vice President and
Chief Financial Officer of the Company since August 2004. Prior
to joining the Company, Mr. Houlihan was Managing Director
in the financial institutions investment banking group at
JPMorgan Chase for one year. Prior to JPMorgan Chase,
Mr. Houlihan spent three years as Executive Vice President
and Chief Financial Officer at Hudson United Bancorp. Before
joining Hudson United Bancorp, Mr. Houlihan held various
investment banking positions at Keefe, Bruyette &
Woods, Inc; Bear, Stearns & Co. Inc; and Goldman,
Sachs & Company.

Matthew S. Meliushas been Executive Vice President, Operations, of the Company
since January 2005. Mr. Melius has also served as President
and Chief Executive Officer of Direct Merchants Bank since
January 2003. Mr. Melius previously was Executive Vice
President, Credit Risk Management, Collections, Credit Card
Operations, Customer Service and Marketing from September 2003
to December 2004, Executive Vice President Credit Risk
Management, Collections and Credit Card Operations from January
2003 to September 2003 and Executive Vice President, Credit Risk
Management from January 2001 to December 2002. Prior to 2001,
Mr. Melius was Executive Vice President, E-Commerce of the
Company from January 2000 to December 2000; Senior Vice
President, Portfolio Marketing from January 1999 to December
1999; and Vice President, Marketing from September 1995 to
December 1998. Prior to that, Mr. Melius served seven years
in the credit card division of First National Bank of Omaha,
where he advanced from a management trainee to manager of the
portfolio management department. In his role as manager of the
portfolio management department he directed the account
retention and portfolio profitability operations.

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

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

Jeffrey D. Grosklagshas been Senior Vice President,
Investor and Public Relations since October 2004.
Mr. Grosklags previously was Senior Vice President, Credit
Card Finance from September 2000 to September 2004. Prior to
that Mr. Grosklags served in a variety of finance positions
since 1995. Mr. Grosklags began his career with
Deloitte & Touche where he worked for over three years
as an auditor.

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

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

20



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##### Table of Contents



Risk Factors

The factors discussed below, among others, could
cause our actual results to differ materially from those
expressed in any forward-looking statements that we make in this
Report. See Forward Looking Statementson pages 1-2
of this Report. Although we have attempted to list
comprehensively these important factors, we caution that other
factors may in the future prove to be important in affecting our
results of operations. New factors emerge from time to time, and
it is not possible for us to predict all of these factors, nor
can we assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any
forward-looking statement.



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Direct Merchants Banks activities are
    regulated by the OCC; failure to operate in accordance with OCC
    directives, including those included in our Modified Operating
    Agreement, could result in adverse actions by the
    OCC.

Direct Merchants Banks activities are
regulated by the OCC. The OCC has imposed on the Bank the
restrictions discussed under Business Regulation 
MCI and Direct Merchants Bankand could increase the
existing restrictions or impose new ones. New or more
restrictive requirements could include, among others,
restrictions relating to:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | minimum regulatory capital levels;                                                                                                                 
|
| |  | extensions of credit;                                                                                                                              
|
| |  | strategic acquisitions and asset growth;                                                                                                           
|
| |  | underwriting criteria, account management,
    account pricing, and accounting policies and practices;                                             
|
| |  | enhanced scrutiny and consent requirements
    relating to business plans and liquidity management                                                 
|
| |  | submission of special periodic regulatory
    reports; and                                                                                         
|
| |  | additional supervisory actions or sanctions under
    applicable Prompt Corrective Action guidelines and other
    applicable laws and regulations.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Direct Merchants Bank is subject to
    regulators who could impose restrictions that could negatively
    impact our operations or financial results.

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



| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to comply with applicable laws and
    regulations, and adverse changes in those laws or regulations,
    could have a negative impact on our financial results and could
    adversely affect our ability to conduct our business in a
    profitable manner.

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



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | limit the fees and other charges that we are
    allowed to charge;     
|
| |  | limit or prescribe certain other terms of our
    products and services;

21



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##### Table of Contents





| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require specified disclosures to consumers,
    including disclosures regarding our practices for collection and
    sharing of non-public customer information;
|
| |  | require us to treat non-public customer
    information in certain ways;                                                                                        
|
| |  | govern the sale and terms of products and
    services we offer;                                                                                                
|
| |  | require that we obtain and maintain licenses and
    qualifications; and                                                                                        
|
| |  | impose capital requirements.                                                                                                                                    

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



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | We are the subject of an SEC investigation
    that could have a material adverse effect on our business and
    financial results.

On August 5, 2003, we received notification
from the SEC that we are the subject of a formal, nonpublic
investigation. We believe that this investigation initially
related primarily to our treatment of Allowance for loan
losses in 2001 and subsequent years, our 2001 credit line
increase program and other related matters. On December 9,
2003, we received notification that the scope of the
investigation had been expanded to include matters related to
our valuation of Retained interests in loans
securitized. The Company subsequently received additional
SEC subpoenas and requests for information on related and other
financial accounting issues, as well as the above matters. The
SEC also has taken testimony from certain of our current and
former officers and our directors in connection with its
investigation. We have responded fully to the SEC in its
investigation. The SEC has informed us that it is reviewing the
information and documents that we have submitted. The SEC has
advised us that this is a fact-finding inquiry and that it has
not reached any conclusions related to this matter. At this time
we cannot predict what the results of the investigation will be.

If the SEC determines that we or our officers and
directors have violated federal securities laws or the
SECs rules and regulations, we could be subject to SEC
enforcement action, including potential fines and penalties,
which could materially adversely affect our results of
operations or financial condition. We cannot provide assurance
the resolution of the SEC investigation will not necessitate
further amendments or restatements to our previously filed
reports. We do not believe, however, that we or our officers or
directors have violated any such laws, rules or regulations.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Litigation involving us could negatively
    affect our business and financial results.

We face the risk of litigation, including class
action lawsuits, challenging our product terms, rates,
disclosures, collections and/or other practices, under state and
federal consumer protection statutes and other laws, as well as
actions relating to federal securities laws. In particular,
state attorneys general and other government prosecutors have
shown an increased interest in the enforcement of consumer
protection laws, including laws relating to subprime lending,
predatory lending practices and privacy. See Legal
Proceedingson pages 27-28 for a discussion of legal
actions to which we are currently subject. All litigation
involves litigation costs, both in terms of money and diversion
of managements time and attention. In addition, litigation
may result in orders that require us to change specific business
practices or adopt business practices different from our
competitors, pay settlement costs and damages and, in some
cases, penalties. Any or all of these could negatively affect
our business and financial results.

22



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##### Table of Contents





| |                                                                      
| | ---------------------------------------------------------------------
| | We could be required to provide support to
    Direct Merchants Bank.

Under our regulatory framework and the CALMA, we
could be required to contribute capital or otherwise provide
support to Direct Merchants Bank in order to maintain or meet
the Banks capital and liquidity needs. If we had to do
this, it could limit our ability to expend funds at the MCI
level or require us to engage in capital raising activities that
could adversely affect our financial results and/or stock price
for a variety of reasons, including dilution to existing equity
holders.



| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The occurrence of certain events could
    result in early amortization (required repayment) of the
    securities issued by the Metris Master Trust and also cause all
    amounts outstanding under our credit agreement and our existing
    senior notes to become due and payable.

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



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our target consumers generally have higher
    default rates and may be impacted more by general economic and
    social factors than lower default consumers.

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



| |   |                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cause purchasers of securities issued by the
    Metris Master Trust to require even higher credit enhancement
    levels for future securities issued by the Metris Master Trust,
    which could divert significant amounts of cash that would
    otherwise be available to us;
|
| |  | jeopardize our ability to complete future
    securitization transactions on acceptable terms or at all,
    thereby decreasing our liquidity and forcing us to rely on other
    potentially more expensive funding sources, to the extent
    available; and                    
|
| |  | cause early amortization (required repayment) of
    outstanding securities issued by the Metris Master Trust, with
    the potential results noted above.                                                                                                                        



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We require a high degree of liquidity to
    operate our business, and an inability to access funding at the
    times and in the amounts that we need could adversely affect our
    ability to operate or our financial results.

Key elements of our strategy depend on us having
adequate available cash, and we therefore require a high degree
of liquidity to operate our business (see Managements
Discussion and Analysis of

23



---



##### Table of Contents



Operations  Liquidity and Capital
Resources for a more detailed
discussion of liquidity). Activities for which we need cash
include:




| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | funding new receivables;                                                                                            
|
| |  | making interest and principal payments under our
    credit agreement, existing senior notes and other indebtedness;
|
| |  | refinancing maturing series of asset-backed
    securities issued by the Metris Master Trust;                       
|
| |  | providing credit enhancement with respect to
    asset-backed securities issued by the Metris Master Trust;         
|
| |  | covering fees and expenses incurred in connection
    with the securitization of receivables; and                   
|
| |  | meeting other operating expenses.                                                                                   

As a result of these activities, ensuring
appropriate liquidity is an ongoing business objective. We rely
heavily on the securitization of our consumer loans for funding,
primarily by selling the loans to the Metris Master Trust.

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



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | We are the subject of an Internal Revenue
    Service examination that could have a material adverse effect on
    our liquidity.

The Companys 1998 through 2002 federal
income tax returns are under examination by the Internal Revenue
Service (IRS). Both the Company and the IRS have
proposed adjustments involving the tax treatment of certain
credit card fees as original issue discount (OID).
These fees include late, overlimit, interchange, cash advance
and annual fees. Although these fees are primarily reported as
income when billed for financial reporting purposes, we believe
the fees create OID that should be deferred and amortized over
the remaining life of the underlying credit card loans for tax
purposes. As of December 31, 2004, and December 31,
2003, the Company had deferred cumulative federal income tax
related to this issue of approximately $129 million and
$179 million, respectively. The decrease is primarily
attributable to the decrease in managed receivables. Our
treatment of these fees is consistent with that of many other
United States credit card issuers. Furthermore, we believe our
treatment of these fees is appropriate based on relevant
technical authority and specific guidance issued by the IRS
regarding late fees. However, the timing and amount of any final
resolution remain uncertain. We continue to work with the IRS to
resolve this matter and do not expect to pay any incremental tax
related to this issue in the next 12 months, nor do we
expect the resolution of this matter to have a material adverse
effect on future earnings.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in the interest rates on the funds
    we borrow and the amounts we loan to our credit card customers
    could adversely affect our financial results.

Like other financial institutions, we borrow
money from institutional lenders that we then lend to our
customers. We earn interest on the consumer loans we make and
pay interest on the borrowings we use to fund those loans.
Changes in these two interest rates affect the value of our
assets and liabilities. Generally, our credit card loans are
priced at rates indexed from the Prime rate. The interest we pay
on our borrowings is based on indices over London Inter Bank
Offered Rate (LIBOR). If the rate of

24



---



##### Table of Contents



interest we pay on our borrowings increases more
than the rate of interest we earn on our loans, our net interest
income, and therefore our earnings, could fall. Our earnings
could also be adversely affected if the rates on our consumer
loans fall more quickly than those on our borrowings.


We manage these risks partly by changing the
interest rates we charge on our credit card accounts. The
success of repricing accounts to match an increase or decrease
in our borrowing rates depends on the overall product mix of
those accounts, the actual amount of accounts repriced, the rate
at which we are originating new accounts, and our ability to
retain accounts (and the related loan balances) after repricing.
For example, if we increase the interest rate we charge on our
credit card accounts and the cardholders close their accounts as
a result, we may not be able to match our increased borrowing
costs as quickly, if at all.

Changes in interest rates also affect the
balances our customers carry on their credit cards. When
interest rates fall, there may be more low-rate product
alternatives available to our customers. Consequently, their
credit card balances may fall and prepayment and attrition rates
may rise. We can mitigate this risk by reducing the interest
rates we charge. However, these changes can reduce the overall
yield on our portfolio. When interest rates rise, on the other
hand, there are fewer low-rate alternatives available to our
customers. Consequently, credit card balances may rise (or fall
more slowly). In this circumstance, we may have to raise
additional funds at higher interest rates to fund loans to our
customers. We can mitigate the impact of this by increasing the
interest rates we charge, although such changes may increase
opportunities for our competitors to offer attractive products
to our customers and consequently increase customer attrition
from our portfolio.



| |                             
| | ----------------------------
| | We face intense competition.

We face intense competition from numerous
financial services providers, many of which have greater
resources and name recognition than we do. Our credit card
business competes with national, regional and local bankcard
issuers, as well as other general purpose and private label
credit card issuers. Some of these issuers are substantially
larger and often compete for customers by offering lower
interest rates and/ or fee levels than we do. Our credit card
lending products also compete with other financial products such
as home equity loans and other line of credit products.
Moreover, the federal Gramm-Leach-Bliley Act, which
permits the affiliation of commercial banks, securities firms
and insurance companies, may increase the number of competitors
in the banking industry and the level of competition for banking
products, including credit cards.

In addition, there has been continued focus on
solicitations to middle-market consumers as competitors have
continued to focus on this market. Our competitors may take
actions such as offering lower interest rates and fees, higher
credit lines, and incentives to customers to use their credit
cards and/ or transfer existing balances to their credit cards.
We believe customers are attracted to credit card products
largely on the basis of price, credit limit and other product
features, and customer loyalty is often limited, these and other
competitive practices could result in the loss of existing
customers, reductions in account balances, a slowdown in account
and balance growth, increased customer acquisition costs and
reductions in the levels of finance charges and fees that we
charge.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our financial results could be negatively
    impacted by fluctuations in our interests in our
    securitizations.

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

25



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##### Table of Contents



changes in the value of these interests in our
financial statements, decreases in value could negatively impact
our financial results.




| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Our restatements of financial results have
    had, and may in the future continue to have, adverse effects on
    us.

In 2004, we restated our financial results for
1998 through 2002, and for the first three quarters of 2003, in
connection with our analysis of our method of valuing
Retained interests in loans securitized. Included in
these restatements, in addition to changes made as a result of
our revised accounting policies and procedures related to
valuing our retained interests, are corrections to conform with
GAAP related to securitization transaction costs, credit card
solicitation costs, interest rate caps and debt waiver revenue
associated with credit card receivables sold to the Metris
Master Trust, as well as the transfer of allowance for loan
losses that was incorrectly classified as a valuation reserve
addition. We also restated certain other prior period amounts to
conform with the current periods presentation. For a more
detailed description of the restatements, see Amendment
No. 1 to our Annual Report on Form 10-K for the year
ended December 31, 2002. These restatements resulted in our
making late filings with the SEC and may have harmed our
reputation with investors and possibly customers. These
restatements and their effects may have additional adverse
effects on us in the future.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Disputes affecting MasterCard and Visa
    could negatively impact our operations and financial
    results.

We are a member of MasterCard International
Incorporated (MasterCard) and Visa U.S.A. Inc.
(Visa). MasterCard® and Visa® are
membership organizations composed of financial institutions that
issue MasterCard or Visa cards. The outcome of pending or future
disputes involving these organizations could, if adversely
decided, affect our operations or result in an increase in the
fees we must pay as a member. In particular, in October 1998,
the U.S. Department of Justice filed a complaint against
MasterCard, Visa and Visa International, Inc., asserting that
duality (the overlapping ownership and control of both the
MasterCard and Visa associations by the same group of banks)
restrains competition in violation of the antitrust laws, and
challenging the rules adopted by both MasterCard and Visa that
restrict member banks from joining American Express, Discover/
Novus or other competing networks. The case was tried in the
summer of 2000 and the trial court announced its decision in
October 2001. The trial court ruled in the associations
favor on the duality claim, but against the associations on the
competing networks claim. In September 2003, the Second Circuit
Court of Appeals affirmed the decision of the District Court.
Visa and MasterCards petition for rehearing was denied in
January 2004. Visa and MasterCard appealed to the
U.S. Supreme Court, but their petition was denied on
October 4, 2004. Following the decision, on October 4,
2004, Discover filed an antitrust suit against MasterCard and
Visa seeking unspecified damages for their alleged
anticompetitive behavior. We cannot predict the final outcome of
this or any similar future litigation, its effect on the
competitive environment in the credit card industry, or its
effect on credit card issuers such as Direct Merchants Bank.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Other industry-wide risks could adversely
    affect our financial performance.

We face many industry-wide risks that could
negatively affect our financial performance. For example, all
businesses in the credit card industry face the risk of fraud by
cardholders and third parties, as well as the risk that
increased criticism from consumer advocates and the media could
hurt consumer acceptance of our products. In addition, like all
businesses in the financial services industry, we face risks
related to:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | rapidly changing technologies, including in
    particular technological challenges in the developing online
    credit card and financial services market;
|
| |  | the possibility that system disruptions and
    failures may interrupt or delay our ability to provide services
    to our customers;                      
|
| |  | potential claims relating to the proprietary
    nature of widely used technology, such as smart
    cards and call center technology; and               

26



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##### Table of Contents





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

Available Information

You can find additional information regarding our
executive officers and Board of Directors in the Proxy Statement
relating to our 2005 Annual Meeting of Stockholders. In
addition, we periodically file reports and other information
with the Securities and Exchange Commission (SEC)
under the Securities Exchange Act of 1934. You can read
and copy this information at SEC offices in
Washington, D.C., New York City, and Chicago; obtain copies
of this information by mail from the Public Reference Section of
the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates; obtain copies
from the SECs website (http://www.sec.gov); inspect
information at the offices of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York, 10005; request copies
of documents by calling our Investor Relations Department at
(952) 525-5074; or visit our website.

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






|        |           
|------- | ----------
|Item 2. | Properties

We lease our principal executive office space in
Minnetonka, Minnesota, currently consisting of approximately
174,000 square feet. That lease expires in December 2011.
During 2004, we entered into a binding agreement with our
landlord, effective October 1, 2004, to release us from our
remaining rent obligation on approximately 126,000 square
feet of office space at our Minnetonka headquarters.

Direct Merchants Bank leases 56,000 square
feet in Phoenix, Arizona, which serves as the Banks
operation center. That lease expires in 2009. We also are party
to a sublease agreement to rent 7,500 square feet in
Scottsdale, Arizona, to support our Data Center, which is
currently set to expire on July 31, 2006. In addition, we
lease facilities in Tulsa, Oklahoma; White Marsh, Maryland;
Jacksonville, Florida; and Duluth, Minnesota, consisting of
approximately 100,000, 100,000, 99,000 and 20,000 square
feet, respectively. These leases expire in December 2010,
September 2007, May 2005 and September 2006, respectively. We
have entered into sublease agreements for approximately
20,000 square feet of our lease obligation in Florida. We
have entered into sublease agreements for approximately
50,000 square feet of our lease obligation in Maryland. The
leased properties in Oklahoma, Maryland, Florida and Duluth
support our collections, customer service and back office
operations. We also own our operations center in Orlando,
Florida, which consists of approximately 45,000 square
feet. We believe our facilities are suitable to our businesses
and that we will be able to lease or purchase additional
facilities as needed.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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

In January 2004, a complaint was filed in
Hennepin County District Court in Minneapolis, Minnesota,
against MCI, certain members of its Board of Directors and a
number of other entities, by Ronald N. Zebeck, MCIs former
Chairman and Chief Executive Officer. The complaint alleges
breach of contract,

27



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##### Table of Contents



intentional interference with contract, breach of
covenant of good faith, defamation, and violation of
Minnesotas whistleblower act. In February 2004, defendants
filed an answer in which they denied the allegations in the
complaint, and MCI filed counterclaims against Mr. Zebeck
alleging breach of fiduciary duty and duty of loyalty, unjust
enrichment, and breach of covenant not to compete. MCI is
requesting an accounting, and seeking declaratory judgment
against Mr. Zebeck for the principal amount
($5 million) of a loan made by MCI in 1999, plus interest.
The lawsuit is in the pre-trial discovery phase. We believe
Mr. Zebecks claims are without factual and legal
support, and we have numerous substantive legal defenses to his
claims. We intend to vigorously defend against
Mr. Zebecks claims and will aggressively prosecute
our case against him.


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

For a discussion of current regulatory
investigations to which we are subject, see Regulatory
Investigationunder Item 1 on page 18-19.

Because at this time we are unable to estimate
damages that may result from the resolution of the matters
outlined above, there can be no assurance that defense or
resolution of these matters will not have a material adverse
affect on our financial position.






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

No matter was submitted to a vote of security
holders during the fourth quarter of our fiscal year ended
December 31, 2004.




PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

The information required by Item 201 of
Regulation S-K is set forth in the Summary of
Consolidated Quarterly Financial Information and Stock Dataon pages 94-95 of this Report.

28



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##### Table of Contents








|        |                                     
|------- | ------------------------------------
|Item 6. | Table 1: Selected Financial
    Data

|                                                                                 |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|-------------------------------------------------------------------------------- |  | ------------------------------------- | --------- | --------- |  | ---- | --------- | ---- |  | ---- | ---------- | ---- |  | - | --------- | - |  | - | --------- | - |  |  | ----- | --
|                                                                                 |  |                                      
|                                                                                 |  | Year Ended December 31,              
|                                                                                 |  |                                      
|                                                                                 |  |                                       |           | Four-Year
|                                                                                 |  |                                       |           | Compound 
|                                                                                 |  |                                       |           | (Decline)
|                                                                                 |  |                                       |           | Growth   
|                                                                                 |  | 2004                                  |           | 2003      |  | 2002 |           | 2001 |  | 2000 |            | Rate
|                                                                                 |  |                                       |           |           |  |      |           |      |  |      |            |     
|                                                                                 |  |                                      
|                                                                                 |  | (In thousands, except per share data)
|Income Statement Data:                                                           |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|Securitization income                                                            |  | $                                     | 329,310   |           |  | $    | 173,367   |      |  | $    | 323,517    |      |  | $ | 650,400   |   |  | $ | 644,457   |   |  |  | (15.5 | )%
|Credit card loan and other interest income                                       |  |                                       | 20,100    |           |  |      | 90,530    |      |  |      | 229,402    |      |  |   | 369,138   |   |  |   | 120,398   |   |  |  | (36.1 | )%
|Total revenues                                                                   |  |                                       | 530,128   |           |  |      | 595,550   |      |  |      | 1,064,823  |      |  |   | 1,642,582 |   |  |   | 1,200,668 |   |  |  | (18.5 | )%
|Interest expense                                                                 |  |                                       | 60,441    |           |  |      | 74,421    |      |  |      | 103,516    |      |  |   | 166,277   |   |  |   | 133,006   |   |  |  | (17.9 | )%
|Provision for loan losses                                                        |  |                                       | (4,762    | )         |  |      | 126,648   |      |  |      | 219,804    |      |  |   | 461,106   |   |  |   | 164,800   |   |  |  | N/A   |   
|Total expenses                                                                   |  |                                       | 474,172   |           |  |      | 812,815   |      |  |      | 1,064,540  |      |  |   | 1,354,667 |   |  |   | 896,945   |   |  |  | (14.7 | )%
|                                                                                 |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|Effective Tax rate                                                               |  |                                       | 39.7      | %         |  |      | 32.0      | %    |  |      | 659.7      | %    |  |   | 39.5      | % |  |   | 38.6      | % |  |  | N/A   |   
|Net income (loss)                                                                |  | $                                     | 33,745    |           |  | $    | (147,739  | )    |  | $    | (1,584     | )    |  | $ | 160,029   |   |  | $ | 185,902   |   |  |  | (34.7 | )%
|                                                                                 |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|Per Common Share Statistics:                                                     |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|(Loss) earnings per common share 
    diluted(7)                                |  | $                                     | (0.17     | )         |  | $    | (3.27     | )    |  | $    | (0.66      | )    |  | $ | 1.25      |   |  | $ | 1.66      |   |  |  | N/A   |   
|Stock price                                                                      |  | $                                     | 12.75     |           |  | $    | 4.44      |      |  | $    | 2.47       |      |  | $ | 25.71     |   |  | $ | 26.31     |   |  |  | (16.6 | )%
|Dividends paid                                                                   |  | $                                     |          |           |  | $    |          |      |  | $    | 0.04       |      |  | $ | 0.04      |   |  | $ | 0.03      |   |  |  | N/A   |   
|Common shares outstanding                                                        |  |                                       | 58,127    |           |  |      | 57,807    |      |  |      | 57,168     |      |  |   | 63,419    |   |  |   | 62,243    |   |  |  | (1.7  | )%
|Preferred securities on a converted basis                                        |  |                                       | 45,054    |           |  |      | 42,616    |      |  |      | 38,978     |      |  |   | 35,598    |   |  |   | 29,164    |   |  |  | 11.5  | % 
|Total book value(1)                                                              |  | $                                     | 9.18      |           |  | $    | 9.05      |      |  | $    | 10.97      |      |  | $ | 11.16     |   |  | $ | 10.20     |   |  |  | (2.6  | )%
|Common stockholders book value(2)                                               |  | $                                     | 7.45      |           |  | $    | 7.58      |      |  | $    | 10.92      |      |  | $ | 11.22     |   |  | $ | 9.19      |   |  |  | (5.1  | )%
|Shares used to compute (loss) earnings per
    share  diluted(7)                |  |                                       | 57,946    |           |  |      | 57,471    |      |  |      | 59,782     |      |  |   | 64,687    |   |  |   | 63,418    |   |  |  | (2.2  | )%
|                                                                                 |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|Selected Metris Master
    Trust Data:                                           |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|Annual net excess spread(3)                                                      |  |                                       | 4.72      | %         |  |      | 2.65      | %    |  |      | 5.77       | %    |  |   | 7.87      | % |  |   | 7.12      | % |  |  | N/A   |   
|Ending gross receivables                                                         |  | $                                     | 6,443,919 |           |  | $    | 7,933,763 |      |  | $    | 10,405,099 |      |  | $ | 9,141,659 |   |  | $ | 6,855,923 |   |  |  | (1.5  | )%
|Average gross receivables                                                        |  |                                       | 6,962,084 |           |  |      | 9,215,480 |      |  |      | 10,200,898 |      |  |   | 7,868,453 |   |  |   | 5,951,562 |   |  |  | 4.0   | % 
|Ending principal receivables                                                     |  |                                       | 6,117,669 |           |  |      | 7,489,568 |      |  |      | 9,809,564  |      |  |   | 8,677,660 |   |  |   | 6,495,214 |   |  |  | (1.5  | )%
|Average principal receivables                                                    |  |                                       | 6,684,742 |           |  |      | 8,819,252 |      |  |      | 9,690,572  |      |  |   | 7,379,816 |   |  |   | 5,597,768 |   |  |  | 4.5   | % 
|Delinquency ratio(4)                                                             |  |                                       | 9.2       | %         |  |      | 11.1      | %    |  |      | 12.0       | %    |  |   | 9.3       | % |  |   | 8.5       | % |  |  | N/A   |   
|Principal delinquency ratio(5)                                                   |  |                                       | 7.7       | %         |  |      | 9.3       | %    |  |      | 10.2       | %    |  |   | 7.9       | % |  |   | 7.0       | % |  |  | N/A   |   
|Selected Operating Data  Owned
    Basis:                                       |  |                                       |           |           |  |      |           |      |  |      |            |      |  |   |           |   |  |   |           |   |  |  |       |   
|Year-end credit card loans                                                       |  | $                                     | 68,230    |           |  | $    | 128,615   |      |  | $    | 846,417    |      |  | $ | 2,756,763 |   |  | $ | 1,184,269 |   |  |  | (51.0 | )%
|Average credit card loans                                                        |  |                                       | 87,317    |           |  |      | 518,705   |      |  |      | 1,305,127  |      |  |   | 1,709,989 |   |  |   | 614,991   |   |  |  | (38.6 | )%
|Year-end assets                                                                  |  |                                       | 1,481,479 |           |  |      | 1,392,396 |      |  |      | 2,590,392  |      |  |   | 4,165,975 |   |  |   | 3,738,307 |   |  |  | (20.7 | )%
|Average assets                                                                   |  |                                       | 1,462,781 |           |  |      | 2,211,348 |      |  |      | 3,334,850  |      |  |   | 3,903,846 |   |  |   | 2,826,653 |   |  |  | (15.2 | )%
|Year-end deposits                                                                |  |                                       | 3,407     |           |  |      | 6,262     |      |  |      | 892,754    |      |  |   | 2,058,008 |   |  |   | 2,106,199 |   |  |  | (79.9 | )%
|Year-end debt                                                                    |  |                                       | 373,624   |           |  |      | 350,448   |      |  |      | 357,649    |      |  |   | 647,904   |   |  |   | 356,066   |   |  |  | 1.2   | % 
|Year-end preferred stock                                                         |  |                                       | 514,545   |           |  |      | 470,728   |      |  |      | 430,642    |      |  |   | 393,970   |   |  |   | 360,421   |   |  |  | 9.3   | % 
|Common stockholders equity                                                      |  |                                       | 432,757   |           |  |      | 438,465   |      |  |      | 624,031    |      |  |   | 711,366   |   |  |   | 572,276   |   |  |  | (6.7  | )%
|Total stockholders equity                                                       |  |                                       | 947,302   |           |  |      | 909,193   |      |  |      | 1,054,673  |      |  |   | 1,105,336 |   |  |   | 932,697   |   |  |  | 0.4   | % 
|Average total stockholders equity                                               |  |                                       | 971,079   |           |  |      | 1,038,190 |      |  |      | 1,116,578  |      |  |   | 1,011,573 |   |  |   | 759,633   |   |  |  | 6.3   | % 
|Return on average assets                                                         |  |                                       | 2.3       | %         |  |      | N/A       |      |  |      | N/A        |      |  |   | 4.1       | % |  |   | 6.6       | % |  |  | N/A   |   
|Return on average total equity                                                   |  |                                       | 3.5       | %         |  |      | N/A       |      |  |      | N/A        |      |  |   | 15.8      | % |  |   | 24.5      | % |  |  | N/A   |   
|Allowance for loan losses                                                        |  | $                                     | 12,409    |           |  | $    | 45,492    |      |  | $    | 90,315     |      |  | $ | 460,159   |   |  | $ | 123,123   |   |  |  | (43.7 | )%
|Delinquencies                                                                    |  |                                       | 7,781     |           |  |      | 20,309    |      |  |      | 7,876      |      |  |   | 277,778   |   |  |   | 89,168    |   |  |  | (45.6 | )%
|Delinquency ratio(4)(6)                                                          |  |                                       | 11.4      | %         |  |      | 15.8      | %    |  |      | 0.9        | %    |  |   | 10.1      | % |  |   | 7.5       | % |  |  | N/A   |   
|Allowance for loan losses as a percent of 30-day
    plus delinquent receivables |  |                                       | 159.5     | %         |  |      | 224.0     | %    |  |      | 1,146.7    | %    |  |   | 165.7     | % |  |   | 138.1     | % |  |  | N/A   |   
|Allowance for loan losses as a percent of credit
    card loans                  |  |                                       | 18.2      | %         |  |      | 35.4      | %    |  |      | 10.7       | %    |  |   | 16.7      | % |  |   | 10.4      | % |  |  | N/A   |   
|Charge-offs                                                                      |  | $                                     | 30,267    |           |  | $    | 137,015   |      |  | $    | 325,351    |      |  | $ | 209,779   |   |  | $ | 59,679    |   |  |  | (15.6 | )%
|Net charge-off ratio                                                             |  |                                       | 34.7      | %         |  |      | 26.4      | %    |  |      | 24.9       | %    |  |   | 12.3      | % |  |   | 9.7       | % |  |  | N/A   |   
|New accounts                                                                     |  |                                       | 480       |           |  |      | 316       |      |  |      | 696        |      |  |   | 1,023     |   |  |   | 1,444     |   |  |  | (24.1 | )%
|Gross active accounts                                                            |  |                                       | 2,177     |           |  |      | 2,482     |      |  |      | 3,398      |      |  |   | 3,871     |   |  |   | 3,920     |   |  |  | (13.7 | )%



---



|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Total book value is calculated assuming
    conversion of preferred stock.                                                                                                                                                                                                           
|   
|(2) | Common stockholders book value is
    calculated using common stockholders equity and period-end
    common shares outstanding.                                                                                                                                                    
|   
|(3) | Monthly net excess spread is calculated as gross
    yield, less gross principal default rate, servicing fees and
    financing costs. Annual net excess spread is calculated as the
    simple average of the 12 monthly net excess spreads during
    the applicable calendar year.
|   
|(4) | The delinquency ratio represents receivables that
    were at least 30 days contractually past due at year-end as
    a percentage of year-end receivables.                                                                                                                          
|   
|(5) | The principal delinquency ratio represents
    principal on credit card loans that were at least 30 days
    contractually past due at year-end as a percentage of year-end
    principal balances.                                                                                  
|   
|(6) | The decrease in owned delinquencies as of
    December 31, 2002 versus December 31, 2001 primarily
    reflects the sale of approximately $120 million in
    delinquent receivables during September and December 2002.                                                             
|   
|(7) | Prior period earnings per share amounts have been
    restated to comply with the provisions of Emerging Issues Task
    Force Issue No. 03-6, which was adopted effective
    April 1, 2004.                                                                                        

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

Business Overview

The following discussion and analysis provides
information management believes to be relevant to understanding
our financial condition and results of operations. This
discussion should be read in conjunction with our consolidated
financial statements and related notes thereto for the period
ended December 31, 2004.

MCI and its subsidiaries are information-based
marketers of consumer lending products throughout the United
States. Our consumer lending products are primarily unsecured
credit cards, including the Direct Merchants Bank
MasterCard® and Visa® credit cards. We also offer
co-branded credit cards through partnerships with other
companies. Our credit cards generate consumer loans through
Direct Merchants Bank. These loans in turn generate income and
cash flow from principal, interest and fee payments. The sales
of our other consumer financial products, such as credit
protection products, generate additional cash flow. Our earnings
may fluctuate based on several factors, including securitization
activity. When securitization transactions occur we incur
Loss on new securitization to the Metris Master
Trust and increased transaction costs.

During 2004, we saw continuing signs of improving
asset quality. That improvement resulted in an increase in the
average excess spread in the Metris Master Trust, which rose
from a 12-month average of 2.65% as of December 31, 2003,
to 4.72% for the year ended December 31, 2004. The
improvement in the excess spread has been driven primarily by
improvements in the overall credit quality of the portfolio.
Delinquency rates in the Metris Master Trust decreased to 9.2%
as of December 31, 2004, compared to 11.1% as of
December 31, 2003. The average principal default rate in
the Metris Master Trust was 18.2% for the year ended
December 31, 2004, compared to 20.4% for the year ended
December 31, 2003. We have also continued to see improved
performance in the early-stage delinquencies in the Metris
Master Trust. As of December 31, 2004, the percentage of
receivables 1-29 days contractually delinquent in the
Metris Master Trust was 4.40%, compared to 5.62% as of
December 31, 2003. We believe this improvement has resulted
from revisions in the operating strategies with which we manage
our portfolio, significantly enhanced collection efforts, and
improvements in the economy. While we anticipate overall
long-term improvement in the performance of the Metris Master
Trust, we do expect monthly and quarterly fluctuations in both
excess spread and delinquencies resulting from several factors,
including seasonal trends.

The one-month LIBOR (the index which primarily
drives our cost of funds) has increased from 1.12% at
December 31, 2003, to 2.40% as of December 31, 2004.
This increase, and potential future increases, will result in a
higher cost of funds on securities issued out of the Metris
Master Trust, which is partially offset by higher yields on our
credit card portfolio. We believe that impacts to our financial
statements that result from increases in interest rates may be
mitigated by a variety of management strategies, including, but
not limited to, interest rate caps, portfolio re-pricing or the
issuance of fixed rate debt. For further information on the
impact to us resulting from changes in interest rates, refer to
Item 7a  Quantitative and Qualitative
Disclosures about Market Riskon page 56 of this Report.

As a result of the improved performance of the
Metris Master Trust, we have seen a decrease in the cash
restricted from release to us from the Metris Master Trust. As
of December 31, 2004, cash restricted from release was
$87.3 million, compared to $305.9 million as of
December 31, 2003. The decrease in restricted cash has
improved our overall liquidity position (See further discussion
on restricted cash in Off Balance Sheet Arrangementson
pages 43-45 of this Report). During 2004, we increased our
financing conduit capacity to $1.2 billion. This facility
is a two-year conduit financing facility that matures in April
2006. We utilized this conduit during the year to defease a
total of $1.75 billion in maturing asset-backed
securitizations (ABS). Effective February 16,
2005, the Company reduced its conduit capacity from
$1.2 billion to $1.0 billion. Our receivable funding
needs for 2005 and 2006 will be covered by future ABS issuances
and further portfolio attrition. We have $1.35 billion in
remaining commitment from MBIA Insurance Corporation
(MBIA) to provide insurance coverage on future ABS
transactions, of which $1.05 billion currently is
available. The remaining $300 million of commitment will
become available to us

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when Series 1999-3 matures. Our improved
liquidity position also has afforded us broader access to the
securitization market, which was illustrated in the
$600 million senior subordinated securitization that we
completed in November 2004. This was the first time we accessed
the senior-subordinated public markets in over three years (See
further discussion of funding transactions completed during the
year in Liquidity, Funding and Capital Resourceson
pages 45-49 of this report).


We continue to focus on strengthening the
long-term operations of our business. Improvements in losses,
delinquencies and payment rates have been driven by tighter
underwriting on new credit card account originations, tighter
credit line management on existing and new cardholder accounts,
better pricing on offerings, and improved collections
initiatives. We have changed our base strategies in these areas
over the past two years and have seen benefits in improved
operating results. These improved results and our stronger cash
position are enabling us to focus on growing our business. We
steadily increased our new account originations throughout 2004.
During the year we generated approximately 480,000 new accounts,
of which approximately 208,000 were generated during the fourth
quarter. We are comfortable increasing our new account
originations due to the continued strong results we are
experiencing in our 2003 vintages, our improved liquidity
position and the improved performance of the Metris Master
Trust. We have experienced an improvement in delinquencies in
comparing our 2004 and 2003 vintages to our 2002 vintages at the
same point in time. We expect credit card originations in 2005
to continue to reflect the discipline exhibited in our 2003 and
2004 originations and anticipate these improved results will
create a more reliable, predictable and long-term receivables
base. Our new account growth will remain focused on our
traditional target market, the middle-market consumer. We will
continue to leverage our account origination strategies,
increase our efforts to penetrate the Hispanic customer segment,
increase our partnership and third-party marketing efforts, and
test additional products, channels and incremental prospects.

In January 2003, the FFIEC issued guidance with
respect to various account management practices for institutions
engaged in credit card lending. The guidance provides
requirements for certain operational and accounting policies,
which are designed to bring consistency in practice between
institutions engaged in credit card lending. Beginning in 2003,
we began implementing the guidance and believe we are now in
compliance with most aspects. In addition, we developed and have
been executing against a multi-phased approach to address the
receivable amortization aspects of this guidance. We expect to
utilize various methods to ensure reasonable receivable
amortization of our accounts, including but not limited to:
limiting consecutive fee billings; implementing a fee billing
cap; reducing customers interest rates; and increasing the
required minimum payment due. The impact of fully implementing
the account management guidance, while not expected to be
significant, is unknown at this time.

Critical Accounting Estimates

The Companys significant accounting
policies are identified on pages 61-68 of this Report; the
most critical of which are our determination of the valuation of
our Retained interests in loans securitized and the
Allowance for loan losses.



| |                                                         
| | --------------------------------------------------------
| | Valuation of Retained Interests in Loans
    Securitized

The Retained interests in loans
securitized on our balance sheet associated with our
securitization transactions includes contractual retained
interests, excess transferors interest, interest-only
strip receivable and spread accounts receivable. We determine
the fair value of each component of the Retained interests
in loans securitized at the time a securitization
transaction or replenishment sale is completed using a
discounted cash flow valuation model and on a quarterly basis
thereafter. Increases to the fair value of each of the assets
related to discount accretion are recorded in Discount
accretion. Any other change in the fair value is recorded
in Change in fair value.

The discounted cash flow valuation is limited to
the receivables that exist and have been sold to the Metris
Master Trust. Therefore, the model assumes the current principal
receivable balance as of the balance sheet date amortizes with
no new sales, interchange fees or cash advances. The future cash
flows

31



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##### Table of Contents



are modeled in accordance with the Companys
debt series legal documents and are applied to all series
on a pro-rata basis. The valuation model assumes that we
repurchase the outstanding principal receivables within each
series at face value according to the clean-up call provisions
contained in the respective security series legal
documents.


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

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

Spread account receivable balances represent
interest-earning cash held by the Metris Master
Trust Trustee due to performance of the Metris Master Trust
and minimum spread reserve deposits required by certain security
series. Their fair value is determined by discounting the
expected future cash flows using a discount rate commensurate
with the risks of the underlying assets and the expected timing
based on the scheduled maturity date for the underlying
securitization. The expected future cash flows include the
release of the spread account receivable balance on the
scheduled maturity date and estimated interest earned on the
cash balances.

The interest-only strip receivable represents the
contractual right to receive excess spread cash flows (portfolio
collections, less principal charge-offs, financing costs and
servicing costs) from customer receivables over the estimated
life of the amortizing receivables. The fair value is determined
by discounting the expected future cash flows using a discount
rate commensurate with the risks of the underlying assets based
on the expected timing of cash flows in the retained interests
valuation model. Within the model, future excess spread cash
flows are first applied to meet spread accounts receivable
requirements in accordance with the debt series legal
documents. When the spread accounts receivable requirements are
met, cash is returned to us and is valued as the interest-only
strip receivable. We determine upper and lower valuation limits
of the interest-only strip receivable based on historical and
forecasted excess spreads. We then determine the best estimate
within the range, weighted heavily toward the low end of the
range.

We use certain assumptions and estimates in
determining the fair value of Retained interests in loans
securitized. These assumptions and estimates include
estimated principal payments, credit losses, gross yield,
interest expense, fees, the timing of cash receipts, and
discount rates commensurate with the risks of the underlying
assets. On a quarterly basis, we review and adjust, as
appropriate, the assumptions and estimates used in our model
based on a variety of internal and external factors, including
national and economic trends and business conditions, current
lending policies, procedures and strategies, historical trends
and assumptions about future trends, competition, and legal and
regulatory requirements. Significant estimates are required in
determining these factors and different judgments concerning
these factors can result in a material impact on our
consolidated balance sheets and statements of income.



| |                          
| | -------------------------
| | Allowance for Loan Losses

We maintain an Allowance for loan
losses sufficient to absorb probable loan losses inherent
in the Credit card loans portfolio as of the balance
sheet date. The Allowance for loan losses results in
a reserve approximating 18 months of anticipated future
charge-offs. At the time of charge-off, all principal balances
are written-off against the allowance and all fees and finance
charges are netted against the

32



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##### Table of Contents



applicable income statement line item. The
allowance is based on managements consideration of all
relevant factors, including its assessment of applicable
economic and seasonal trends.


Historically, we segmented the loan portfolio
into several individual liquidating pools with similar credit
risk characteristics, and estimated (based on historical
experience for similar pools and existing environmental
conditions) the dollar amount of principal, accrued finance
charges and fees that would charge-off. We then aggregated these
pools into prime and subprime portfolios based on the prescribed
FICO score cuts, credit counseling programs, and various pools
of other receivables. We separately analyzed the reserve
requirement on each of these groups or portfolios. During the
first quarter of 2004, we changed our methodology and now
aggregate all liquidating pools into one segment, which is
treated as subprime for allowance determination purposes. We
believe this was appropriate due to the reduction in the size of
the loan portfolio and the fact that the remaining loans had
similar risk characteristics.

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

Additionally, in evaluating the adequacy of the
loan loss reserves, we consider several subjective factors that
may be overlaid into the credit risk roll-rate model in
determining the necessary loan loss reserve. These factors
include, but are not limited to:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | national and economic trends and business
    conditions, including the condition of various market segments;                                                                                               
|
| |  | changes in lending policies and procedures,
    including those for underwriting, collection, charge-off and
    recovery, as well as the experience, ability and depth of
    lending management and staff;
|
| |  | trends in volume and the product pricing of
    accounts, including any concentrations of credit; and                                                                                                       
|
| |  | impacts from external factors, such as changes in
    competition and legal and regulatory requirements, on the level
    of estimated credit losses in the current portfolio.                              

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

Results of Operations



| |                                                                           
| | --------------------------------------------------------------------------
| | Year Ended December 31, 2004, Compared
    to Year Ended December 31, 2003

Net income was $33.7 million for the year
ended December 31, 2004, a $181.4 million increase
from a $147.7 million net loss for the year ended
December 31, 2003. The $181.4 million improvement in
net income over 2003 is due primarily to a $155.9 million
increase in Securitization income, a
$338.6 million decrease in Total expenses, and
a Loss on sale of credit card loans of
$117.2 million recorded in 2003, partially offset by a
Gain on sale of membership and warranty business of
$84.8 million also recorded in 2003, and a
$221.4 million decrease in other operating revenues in 2004.

In accordance with Emerging Issues Task Force
Issue No. 03-6 Participating Securities and the
Two  Class Method under FASB
Statement 128, diluted earnings per common share
are calculated as net income after preferred dividends, less
undistributed income allocated to preferred stockholders,
divided by the sum of weighted average common shares outstanding
and common share equivalents. For earnings per share purposes,
common share equivalents do not include an assumed conversion of
preferred securities. For the year ended December 31, 2004,
the Company had a loss of $0.17 per diluted common share,
compared to a loss of $3.27 per diluted common share for
the year ended December 31, 2003.

33



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##### Table of Contents



Securitization income was
$329.3 million for the year ended December 31, 2004, a
$155.9 million or 89.9% increase from $173.4 million
for the year ended December 31, 2003. The following table
details Securitization income for the years ended
December 31, 2004, 2003 and 2002, respectively.

|                                                                           |                                                |                         |          |         |   |      |          |         |   |  |          |         |  
|-------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------- | -------- | ------- | - | ---- | -------- | ------- | - |  | -------- | ------- | -
|                                                                           |                                                |                        
|                                                                           |                                                | Year Ended December 31,
|                                                                           |                                                |                        
|                                                                           |                                                | 2004                    |          | 2003    |   | 2002
|                                                                           |                                                |                         |          |         |   |     
|                                                                           |                                                |                        
|                                                                           |                                                | (In thousands)         
|Loss on new securitizations of receivables to the
    Metris Master Trust: |                                                |                         |          |         |   |      |          |         |   |  |          |        
|                                                                           | Defeasance of maturing ABS series into conduit |                         | $        | (94,567 | ) |      | $        | (35,260 | ) |  | $        |        |  
|                                                                           | Amortizing term series financing               |                         |          | (1,246  | ) |      |          |        |   |  |          |        |  
|                                                                           | Establishment of a new conduit                 |                         |          |        |   |      |          | (19,954 | ) |  |          | (445    | )
|                                                                           | New term ABS transactions                      |                         |          | (47,808 | ) |      |          |        |   |  |          | (70,133 | )
|                                                                           |                                                |                         |          |         |   |      |          |         |   |  |          |        
|                                                                           |                                                |                         | (143,621 | )       |   |      | (55,214  | )       |   |  | (70,578  | )      
|(Loss) gain on replenishment of receivables to
    the Metris Master Trust |                                                |                         | (88,193  | )       |   |      | (161,743 | )       |   |  | 28,706   |        
|Discount accretion                                                         |                                                |                         | 254,455  |         |   |      | 308,912  |         |   |  | 305,327  |        
|Interest-only revenue                                                      |                                                |                         | 292,710  |         |   |      | 221,331  |         |   |  | 452,268  |        
|Change in fair value                                                       |                                                |                         | 114,515  |         |   |      | (71,669  | )       |   |  | (342,080 | )      
|Transaction and other costs                                                |                                                |                         | (100,556 | )       |   |      | (68,250  | )       |   |  | (50,126  | )      
|                                                                           |                                                |                         |          |         |   |      |          |         |   |  |          |        
|                                                                           | Securitization income                          |                         | $        | 329,310 |   |      | $        | 173,367 |   |  | $        | 323,517 |  
|                                                                           |                                                |                         |          |         |   |      |          |         |   |  |          |        

The increase in Securitization income
is due primarily to a decrease in Loss on replenishment of
receivables to the Metris Master Trust of
$73.6 million, an improvement in the Change in fair
value of $186.2 million and an increase in
Interest-only revenue of $71.4 million. These
improvements were partially offset by an $88.4 million
increase in Loss on new securitization of receivables to
the Metris Master Trust, a $54.5 million reduction in
Discount accretion and a $32.3 million increase
in Transaction and other costs.

Loss on new securitizations of receivables
to the Metris Master Trust was $143.6 million for the
year ended December 31, 2004, an $88.4 million or 160%
increase from $55.2 million for the year ended
December 31, 2003. The $143.6 million loss in 2004
relates to $2.8 billion of new securitizations and
defeasances with an average term of 19 months-to-maturity,
compared to $1.3 billion of new securitizations and
defeasances with an average term of 12 months-to-maturity
during the same period in 2003.

Loss on replenishment of receivables to the
Metris Master Trust was $88.2 million for the year
ended December 31, 2004, a decrease of $73.5 million
or 45.5% from $161.7 million for the year ended
December 31, 2003. The improvement was primarily due to a
$29.7 million decrease resulting from higher projected
excess spreads, a $21.6 million decrease resulting from
lower volumes of replenished receivables sold to the Metris
Master Trust, and an $11.9 million decrease due to a
reduction in the weighted average months-to-maturity on the
outstanding securitization transactions.

Discount accretion was
$254.5 million for the year ended December 31, 2004, a
$54.4 million or 17.6% decrease from $308.9 million
for the year ended December 31, 2003. The decrease was
primarily due to lower receivable balances and the resulting
lower contractual retained interest held in the Metris Master
Trust and lower spread reserve deposits due to improved Metris
Master Trust performance.

Change in fair value was income of
$114.5 million for the year ended December 31, 2004,
compared to a $71.7 million loss for the year ended
December 31, 2003. The Change in fair value for
the year ended December 31, 2004, was primarily due to a
$56.5 million increase in the fair value of contractual
retained interest and excess transferors interest related
to the early pay-down of our variable funding conduits, a
$44.1 million increase in the fair value of spread accounts
receivable related to the

34



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##### Table of Contents



early pay-down of our variable funding conduits
and the release of restricted cash due to higher excess spreads,
and a $10.5 million increase in the fair value of the
interest-only strip receivable related to a $73.5 million
increase due to higher projected excess spreads, partially
offset by a $63.0 million decrease due to receivable
attrition and matured securitization transactions. The
$71.7 million loss in Change in fair value for
the year ended December 31, 2003, was primarily due to an
increase in the discount against spread accounts receivable due
to additional excess spread cash flows in the Metris Master
Trust being restricted from release.


Interest-only revenue was
$292.7 million for the year ended December 31, 2004, a
$71.4 million or 32.3% increase from $221.3 million
for the year ended December 31, 2003. The increase was due
to a 207-basis-point increase in the weighted average excess
spread in the Metris Master Trust, partially offset by a
$2.1 billion decrease in average principal receivables.

Transaction and other costs were
$100.6 million for the year ended December 31, 2004, a
$32.3 million or 47.3% increase from $68.3 million for
the year ended December 31, 2003. The increase in costs in
2004 relates primarily to $800 million of new ABS
securitizations, a $500 million amortizing term series
financing and the establishment of a $1.2 billion two-year
variable funding conduit. In addition, during 2004 transaction
fees were incurred related to commitment fees for MBIA insurance
coverage on future asset-backed transactions and a
mark-to-market valuation adjustment on interest rate caps. The
$68.3 million in costs during 2003 relates primarily to
$850 million of variable conduit financing and
$622 million of amortizing term series financing.

Servicing income on securitized
receivables was $133.7 million for the year ended
December 31, 2003, a $42.9 million or 24.3% decrease
from $176.6 million for the year ended December 31,
2003. This reflects a $2.1 billion decrease in average
principal receivables held by the Metris Master Trust for the
year ended December 31, 2004, compared to 2003.

Credit card loan and other interest
income and Credit card loan fees, interchange and
other income, totaled $42.1 million for the year
ended December 31, 2004, a $127.9 million or 75.2%
decrease from $170.0 million for the year ended
December 31, 2003. The cumulative decrease resulted
primarily from the reduction in average owned credit card loans
of $431.4 million year over year.

Enhancement services income was
$25.1 million for the year ended December 31, 2004, a
$82.8 million or 76.7% decrease from $107.9 million
for the year ended December 31, 2003. This decrease
resulted from the sale of our membership club and warranty
business in July 2003. Remaining Enhancement services
income is primarily commission revenue that Direct
Merchants Bank earns on membership club and warranty products
sold to the Banks credit card customers under a marketing
agreement with the third-party purchaser of that business and
income generated from certain products not sold to that
purchaser.

Interest expense was
$60.4 million for the year ended December 31, 2004, a
$14.0 million or 18.8% decrease from $74.4 million for
the year ended December 31, 2003. This decrease resulted
primarily from a reduction in interest costs of
$28.3 million resulting from the sale in the third quarter
of 2003 of the portfolio of certificates of deposit
(CDs) held by Direct Merchants Bank, which was
partially offset by an increase in interest costs on debt of
$14.3 million.

Provision for loan losses was income
of $4.8 million for the year ended December 31, 2004,
a $131.4 million or 103.8% increase from expense of
$126.6 million for the year ended December 31, 2003.
This decrease resulted from the $431.4 million reduction in
average owned Credit card loans between the two
periods, as well as slightly improved credit quality in the
owned loan portfolio.

Credit card account and other product
solicitation and marketing expenses were
$78.7 million for the year ended December 31, 2004, a
$14.6 million or 15.6% decrease from $93.3 million for
the year ended December 31, 2003. The decrease resulted
primarily from a $40.5 million reduction in marketing
expenses on our membership club and warranty business that was
sold during the third quarter of 2003. The decrease was
partially offset by an increase in acquisition and other
portfolio marketing costs of

35



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$25.9 million. This increase resulted from
an increase in new account origination from approximately
316,000 accounts in 2003 to approximately 480,000 accounts in
2004.


Employee compensation was
$141.4 million for the year ended December 31, 2004, a
$34.1 million or 19.4% decrease from $175.5 million
for the year ended December 31, 2003. This decrease
resulted from a reduction in the average number of employees
during 2004 to 2,299 from an average of 3,277 employees during
2003. The reduction in the average number of employees resulted
from the lower number of employees required to service fewer
gross active account and from the sale of our membership club
and warranty business during 2003.

Data processing services and
communications, Credit protection claims
expense, Occupancy and equipment and
Purchased portfolio premium amortization totaled
$103.7 million for the year ended December 31, 2004, a
$57.5 million or 35.7% decrease from $161.2 million
for the year ended December 31, 2003. This cumulative
decrease resulted primarily from the sale of the membership club
and warranty business and the significant reduction in our
credit card operations.

Other expenses were
$89.6 million for the year ended December 31, 2004, a
$2.9 million or 3.1% decrease from $92.5 million for
the year ended December 31, 2003. The following table
illustrates the components of Other expenses for the
years ended December 31, 2004, 2003 and 2002, respectively.

|                                     |                      |                         |        |        |  |      |        |        |  |   |        |         | 
|------------------------------------ | -------------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------- | 
|                                     |                      |                        
|                                     |                      | Year Ended December 31,
|                                     |                      |                        
|                                     |                      | 2004                    |        | 2003   |  | 2002
|                                     |                      |                         |        |        |  |     
|                                     |                      |                        
|                                     |                      | (In thousands)         
|MasterCard/ Visa assessment and fees |                      | $                       | 6,862  |        |  | $    | 9,243  |        |  | $ | 13,869 |        
|Credit card fraud losses             |                      |                         | 2,258  |        |  |      | 3,821  |        |  |   | 8,647  |        
|Enhancement services claims          |                      |                         | 1,709  |        |  |      | 1,700  |        |  |   | 6,991  |        
|Legal fees                           |                      |                         | 7,241  |        |  |      | 6,033  |        |  |   | 3,092  |        
|Collection and risk management       |                      |                         | 13,635 |        |  |      | 15,268 |        |  |   | 10,316 |        
|Other professional fees              |                      |                         | 20,043 |        |  |      | 26,995 |        |  |   | 42,191 |        
|General and administrative expenses  |                      |                         | 23,930 |        |  |      | 29,455 |        |  |   | 37,623 |        
|Other                                |                      |                         | 13,882 |        |  |      |       |        |  |   |       |        
|                                     |                      |                         |        |        |  |      |        |        |  |   |        |        
|                                     | Total other expenses |                         | $      | 89,560 |  |      | $      | 92,515 |  |   | $      | 122,729 | 
|                                     |                      |                         |        |        |  |      |        |        |  |   |        |        

The other component of Other expenses
for the year ended December 31, 2004 is primarily comprised
of expenses related to the two debt prepayments made during the
fourth quarter of 2004, including prepayment penalties and the
write-off of capitalized debt costs.

Total expenses in 2004 included
$5.2 million that primarily was related to employment
severance costs resulting from workforce reductions. Total
expenses in 2003 also included $8.3 million related
to workforce reductions, $20.8 million in write-downs of
excess property, equipment and operating leases, a
$22.0 million write-off of purchased portfolio premium, a
$5.1 million write-off of capitalized commitment fees, and
a $33.0 million loss recognized during 2003 related to the
sale of the Banks portfolio of CDs, which are classified
as Asset impairment, lease write-off and severance
on the consolidated statements of income.

The effective income tax rate was 39.7% for the
year ended December 31, 2004 compared to 32.0% for the year
ended December 31, 2003. The effective tax rates for both
years differ from statutory tax rates due to tax credit
utilization limitations and permanent and other differences
between tax accounting rules and GAAP. The 2004 effective tax
rate was higher than statutory tax rates because there was
pre-tax income. The 2003 effective tax rate was lower than
statutory tax rates because there was a pre-tax loss.



| |                                            
| | -------------------------------------------
| | Retained Interests in Loans
    Securitized

Our credit card receivables are primarily funded
through asset-backed securitizations. Upon securitization, we
remove the applicable credit card loans from our balance sheet
and recognize the retained interests in loans securitized at
their allocated carrying value in accordance with Statement of
Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial

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##### Table of Contents



Assets and Extinguishments of
Liabilities  a replacement of FASB Statement
No. 125 (SFAS No. 140).
We sell some assets to the Metris Master Trust at the inception
of a securitization series. We also sell receivables to the
Metris Master Trust on a daily basis to replenish principal
receivable balances that have decreased due to payments and
charge-offs. The difference between the allocated carrying value
and the proceeds from the assets sold is recorded as a gain or
loss on sale and is included in Securitization
income. At the same time, we recognize Retained
interests in loans securitized. The Retained
interests in loans securitized are financial assets
measured at fair value consistent with trading securities in
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities,and
include our contractual retained interests, an interest-only
strip receivable, excess transferors interests, and spread
accounts receivable. The contractual retained interests consist
of non-interest bearing securities held by us. The interest-only
strip receivable represents the present value of the excess of
the estimated future interest and fee collections expected to be
generated by the securitized loans over the period such loans
are projected to be outstanding over the interest paid on
investor certificates, credit losses, contractual servicing fees
and other expenses. The excess transferors interests
represent principal receivables held in the Metris Master Trust
in excess of the contractual retained interests. Spread accounts
receivable represent restricted cash reserve accounts held by
the Metris Master Trust that can be used to fund payments due
securitization investors and credit enhancers if cash flows are
insufficient. Cash held in spread accounts is released to us if
certain conditions are met or a securitization series terminates
with amounts remaining in the related spread accounts. The fair
value of the Retained interests in loans securitized
is determined through estimated cash flows discounted at rates
that reflect the level of subordination, the projected repayment
term and the credit risk of the securitized loans.


The following summarizes our Retained
interests in loans securitized as of December 31,
2004 and December 31, 2003.

Table 2:     Retained
Interests in Loans Securitized

|                                        |  |                |         |              |  |   |         | 
|--------------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                                        |  | December 31,   |         | December 31,
|                                        |  | 2004           |         | 2003        
|                                        |  |                |         |             
|                                        |  |               
|                                        |  | (In thousands)
|Contractual retained interests          |  | $              | 537,945 |              |  | $ | 542,014 | 
|Excess transferors interests           |  |                | 105,237 |              |  |   | 48,775  | 
|Interest-only strip receivable          |  |                | 82,672  |              |  |   | 16,039  | 
|Spread accounts receivable              |  |                | 58,281  |              |  |   | 230,073 | 
|                                        |  |                |         |              |  |   |         | 
|Retained interests in loans securitized |  | $              | 784,135 |              |  | $ | 836,901 | 
|                                        |  |                |         |              |  |   |         | 

Retained interests in loans
securitized were $784.1 million as of
December 31, 2004, a $52.8 million or 6.3% decrease
from $836.9 million as of December 31, 2003. The
decrease is due to a $171.8 million decrease in spread
accounts receivable and a $4.1 million decrease in
contractual retained interests, partially offset by a
$66.6 million increase in interest-only strip receivable
and a $56.5 million increase in excess transferors
interests.

The contractual retained interests were
$537.9 million as of December 31, 2004, a
$4.1 million or 0.8% decrease from $542.0 million as
of December 31, 2003. The decrease resulted from a
$1.4 billion reduction in principal receivables in the
Metris Master Trust and the resulting lower contractual retained
interest held, partially offset by a 1.65% increase in the
weighted average enhancement level and a 4.3-month decrease in
the weighted average months-to-maturity on the outstanding
series of securities issued by the Metris Master Trust. The
increase in the weighted average enhancement level is due to
higher enhancement requirements on recent ABS transactions
compared to series that matured during the year.

The excess transferors interests were
$105.2 million as of December 31, 2004, a
$56.4 million or 115.6% increase from $48.8 million as
of December 31, 2003, due primarily to the pay-down of our
variable funding conduits.

37



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The interest-only strip receivable was
$82.7 million as of December 31, 2004, a
$66.7 million or 416.9% increase from $16.0 million as
of December 31, 2003. The increase is due to higher
projected excess spreads from the receivables held in the Metris
Master Trust, partially offset by a lower aggregate amount of
receivables. The projected excess spread has increased from
0.50% at December 31, 2003 to 2.58% at December 31,
2004 primarily due to a decrease in the projected principal
default rates, partially offset by net yield compression
resulting from a projected increase in interest rates.

Spread accounts receivable were
$58.3 million as of December 31, 2004, a
$171.8 million or 74.7% decrease from $230.1 million
as of December 31, 2003. The decrease is due to restricted
cash released to us during 2004 resulting from improved excess
spreads in the Metris Master Trust, partially offset by an
increase in non-performance-based reserves resulting from
securitization transactions during the year.

For more information on restricted cash, see the
Off Balance Sheet Arrangementssection of
Managements Discussion and Analysis of Financial
Condition and Results of Operationson pages 43-45.

At least quarterly, we adjust our valuation of
the Retained interests in loans securitized to
reflect changes in the amount and expected timing of future cash
flows. The significant factors that affect the timing and amount
of cash flows relate to collateral assumptions, which include
payment rate, default rate, gross yield and discount rate. These
values can, and will, vary as a result of changes in the amount
and timing of the cash flows and the underlying economic
assumptions. The discount rates used to estimate the fair value
of the retained interest assets are commensurate with the risk
associated with the underlying expected future cash flows.
Indicators of the level of risk inherent in the portfolio
include delinquency and loss rates and expectations surrounding
interest rates. Other factors that would impact the risk
assessment include changes to our corporate capital structure,
corporate ratings, or securitization enhancement levels. Changes
in expectations as to the level of risk related to future cash
flows may result in changes to the discount rate assumption.
(See Critical Accounting Estimateson pages 31-33
for more information on the valuation of the Retained
interests in loans securitized.)

The significant assumptions we use in estimating
the fair value of the Retained interests in loans
securitized are as follows:

|                                           |                                |              |      |      |   |  |      |      |  
|------------------------------------------ | ------------------------------ | ------------ | ---- | ---- | - |  | ---- | ---- | -
|                                           |                                |             
|                                           |                                | At          
|                                           |                                |             
|                                           |                                | December 31,
|                                           |                                |             
|                                           |                                | 2004         |      | 2003
|                                           |                                |              |      |     
|Monthly payment rate                       |                                |              | 7.6  | %    |   |  | 6.7  | %   
|Gross yield(1)                             |                                |              | 25.9 | %    |   |  | 25.4 | %   
|Annual interest expense and servicing fees |                                |              | 5.0  | %    |   |  | 4.2  | %   
|Annual gross principal default rate        |                                |              | 18.4 | %    |   |  | 20.7 | %   
|Discount rate:                             |                                |              |      |      |   |  |      |     
|                                           | Contractual retained interests |              |      | 16.0 | % |  |      | 16.0 | %
|                                           | Excess transferors interests  |              |      | 16.0 | % |  |      | 16.0 | %
|                                           | Interest-only strip receivable |              |      | 30.0 | % |  |      | 30.0 | %
|                                           | Spread accounts receivable     |              |      | 16.0 | % |  |      | 15.3 | %
|Weighted average months-to-maturity        |                                |              | 20.1 |      |   |  | 24.5 |     
|Weighted average enhancement level(2)      |                                |              | 12.1 | %    |   |  | 9.9  | %   



---



|    |                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes expected cash flows from finance
    charges, late and overlimit fees, debt waiver premiums and bad
    debt recoveries. Gross yield for purposes of estimating fair
    value does not include cash flows from interchange income or
    cash advance fees.
|   
|(2) | Includes contractual retained interest and
    required minimum spread reserve deposits.                                                                                                                                                                             

38



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##### Table of Contents



During the third quarter of 2004 the Company made
the following assumption changes to the valuation of retained
interests:



| |   |                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The discount associated with the variable
    conduits has been determined the remaining life of the conduit
    financing facility. Previously, the discount was determined
    assuming 24 months to maturity.                                                                                                                                                                     
|
| |  | Requisite deposits used to cover interest expense
    during the accumulation period associated with the defeasance of
    maturing term asset back securities are assumed to have a market
    value of zero. Previously, the model estimated the amount of
    funds that would be returned to the company, and discounted this
    amount at 15.25% to determine the market value.
|
| |  | Interest earned on spread accounts receivable is
    now calculated as a monthly cash flow in the valuation of the
    spread reserve deposits using the current LIBOR yield curve.
    Previously, the discount rate applied to the spread reserve
    deposits was reduced to account for the interest income earned.                                                              
|
| |  | The weighted average months to maturity used to
    determine the market value of the contractual retained interest
    is based on a 365 day calendar, versus a 360 day
    calendar in previous models.                                                                                                                                                                            

At December 31, 2004, the sensitivity of the
current fair value of the Retained interests in loans
securitized to immediate 10% and 20% adverse changes are
as follows (in millions):

|                                           |  |                              |      |             |  |   |       | 
|------------------------------------------ |  | ---------------------------- | ---- | ----------- |  | - | ----- | 
|                                           |  |                             
|                                           |  | Adverse Impact on Fair Value
|                                           |  |                             
|                                           |  | 10% Adverse                  |      | 20% Adverse
|                                           |  | Change                       |      | Change     
|                                           |  |                              |      |            
|Annual discount rate                       |  | $                            | 20.1 |             |  | $ | 39.6  | 
|Monthly payment rate                       |  |                              | 83.6 |             |  |   | 212.4 | 
|Gross yield                                |  |                              | 85.7 |             |  |   | 197.0 | 
|Annual interest expense and servicing fees |  |                              | 8.0  |             |  |   | 15.7  | 
|Annual gross principal default rate        |  |                              | 63.2 |             |  |   | 124.3 | 

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



| |                        
| | -----------------------
| | Credit Card Receivables

Our delinquency and net loan charge-off rates at
any point in time reflect, among other factors, the credit risk
of loans, the average age of our various credit card account
portfolios, the success of our collection efforts and general
economic conditions. The average age of our credit card
portfolio affects the stability of delinquency and loss rates.
In order to minimize losses, we continue to focus our resources
on refining our credit underwriting standards for new credit
card accounts and on collection efforts.

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



| |              
| | -------------
| | Delinquencies

It is our policy to accrue interest and fee
income on all credit card accounts, except in limited
circumstances, until we charge-off the account. In November
2002, we stopped billing late fees once an account became
greater than 120 days contractually delinquent, and in
March 2003, we stopped billing overlimit fees once an account
became greater than 120 days contractually delinquent.
Past-due accounts are re-aged to current status only after we
receive at least three minimum payments or the equivalent
cumulative amount. Accounts can only be re-aged to current
status once every 12 months and two times

39



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##### Table of Contents



every five years. Accounts entering long-term
fixed payment debt management programs may receive a re-age upon
entering the debt management program (workout
re-age). Workout re-ages can only occur after receipt of
at least three consecutive minimum monthly payments, or the
equivalent cumulative amount, as defined by the debt management
program. Workout re-ages can only occur once in five years, in
accordance with FFIEC guidelines. Table 3 presents the
delinquency trends of our owned credit card loan portfolio as of
the dates specified below.


Table
3:     Loan Delinquency

|                                |       |                        |        |       |  |              |     |       |   |              |         |        |  |  |     |      |   |   |         |       |  |  |     |     |  
|------------------------------- | ----- | ---------------------- | ------ | ----- |  | ------------ | --- | ----- | - | ------------ | ------- | ------ |  |  | --- | ---- | - | - | ------- | ----- |  |  | --- | --- | -
|                                |       | December 31,           |        | % of  |  | December 31, |     | % of  |   | December 31, |         | % of  
|                                |       | 2004                   |        | Total |  | 2003         |     | Total |   | 2002         |         | Total 
|                                |       |                        |        |       |  |              |     |       |   |              |         |       
|                                |       |                       
|                                |       | (Dollars in thousands)
|Loans outstanding               |       | $                      | 68,230 |       |  |              | 100 | %     |   | $            | 128,615 |        |  |  | 100 | %    |   | $ | 846,417 |       |  |  | 100 | %  
|Loans contractually Delinquent: |       |                        |        |       |  |              |     |       |   |              |         |        |  |  |     |      |   |   |         |       |  |  |     |    
|30 to 59 days                   |       |                        | 1,750  |       |  |              | 2.6 | %     |   |              | 5,015   |        |  |  | 3.9 | %    |   |   | 1,673   |       |  |  | 0.2 | %  
|60 to 89 days                   |       |                        | 1,722  |       |  |              | 2.5 | %     |   |              | 4,888   |        |  |  | 3.8 | %    |   |   | 2,121   |       |  |  | 0.2 | %  
|90 or more days                 |       |                        | 4,309  |       |  |              | 6.3 | %     |   |              | 10,406  |        |  |  | 8.1 | %    |   |   | 4,082   |       |  |  | 0.5 | %  
|                                |       |                        |        |       |  |              |     |       |   |              |         |        |  |  |     |      |   |   |         |       |  |  |     |    
|                                | Total |                        | $      | 7,781 |  |              |     | 11.4  | % |              | $       | 20,309 |  |  |     | 15.8 | % |   | $       | 7,876 |  |  |     | 0.9 | %
|                                |       |                        |        |       |  |              |     |       |   |              |         |        |  |  |     |      |   |   |         |       |  |  |     |    

As part of our overall portfolio management, we
sell portfolios of delinquent credit card accounts to third
parties from time to time. These transactions have a direct
effect on our delinquency dollars and rates. Excluding the sale
of $72.5 million of 2-cycle plus delinquent assets in
December 2002, the delinquency ratio would have been 8.7% as of
December 31, 2002. The decrease in the delinquency rate as
of December 31, 2004, versus December 31, 2003,
primarily reflects the sale of approximately $38 million in
Credit card loans during the second quarter of 2004,
which had a higher average delinquency rate than the remainder
of the owned loan portfolio, and improvement in the overall
credit quality of the remaining receivables in the owned
portfolio.



| |                
| | ---------------
| | Net Charge-offs

Net charge-offs are the principal amount of
losses from cardholders unwilling or unable to make minimum
payments, bankrupt cardholders and deceased cardholders, less
current period recoveries. Net charge-offs exclude accrued
finance charges and fees, which are charged-off against the
applicable revenue line item at the time of charge-off. We
charge-off and take accounts as a loss (i) within
60 days following formal notification of bankruptcy;
(ii) at the end of the month during which most unsecured
accounts become contractually 180 days past due;
(iii) at the end of the month during which unsecured
accounts that have entered into a credit counseling or other
similar programs and later become contractually 120 days
past due; (iv) at the end of the month during which secured
accounts become contractually 120 days past due after first
reducing the loss by the secured deposit; or (v) within
120 days of notification of the death of a cardholder.

In the owned portfolio, charge-offs due to
bankruptcies were $4.3 million, representing 14.9% of total
gross charge-offs, for the year ended December 31, 2004,
and $32.6 million, representing 42.5% of total gross
charge-offs, for the year ended December 31, 2003. We enter
into forward-flow agreements with third parties for the sale of
a majority of charged-off accounts. When appropriate, we place
accounts with external collection agencies or attorneys.

40



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##### Table of Contents



Table 4 presents our owned net charge-offs for
the periods indicated as reported in the consolidated financial
statements:

Table 4:     Net
Charge-offs

|                          |  |                         |        |      |  |      |         |   |  |   |           |  
|------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  | - | --------- | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  | 2004                    |        | 2003 |  | 2002
|                          |  |                         |        |      |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Average credit card loans |  | $                       | 87,317 |      |  | $    | 518,705 |   |  | $ | 1,305,127 |  
|Net charge-offs           |  |                         | 30,267 |      |  |      | 137,015 |   |  |   | 325,351   |  
|                          |  |                         |        |      |  |      |         |   |  |   |           |  
|Net charge-off ratio      |  |                         | 34.7   | %    |  |      | 26.4    | % |  |   | 24.9      | %
|                          |  |                         |        |      |  |      |         |   |  |   |           |  

The sale of portfolios of delinquent credit card
accounts and other credit card portfolios has a direct effect on
our charge-off dollars and rates as any reduction in the
loans value is reflected as a charge-off. During 2004, we
sold approximately $38 million in loans that resulted in a
charge-off of $10.2 million. During 2003, we sold two
portfolios of delinquent accounts approximating
$69.0 million, resulting in a $62.3 million
charge-off. During 2002, we sold two portfolios of delinquent
accounts approximating $120 million, resulting in a
$101.5 million charge-off.

We also take accounts as a loss when they are
identified as fraud losses no later than 90 days from
discovery. These charge-offs are included in Other
expenses on the consolidated statements of income.



| |                                            
| | -------------------------------------------
| | Provision and Allowance for Loan
    Losses

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

In order to mitigate credit losses, we have
focused our collection efforts to aggressively address any
potential delinquency increases. We also leverage debt
management programs and credit counseling services for
qualifying cardholders that are experiencing payment
difficulties. These programs include reduced interest rates,
reduced or suspended fees and other incentives to induce the
customer to continue making payments. The amount of owned
receivables in debt management programs was $3.5 million or
5.1% of total Credit card loans as of
December 31, 2004, compared to $6.2 million or 4.8% of
total Credit card loans as of December 31,
2003. All delinquent receivables in debt management programs are
included in Table 3.

The Provision for loan losses for the
year ended December 31, 2004, was income of
$4.8 million, compared to an expense of $126.6 million
in 2003. The decrease in the Provision for loan
losses in 2004 compared to 2003 primarily reflects the
decrease in the owned Credit card loans during the
year and the improved credit quality of our portfolio of owned
credit card loans. The Allowance for loan losses was
$12.4 million as of December 31, 2004, versus
$45.5 million as of December 31, 2003.

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

Balance Sheet Analysis



| |                       
| | ----------------------
| | Short-Term Investments

Short-term investments were
$43.1 million as of December 31, 2004 a decrease of
$30.0 million or 41.0% from $73.1 million as of
December 31, 2003. The decrease resulted primarily from a
re-allocation of Short-term investments to
Available for sale securities due to more attractive
investment returns on those securities.

41



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##### Table of Contents





| |                              
| | -----------------------------
| | Available for Sale Securities

Available for sale securities were
$306.4 million as of December 31, 2004, an increase of
$258.4 million or 538.3% from $48.0 million as of
December 31, 2003. The increase was due to an overall
increase in excess cash available for investment that resulted
from the net release of $218.6 million in cash primarily as
a result of improved performance of the Metris Master Trust.



| |                  
| | -----------------
| | Credit Card Loans

Credit card loans were
$68.2 million as of December 31, 2004, a decrease of
$60.4 million or 47.0% from $128.6 million as of
December 31, 2003. The decrease is primarily the result of
loans charged off and the sale of $38.0 million in
Credit card loans to a third party during the second
quarter of 2004.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment, net was
$24.1 million at December 31, 2004, a decrease of
$9.6 million or 28.5% from $33.7 million as of
December 31, 2003. The decrease resulted primarily from
normal depreciation of property and equipment during the year.



| |                                                                
| | ---------------------------------------------------------------
| | Other Receivables Due from Credit Card
    Securitizations, Net

Other receivables due from credit card
securitizations, net were $68.0 million at
December 31, 2004, a decrease of $12.7 million or
15.7% from $80.7 million as of December 31, 2003. This
decrease resulted primarily from a $1.5 billion decrease in
the receivables held by the Metris Master Trust between the two
dates.



| |             
| | ------------
| | Other Assets

Other assets were $63.2 million
as of December 31, 2004, a decrease of $18.6 million
or 22.7% from $81.8 million at December 31, 2003. This
decrease resulted primarily from a $7.7 million decrease in
the fair value of interest rate caps, a $6.8 million
decrease in current taxes receivable, and a $5.0 million
decrease in other receivable amounts.



| |     
| | ----
| | Debt

Debt was $373.6 million as of
December 31, 2004, an increase of $23.2 million or
6.6% from $350.4 million at December 31, 2003. The
increase resulted from our new $300 million term loan that
matures in May 2007, largely offset by the paydown of
$95.3 million outstanding on our $125 million term
loan which came due June 2004, and the early repayment of our
$100 million Senior Notes which were due in November 2004.
Also, during the fourth quarter of 2004, we made two optional
prepayments totaling $75 million on our $300 million
term loan.



| |                
| | ---------------
| | Deferred Income

Deferred income was
$10.5 million as of December 31, 2004, a decrease of
$7.6 million or 42.0% from $18.1 million as of
December 31, 2003. The decrease primarily related to the
continued decline in the number of memberships retained by us
following the sale of our membership club and warranty business
in the third quarter of 2003.



| |                                           
| | ------------------------------------------
| | Accrued Expenses and Other
    Liabilities

Accrued expenses and other
liabilities were $109.0 million at December 31,
2004, an increase of $33.0 million or 43.4% from
$76.0 million at December 31, 2003. The increase was
due primarily to a $33.1 million increase in current taxes
payable and a $15.6 million increase in our deferred tax
liability, partially offset by a $15.7 million decrease in
accrued compensation and other accrued expenses.

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##### Table of Contents



Off Balance Sheet Arrangements

Our operations are funded primarily through
asset-backed securitizations of principal receivables on credit
card accounts. Our securitizations involve selling pools of both
current and future principal receivable balances on credit card
accounts. We retain the servicing of the receivables, and we
also currently maintain a qualified back-up servicer. Our
securitizations are treated as sales under GAAP and the
receivables are removed from our consolidated balance sheets
(except for any retained interests in the securitization). We
primarily securitize receivables by selling them to the Metris
Master Trust, a proprietary, non-consolidated trust, through
public and private asset-backed securitizations or multi-seller
commercial paper conduits.

The Metris Master Trust was formed in May 1995
pursuant to a pooling and servicing agreement, as amended. MRI,
one of our special purpose entity subsidiaries, transfers
receivables in designated accounts to the Metris Master Trust.
The Metris Master Trust may, and does from time to time, issue
securities that represent undivided interests in the receivables
in the Metris Master Trust. These securities are issued by
series, and each series typically has multiple classes of
securities. Each series, or class within a series, may have
different terms. The different classes of an individual series
are structured to obtain specific debt ratings. As of
December 31, 2004, 12 series of publicly and privately
issued securities were outstanding. MRI currently retains the
most subordinated class of securities in each series, and all
other classes are issued to non-affiliated third parties. These
securities are interests in the Metris Master Trust only and are
not obligations of MRI, MCI, Direct Merchants Bank or any other
subsidiary of the Company. The interest in the Metris Master
Trust not represented by any series of securities issued by the
Metris Master Trust also belongs to MRI and is known as the
transferors interest.

Generally, each series involves an initial
reinvestment period, referred to as the revolving
period, in which principal payments on receivables
allocated to such series are returned to MRI and reinvested in
new principal receivables arising in the accounts. After the
revolving period ends, principal payments allocated to the
series are then accumulated and used to repay the investors.
This period is referred to as the accumulation
period, and is followed by a controlled amortization
period wherein investors are repaid their invested amount.
Currently, the Metris Master Trust does not have any series in
an accumulation period or controlled amortization period. The
scheduled accumulation and amortization periods are set forth in
the securitization agreements governing each series. However,
all series set forth certain events by which amortization can be
accelerated, referred to as early amortization.
Reasons early amortization could occur include: (i) one- or
three-month average of portfolio collections, less principal and
finance charge charge-offs, financing costs and servicing costs,
would drop below levels between 0.0% and 1.0%;
(ii) negative transferors interest within the Metris
Master Trust, or; (iii) failure to obtain funding during an
accumulation period for a maturing series. New receivables in
designated accounts cannot be funded from a series that is in
early amortization. We do not currently have any series that are
in early amortization.

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

The cash restricted from release is limited to
the amount of excess spread generated in the Metris Master Trust
on a cash basis. During periods of lower excess spreads, the
maximum amount of cash required to be restricted in the Metris
Master Trust may not be generated. During those periods, all
excess cash normally released to MRI will be restricted from
release. Once the maximum amount of cash required to be
restricted is restricted from release or excess spreads improve,
cash can again be released to MRI. Table 5 presents the cash
restricted from release as of December 31, 2004 and 2003,
respectively.

43



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##### Table of Contents



Table 5:     Cash
Restricted from Release

|                                              |                       |                |        |        |  |   |         |         | 
|--------------------------------------------- | --------------------- | -------------- | ------ | ------ |  | - | ------- | ------- | 
|                                              |                       |               
|                                              |                       | December 31,  
|                                              |                       |               
|                                              |                       | 2004           |        | 2003  
|                                              |                       |                |        |       
|                                              |                       |               
|                                              |                       | (In thousands)
|Cash restricted due to performance            |                       | $              | 36,367 |        |  | $ | 255,373 |        
|Cash restricted due to corporate debt ratings |                       |                | 13,187 |        |  |   | 21,429  |        
|Cash restricted due to defeasance of 2001-1   |                       |                |       |        |  |   | 12,200  |        
|Other non-performance based cash restricted   |                       |                | 37,770 |        |  |   | 16,902  |        
|                                              |                       |                |        |        |  |   |         |        
|                                              | Total cash restricted |                | $      | 87,324 |  |   | $       | 305,904 | 
|                                              |                       |                |        |        |  |   |         |        

The $218.6 million decrease in cash
restricted due to performance between December 31, 2003 and
December 31, 2004, is primarily due to improving excess
spreads in the Metris Master Trust. The $20.9 million
increase in other cash restricted due to non-performance between
December 31, 2003 and December 31, 2004, is due to the
additional enhancement required on new transactions. The
$8.2 million decrease in cash restricted for corporate debt
ratings between December 31, 2003 and December 31,
2004, resulted from the maturity of Series 1999-1. We
expect the release of a significant portion of the remaining
performance based restricted cash during 2005.

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

|                             |  |                    |             | 
|---------------------------- |  | ------------------ | ----------- | 
|Cash Basis Net Excess Spread |  | Maximum Restricted
|                             |  |                   
|greater than 5.5%            |  |                    |            | 
|5.0%  5.5%                  |  |                    | 0.5%  1.0% | 
|4.5%  5.0%                  |  |                    | 0.5%  1.5% | 
|4.0%  4.5%                  |  |                    | 1.0%  2.0% | 
|3.5%  4.0%                  |  |                    | 1.0%  3.0% | 
|3.0%  3.5%                  |  |                    | 1.0%  4.0% | 
|less than 3.0%               |  |                    | 4.5%  5.0% | 

On a monthly basis, each series is allocated its
share of finance charge and fee collections, which are used to
pay investors interest on their securities, pay their share of
servicing fees and reimburse investors for their share of losses
due to charge-offs. Amounts remaining may be deposited in cash
accounts of the Metris Master Trust as additional protection for
future losses. Once each of these obligations is fully met,
remaining finance charge collections, if any, are returned to
us. Principal receivables held by the Metris Master Trust were
$6.1 billion and $7.5 billion as of December 31,
2004 and 2003, respectively.

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

|                                           |  |                         |           |      |  |      |       |   |  |   |           |  |  |  |       |   |  |   |           |  |  |  |       |  
|------------------------------------------ |  | ----------------------- | --------- | ---- |  | ---- | ----- | - |  | - | --------- |  |  |  | ----- | - |  | - | --------- |  |  |  | ----- | -
|                                           |  |                        
|                                           |  | Year Ended December 31,
|                                           |  |                        
|                                           |  |                         |           |      |  |     
|                                           |  | 2004                    |           | 2003 |  | 2002
|                                           |  |                         |           |      |  |     
|                                           |  |                         |           |      |  |      |       |   |  |  
|                                           |  |                        
|                                           |  | (Dollars in thousands) 
|Gross yield(1)                             |  | $                       | 1,800,905 |      |  |      | 26.94 | % |  | $ | 2,367,452 |  |  |  | 26.84 | % |  | $ | 2,564,009 |  |  |  | 26.41 | %
|Annual principal defaults                  |  |                         | 1,219,529 |      |  |      | 18.20 | % |  |   | 1,803,022 |  |  |  | 20.41 | % |  |   | 1,587,095 |  |  |  | 16.28 | %
|                                           |  |                         |           |      |  |      |       |   |  |   |           |  |  |  |       |   |  |   |           |  |  |  |       |  
|Net portfolio yield                        |  |                         | 581,376   |      |  |      | 8.74  | % |  |   | 564,430   |  |  |  | 6.43  | % |  |   | 976,914   |  |  |  | 10.13 | %
|Annual interest expense and servicing fees |  |                         | 255,649   |      |  |      | 4.02  | % |  |   | 316,992   |  |  |  | 3.78  | % |  |   | 406,826   |  |  |  | 4.36  | %
|                                           |  |                         |           |      |  |      |       |   |  |   |           |  |  |  |       |   |  |   |           |  |  |  |       |  
|Net excess spread                          |  | $                       | 325,727   |      |  |      | 4.72  | % |  | $ | 247,438   |  |  |  | 2.65  | % |  | $ | 570,088   |  |  |  | 5.77  | %
|                                           |  |                         |           |      |  |      |       |   |  |   |           |  |  |  |       |   |  |   |           |  |  |  |       |  



---



|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes cash flows from finance charges, late,
    overlimit and cash advance fees, bad debt recoveries,
    interchange income and debt waiver fees.

44



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Revenues and expenses generated from the Metris
Master Trust are found in the Securitization income
and Servicing income on securitized receivables
lines in the consolidated statements of income. Our interests
retained in credit card receivables sold to the Metris Master
Trust are recorded at fair value in Retained interests in
loans securitized on the consolidated balance sheets. The
cash flows generated from the Metris Master Trust are presented
in Note 6 to the consolidated financial statements on
pages 71-72 of this Report.

Maintaining adequate liquidity in the Metris
Master Trust is, and will continue to be, at the forefront of
our business objectives. Additional information regarding off
balance sheet arrangements is set forth under Liquidity,
Funding and Capital Resourcesbelow. Additional information
regarding the accounting for our Retained interests in
loans securitized can be found in
Note 2  Significant Accounting Policieson pages 61-68 of this Report and on pages 31-33
under Critical Accounting Estimates.

Liquidity, Funding and Capital
Resources

One of our primary financial goals is to maintain
an adequate level of liquidity through active management of our
assets and liabilities. Liquidity management is a dynamic
process, affected by changes in the characteristics of our
assets and liabilities and short- and long-term interest rates
and by the capital markets. We use a variety of financing
sources to manage liquidity, funding and interest rate risks.
Table 6 summarizes our funding and liquidity as of
December 31, 2004 and 2003, respectively.

Table
6:     Liquidity, Funding and Capital
Resources

|                              |  |                   |         |                   |  |              |         |       |  |       |         |              |  |   |         |  |  |   |        |  |  |   |         | 
|----------------------------- |  | ----------------- | ------- | ----------------- |  | ------------ | ------- | ----- |  | ----- | ------- | ------------ |  | - | ------- |  |  | - | ------ |  |  | - | ------- | 
|                              |  |                   |         |                  
|                              |  | December 31, 2004 |         | December 31, 2003
|                              |  |                   |         |                  
|                              |  | DMCCB             |         | Other             |  | Consolidated |         | DMCCB |  | Other |         | Consolidated
|                              |  |                   |         |                   |  |              |         |       |  |       |         |             
|                              |  |                  
|                              |  | (In thousands)   
|Cash and due from banks       |  | $                 | 25,340  |                   |  | $            | (142    | )     |  | $     | 25,198  |              |  | $ | 29,399  |  |  | $ | 2,677  |  |  | $ | 32,076  | 
|Federal funds sold            |  |                   | 22,450  |                   |  |              |        |       |  |       | 22,450  |              |  |   | 25,300  |  |  |   |       |  |  |   | 25,300  | 
|Short-term investments        |  |                   | 12,599  |                   |  |              | 30,471  |       |  |       | 43,070  |              |  |   | 53,854  |  |  |   | 19,280 |  |  |   | 73,134  | 
|Available for sale securities |  |                   | 107,138 |                   |  |              | 199,271 |       |  |       | 306,409 |              |  |   | 17,975  |  |  |   | 30,000 |  |  |   | 47,975  | 
|                              |  |                   |         |                   |  |              |         |       |  |       |         |              |  |   |         |  |  |   |        |  |  |   |         | 
|Total liquid assets           |  | $                 | 167,527 |                   |  | $            | 229,600 |       |  | $     | 397,127 |              |  | $ | 126,528 |  |  | $ | 51,957 |  |  | $ | 178,485 | 
|                              |  |                   |         |                   |  |              |         |       |  |       |         |              |  |   |         |  |  |   |        |  |  |   |         | 

Our Available for sale securities
portfolio consists solely of investments in AA/ Aa2 or higher
rated auction rate securities. Auction rate securities are term
debt and/or equity securities earning income at a rate that is
frequently reset to reflect current market conditions via an
auction. The following table illustrates the fair value of term
debt and equity auction rate securities outstanding at
December 31, 2004 and 2003. Equity securities available for
sale are those auction rate securities with perpetual maturity
dates.

|                                    |                       |                        |         |         |        |   |        |        |   | 
|----------------------------------- | --------------------- | ---------------------- | ------- | ------- | ------ | - | ------ | ------ | - | 
|                                    |                       |                       
|                                    |                       | Fair Value and Cost of
|                                    |                       | Available for Sale    
|                                    |                       | Securities Outstanding
|                                    |                       | as of December 31,    
|                                    |                       |                       
|Debt Securities                     |                       | 2004                   |         | 2003   
|                                    |                       |                        |         |        
|                                    |                       |                       
|                                    |                       | (In thousands)        
|Legal Final Maturity Date           |                       |                        |         |         |        |   |        |       
|                                    |                       | Less than 1 year       |         | $       | 10,000 |   |        | $      |  | 
|                                    |                       | 1 year  5 years       |         |         | 10,000 |   |        |        |  | 
|                                    |                       | 5 years  10 years     |         |         |       |   |        |        |  | 
|                                    |                       | Over 10 years          |         |         | 24,420 |   |        |        |  | 
|                                    |                       |                        |         |         |        |   |        |       
|                                    | Total Debt Securities |                        | $       | 44,420  |        |   | $      |       |  
|                                    |                       |                        |         |         |        |   |        |       
|                                    | Equity Securities     |                        |         | 261,989 |        |   |        | 47,975 |  
|                                    |                       |                        |         |         |        |   |        |       
|Total Available for Sale Securities |                       | $                      | 306,409 |         |        | $ | 47,975 |       
|                                    |                       |                        |         |         |        |   |        |       

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Actual maturies of our available for sale debt
securities will vary from their legal final maturity because on
each reset date, we buy and sell securities at par. As of
December 31, 2004 and 2003, reset dates ranged from 2 to
31 days. At all times we invest in securities with reset
dates of 90 days or less. The auction rate securities
market is large and liquid, with over $250 billion of
securities currently outstanding. However, in the event of a
failed auction, we may not be able to sell securities until the
next successful auction or legal final maturity.

The following tables detail our outstanding on-
and off-balance sheet funding as of December 31, 2004 and
2003, including any unused capacity as of those dates.

|                          |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |         |     | 
|------------------------- | ----------------------------------------------------------------------------------- | ----------------- | - | ----------------- | ------- | ----------- | - | -------- | --- |  | - | --------- | ------- |  | - | ------- | --- | 
|                          |                                                                                     |                   |   |                  
|                          |                                                                                     | December 31, 2004 |   | December 31, 2003
|                          |                                                                                     |                   |   |                  
|                          |                                                                                     |                   |   | Unused            |         |             |   | Unused  
|                          |                                                                                     | Outstanding       |   | Capacity          |         | Outstanding |   | Capacity
|                          |                                                                                     |                   |   |                   |         |             |   |         
|                          |                                                                                     |                  
|                          |                                                                                     | (In thousands)   
|On-balance sheet funding  |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |        
|                          | 10% senior notes  November 2004                                                    |                   |   |                  |         |             |   | N/A      |     |  |   | 100,000   |         |  |   | N/A     |    
|                          | 10.125% senior notes  July 2006                                                    |                   |   | 148,624           |         |             |   | N/A      |     |  |   | 147,724   |         |  |   | N/A     |    
|                          | Term loan  June 2004                                                               |                   |   |                  |         |             |   | N/A      |     |  |   | 101,679   |         |  |   | N/A     |    
|                          | Term loan  May 2007                                                                |                   |   | 225,000           |         |             |   | N/A      |     |  |   |          |         |  |   | N/A     |    
|                          | Other                                                                               |                   |   |                  |         |             |   | N/A      |     |  |   | 1,045     |         |  |   | N/A     |    
|                          | Deposits                                                                            |                   |   | 3,407             |         |             |   | N/A      |     |  |   | 6,262     |         |  |   | N/A     |    
|                          |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |        
|                          |                                                                                     | Subtotal          |   |                   | 377,031 |             |   |          | N/A |  |   |           | 356,710 |  |   |         | N/A | 
|Off-balance sheet funding |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |        
|Metris Master Trust:      |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |        
|                          | Term asset-backed securitizations with various
    maturities through February 2009 |                   |   | 4,950,000         |         |             |   |         |     |  |   | 6,400,000 |         |  |   |        |    
|                          | Conduits  matured March 2004                                                       |                   |   |                  |         |             |   |         |     |  |   | 196,000   |         |  |   | 654,000 |    
|                          | Amortizing term series  matured
    February 2004                                  |                   |   |                  |         |             |   |         |     |  |   | 99,200    |         |  |   |        |    
|                          | Conduits  maturing April 2006                                                      |                   |   | 360,000           |         |             |   | 840,000  |     |  |   |          |         |  |   |        |    
|                          |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |        
|                          | Subtotal                                                                            |                   |   | 5,310,000         |         |             |   | 840,000  |     |  |   | 6,695,200 |         |  |   | 654,000 |    
|                          |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |        
|                          | Total                                                                               |                   | $ | 5,687,031         |         |             | $ | 840,000  |     |  | $ | 7,051,910 |         |  | $ | 654,000 |    
|                          |                                                                                     |                   |   |                   |         |             |   |          |     |  |   |           |         |  |   |        

We have the following term asset-backed
securitizations outstanding as of December 31, 2004:

|                            |  |                |           |                                |  |                                                
|--------------------------- |  | -------------- | --------- | ------------------------------ |  | -----------------------------------------------
|Asset-Backed Securitization |  | Amount         |           | Expected Final Payment Date(s)
|                            |  |                |           |                               
|                            |  | (In thousands) |           |                               
|Series 2002-3               |  | $              | 900,000   |                                |  | May 20, 2005 (defeased on February 1,
    2005)
|Series 2000-3               |  |                | 500,000   |                                |  | October 20, 2005 and November 21, 2005         
|Series 1999-3               |  |                | 300,000   |                                |  | November 21, 2005                              
|Series 2001-2               |  |                | 750,000   |                                |  | May 22, 2006 and June 20, 2006                 
|Series 1999-2               |  |                | 500,000   |                                |  | July 20, 2006                                  
|Series 2004-2               |  |                | 600,000   |                                |  | October 20, 2006                               
|Series 2004-1               |  |                | 200,000   |                                |  | April 20, 2007                                 
|Series 2002-4               |  |                | 600,000   |                                |  | May 21, 2007                                   
|Series 2002-1               |  |                | 300,000   |                                |  | January 20, 2009 and February 20, 2009         
|Series 2002-2               |  |                | 300,000   |                                |  | January 20, 2009 and February 20, 2009         
|                            |  |                |           |                                |  |                                                
|Total                       |  | $              | 4,950,000 |                                |  |                                                
|                            |  |                |           |                                |  |                                                

Our term asset-backed securitizations require the
accumulation of principal cash payments received by the Metris
Master Trust to fund the repayment of these obligations at the
time of maturity. We

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typically achieve this by either obtaining a
paired series funding vehicle or defeasing the maturing bonds
with draw downs on existing conduit facilities or other funding
vehicles prior to the start of the accumulation period.


The weighted-average interest rates on
outstanding funding as of December 31, 2004 and 2003, were
as follows:

|                                |  |                   |      |                   |  |  |      |  
|------------------------------- |  | ----------------- | ---- | ----------------- |  |  | ---- | -
|                                |  | December 31, 2004 |      | December 31, 2003
|                                |  |                   |      |                  
|Senior Secured Credit Agreement |  |                   |     |                   |  |  | 16.6 | %
|Senior Notes  2004             |  |                   |     |                   |  |  | 10.0 | %
|Senior Notes  2006             |  |                   | 10.2 | %                 |  |  | 10.3 | %
|Term Loan  2007                |  |                   | 11.3 | %                 |  |  |     |  
|Other                           |  |                   |     |                   |  |  | 12.3 | %
|Deposits                        |  |                   | 2.3  | %                 |  |  | 2.2  | %
|Metris Master Trust             |  |                   | 2.4  | %                 |  |  | 1.9  | %

The 50-basis-point increase in the
weighted-average interest rate on the Metris Master Trust was
primarily due to the increase in LIBOR, which is the index rate
for these funding vehicles. LIBOR increased from 1.1% as of
December 31, 2003, to 2.4% as of December 31, 2004.

During 2003, we had net proceeds of approximately
$0.7 billion, from transfers of credit card loans to the
Metris Master Trust from Direct Merchants Bank. We used cash
generated from these transactions to reduce borrowings and to
fund our credit card loan portfolio. Currently, we assign all
new eligible accounts to the Metris Master Trust shortly after
the time of origination.

As of December 31, 2004 and 2003, we had
$5.5 million and $5.9 million, respectively, in
letters of credit issued under a letter of credit facility
agreement. We have pledged 110% collateral against our letters
of credit, which is classified in Other assets on
the consolidated balance sheets.

We are bound by certain covenants under the
Credit Agreement. Subject to certain exceptions, the
$300 million Senior Secured Credit Agreement (Credit
Agreement) requires the Company to prepay portions of the
loan from net proceeds received from the issuance, in whatever
form, of debt or equity by the Company or any of its affiliates,
any insurance settlement or litigation award, and from any sale
of assets (other than excluded asset sales) by the Company in
excess of $10,000,000 in any fiscal year. We are in compliance
with all covenants under the Credit Agreement. The Company has
pledged substantially all of its assets as collateral under the
Credit Agreement other than the assets of the Bank and Metris
Receivables, Inc.

As a result of recent interpretive changes to the
treatment of Auction Rate Securities, we executed a Second
Amendment to our Credit Agreement dated as of March 1, 2005
(a copy has been filed with this Form 10-K). Although no
covenant breach was determined by any parties to the credit
agreement, the Second Amendment provided for a waiver to the
extent that any covenant breach may have occurred as a result of
investments in Auction Rate Securities.

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Our contractual cash obligations as of
December 31, 2004, were as follows:

|                                    |  |                |        |             |  |            |         |           |  |       |        |  |  |   |       |  |  |   |         | 
|----------------------------------- |  | -------------- | ------ | ----------- |  | ---------- | ------- | --------- |  | ----- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                                    |  | Less           |        |             |  |            |         |           |  |      
|                                    |  | Than           |        | One to      |  | Four to    |         | Over Five |  |      
|                                    |  | One Year       |        | Three Years |  | Five Years |         | Years     |  | Total
|                                    |  |                |        |             |  |            |         |           |  |      
|                                    |  |               
|                                    |  | (In thousands)
|Long-term debt                      |  | $              |       |             |  | $          | 373,624 |           |  | $     |       |  |  | $ |      |  |  | $ | 373,624 | 
|Operating leases                    |  |                | 8,283  |             |  |            | 19,524  |           |  |       | 5,669  |  |  |   | 7,643 |  |  |   | 41,119  | 
|Contractual purchase obligations(1) |  |                | 45,517 |             |  |            | 101,585 |           |  |       | 63,081 |  |  |   |      |  |  |   | 210,183 | 
|Deposits                            |  |                | 3,407  |             |  |            |        |           |  |       |       |  |  |   |      |  |  |   | 3,407   | 
|                                    |  |                |        |             |  |            |         |           |  |       |        |  |  |   |       |  |  |   |         | 
|Total                               |  | $              | 57,207 |             |  | $          | 494,733 |           |  | $     | 68,750 |  |  | $ | 7,643 |  |  | $ | 628,333 | 
|                                    |  |                |        |             |  |            |         |           |  |       |        |  |  |   |       |  |  |   |         | 



---



|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes purchase obligations for goods and
    services covered by non-cancellable contracts and contracts
    containing cancellation fees.

In addition to contractual cash obligations,
open-to-buy on credit card accounts as of December 31,
2004, was $6.7 billion. While these amounts represent the
total lines of credit available to our customers, we have not
experienced, and do not anticipate, that all of our customers
will exercise their entire available credit line at any given
point in time. We also have the right to increase, reduce,
cancel, alter or amend the terms for those available lines of
credit at any time. See tables on page 9 of this Report for
further information.

In May 2004, we paid off the $95.3 million
outstanding on our $125 million term loan due June 2004 and
closed on a $300 million term loan that matures in May
2007. The proceeds of the loan were used in part for early
repayment of our $100 million 10% Senior Notes that
came due in November 2004. We used the balance of the proceeds
from the loan for general corporate purposes. In November and
December 2004, we made two optional prepayments of
$50 million and $25 million, respectively, to the
lenders on our term loan. The lenders were paid a contractual 5%
prepayment premium as a result of the prepayments.

During 2004, we increased our conduit capacity to
$1.2 billion. This facility is a two-year conduit financing
facility, maturing in April 2006. We utilized this conduit
during the year to defease $1.75 billion in maturing
asset-backed securitizations. We expect our receivable funding
needs for the remainder of 2005 and 2006 to be covered by
portfolio attrition and future asset-backed securitizations. We
have $1.35 billion in remaining MBIA commitment to provide
insurance coverage on future asset-backed securities
transactions, of which $1.05 billion currently is
available. The remaining $300 million of commitment will
become available to us when the Series 1999-3 matures in
2005.

Subsequent to December 31, 2004, we issued
$52.8 million of asset-backed securities from the Metris
Secured Note Trust 2004-2. The floating-rate
class D secured notes were issued January 26, 2005 and
mature on October 20, 2006, and were rated Ba2 and BB+ by
Moodys Investors Service, Inc. (Moodys)
and Fitch Inc. (Fitch), respectively. These notes
were priced at one-month LIBOR plus 325 basis points.
Proceeds from the issuance were used in part to make an optional
$50 million prepayment on our unsecured 10.125% senior
notes, which mature July 2006. Call premium on this prepayment
was approximately 2.5% of the principal prepaid, or
approximately $1.3 million, to the holders of the notes.
The remaining principal outstanding on the original unsecured
senior notes is $100 million after this prepayment. In
addition, effective February 16, 2005, we exercised our
option to reduce our conduit capacity from $1.2 billion to
$1.0 billion.

The Companys 1998 through 2002 federal
income tax returns are under examination by the Internal Revenue
Service (IRS). Both the Company and the IRS have
proposed adjustments involving the tax treatment of certain
credit card fees as original issue discount (OID).
These fees include late, overlimit, interchange, cash advance
and annual fees. Although these fees are primarily reported as
income when billed for financial reporting purposes, we believe
the fees create OID that should be deferred and amortized over
the remaining life of the underlying credit card loans for tax
purposes. As of December 31,

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2004, and December 31, 2003, the Company had
deferred cumulative federal income tax related to this issue of
approximately $129 million and $179 million,
respectively. The decrease is primarily attributable to the
decrease in managed receivables. Our treatment of these fees is
consistent with that of many other United States credit card
issuers. Furthermore, we believe our treatment of these fees is
appropriate based on relevant technical authority and specific
guidance issued by the IRS regarding late fees. However, the
timing and amount of any final resolution remain uncertain. We
continue to work with the IRS to resolve this matter and do not
expect to pay any incremental tax related to this issue in the
next 12 months, nor do we expect the resolution of this
matter to have a material adverse effect on future earnings.


Convertible Preferred Stock

We have $514.5 million of Perpetual
Convertible Preferred Stock outstanding. The preferred
stockholders are entitled to receive quarterly dividends payable
in additional shares of preferred stock. The preferred
stockholders are entitled to receive cash dividends paid on our
common stock based on the number of shares of common stock into
which the preferred stock would convert on the record date of
the dividend. Under certain circumstances, the preferred
stockholders may also receive, in lieu of a dividend in
additional shares of preferred stock, dividends payable in cash,
property or other securities that are economically equivalent to
additional shares of preferred stock if the Board of Directors
determines that paying dividends in-kind would be inadvisable
and the payment of such other dividend is approved by 80% of the
Board of Directors, which 80% must include a majority of the
directors elected by the preferred stockholders (or, if there
are no such directors, must be approved by holders of a majority
of the preferred stock). In addition, if a change in control
were to occur, and an offer of redemption is not made, a change
in control trigger event occurs and, among other things, the
preferred stock dividend rate increases to 11.5% before
December 9, 2008, and 15% thereafter, and dividends are due
quarterly in cash. See further discussion in
Note 10  Convertible Preferred Stockon
pages 73-74 of this Report.

Our secured and unsecured debt is rated by
Moodys, Standard & Poors Rating Services
(S&P) and Fitch. Factors affecting the various
ratings include the overall health of the global/ national
economy, specific economic conditions impacting the subprime
consumer finance industry, and our overall financial
performance, including earnings, credit losses, delinquencies,
excess spreads in the Metris Master Trust and our overall
liquidity. Certain of our term asset-backed securitizations
require the restriction of cash if our corporate debt ratings go
below certain levels. The table below illustrates the debt
ratings of MCI as of December 31, 2004:

|                      |  |         |      |       |  |       |     |  |  |  |    | 
|--------------------- |  | ------- | ---- | ----- |  | ----- | --- |  |  |  | -- | 
|                      |  | Moodys |      | S & P |  | Fitch
|                      |  |         |      |       |  |      
|Senior unsecured debt |  |         | Caa2 |       |  |       | CCC |  |  |  | B- | 

During 2004, our corporate debt ratings, the
Metris Master Trusts ratings and the ratings of Direct
Merchants Bank were upgraded. These upgrades reflect the
continuing improvement we experienced in 2004, including
improved performance in the Metris Master Trust, and have had a
positive effect on our ability to obtain funding. In addition,
access to funding may be at a more favorable cost and on terms
more favorable to us than those recently available as a result
of the improvement in our financial performance and asset
quality. Currently, our outlooks from Moodys, S&P and
Fitch are review for possible upgrade,
positive and stable, respectively.

Capital Adequacy

As of December 31, 2004 the Companys
Total Stockholders Equity was
$947.3 million, or 13.9% of total managed assets, compared
to $909.2 million or 11.2% of total managed assets as of
December 31, 2003.

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

The Federal Reserve Actimposes 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

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restrictions on any extensions of credit to us or
other covered transactions, such as certain purchases of assets,
with us and our affiliates. Such restrictions limit Direct
Merchants Banks ability to lend to us and our affiliates.
Additionally, Direct Merchants Bank is limited in its ability to
pay dividends to us and our affiliates in accordance with the
national bank dividend rules and the Modified Operating
Agreement with the OCC.


Direct Merchants Bank is subject to certain
capital adequacy guidelines adopted by the OCC. Furthermore,
FFIEC guidelines indicate that an institution with a
concentration in subprime lending should hold one and one-half
to three times the normal minimum capital required. At both
December 31, 2004 and 2003, 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.

Direct Merchants Bank and MCI have entered into a
Capital Assurance and Liquidity Maintenance Agreement
(CALMA) that requires MCI to make such capital
infusions or provide the Bank with financial assistance so as to
permit the Bank to meet its liquidity requirements.

Direct Merchants Bank also entered into a
Liquidity Reserve Deposit Agreement (LRDA) under
which the Bank has established restricted deposits with
third-party depository institutions for the purpose of
supporting Direct Merchants Banks funding needs. These
deposits are invested in short-term liquid assets and are
classified on the consolidated balance sheets as the
Liquidity reserve deposit. As of December 31,
2004 and 2003, the balance in the liquidity reserve accounts was
$79.7 million and $80.2 million, respectively.

On December 11, 2003, MCI and Direct
Merchants Bank entered into a Modified Operating Agreement with
the OCC, which replaced the original Operating Agreement dated
March 18, 2003. The Modified Operating Agreement requires,
among other things, that:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Bank must maintain minimum capital at the
    dollar amount reported on its September 30, 2003 Call
    Report ($213 million), unless otherwise approved by the OCC.                             
|
| |  | The Bank may continue to pay dividends in
    accordance with applicable statutory and regulatory
    requirements, provided capital remains at the required level.                                  
|
| |  | The Bank must maintain liquid assets at the
    greater of $35 million or 100% of the average highest daily
    funding requirement for managed receivables ($31.5 million
    at December 31, 2004).
|
| |  | The Bank must comply with the terms of the LRDA
    and the CALMA.                                                                                                                                   
|
| |  | MCI must comply with the terms of the CALMA.                                                                                                                                                         

The Company believes it is currently in
compliance with all of the terms of the Modified Operating
Agreement. If the OCC were to conclude that the Bank failed to
adhere to any provisions of the Modified Operating Agreement,
the OCC could pursue various enforcement options. If any of
those options were to be pursued by the OCC, it could have a
material adverse effect on our operations or capital position.

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

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

50



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##### Table of Contents



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

|                          |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|------------------------- |  | ------ | ------- | ----------- |  | ----------- | ----- | ----- |  | ------ | ------ | ----- |  |  | --- | - |  | - | ------ |  |  |  | ---- | -
|                          |  |        |         |             |  |             |       |       |  |       
|                          |  |        |         |             |  | To be       |       |      
|                          |  |        |         | Adequately  |  | To Be Well 
|                          |  | Actual |         | Capitalized |  | Capitalized
|                          |  |        |         |             |  |            
|                          |  | Amount |         | Ratio       |  | Amount      |       | Ratio |  | Amount |        | Ratio
|                          |  |        |         |             |  |             |       |       |  |        |        |      
|As of December 31, 2004   |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Total capital             |  | $      | 247,382 |             |  |             | 113.6 | %     |  | $      | 17,417 |       |  |  | 8.0 | % |  | $ | 21,771 |  |  |  | 10.0 | %
|(to risk-weighted assets) |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Tier 1 capital            |  |        | 244,555 |             |  |             | 112.3 | %     |  |        | 8,709  |       |  |  | 4.0 | % |  |   | 13,063 |  |  |  | 6.0  | %
|(to risk-weighted assets) |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Tier 1 capital            |  |        | 244,555 |             |  |             | 70.5  | %     |  |        | 13,875 |       |  |  | 4.0 | % |  |   | 17,344 |  |  |  | 5.0  | %
|(to average assets)       |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  

|                          |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|------------------------- |  | ------ | ------- | ----------- |  | ----------- | ----- | ----- |  | ------ | ------ | ----- |  |  | --- | - |  | - | ------ |  |  |  | ---- | -
|                          |  |        |         |             |  |             |       |       |  |       
|                          |  |        |         |             |  | To be       |       |      
|                          |  |        |         | Adequately  |  | To Be Well 
|                          |  | Actual |         | Capitalized |  | Capitalized
|                          |  |        |         |             |  |            
|                          |  | Amount |         | Ratio       |  | Amount      |       | Ratio |  | Amount |        | Ratio
|                          |  |        |         |             |  |             |       |       |  |        |        |      
|As of December 31, 2003   |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Total capital             |  | $      | 240,868 |             |  |             | 140.0 | %     |  | $      | 13,760 |       |  |  | 8.0 | % |  | $ | 17,200 |  |  |  | 10.0 | %
|(to risk-weighted assets) |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Tier 1 capital            |  |        | 238,328 |             |  |             | 138.6 | %     |  |        | 6,880  |       |  |  | 4.0 | % |  |   | 10,320 |  |  |  | 6.0  | %
|(to risk-weighted assets) |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  
|Tier 1 capital            |  |        | 238,328 |             |  |             | 70.2  | %     |  |        | 13,589 |       |  |  | 4.0 | % |  |   | 16,987 |  |  |  | 5.0  | %
|(to average assets)       |  |        |         |             |  |             |       |       |  |        |        |       |  |  |     |   |  |   |        |  |  |  |      |  

Newly Issued Accounting
Pronouncements

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

In January 2003, the FASB also issued
Interpretation No. 46, Consolidation of Variable
Interest Entitiesin an effort to expand upon and
strengthen existing accounting guidance that addresses when a
company should include in its financial statements the assets,
liabilities and activities of another entity. FASB
Interpretation No. 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of
the entitys residual returns or both. Interpretation
No. 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in
which it has a significant variable interest. Interpretation
No. 46 provides a specific exemption for entities
qualifying as Qualified Special Purpose Entities as described in
SFAS No. 140. Our non-consolidated entity, the Metris
Master Trust, is a Qualified Special Purpose Entity under the
definition in SFAS No. 140. The adoption of this
Interpretation did not have a material impact on our financial
statements.

In April 2003, the FASB issued
SFAS No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities.SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities under
SFAS No. 133. The adoption of SFAS No. 149
did not impact our financial statements.

In May 2003, the FASB issued
SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for
classification and

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measurement of certain instruments with
characteristics of both liabilities and equity. It requires that
financial instruments within its scope be classified as a
liability (or asset in some circumstances). Many of those
instruments were classified as equity under previous accounting
guidance. The adoption of SFAS No. 150 did not impact
our financial statements.


In March 2004, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 03-6 Participating Securities and the
two-class method under FASB Statement 128, (the
Consensus or EITF 03-6). For
purposes of calculating earnings per share, the Consensus
requires net income to be reduced by the amount of dividends
declared in the current period for each class of stock and by
the contractual amount of dividends or other participation
payments that are paid or accumulated for the current period.
Undistributed earnings for the period are allocated to
participating securities based on the contractual participation
rights of the security to share in those current earnings
assuming all earnings for the period are distributed. Our
preferred stockholders have contractual participation rights on
a converted basis that are equivalent to those of common
stockholders. Therefore, we allocate undistributed earnings to
preferred and common stockholders based on their respective
ownership percentage on a converted basis as of the end of the
period. We adopted this Consensus effective June 30, 2004,
and all periods presented have been restated to conform with the
Consensus.

In December 2004, the FASB issued
SFAS No. 123 (Revised 2004), Share-Based
Payment (SFAS 123R). SFAS 123R is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25 Accounting for
Stock Issued to Employees and its related
implementation guidance. SFAS 123R focuses primarily on
accounting for transactions in which an entity obtains employee
services through share-based payment transactions.
SFAS 123R requires a public entity to measure the cost of
employee services received in exchange for the award of equity
instruments based on the fair value of the award at the date of
grant. The cost will be recognized over the period during which
an employee is required to provide services in exchange for the
award. SFAS 123R is effective as of the beginning of the
first interim or annual reporting period that begins after
June 15, 2005. The Company intends to adopt the provisions
of SFAS 123R effective July  1, 2005. The impact
to compensation expense related to the equity instruments
outstanding as of December 31, 2004 is not expected to be
material, however, the final impact to compensation expense will
be dependent on the number of equity instruments granted during
any year, including their timing and vesting period, and the
method used to calculate the fair value of the awards, among
other factors.



| |                                                                           
| | --------------------------------------------------------------------------
| | Year Ended December 31, 2003, Compared
    to Year Ended December 31, 2002

Net loss for the year ended December 31,
2003, was $147.7 million, or $3.27 per diluted common
share, compared to a net loss of $1.6 million, or
$0.66 per diluted common share, for the year ended
December 31, 2002.

Securitization income was
$173.4 million for the year ended December 31, 2003, a
$150.1 million or 46.4% decrease from $323.5 million
for the year ended December 31, 2002. This decrease was
primarily due to a $161.7 million loss on replenishment of
receivables to the Metris Master Trust, a $230.9 million
decrease in interest-only revenue due to a $2.6 billion
reduction in receivables held in the Metris Master Trust, and a
311-basis-point decrease in average excess spread in the Metris
Master Trust. This was partially offset by a $270.4 million
improvement in the change in fair market value of Retained
interests in loans securitized caused primarily by the
flattening of excess spreads in the Metris Master Trust.

Servicing income on securitized
receivables was $176.6 million for the year ended
December 31, 2003, an $18.6 million or 9.5% decrease
from $195.2 million for the year ended December 31,
2002. The decrease in servicing income was caused by a
$0.9 billion reduction in average principal receivables
held by the Metris Master Trust during 2003.

Credit card loan and other interest
income was $90.5 million for the year ended
December 31, 2003, a $138.9 million or 60.5% decrease
from $229.4 million for the year ended December 31,
2002. The decrease was due to a reduction of $786.4 million
in average Credit card loans.

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Credit card loan fees, interchange, and
other income was $79.5 million for the year ended
December 31, 2003, an $83.7 million or 51.3% decrease
from $163.2 million for the year ended December 31,
2002. The decrease was primarily due to a decrease in average
Credit card loans of $786.4 million over the
12-month period. Further this decline was an amendment to the
core transaction documents of the Metris Master Trust agreement
as of May 2002, resulting in interchange income earned on
receivables held in the Metris Master Trust being recorded as a
contribution to the excess spread of the Metris Master Trust.

Provision for loan losses was
$126.6 million for the year ended December 31, 2003, a
$93.2 million or 42.4% decrease from $219.8 million
for the year ended December 31, 2002. The decrease in
Provision for loan losses primarily reflects the
decrease in Credit card loans during the year,
partially offset by the increased delinquency rate as of
December 31, 2003. The Allowance for loan
losses was $45.5 million as of December 31,
2003, versus $90.3 million as of December 31, 2002.

Credit card account and other product
solicitation and marketing expenses were
$93.3 million for the year ended December 31, 2003, an
$80.0 million or 46.2% decrease from $173.3 million
for the year ended December 31, 2002. The decrease resulted
primarily from the Companys decisions to decrease the size
of its managed credit card portfolio through lower account
acquisitions, and to exit the membership club and warranty
business. New account acquisitions were approximately 316,000 in
2003, compared to 696,000 in 2002.

Employee compensation was
$175.5 million for the year ended December 31, 2003, a
$35.3 million or 16.7% decrease from $210.8 million
for the year ended December 31, 2002. The decrease resulted
primarily from the elimination of 1,025 positions during 2003
and the sale of our membership club and warranty business during
the third quarter of 2003.

Data processing services and
communications was $68.7 million for the year ended
December 31, 2003, a $15.2 million or 18.1% decrease
from $83.9 million for the year ended December 31,
2002. The decrease resulted primarily from the reduction in our
managed credit card portfolio between the two periods.

Credit protection claims expense was
$30.9 million for the year ended December 31, 2003, a
$13.7 million or 30.7% decrease from $44.6 million for
the year ended December 31, 2002. The decrease resulted
primarily from a reduction in receivable balances covered by our
debt waiver products.

Occupancy and equipment was
$36.6 million for the year ended December 31, 2003, an
$11.4 million or 23.8% decrease from $48.0 million for
the year ended December 31, 2002, due primarily to the
decline in facility requirements as a result of a reduction in
staffing requirements discussed above.

Asset impairments, lease write-offs and
severance were $56.2 million for the year ended
December 31, 2003, a $28.5 million or 102.9% increase
from $27.7 million for the year ended December 31,
2002. During 2003, we recorded $8.3 million for workforce
reductions, $20.8 million in write-downs of excess
property, equipment, and operating leases, a $22.0 million
write-off of purchased portfolio premium on Credit card
loans sold in the third and fourth quarters of 2003, and a
$5.1 million write-off of commitment fees related to a
backup financing facility entered into in March of 2003 with
Thomas H. Lee Equity Fund IV, L.P. Comparatively, in 2002,
we recorded a write-down of $10.6 million for portfolios of
charged-off loans purchased in 2001 and 2000, a
$17.1 million write-down of excess property, equipment,
operating leases, and the then-pending sale of our Arizona
facility.

Other expense was $92.5 million
for the year ended December 31, 2003, a $30.2 million
or 24.6% decrease from $122.7 million for the year ended
December 31, 2002. The decrease over the prior period was
primarily due to a reduction of $7.0 million in marketing
and origination costs on our retail note program, an
$7.0 million reduction from the write-off of certain
uncollectible receivables during 2002, and an overall shrinking
of the core business.

Included in the 2003 results are a one-time gain
of $84.8 million resulting from the sale of our membership
club and warranty business, a one-time loss of
$117.2 million related to the sale of two credit

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card loan portfolios totaling $1.1 billion,
and a one-time loss of $33.0 million related to the sale of
Deposits during 2003.


The effective income tax rate was 32.0% for the
year ended December 31, 2003 compared to 659.7% for the
year ended December 31, 2002. The 2003 effective tax rate
was low relative to statutory tax rates because we were not able
to record the full benefit of the 2003 pre-tax loss due to tax
credit utilization limitations and the effects of permanent and
other differences between tax rules and GAAP. The 2002 effective
tax rate is high relative to statutory tax rates primarily due
to the effects of nondeductible expenses, state minimum taxes
and low pre-tax income.

Selected Operating Data  Managed
Basis

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

The following information is not in conformity
with GAAP; however, we believe the information is relevant to
understanding our overall financial condition and results of
operations.

Table 7:     Selected
Operating Data  Managed Basis

|                                |  |                         |           |           |  |      |            |      |  |      |            |              |  |   |            |   |  |   |           |   |  |  |       |   
|------------------------------- |  | ----------------------- | --------- | --------- |  | ---- | ---------- | ---- |  | ---- | ---------- | ------------ |  | - | ---------- | - |  | - | --------- | - |  |  | ----- | --
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  |                         |           | Four-Year
|                                |  |                         |           | Compound 
|                                |  | 2004                    |           | 2003      |  | 2002 |            | 2001 |  | 2000 |            | Decline Rate
|                                |  |                         |           |           |  |      |            |      |  |      |            |             
|                                |  |                        
|                                |  | (In thousands)         
|Gross active accounts           |  |                         | 2,177     |           |  |      | 2,482      |      |  |      | 3,398      |              |  |   | 3,871      |   |  |   | 3,920     |   |  |  | (13.7 | )%
|Year-end loans(1)               |  | $                       | 6,580,220 |           |  | $    | 8,131,831  |      |  | $    | 11,420,186 |              |  | $ | 11,991,784 |   |  | $ | 9,345,631 |   |  |  | (8.4  | )%
|Average loans(1)                |  |                         | 7,217,190 |           |  |      | 10,047,580 |      |  |      | 11,850,927 |              |  |   | 10,419,280 |   |  |   | 8,081,638 |   |  |  | (2.8  | )%
|Year-end assets                 |  |                         | 6,791,478 |           |  |      | 8,098,524  |      |  |      | 11,431,203 |              |  |   | 12,124,528 |   |  |   | 9,806,249 |   |  |  | (8.8  | )%
|Average assets                  |  |                         | 7,374,172 |           |  |      | 10,023,893 |      |  |      | 11,972,958 |              |  |   | 10,656,156 |   |  |   | 8,332,500 |   |  |  | (3.0  | )%
|Return on average assets        |  |                         | 0.5       | %         |  |      | N/A        |      |  |      | N/A        |              |  |   | 2.3        | % |  |   | 2.3       | % |  |  |       |   
|Common equity to managed assets |  |                         | 13.9      | %         |  |      | 11.2       | %    |  |      | 9.3        | %            |  |   | 9.4        | % |  |   | 9.0       | % |  |  |       |   
|Delinquency ratio(2)            |  |                         | 9.1       | %         |  |      | 11.1       | %    |  |      | 11.0       | %            |  |   | 9.4        | % |  |   | 8.2       | % |  |  |       |   
|Net charge-off ratio(3)         |  |                         | 16.2      | %         |  |      | 20.2       | %    |  |      | 15.5       | %            |  |   | 10.9       | % |  |   | 9.6       | % |  |  |       |   



---



|    |                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Included in period end and average loans are
    principal receivables, accrued finance charges and net deferred
    acquisition costs.                                    
|   
|(2) | The delinquency ratio represents managed credit
    card loans that were at least 30 days contractually past
    due at year-end as a percentage of year-end managed loans.
|   
|(3) | The net charge-off ratio reflects actual
    principal amounts charged-off, less recoveries, as a percentage
    of average managed credit card loans.                     

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Table 8:     Managed
Loan Portfolio

|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |     |      |  
|------------------------------------------- | --------------- | ---------------------- | --------- | ------- | ------- | ---- | ---- | ----- | --- | ---- | ---------- | ------- | ------- |  | ---- | --- | ---- | - | ---------- | ------- | --------- |  | ---- | --- | ---- | -
|                                            |                 |                       
|                                            |                 | December 31,          
|                                            |                 |                       
|                                            |                 |                        |           | % of    |         |      |      | % of  |     |      |            | % of   
|                                            |                 | 2004                   |           | Total   |         | 2003 |      | Total |     | 2002 |            | Total  
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |        
|                                            |                 |                       
|                                            |                 | (Dollars in thousands)
|Credit card loans                           |                 | $                      | 68,230    |         |         |      |      |       |     | $    | 128,615    |         |         |  |      |     |      | $ | 846,417    |         |           |  |      |    
|Receivables held by the Metris Master Trust |                 |                        | 6,511,990 |         |         |      |      |       |     |      | 8,003,216  |         |         |  |      |     |      |   | 10,573,769 |         |           |  |      |    
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|Total managed loan portfolio                |                 | $                      | 6,580,220 |         |         |      |      |       |     | $    | 8,131,831  |         |         |  |      |     |      | $ | 11,420,186 |         |           |  |      |    
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|Loans contractually Delinquent:             |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|                                            | 30 to 59 days   |                        |           | 149,355 |         |      |      | 2.3   | %   |      |            | 242,571 |         |  |      | 3.0 | %    |   |            | 359,223 |           |  |      | 3.1 | %   
|                                            | 60 to 89 days   |                        |           | 133,477 |         |      |      | 2.0   | %   |      |            | 204,621 |         |  |      | 2.5 | %    |   |            | 285,448 |           |  |      | 2.5 | %   
|                                            | 90 or more days |                        |           | 318,768 |         |      |      | 4.8   | %   |      |            | 454,884 |         |  |      | 5.6 | %    |   |            | 615,278 |           |  |      | 5.4 | %   
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|                                            |                 | Total                  |           | $       | 601,600 |      |      |       | 9.1 | %    |            | $       | 902,076 |  |      |     | 11.1 | % |            | $       | 1,259,949 |  |      |     | 11.0 | %
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|Average balances:                           |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|Credit card loans                           |                 | $                      | 87,317    |         |         |      |      |       |     | $    | 518,705    |         |         |  |      |     |      | $ | 1,305,127  |         |           |  |      |    
|Receivables held by the Metris Master Trust |                 |                        | 7,129,873 |         |         |      |      |       |     |      | 9,528,875  |         |         |  |      |     |      |   | 10,545,800 |         |           |  |      |    
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|Total managed loan portfolio                |                 | $                      | 7,217,190 |         |         |      |      |       |     | $    | 10,047,580 |         |         |  |      |     |      | $ | 11,850,927 |         |           |  |      |    
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    
|Net charge-offs                             |                 | $                      | 1,166,091 |         |         |      | 16.2 | %     |     | $    | 2,033,852  |         |         |  | 20.2 | %   |      | $ | 1,840,786  |         |           |  | 15.5 | %  
|                                            |                 |                        |           |         |         |      |      |       |     |      |            |         |         |  |      |     |      |   |            |         |           |  |      |    

The decrease in the managed delinquency rates as
of December 31, 2004, over December 31, 2003 and 2002,
is due primarily to improved collection activity, tighter credit
line management, improved performance of our credit card loans
resulting from more stringent underwriting criteria, and lower
pricing on new accounts. Also impacting the delinquency rate
improvement was the improvement in the overall economy,
specifically the improvement in the average national
unemployment rates, which decreased from 6.0% at
December 31, 2003 to 5.5% at December 31, 2004. The
slight increase in the delinquency rate between
December 31, 2002 and 2003, primarily reflects the sale of
$72.5 million of 2-cycle plus delinquent assets in December
2002. Excluding the sale, the managed delinquency ratio would
have been 11.6% as of December 31, 2002. Also impacting the
delinquency ratio increase between 2002 and 2003 was an increase
in the average national unemployment rate from 5.8% at
December 31, 2002, to 6.0% at December 31, 2003.

Managed net charge-offs for the year ended
December 31, 2004, decreased 400 basis points over the
year ended December 31, 2003. Consistent with above, this
decrease resulted from overall improvement in the quality of the
credit card portfolio. The slight increase in the net charge-off
rate for full-year 2003 compared to full-year 2002 resulted
primarily from the residual impacts of the 2001 credit line
increase program. Charge-offs resulting from this program peaked
during the first quarter of 2003, and we have experienced steady
improvement in the managed charge-off rates since that time. As
part of our overall portfolio management, we sell portfolios of
delinquent credit card accounts. These transactions have a
direct effect on charge-off dollars and rates as any reduction
in the loans value is reflected as a charge-off. We sold
$72.5 million of 2-cycle plus delinquent assets in December
2002. The effect of this transaction is included in the
delinquency and net charge-off rates presented in Table 8.

We charge-off bankrupt accounts within
60 days of formal notification. Charge-offs due to
bankruptcies were $396.1 million or 24.7% of total managed
gross charge-offs for the year ended December 31, 2004,
$681.1 million or 28.1% of total managed gross charge-offs
for the year ended December 31, 2003, and
$654.5 million or 33.7% of total managed gross charge-offs
at December 31, 2002. In addition to those bankrupt
accounts that were charged-off, we received formal notification
of $46.7 million, $65.8 million, and
$106.3 million of managed bankrupt accounts that had not
been charged-off as of December 31, 2004, 2003 and 2002,
respectively.

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Total managed loans decreased $1.5 billion
to $6.6 billion as of December 31, 2004, compared to
$8.1 billion as of December 31, 2003, and
$11.4 billion at December 31, 2002. These decreases
were due primarily to the sale of credit card loans to third
parties during 2003, reductions in credit lines and tighter
underwriting standards, fewer new accounts and increased
charged-off receivables. The amount of credit card loans in debt
management programs was $540.3 million or 8.2% of total
managed loans as of December 31, 2004, compared with
$695.4 million or 8.6% of managed loans as of
December 31, 2003. All delinquent receivables in debt
management programs are included in Table 8.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures
    About Market Risk

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

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

Our primary assets are Credit card
loans and Retained interests in loans
securitized. The majority of our owned receivables and the
receivables held by the Metris Master Trust are priced at rates
indexed to the variable Prime Rate. We fund Credit card
loans through a combination of cash flows from operations,
bank loans, long-term debt and equity issuances. Our securitized
loans are held by the Metris Master Trust and bank-sponsored
multi-seller commercial paper conduits and investors in term
series securities issued by the Metris Master Trust, which have
committed funding primarily indexed to variable commercial paper
rates and LIBOR. Long-term debt includes $150 million at a
fixed interest rate and $225 million indexed to LIBOR. At
December 31, 2004 and 2003, none of the securities issued
out of the Metris Master Trust and conduit funding of
securitized receivables were funded with fixed rate securities.

In an interest rate environment with rates
significantly above current rates, we partially mitigate the
negative impact on earnings from higher interest expense by
entering into interest rate cap contracts and, to a lesser
extent, through fixed rate funding.

The approach we use to quantify interest rate
risk is a sensitivity analysis, which we believe best reflects
the risk inherent in our business. This approach calculates the
impact on net income before income taxes from an instantaneous
and sustained change in interest rates of 200 basis points.
In this analysis interest rates on our floating rate debt are
not allowed to decrease below 0%. Assuming that we take no
counteractive measures, as of December 31, 2004, a
200 basis point increase in interest rates affecting our
floating rate financial instruments, including both debt
obligations and receivables, would result in a decrease in net
income before income taxes of approximately $21.5 million
over the next 12 months relative to a base case, compared
to an approximate $23.0 million decrease as of
December 31, 2003. A decrease of 200 basis points
would result in an increase in net income before income taxes of
approximately $35.9 million as of December 31, 2004,
compared to an increase of $36.5 million as of
December 31, 2003.

The change in sensitivity for the 200-basis-point
increase is primarily due to a smaller receivable base and a
higher percentage of receivables impacted by a rate increase.
The change in sensitivity for the 200-basis-point decrease is
due to a larger decrease from interest expense, as well as
replacing $202 million of long-term fixed rate debt with
$225 million of long-term debt indexed to LIBOR. As LIBOR
rates have increased, the impact on interest costs from falling
rates has increased since interest costs can fall further before
hitting 0%.

56



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

METRIS COMPANIES INC. AND
SUBSIDIARIES

Consolidated Balance Sheets


|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |           |        |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------- | ----------------- | --------- | ------ | --------- | ------- | --------- | ------ | --------- | 
|                                                                                                                                                                     |                                           |                              
|                                                                                                                                                                     |                                           | December 31,                 
|                                                                                                                                                                     |                                           |                              
|                                                                                                                                                                     |                                           | 2004                          |                   | 2003     
|                                                                                                                                                                     |                                           |                               |                   |          
|                                                                                                                                                                     |                                           |                              
|                                                                                                                                                                     |                                           | (Dollars in thousands, except
|                                                                                                                                                                     |                                           | per-share data)              
|ASSETS:                                                                                                                                                             
|Cash and due from banks                                                                                                                                              |                                           | $                             | 25,198            |           |        | $         | 32,076  |          
|Federal funds sold                                                                                                                                                   |                                           |                               | 22,450            |           |        |           | 25,300  |          
|Short-term investments                                                                                                                                               |                                           |                               | 43,070            |           |        |           | 73,134  |          
|Available for sale securities                                                                                                                                        |                                           |                               | 306,409           |           |        |           | 47,975  |          
|Liquidity reserve deposit                                                                                                                                            |                                           |                               | 79,746            |           |        |           | 80,158  |          
|Credit card loans                                                                                                                                                    |                                           |                               | 68,230            |           |        |           | 128,615 |          
|Less: Allowance for loan losses                                                                                                                                      |                                           |                               | 12,409            |           |        |           | 45,492  |          
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|                                                                                                                                                                     |                                           | Net credit card loans         |                   |           | 55,821 |           |         |           | 83,123 |          
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|Retained interests in loans securitized                                                                                                                              |                                           |                               | 784,135           |           |        |           | 836,901 |          
|Property and equipment, net                                                                                                                                          |                                           |                               | 24,135            |           |        |           | 33,680  |          
|Purchased portfolio premium                                                                                                                                          |                                           |                               | 9,261             |           |        |           | 17,561  |          
|Other receivables due from credit card
    securitizations, net                                                                                                      |                                           |                               | 68,021            |           |        |           | 80,714  |          
|Other assets                                                                                                                                                         |                                           |                               | 63,233            |           |        |           | 81,774  |          
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|                                                                                                                                                                     |                                           |                               | TOTAL ASSETS      |           | $      | 1,481,479 |         |           | $      | 1,392,396 | 
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|                                                                                                                                                                    
|LIABILITIES:                                                                                                                                                        
|Deposits                                                                                                                                                             |                                           | $                             | 3,407             |           |        | $         | 6,262   |          
|Debt                                                                                                                                                                 |                                           |                               | 373,624           |           |        |           | 350,448 |          
|Accounts payable                                                                                                                                                     |                                           |                               | 37,619            |           |        |           | 32,397  |          
|Deferred income                                                                                                                                                      |                                           |                               | 10,530            |           |        |           | 18,060  |          
|Accrued expenses and other liabilities                                                                                                                               |                                           |                               | 108,997           |           |        |           | 76,036  |          
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|                                                                                                                                                                     |                                           |                               | TOTAL LIABILITIES |           |        | 534,177   |         |           |        | 483,203   | 
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|STOCKHOLDERS EQUITY:                                                                                                                                                |                                           |                               |                   |           |        |           |         |          
|Convertible preferred stock, par value
    $.01 per share; 10,000,000 shares authorized,
    1,381,327 and 1,263,699 shares issued and outstanding,
    respectively |                                           |                               | 514,545           |           |        |           | 470,728 |          
|Common stock, par value $.01 per share;
    300,000,000 shares authorized, 65,182,416 and
    64,862,314 shares issued, respectively                                 |                                           |                               | 652               |           |        |           | 649     |          
|Paid-in capital                                                                                                                                                      |                                           |                               | 233,989           |           |        |           | 229,655 |          
|Unearned compensation                                                                                                                                                |                                           |                               |                  |           |        |           | (27     | )        
|Treasury stock  7,055,300 shares                                                                                                                                    |                                           |                               | (58,308           | )         |        |           | (58,308 | )        
|Retained earnings                                                                                                                                                    |                                           |                               | 256,424           |           |        |           | 266,496 |          
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|                                                                                                                                                                     | TOTAL STOCKHOLDERS EQUITY                |                               |                   | 947,302   |        |           |         | 909,193   |       
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          
|                                                                                                                                                                     | TOTAL LIABILITIES AND STOCKHOLDERSEQUITY |                               | $                 | 1,481,479 |        |           | $       | 1,392,396 |       
|                                                                                                                                                                     |                                           |                               |                   |           |        |           |         |          

See accompanying Notes to Consolidated Financial
Statements.

57



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METRIS COMPANIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |         |           | 
|----------------------------------------------------------------------------- | --------------------- | --------------------------------------------- | -------- | ------- | ------- | ---- | -------- | ------- | ------- | - | -------- | ------- | --------- | 
|                                                                              |                       |                                              
|                                                                              |                       | Twelve Months Ended December 31,             
|                                                                              |                       |                                              
|                                                                              |                       | 2004                                          |          | 2003    |         | 2002
|                                                                              |                       |                                               |          |         |         |     
|                                                                              |                       |                                              
|                                                                              |                       | (Dollars in thousands, except per-share data)
|REVENUES:                                                                     |                       |                                               |          |         |         |      |          |         |         |   |          |        
|Loss on new securitizations of receivables to the
    Metris Master Trust     |                       | $                                             | (143,621 | )       |         | $    | (55,214  | )       |         | $ | (70,578  | )      
|(Loss) gain on replenishment of receivables to
    the Metris Master Trust    |                       |                                               | (88,193  | )       |         |      | (161,743 | )       |         |   | 28,706   |        
|Discount accretion                                                            |                       |                                               | 254,455  |         |         |      | 308,912  |         |         |   | 305,327  |        
|Interest-only revenue                                                         |                       |                                               | 292,710  |         |         |      | 221,331  |         |         |   | 452,268  |        
|Change in fair value of retained interests in
    loans securitized           |                       |                                               | 114,515  |         |         |      | (71,669  | )       |         |   | (342,080 | )      
|Transaction and other costs                                                   |                       |                                               | (100,556 | )       |         |      | (68,250  | )       |         |   | (50,126  | )      
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|                                                                              | Securitization income |                                               |          | 329,310 |         |      |          | 173,367 |         |   |          | 323,517 |          
|Servicing income on securitized receivables                                   |                       |                                               | 133,665  |         |         |      | 176,627  |         |         |   | 195,214  |        
|Credit card loan and other interest income                                    |                       |                                               | 20,100   |         |         |      | 90,530   |         |         |   | 229,402  |        
|Credit card loan fees, interchange and other
    income                       |                       |                                               | 21,966   |         |         |      | 79,492   |         |         |   | 163,174  |        
|Enhancement services income                                                   |                       |                                               | 25,087   |         |         |      | 107,930  |         |         |   | 153,516  |        
|Loss on sale of credit card loans                                             |                       |                                               |         |         |         |      | (117,183 | )       |         |   |         |        
|Gain on sale of membership club and warranty
    business                     |                       |                                               |         |         |         |      | 84,787   |         |         |   |         |        
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|                                                                              |                       | TOTAL REVENUES                                |          |         | 530,128 |      |          |         | 595,550 |   |          |         | 1,064,823 | 
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|EXPENSES:                                                                     |                       |                                               |          |         |         |      |          |         |         |   |          |        
|Interest expense                                                              |                       |                                               | 60,441   |         |         |      | 74,421   |         |         |   | 103,516  |        
|Provision for loan losses                                                     |                       |                                               | (4,762   | )       |         |      | 126,648  |         |         |   | 219,804  |        
|Credit card account and other product
    solicitation and marketing expenses |                       |                                               | 78,658   |         |         |      | 93,349   |         |         |   | 173,269  |        
|Employee compensation                                                         |                       |                                               | 141,353  |         |         |      | 175,539  |         |         |   | 210,826  |        
|Data processing services and communications                                   |                       |                                               | 54,941   |         |         |      | 68,715   |         |         |   | 83,874   |        
|Credit protection claims expense                                              |                       |                                               | 17,891   |         |         |      | 30,882   |         |         |   | 44,550   |        
|Occupancy and equipment                                                       |                       |                                               | 22,591   |         |         |      | 36,564   |         |         |   | 48,013   |        
|Purchased portfolio premium amortization                                      |                       |                                               | 8,300    |         |         |      | 25,000   |         |         |   | 30,220   |        
|Asset impairments, lease write-offs and severance                             |                       |                                               | 5,197    |         |         |      | 56,222   |         |         |   | 27,736   |        
|Loss on sale of deposits                                                      |                       |                                               |         |         |         |      | 32,963   |         |         |   |         |        
|Other                                                                         |                       |                                               | 89,562   |         |         |      | 92,512   |         |         |   | 122,732  |        
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|                                                                              |                       | TOTAL EXPENSES                                |          |         | 474,172 |      |          |         | 812,815 |   |          |         | 1,064,540 | 
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|INCOME (LOSS) BEFORE INCOME TAXES                                             |                       |                                               | 55,956   |         |         |      | (217,265 | )       |         |   | 283      |        
|Income tax expense (benefit)                                                  |                       |                                               | 22,211   |         |         |      | (69,526  | )       |         |   | 1,867    |        
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|NET INCOME (LOSS)                                                             |                       |                                               | 33,745   |         |         |      | (147,739 | )       |         |   | (1,584   | )      
|Convertible preferred stock dividends                                         |                       |                                               | 43,817   |         |         |      | 40,086   |         |         |   | 38,009   |        
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|NET LOSS AFTER PREFERRED DIVIDENDS                                            |                       | $                                             | (10,072  | )       |         | $    | (187,825 | )       |         | $ | (39,593  | )      
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|(LOSS) EARNINGS PER COMMON SHARE:                                             |                       |                                               |          |         |         |      |          |         |         |   |          |        
|BASIC                                                                         |                       |                                               |          |         |         |      |          |         |         |   |          |        
|Distributed                                                                   |                       | $                                             |         |         |         | $    |         |         |         | $ | 0.04     |        
|Undistributed                                                                 |                       |                                               | (0.17    | )       |         |      | (3.27    | )       |         |   | (0.70    | )      
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|TOTAL BASIC                                                                   |                       |                                               | (0.17    | )       |         |      | (3.27    | )       |         |   | (0.66    | )      
|                                                                              |                       |                                               |          |         |         |      |          |         |         |   |          |        
|TOTAL DILUTED                                                                 |                       | $                                             | (0.17    | )       |         | $    | (3.27    | )       |         | $ | (0.66    | )      
|SHARES USED TO COMPUTE (LOSS) EARNINGS PER COMMON
    SHARE:                  |                       |                                               |          |         |         |      |          |         |         |   |          |        
|                                                                              | Basic                 |                                               |          | 57,946  |         |      |          | 57,471  |         |   |          | 59,782  |          
|                                                                              | Diluted               |                                               |          | 57,946  |         |      |          | 57,471  |         |   |          | 59,782  |          

See accompanying Notes to Consolidated Financial
Statements.

58



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##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |        |         |   |  |   |        |   |  |   |         |   |  |   |          |   |  |   |           |  
|--------------------------------------------------------- |  | --------------------------------- | ----- | --------- |  | ------ | ------ | ------- |  | -------- | ------- | ------------ |  | -------- | --- | ------------- |  | ------ | ------- | - |  | - | ------ | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | -
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |              
|                                                          |  | Number of Shares                  |       |           |  |        |        |         |  |          |         |              |  |          |     |              
|                                                          |  | Outstanding                       |       |           |  |        |        |         |  |          |         |              |  |          |     | Total        
|                                                          |  |                                   |       | Preferred |  | Common |        | Paid-In |  | Unearned |         | Treasury     |  | Retained |     | Stockholders
|                                                          |  | Preferred                         |       | Common    |  | Stock  |        | Stock   |  | Capital  |         | Compensation |  | Stock    |     | Earnings      |  | Equity
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |       
|                                                          |  |                                  
|                                                          |  | (Dollars and shares in thousands)
|BALANCE, DECEMBER 31, 2001                                |  |                                   | 1,058 |           |  |        | 63,419 |         |  | $        | 393,970 |              |  | $        | 642 |               |  | $      | 232,413 |   |  | $ | (4,980 | ) |  | $ | (13,014 | ) |  | $ | 496,305  |   |  | $ | 1,105,336 |  
|Net loss                                                  |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   |        |   |  |   | (1,584   | ) |  |   | (1,584    | )
|Cash dividends                                            |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   |        |   |  |   | (3,728   | ) |  |   | (3,728    | )
|Common stock repurchased                                  |  |                                   |      |           |  |        | (6,249 | )       |  |          |        |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   | (45,294 | ) |  |   |         |   |  |   | (45,294   | )
|Preferred dividends in kind                               |  |                                   | 98    |           |  |        |       |         |  |          | 36,672  |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   |        |   |  |   | (36,672  | ) |  |   |          |  
|Issuance of common stock under employee benefit
    plans |  |                                   |      |           |  |        | 462    |         |  |          |        |              |  |          | 4   |               |  |        | 2,975   |   |  |   |       |   |  |   |        |   |  |   |         |   |  |   | 2,979     |  
|Deferred compensation                                     |  |                                   |      |           |  |        | 76     |         |  |          |        |              |  |          | 1   |               |  |        | 967     |   |  |   | (968   | ) |  |   |        |   |  |   |         |   |  |   |          |  
|Amortization of restricted stock                          |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        |        |   |  |   | 1,808  |   |  |   |        |   |  |   |         |   |  |   | 1,808     |  
|Forfeiture of restricted stock                            |  |                                   |      |           |  |        | (540   | )       |  |          |        |              |  |          | (5  | )             |  |        | (8,979  | ) |  |   | 4,140  |   |  |   |        |   |  |   |         |   |  |   | (4,844    | )
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |        |         |   |  |   |        |   |  |   |         |   |  |   |          |   |  |   |           |  
|BALANCE, DECEMBER 31, 2002                                |  |                                   | 1,156 |           |  |        | 57,168 |         |  | $        | 430,642 |              |  | $        | 642 |               |  | $      | 227,376 |   |  | $ |       |   |  | $ | (58,308 | ) |  | $ | 454,321  |   |  | $ | 1,054,673 |  
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |        |         |   |  |   |        |   |  |   |         |   |  |   |          |   |  |   |           |  
|Net loss                                                  |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   |        |   |  |   | (147,739 | ) |  |   | (147,739  | )
|Preferred dividends in kind                               |  |                                   | 108   |           |  |        |       |         |  |          | 40,086  |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   |        |   |  |   | (40,086  | ) |  |   |          |  
|Issuance of common stock under employee benefit
    plans |  |                                   |      |           |  |        | 461    |         |  |          |        |              |  |          | 5   |               |  |        | 1,961   |   |  |   |       |   |  |   |        |   |  |   |         |   |  |   | 1,966     |  
|Deferred compensation                                     |  |                                   |      |           |  |        | 303    |         |  |          |        |              |  |          | 3   |               |  |        | 546     |   |  |   | (549   | ) |  |   |        |   |  |   |         |   |  |   |          |  
|Restricted stock forfeitures                              |  |                                   |      |           |  |        | (125   | )       |  |          |        |              |  |          | (1  | )             |  |        | (228    | ) |  |   | 229    |   |  |   |        |   |  |   |         |   |  |   |          |  
|Amortization of restricted stock                          |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        |        |   |  |   | 293    |   |  |   |        |   |  |   |         |   |  |   | 293       |  
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |        |         |   |  |   |        |   |  |   |         |   |  |   |          |   |  |   |           |  
|BALANCE, DECEMBER 31, 2003                                |  |                                   | 1,264 |           |  |        | 57,807 |         |  | $        | 470,728 |              |  | $        | 649 |               |  | $      | 229,655 |   |  | $ | (27    | ) |  | $ | (58,308 | ) |  | $ | 266,496  |   |  | $ | 909,193   |  
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |        |         |   |  |   |        |   |  |   |         |   |  |   |          |   |  |   |           |  
|Net income                                                |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   |        |   |  |   | 33,745   |   |  |   | 33,745    |  
|Preferred dividends in kind                               |  |                                   | 117   |           |  |        |       |         |  |          | 43,817  |              |  |          |    |               |  |        |        |   |  |   |       |   |  |   |        |   |  |   | (43,817  | ) |  |   |          |  
|Issuance of common stock under employee benefit
    plans |  |                                   |      |           |  |        | 370    |         |  |          |        |              |  |          | 3   |               |  |        | 4,423   |   |  |   |       |   |  |   |        |   |  |   |         |   |  |   | 4,426     |  
|Deferred compensation                                     |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        | (85     | ) |  |   |       |   |  |   |        |   |  |   |         |   |  |   | (85       | )
|Restricted stock forfeitures                              |  |                                   |      |           |  |        | (50    | )       |  |          |        |              |  |          |    |               |  |        | (4      | ) |  |   | 4      |   |  |   |        |   |  |   |         |   |  |   |          |  
|Amortization of restricted stock                          |  |                                   |      |           |  |        |       |         |  |          |        |              |  |          |    |               |  |        |        |   |  |   | 23     |   |  |   |        |   |  |   |         |   |  |   | 23        |  
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |        |         |   |  |   |        |   |  |   |         |   |  |   |          |   |  |   |           |  
|BALANCE, DECEMBER 31, 2004                                |  |                                   | 1,381 |           |  |        | 58,127 |         |  | $        | 514,545 |              |  | $        | 652 |               |  | $      | 233,989 |   |  | $ |       |   |  | $ | (58,308 | ) |  | $ | 256,424  |   |  | $ | 947,302   |  
|                                                          |  |                                   |       |           |  |        |        |         |  |          |         |              |  |          |     |               |  |        |         |   |  |   |        |   |  |   |         |   |  |   |          |   |  |   |           |  

See accompanying notes to Consolidated Financial
Statements.

59



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##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |         |  
|------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------- | ----------------------- | ---------- | -------- | - | ---- | ---------- | -------- | - | - | ---------- | ------- | -
|                                                                                                       |                                                            |                        
|                                                                                                       |                                                            | Year Ended December 31,
|                                                                                                       |                                                            |                        
|                                                                                                       |                                                            | 2004                    |            | 2003     |   | 2002
|                                                                                                       |                                                            |                         |            |          |   |     
|                                                                                                       |                                                            |                        
|                                                                                                       |                                                            | (Dollars in thousands) 
|OPERATING ACTIVITIES:                                                                                  |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Net income (loss)                                                                                      |                                                            | $                       | 33,745     |          |   | $    | (147,739   | )        |   | $ | (1,584     | )      
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Depreciation, amortization and accretion                                                               |                                                            |                         | (208,171   | )        |   |      | (175,252   | )        |   |   | (175,314   | )      
|Provision for loan losses                                                                              |                                                            |                         | (4,762     | )        |   |      | 126,648    |          |   |   | 219,804    |        
|Loss on credit card securitizations                                                                    |                                                            |                         | 231,814    |          |   |      | 216,957    |          |   |   | 41,872     |        
|Gain on sale of membership club and warranty
    business                                              |                                                            |                         |           |          |   |      | (84,787    | )        |   |   |           |        
|Asset impairments, lease write-offs, and severance                                                     |                                                            |                         | 5,197      |          |   |      | 56,222     |          |   |   | 27,736     |        
|Market loss on derivative financial instruments                                                        |                                                            |                         | 11,280     |          |   |      | 5,303      |          |   |   | 22,562     |        
|Loss on sale of deposits                                                                               |                                                            |                         |           |          |   |      | 32,963     |          |   |   |           |        
|Changes in operating assets and liabilities, net:                                                      |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|                                                                                                       | Fair value of retained interests in loans
    securitized  |                         |            | (114,515 | ) |      |            | 71,669   |   |   |            | 342,080 |  
|                                                                                                       | Spread accounts receivable                                 |                         |            | 257,528  |   |      |            | (268,805 | ) |   |            | (39,785 | )
|                                                                                                       | Other receivables due from credit card
    securitizations |                         |            | 12,693   |   |      |            | 29,757   |   |   |            | 29,362  |  
|                                                                                                       | Accounts payable and accrued expenses                      |                         |            | 29,745   |   |      |            | (62,398  | ) |   |            | (27,163 | )
|                                                                                                       | Liquidity reserve deposit                                  |                         |            | 412      |   |      |            | (80,158  | ) |   |            |        |  
|                                                                                                       | Deferred income                                            |                         |            | (7,530   | ) |      |            | (34,299  | ) |   |            | (45,587 | )
|                                                                                                       | Other                                                      |                         |            | 4,959    |   |      |            | (24,201  | ) |   |            | (54     | )
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Net cash provided by (used in) operating
    activities                                                |                                                            |                         | 252,395    |          |   |      | (338,120   | )        |   |   | 393,929    |        
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|INVESTING ACTIVITIES:                                                                                  |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Proceeds from sales of available for sale
    securities                                               |                                                            |                         | 3,430,976  |          |   |      | 1,473,108  |          |   |   | 4,440,526  |        
|Purchases of available for sale securities                                                             |                                                            |                         | (3,689,410 | )        |   |      | (1,411,083 | )        |   |   | (4,550,526 | )      
|Proceeds from transfers of portfolios to the
    Metris Master Trust                                   |                                                            |                         |           |          |   |      | 695,459    |          |   |   | 2,087,097  |        
|Net cash from loan originations and principal
    collections on loans receivable                      |                                                            |                         | (64,010    | )        |   |      | (794,033   | )        |   |   | (788,358   | )      
|Proceeds from sales of credit card portfolios to
    third-parties                                     |                                                            |                         | 27,870     |          |   |      | 891,256    |          |   |   | 16,278     |        
|Proceeds from sale of membership club and
    warranty business                                        |                                                            |                         |           |          |   |      | 45,000     |          |   |   |           |        
|Net (additions to) disposal of property and
    equipment                                              |                                                            |                         | (2,297     | )        |   |      | 25,942     |          |   |   | (6,159     | )      
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Net cash (used in) provided by investing
    activities                                                |                                                            |                         | (296,871   | )        |   |      | 925,649    |          |   |   | 1,198,858  |        
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|FINANCING ACTIVITIES:                                                                                  |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Proceeds from issuance of debt                                                                         |                                                            |                         | 283,974    |          |   |      | 125,606    |          |   |   | 51,745     |        
|Repayment of debt                                                                                      |                                                            |                         | (277,724   | )        |   |      | (133,707   | )        |   |   | (342,000   | )      
|Sale of deposits                                                                                       |                                                            |                         |           |          |   |      | (559,282   | )        |   |   |           |        
|Net decrease in deposits                                                                               |                                                            |                         | (2,855     | )        |   |      | (327,210   | )        |   |   | (1,165,254 | )      
|Premium and transaction costs paid on sale of
    deposits                                             |                                                            |                         |           |          |   |      | (32,963    | )        |   |   |           |        
|Cash dividends paid                                                                                    |                                                            |                         |           |          |   |      |           |          |   |   | (3,728     | )      
|Proceeds from issuance of common stock                                                                 |                                                            |                         | 1,289      |          |   |      | 305        |          |   |   | 1,337      |        
|Repurchase of common stock                                                                             |                                                            |                         |           |          |   |      |           |          |   |   | (45,294    | )      
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Net cash provided by (used in) financing
    activities                                                |                                                            |                         | 4,684      |          |   |      | (927,251   | )        |   |   | (1,504,194 | )      
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Net (decrease) increase in cash and cash
    equivalents                                               |                                                            |                         | (39,792    | )        |   |      | (339,722   | )        |   |   | 88,593     |        
|Cash and cash equivalents at beginning of year                                                         |                                                            |                         | 130,510    |          |   |      | 470,232    |          |   |   | 381,639    |        
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        
|Cash and cash equivalents at end of year                                                               |                                                            | $                       | 90,718     |          |   | $    | 130,510    |          |   | $ | 470,232    |        
|                                                                                                       |                                                            |                         |            |          |   |      |            |          |   |   |            |        

|                                                        |                                                  |                         |   |         |   |      |   |         |   |  |   |         |  
|------------------------------------------------------- | ------------------------------------------------ | ----------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                        |                                                  |                        
|                                                        |                                                  | Year Ended December 31,
|                                                        |                                                  |                        
|                                                        |                                                  | 2004                    |   | 2003    |   | 2002
|                                                        |                                                  |                         |   |         |   |     
|SUPPLEMENTAL DISCLOSURES AND CASH FLOW
    INFORMATION: |                                                  |                         |   |         |   |      |   |         |   |  |   |        
|Cash paid (received) during the year for:               |                                                  |                         |   |         |   |      |   |         |   |  |   |        
|                                                        | Interest                                         |                         | $ | 45,579  |   |      | $ | 67,519  |   |  | $ | 106,394 |  
|                                                        | Income taxes                                     |                         |   | (33,935 | ) |      |   | (78,601 | ) |  |   | (32,996 | )
|                                                        | Tax benefit from employee stock option exercises |                         |   | 371     |   |      |   | 1       |   |  |   | 174     |  

See accompanying Notes to Consolidated Financial
Statements.

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METRIS COMPANIES INC. AND
SUBSIDIARIES

Notes to Consolidated Financial
Statements

(Dollars in thousands, except as
noted)


Note 1  Organization and Basis
of Presentation

The consolidated financial statements include the
accounts of Metris Companies Inc. (MCI) and its
subsidiaries. MCIs principal subsidiaries are Direct
Merchants Credit Card Bank, National Association (Direct
Merchants Bank or Bank), Metris Direct, Inc.
and Metris Receivables, Inc. (MRI). MCI and its
subsidiaries are referred to in this Report as we,
us, our, and the Company.

Beginning with the period ended December 31,
2004 we have classified all auction rate securities in
Available for sale securities. In prior periods
these securities were classified as Short-term
investments. All periods presented have been modified to
reflect the change in classification.

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



| |                           
| | --------------------------
| | Pervasiveness of Estimates

We have prepared the consolidated financial
statements in accordance with accounting principles generally
accepted in the United States of America (GAAP),
which requires us to make estimates and assumptions that affect
the reported amounts in the consolidated financial statements
and accompanying notes. The most significant and subjective of
these estimates are our determination of the fair value of
Retained interests in loans securitized and our
determination of the adequacy of the Allowance for loan
losses. The significant factors susceptible to future
change that have an impact on these estimates include default
rates, delinquency rates, net interest spreads, payment rates,
liquidity and/or ability to finance future receivables activity
and overall economic conditions. The fair value of our
Retained interests in loans securitized and the
actual losses inherent in our credit card loan portfolio as of
December 31, 2004, could materially differ from these
estimates.



| |                     
| | --------------------
| | Comprehensive Income

During the years ended December 31, 2004,
2003 and 2002 we did not have any other comprehensive income as
defined by SFAS No. 130 Reporting
Comprehensive Income. As such, net income equals
comprehensive income for all periods presented.



| |                  
| | -----------------
| | Segment Reporting

In 2003, we sold our membership club and warranty
business. After the sale of this business, the Company conducts
all operations through a single segment of consumer lending
products and, as such, management no longer separately evaluates
the results of the former enhancement services segment in
deciding how to allocate resources or in evaluating performance.
As a result, segment reporting is not applicable to these
financial statements.

Note 2  Significant Accounting
Policies

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



| |                                                  
| | -------------------------------------------------
| | Federal Funds Sold and Short-term
    Investments

Federal funds sold are short-term
loans made to banks through the Federal Reserve System. It is
our policy to make such loans only to banks that are considered
to be in compliance with their regulatory capital requirements.
Short-term investments are investments in money
market mutual funds, Treasuries, other Government Agency
Obligations and commercial paper with maturities less than three
months.

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METRIS COMPANIES INC. AND
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Notes to Consolidated Financial
Statements  (CONTINUED)



| |                              
| | -----------------------------
| | Available for Sale Securities

Available for sale securities
consists solely of investments in AA/ Aa2 or higher rated
auction rate securities. Auction rate securities are term debt
and/or equity securities earning income at a rate that is
frequently reset to reflect current market conditions via an
auction. On each reset date, we buy and sell securities at par.
We only invest in securities with reset dates of 90 days or
less. These securities may not be held until maturity and are
therefore classified as available for sale and reported at their
estimated fair value. Due to the frequency with which the yields
on these securities reset, cost approximates fair market value
and there is no resulting other comprehensive income. If
applicable, unrealized gains and losses, after applicable taxes,
would be reported in accumulated other comprehensive income. We
would reduce the carrying value of these available for sale
securities in the event we considered any potential decline in
value to be other-than-temporary and record the estimated loss
in Other expenses on the consolidated statements of
income.



| |                          
| | -------------------------
| | Liquidity Reserve Deposit

Direct Merchants Bank has established restricted
deposits with third-party depository banks for the purpose of
supporting the Banks funding needs and to satisfy
requirements under the Modified Operating Agreement among Direct
Merchants Bank, MCI, and the Office of the Comptroller of the
Currency (OCC). These deposits are invested in
short-term liquid assets and are classified on the consolidated
balance sheets as Liquidity reserve deposit.



| |                  
| | -----------------
| | Credit Card Loans

Credit card loans presented on our
consolidated balance sheets are receivables from cardholders
that we have not sold via securitizations or third-party conduit
warehousing arrangements, and are recorded at the amount
outstanding. Interest income on Credit card loans is
earned and accrued based on the amount of the loans outstanding.
Accrued interest and fees, which have been billed to the
cardholder but not yet received, are classified on the
consolidated balance sheets with the related Credit card
loans. Accrued interest that has not yet been billed to
the cardholder is estimated and classified on the consolidated
balance sheets in Other assets. Interest income and
fees are generally recognized until a loan is charged-off. Upon
charge-off, any unpaid principal is applied to the
Allowance for loan losses and any unpaid finance
charges and fees are netted against the applicable income
statement line items. Further interest charges are reduced or
elminated and fee billings are eliminated if a cardholder is
placed in a credit counseling or debt management program.
Effective November 2002, we suspended the billing of late fees
after an account becomes 120 days contractually delinquent.
Effective March 2003, we stopped billing overlimit fees once an
account becomes 120 days contractually delinquent. In June
and July of 2004, we stopped billing late and overlimit fees on
accounts with balances of 130 percent or more of their
limit.

When we decide to sell a portion of our
Credit card loans, the loans are specifically
identified and transferred to the loans held-for-sale account.
The loans are transferred into the account at the lower of cost
or fair value at the date the decision to sell is made. To the
extent that the loans carrying value at the time of
transfer does not reflect fair value, additional Provision
for loan losses is recorded. Any reduction in the
loans value is reflected as a charge-off of the recorded
investment in the loan with a corresponding reduction in the
Allowance for loan losses. Any Purchased
portfolio premium would be written-off unless we retain
ownership of the cardholder account. Any loans in the
held-for-sale account are revalued to the lower of cost or fair
value at each subsequent reporting date. We had no loans in the
held-for-sale account as of December 31, 2004 or 2003.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)



| |                          
| | -------------------------
| | Allowance for Loan Losses

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

Historically, we segmented the loan portfolio
into several individual liquidating pools with similar credit
risk characteristics, and estimated (based on historical
experience for similar pools and existing environmental
conditions) the dollar amount of principal, accrued finance
charges and fees that would charge-off. We then aggregated these
pools into prime and subprime portfolios based on the prescribed
FICO score cuts, credit counseling programs, and various pools
of other receivables. We separately analyzed the reserve
requirement on each of these groups or portfolios. During the
first quarter of 2004, we changed our methodology and now
aggregate all liquidating pools into one segment, which is
treated as subprime for allowance determination purposes. We
believe this was appropriate due to the reduction in the size of
the loan portfolio and the fact that the remaining loans had
similar risk characteristics.

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

Additionally, in evaluating the adequacy of the
loan loss reserves, we consider several subjective factors that
may be overlaid into the credit risk roll-rate model in
determining the necessary loan loss reserve. These factors
include, but are not limited to:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | national and economic trends and business
    conditions, including the condition of various market segments;                                                                                               
|
| |  | changes in lending policies and procedures,
    including those for underwriting, collection, charge-off and
    recovery, as well as the experience, ability and depth of
    lending management and staff;
|
| |  | trends in volume and the product pricing of
    accounts, including any concentrations of credit; and                                                                                                       
|
| |  | impacts from external factors, such as changes in
    competition and legal and regulatory requirements, on the level
    of estimated credit losses in the current portfolio.                              



| |                                           
| | ------------------------------------------
| | Credit Card Fees and Origination
    Costs

Credit card fees include annual membership, late
payment, overlimit, returned-check, cash advance, transaction
and other miscellaneous fees. We assess these fees according to
the terms of the related cardholder agreements and, except for
annual membership fees, recognize them as revenue when charged
to the cardholders account. All origination costs of
credit card solicitation are expensed as incurred within
Credit card card account and other product, solicitation
and marketing expenses because we assign all new eligible
accounts to the Metris Master Trust shortly after the time of
origination.



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

The Retained interests in loans
securitized on our balance sheet associated with our
securitization transactions includes contractual retained
interests, excess transferors interest, interest-only
strip receivable and spread accounts receivable. We determine
the fair value of each component of the Retained interests
in loans securitized at the time a securitization
transaction or replenishment sale is completed using a

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

discounted cash flow valuation model and on a
quarterly basis thereafter. Increases to the fair value of each
of the assets related to discount accretion are recorded in
Discount accretion. Any other change in the fair
value is recorded in Change in fair value.

The discounted cash flow valuation is limited to
the receivables that exist and have been sold to the Metris
Master Trust. Therefore, the model assumes the current principal
receivable balance as of the balance sheet date amortizes with
no new sales, interchange fees or cash advances. The future cash
flows are modeled in accordance with the Companys debt
series legal documents and are applied to all series on a
pro-rata basis. The valuation model assumes that we repurchase
the outstanding principal receivables within each series at face
value according to the clean-up call provisions contained in the
respective security series legal documents.

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

Transferors interest represents an
undivided interest in receivables that are not pledged to
support a specific security series or class, and represent our
interest in the excess principal receivables held in the Metris
Master Trust.

The fair value is determined in the same manner
as the contractual retained interests and is discounted based on
12 months-to-maturity. We have subordinated our rights to
the excess cash flows on the receivables underlying the
transferors interest, thus they are included in the value
of the interest-only strip receivable.

Spread account receivable balances represent
interest-earning cash held by the Metris Master
Trust Trustee due to performance of the Metris Master Trust
and minimum spread reserve deposits required by certain security
series. Their fair value is determined by discounting the
expected future cash flows using a discount rate commensurate
with the risks of the underlying assets and the expected timing
based on the scheduled maturity date for the underlying
securitization. The expected future cash flows include the
release of the spread account receivable balance on the
scheduled maturity date and estimated interest earned on the
cash balances.

The interest-only strip receivable represents the
contractual right to receive excess spread cash flows (portfolio
collections, less principal charge-offs, financing costs and
servicing costs) from customer receivables over the estimated
life of the amortizing receivables. The fair value is determined
by discounting the expected future cash flows using a discount
rate commensurate with the risks of the underlying assets based
on the expected timing of cash flows in the retained interests
valuation model. Within the model, future excess spread cash
flows are first applied to meet spread accounts receivable
requirements in accordance with the debt series legal
documents. When the spread accounts receivable requirements are
met, cash is returned to us and is valued as the interest-only
strip receivable. We determine upper and lower valuation limits
of the interest-only strip receivable based on historical and
forecasted excess spreads. We then determine the best estimate
within the range, weighted heavily toward the low end of the
range.



| |                    
| | -------------------
| | Debt Issuance Costs

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

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

Upfront fees are recorded in the consolidated
balance sheets as Other assets. Transaction costs
related to the securitization of receivables through the Metris
Master Trust are allocated and recognized over the initial and
reinvestment periods of the respective debt securities or Metris
Master Trust financing unless the transaction results in a loss,
in which case the costs are expensed as incurred.



| |                       
| | ----------------------
| | Property and Equipment

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



| |                            
| | ---------------------------
| | Purchased Portfolio Premium

Purchased portfolio premium
represents the excess of amounts paid for portfolio acquisitions
over the original book value of the related Credit card
loans, net of reserves and discounts. The premium is
amortized over the estimated account life, generally seven
years, based on expected account attrition. The recoverability
of the premium is evaluated quarterly on a
portfolio-by-portfolio basis. If actual attrition were to
significantly exceed forecasted attrition, we would make an
appropriate adjustment for impairment.



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

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

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

The Bank incurs the related claims and marketing
expenses for all debt waiver products. A reserve is maintained
for future death and finance charge claims based on experience
with settlement of such claims. Reserves for pending and
incurred but not reported claims are recorded in the
consolidated balance sheets in Accrued expenses and other
liabilities. Expenses related to these claims are included
in Credit protection claims expense on the
consolidated statements of income.



| |                                            
| | -------------------------------------------
| | Interest Rate Risk Management
    Contracts

We enter into interest rate risk management
contracts such as interest rate cap agreements with highly rated
counterparties in order to hedge our interest rate exposure on
securitized loans and long-term debt. We account for these
contracts in accordance with SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, as
amended by SFAS 149. We recognize all derivatives as
Other assets on the consolidated balance sheets and
measure those instruments at fair value. These contracts do

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

not qualify for hedge accounting treatment, and
all changes in fair value of the derivatives are recognized
currently in earnings as Transaction costs and other
or Other expenses as appropriate.



| |             
| | ------------
| | Income Taxes

Deferred taxes are based on temporary differences
between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible
amounts. The deferred taxes are determined using the enacted tax
rates that are expected to apply when the temporary differences
reverse. A valuation allowance is recognized if it is more
likely than not that all or some portion of the deferred tax
asset will not be realized.



| |                   
| | ------------------
| | Earnings Per Share

We calculate earnings per share in accordance
with Emerging Issues Task Force (EITF) Issue
No. 03-6 Participating Securities and the
two-class method under FASB Statement 128, (the
Consensus or EITF 03-6). This
method requires net income to be reduced by the amount of
dividends declared in the current period for each class of stock
and by the contractual amount of dividends or other
participation payments that are paid or accumulated for the
current period. Undistributed earnings for the period are
allocated to participating securities based on the contractual
participation rights of the security to share in those current
earnings assuming all earnings for the period are distributed.
Our preferred stockholders have contractual participation rights
on a converted basis that are equivalent to those of common
stockholders. Therefore, we allocate undistributed earnings to
preferred and common stockholders based on their respective
ownership percentage, on a converted basis, as of the end of the
period. Prior period earnings per share amounts have been
restated to comply with the provisions of EITF 03-6, which
was adopted effective April 1, 2004.

The following table presents the computation of
earnings (loss) per-share:

|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                              |  |                        
|                                                              |  | Year Ended December 31,
|                                                              |  |                        
|                                                              |  | 2004                    |         | 2003 |  | 2002
|                                                              |  |                         |         |      |  |     
|                                                              |  |                        
|                                                              |  | (In thousands)         
|Net income (loss)                                             |  | $                       | 33,745  |      |  | $    | (147,739 | ) |  | $ | (1,584  | )
|Convertible preferred stock dividends                         |  |                         | 43,817  |      |  |      | 40,086   |   |  |   | 38,009  |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Net loss after preferred dividends                            |  | $                       | (10,072 | )    |  | $    | (187,825 | ) |  | $ | (39,593 | )
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Convertible preferred stock dividends                         |  |                         | 43,817  |      |  |      | 40,086   |   |  |   | 38,009  |  
|Weighted average preferred shares                             |  |                         | 1,307   |      |  |      | 1,196    |   |  |   | 1,094   |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Distributed earnings per share 
    Preferred                |  | $                       | 33.52   |      |  | $    | 33.52    |   |  | $ | 34.74   |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Undistributed loss                                            |  | $                       | (10,072 | )    |  | $    | (187,825 | ) |  | $ | (39,593 | )
|Preferred ownership on a converted basis                      |  |                         | 44      | %    |  |      | 42       | % |  |   | 41      | %
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Preferred stockholders interest in undistributed
    loss (1) |  | $                       |        |      |  | $    |         |   |  | $ |        |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Weighted average preferred shares                             |  |                         | 1,307   |      |  |      | 1,196    |   |  |   | 1,094   |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Undistributed earnings per share 
    Preferred              |  | $                       |        |      |  | $    |         |   |  | $ |        |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Dividends paid to common stockholders                         |  | $                       |        |      |  | $    |         |   |  | $ | 2,391   |  
|Weighted average common shares
    outstanding  Basic        |  |                         | 57,946  |      |  |      | 57,471   |   |  |   | 59,782  |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  
|Distributed earnings per share  Common                       |  | $                       |        |      |  | $    |         |   |  | $ | 0.04    |  
|                                                              |  |                         |         |      |  |      |          |   |  |   |         |  

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

|                                                           |  |                         |         |      |  |      |          |   |  |   |         |  
|---------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                           |  |                        
|                                                           |  | Year Ended December 31,
|                                                           |  |                        
|                                                           |  | 2004                    |         | 2003 |  | 2002
|                                                           |  |                         |         |      |  |     
|                                                           |  |                        
|                                                           |  | (In thousands)         
|Undistributed loss                                         |  | $                       | (10,072 | )    |  | $    | (187,825 | ) |  | $ | (39,593 | )
|Common ownership                                           |  |                         | 56      | %    |  |      | 58       | % |  |   | 59      | %
|                                                           |  |                         |         |      |  |      |          |   |  |   |         |  
|Common stockholders interest in undistributed
    loss(1)  |  | $                       | (10,072 | )    |  | $    | (187,825 | ) |  | $ | (39,593 | )
|                                                           |  |                         |         |      |  |      |          |   |  |   |         |  
|Weighted average common shares
    outstanding  Basic     |  |                         | 57,946  |      |  |      | 57,471   |   |  |   | 59,782  |  
|Common share equivalents(2)                                |  |                         |        |      |  |      |         |   |  |   |        |  
|                                                           |  |                         |         |      |  |      |          |   |  |   |         |  
|Shares used to compute loss per common
    share  Diluted |  |                         | 57,946  |      |  |      | 57,471   |   |  |   | 59,782  |  
|                                                           |  |                         |         |      |  |      |          |   |  |   |         |  
|Total basic loss per share  Common                        |  | $                       | (0.17   | )    |  | $    | (3.27    | ) |  | $ | (0.66   | )
|Total diluted loss per share  Common                      |  | $                       | (0.17   | )    |  | $    | (3.27    | ) |  | $ | (0.66   | )



---



|    |                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Preferred stockholders do not participate in any
    undistributed losses with common stockholders.                                                                                                                                                                                                           
|   
|(2) | Common share equivalents are not included in the
    diluted earnings per common share calculation for any of the
    periods presented as they are anti-dilutive. Potential common
    shares totaled 5.1 million, 5.8 million and
    11.7 million as of December 31, 2004, 2003 and 2002,
    respectively.

Stock-Based Compensation Plans

We recognize compensation cost for stock-based
employee compensation plans based on the difference, if any,
between the quoted market price of the stock on the measurement
date and the amount an employee must pay to acquire the stock.
No expense has been recorded related to stock options as all
options granted had an exercise price equal to the market value
of the underlying common stock on the measurement date. We
recorded expense of approximately $15,000 and $192,000 for the
periods ended December 31, 2004 and 2003, respectively, of
amortization of deferred compensation obligation, net of related
tax benefit. During the year ended December 31, 2002 we
recorded income of approximately $1.9 million, of
amortization of deferred compensation obligation, net of related
tax benefit, due to forfeitures of restricted stock during the
year. During 2004, we issued approximately 971,300 restricted
stock units to employees. The units vest over a four-year period
with possible acceleration of vesting if certain earnings
targets are met. The majority of the restricted stock units are
subject to forfeiture if the Company does not have cumulative
net income for specified years preceeding the scheduled vesting
dates. Upon vesting, each restricted stock unit converts to one
share of common stock that is distributable to the employee. The
fair value of the restricted stock units is expensed over the
expected vesting period and included in Employee
compensation on the consolidated statements of income and
Accrued expenses and other liabilities on the
consolidated balance sheets. For the year ended
December 31, 2004, we recognized $2.1 million of
expenses related to restricted stock units, net of related tax
benefit.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

The following table provides pro forma net income
(loss) and earnings (loss) per share as if we accounted for our
employee stock options under the fair value method. The fair
value of the options was estimated at the grant date using a
Black-Scholes option pricing model. The fair value of the
options is amortized to expense over the options vesting
periods. Under the fair value method, our Net income
(loss) and Earnings (loss) per share would
have been recorded at the pro forma amounts indicated below:

|                                                                                                                                               |  |                                      |        |      |  |      |          |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                                                                                                               |  |                                     
|                                                                                                                                               |  | Year Ended December 31,             
|                                                                                                                                               |  |                                     
|                                                                                                                                               |  | 2004                                 |        | 2003 |  | 2002
|                                                                                                                                               |  |                                      |        |      |  |     
|                                                                                                                                               |  |                                     
|                                                                                                                                               |  | (In thousands except per share data)
|Net income (loss), as reported                                                                                                                 |  | $                                    | 33,745 |      |  | $    | (147,739 | ) |  | $ | (1,584  | )
|Add: Stock-based employee compensation expense
    (benefit) included in reported net income (loss), net of related
    tax effects            |  |                                      | 2,107  |      |  |      | 192      |   |  |   | (1,893  | )
|Deduct: Annual stock-based employee compensation
    benefit determined based on the fair value for all awards, net
    of related tax effects |  |                                      | (3,448 | )    |  |      | (20,609  | ) |  |   | 16,248  |  
|                                                                                                                                               |  |                                      |        |      |  |      |          |   |  |   |         |  
|Pro forma net income (loss)                                                                                                                    |  |                                      | 39,300 |      |  |      | (126,938 | ) |  |   | (19,725 | )
|                                                                                                                                               |  |                                      |        |      |  |      |          |   |  |   |         |  
|Loss per share:                                                                                                                                |  |                                      |        |      |  |      |          |   |  |   |         |  
|Basic-as reported                                                                                                                              |  |                                      | (0.17  | )    |  |      | (3.27    | ) |  |   | (0.66   | )
|                                                                                                                                               |  |                                      |        |      |  |      |          |   |  |   |         |  
|Basic-pro forma                                                                                                                                |  |                                      | (0.08  | )    |  |      | (2.91    | ) |  |   | (0.97   | )
|                                                                                                                                               |  |                                      |        |      |  |      |          |   |  |   |         |  
|Diluted-as reported                                                                                                                            |  |                                      | (0.17  | )    |  |      | (3.27    | ) |  |   | (0.66   | )
|                                                                                                                                               |  |                                      |        |      |  |      |          |   |  |   |         |  
|Diluted-pro forma                                                                                                                              |  |                                      | (0.08  | )    |  |      | (2.91    | ) |  |   | (0.97   | )
|                                                                                                                                               |  |                                      |        |      |  |      |          |   |  |   |         |  
|Weighted-average assumptions in option valuation:                                                                                              |  |                                      |        |      |  |      |          |   |  |   |         |  
|Risk-free interest rates                                                                                                                       |  |                                      | 3.4    | %    |  |      | 1.5      | % |  |   | 3.7     | %
|Dividend yields                                                                                                                                |  |                                      |       |      |  |      |         |   |  |   | 1.6     | %
|Stock volatility factor                                                                                                                        |  |                                      | 129.1  | %    |  |      | 111.4    | % |  |   | 92.9    | %
|Expected life of options (in years)                                                                                                            |  |                                      | 2.7    |      |  |      | 3.7      |   |  |   | 6.0     |  

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

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)



|         |                              
|-------- | -----------------------------
|Note 3  | Available for Sale Securities

Our Available for sale securities
portfolio consists solely of investments in AA/ Aa2 or higher
rated auction rate securities. Auction rate securities are term
debt and/or equity securities earning income at a rate that is
frequently reset to reflect current market conditions via an
auction. The following table illustrates the fair value of term
debt and equity auction rate securities outstanding at
December 31, 2004 and 2003. Equity securities avaiable for
sale are those auction rate securities with perpetual maturity
dates.

|                                    |                    |                        |         |        |         |   |        |   |        | 
|----------------------------------- | ------------------ | ---------------------- | ------- | ------ | ------- | - | ------ | - | ------ | 
|                                    |                    |                       
|                                    |                    | Fair Value and Cost of
|                                    |                    | Available for Sale    
|                                    |                    | Securities Outstanding
|                                    |                    | as of December 31,    
|                                    |                    |                       
|Debt Securities                     |                    | 2004                   |         | 2003  
|                                    |                    |                        |         |       
|                                    |                    |                       
|                                    |                    | (In thousands)        
|Legal Final Maturity Date           |                    |                        |         |        |         |   |        |  
|                                    | Less than 1 year   |                        | $       | 10,000 |         |   | $      |  |       
|                                    | 1 year  5 years   |                        |         | 10,000 |         |   |        |  |       
|                                    | 5 years  10 years |                        |         |       |         |   |        |  |       
|                                    | Over 10 years      |                        |         | 24,420 |         |   |        |  |       
|                                    |                    |                        |         |        |         |   |        |  
|                                    |                    | Total Debt Securities  |         | $      | 44,420  |   |        | $ |       | 
|                                    |                    |                        |         |        |         |   |        |  
|                                    |                    | Equity Securities      |         |        | 261,989 |   |        |   | 47,975 | 
|                                    |                    |                        |         |        |         |   |        |  
|Total Available for Sale Securities |                    | $                      | 306,409 |        |         | $ | 47,975 |  
|                                    |                    |                        |         |        |         |   |        |  

Actual maturities of our available for sale debt
securities will vary from their legal final maturity because on
each reset date, we buy and sell securities at par. As of
December 31, 2004 and 2003, reset dates ranged from 2 to
31 days. At all times we invest in securities with reset
dates of 90 days or less. In the event of a failed auction,
we may not be able to sell securities until the next successful
auction or legal final maturity. Due to the frequency with which
the yields on these securities reset, cost approximates fair
market value and there is no resulting other comprehensive
income.



|         |                          
|-------- | -------------------------
|Note 4  | Allowance for Loan Losses

Activity in the Allowance for loan
losses is as follows:

|                                                                       |  |                         |         |      |  |      |          |   |  |   |          |  
|---------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                       |  |                        
|                                                                       |  | Year Ended December 31,
|                                                                       |  |                        
|                                                                       |  | 2004                    |         | 2003 |  | 2002
|                                                                       |  |                         |         |      |  |     
|                                                                       |  |                        
|                                                                       |  | (In thousands)         
|Balance at beginning of year                                           |  | $                       | 45,492  |      |  | $    | 90,315   |   |  | $ | 460,159  |  
|Allowance related to assets transferred to the
    Metris Master Trust |  |                         |        |      |  |      | (34,456  | ) |  |   | (264,297 | )
|Allowance related to assets re-acquired                                |  |                         | 1,946   |      |  |      |         |   |  |   |         |  
|Provision for loan losses                                              |  |                         | (4,762  | )    |  |      | 126,648  |   |  |   | 219,804  |  
|Principal receivables charged-off(1)                                   |  |                         | (33,004 | )    |  |      | (141,164 | ) |  |   | (345,785 | )
|Recoveries                                                             |  |                         | 2,737   |      |  |      | 4,149    |   |  |   | 20,434   |  
|                                                                       |  |                         |         |      |  |      |          |   |  |   |          |  
|Net loans charged-off                                                  |  |                         | (30,267 | )    |  |      | (137,015 | ) |  |   | (325,351 | )
|                                                                       |  |                         |         |      |  |      |          |   |  |   |          |  
|Balance at end of year                                                 |  | $                       | 12,409  |      |  | $    | 45,492   |   |  | $ | 90,315   |  
|                                                                       |  |                         |         |      |  |      |          |   |  |   |          |  



---



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

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

Credit card loans greater than
30 days contractually past due as of December 31,
2004, 2003 and 2002, were $7.8 million, $20.3 million,
and $7.9 million, respectively.



|         |                                            
|-------- | -------------------------------------------
|Note 5  | Retained Interests in Loans
    Securitized

The following table shows the fair value of the
components of the Retained interests in loans
securitized as of December 31, 2004 and 2003,
respectively.

|                                        |  |                 |         |      |  |   |         | 
|--------------------------------------- |  | --------------- | ------- | ---- |  | - | ------- | 
|                                        |  |                
|                                        |  | At December 31,
|                                        |  |                
|                                        |  | 2004            |         | 2003
|                                        |  |                 |         |     
|                                        |  |                
|                                        |  | (In thousands) 
|Contractual retained interests          |  | $               | 537,945 |      |  | $ | 542,014 | 
|Excess transferors interests           |  |                 | 105,237 |      |  |   | 48,775  | 
|Interest-only strip receivable          |  |                 | 82,672  |      |  |   | 16,039  | 
|Spread accounts receivable              |  |                 | 58,281  |      |  |   | 230,073 | 
|                                        |  |                 |         |      |  |   |         | 
|Retained interests in loans securitized |  | $               | 784,135 |      |  | $ | 836,901 | 
|                                        |  |                 |         |      |  |   |         | 

The following table illustrates the significant
assumptions used in estimating the fair value of retained
interests as of December 31, 2004 and 2003, respectively.

|                                           |                                |                 |      |      |   |  |      |      |  
|------------------------------------------ | ------------------------------ | --------------- | ---- | ---- | - |  | ---- | ---- | -
|                                           |                                |                
|                                           |                                | At December 31,
|                                           |                                |                
|                                           |                                | 2004            |      | 2003
|                                           |                                |                 |      |     
|Monthly payment rate                       |                                |                 | 7.6  | %    |   |  | 6.7  | %   
|Gross yield(1)                             |                                |                 | 25.9 | %    |   |  | 25.4 | %   
|Annual interest expense and servicing fees |                                |                 | 5.0  | %    |   |  | 4.2  | %   
|Annual gross principal default rate        |                                |                 | 18.4 | %    |   |  | 20.7 | %   
|Discount rate:                             |                                |                 |      |      |   |  |      |     
|                                           | Contractual retained interests |                 |      | 16.0 | % |  |      | 16.0 | %
|                                           | Excess transferors interests  |                 |      | 16.0 | % |  |      | 16.0 | %
|                                           | Interest-only strip receivable |                 |      | 30.0 | % |  |      | 30.0 | %
|                                           | Spread accounts receivable     |                 |      | 16.0 | % |  |      | 15.3 | %
|Weighted average months-to-maturity        |                                |                 | 20.1 |      |   |  | 24.5 |     
|Weighted average enhancement level(2)      |                                |                 | 12.1 | %    |   |  | 9.9  | %   



---



|    |                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes expected cash flows from finance
    charges, late and overlimit fees, debt waiver premiums and bad
    debt recoveries. Gross yield for purposes of estimating fair
    value does not include cash flows from interchange income or
    cash advance fees.
|   
|(2) | Includes contractual retained interest and
    required minimum spread reserve deposits.                                                                                                                                                                             

During the third quarter of 2004 the Company made
the following assumption changes to the valuation of retained
interests:



| |   |                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The discount associated with the variable
    conduits has been determined assuming the remaining life of the
    conduit financing facility. Previously, the discount was
    determined assuming 24 months to maturity.                                                                                                                                                            
|
| |  | Requisite deposits used to cover interest expense
    during the accumulation period associated with the defeasance of
    maturing term asset back securities are assumed to have a market
    value of zero. Previously, the model estimated the amount of
    funds that would be returned to the company, and discounted this
    amount at 15.25% to determine the market value.

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SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)



| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest earned on spread accounts receivable is
    now calculated as a monthly cash flow in the valuation of the
    spread reserve deposits using the current LIBOR yield curve.
    Previously, the discount rate applied to the spread reserve
    deposits was reduced to account for the interest income earned.
|
| |  | The weighted average months to maturity used to
    determine the market value of the contractual retained interest
    is based on a 365 day calendar, versus a 360 day
    calendar in previous models.                                                                                                              

At December 31, 2004, the sensitivity of the
current fair value of the retained interests to immediate 10%
and 20% adverse changes were as follows:

|                                           |  |                              |      |             |  |   |       | 
|------------------------------------------ |  | ---------------------------- | ---- | ----------- |  | - | ----- | 
|                                           |  |                             
|                                           |  | Adverse Impact on Fair Value
|                                           |  |                             
|                                           |  | 10% Adverse                  |      | 20% Adverse
|                                           |  | Change                       |      | Change     
|                                           |  |                              |      |            
|                                           |  |                             
|                                           |  | (In millions)               
|Annual discount rate                       |  | $                            | 20.1 |             |  | $ | 39.6  | 
|Monthly payment rate                       |  |                              | 83.6 |             |  |   | 212.4 | 
|Gross yield                                |  |                              | 85.7 |             |  |   | 197.0 | 
|Annual interest expense and servicing fees |  |                              | 8.0  |             |  |   | 15.7  | 
|Annual gross principal default rate        |  |                              | 63.2 |             |  |   | 124.3 | 

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

The average actual rates for loans securitized
were as follows:

|                                    |  |               |      |      |  |  |      |  
|----------------------------------- |  | ------------- | ---- | ---- |  |  | ---- | -
|                                    |  |              
|                                    |  | Year to Date 
|                                    |  | Average as of
|                                    |  | December 31, 
|                                    |  |              
|                                    |  | 2004          |      | 2003
|                                    |  |               |      |     
|Annual gross principal default rate |  |               | 18.2 | %    |  |  | 20.4 | %
|Monthly payment rate                |  |               | 7.6  | %    |  |  | 6.8  | %
|Gross yield(1)                      |  |               | 26.9 | %    |  |  | 26.8 | %



---



|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes cash flows from finance charges, late
    and overlimit fees, debt waiver premiums, bad debt recoveries,
    interchange income and cash advance fees.

Note 6  Securitization
Activity

Securitization activity as of and for the years
ended December 31, 2004 and 2003 is as follows:

|                                                             |                     |                |           |           |  |   |           |           | 
|------------------------------------------------------------ | ------------------- | -------------- | --------- | --------- |  | - | --------- | --------- | 
|                                                             |                     | 2004           |           | 2003     
|                                                             |                     |                |           |          
|                                                             |                     |               
|                                                             |                     | (In thousands)
|Credit card loans                                            |                     | $              | 68,230    |           |  | $ | 128,615   |          
|Receivables held in the Metris Master Trust                  |                     |                | 6,511,990 |           |  |   | 8,003,216 |          
|                                                             |                     |                |           |           |  |   |           |          
|                                                             | Total managed loans |                | $         | 6,580,220 |  |   | $         | 8,131,831 | 
|                                                             |                     |                |           |           |  |   |           |          
|Managed loans more than 30 days
    contractually delinquent |                     | $              | 601,600   |           |  | $ | 902,075   |          
|Managed loans charged-off, net of recoveries                 |                     | $              | 1,166,091 |           |  | $ | 2,033,852 |          

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

|                                                                                                        |       |                         |            |           |  |   |            |           | 
|------------------------------------------------------------------------------------------------------- | ----- | ----------------------- | ---------- | --------- |  | - | ---------- | --------- | 
|                                                                                                        |       |                        
|                                                                                                        |       | Year Ended December 31,
|                                                                                                        |       |                        
|                                                                                                        |       | 2004                    |            | 2003     
|                                                                                                        |       |                         |            |          
|Cash flow to/from the Company:                                                                          |       |                         |            |           |  |   |            |          
|Proceeds from transfers of portfolios to the
    Metris Master Trust                                    |       | $                       |           |           |  | $ | 695,459    |          
|Net proceeds from sales and repayments of
    securitized loans                                         |       |                         | (1,385,200 | )         |  |   | (2,141,657 | )        
|Proceeds from principal receivables collections
    reinvested in revolving credit card securitizations |       |                         | 4,682,706  |           |  |   | 5,306,757  |          
|Servicing fees received                                                                                 |       |                         | 129,564    |           |  |   | 174,964    |          
|Cash flows received from net excess spread                                                              |       |                         | 325,727    |           |  |   | 247,438    |          
|                                                                                                        |       |                         |            |           |  |   |            |          
|                                                                                                        | Total |                         | $          | 3,752,797 |  |   | $          | 4,282,961 | 
|                                                                                                        |       |                         |            |           |  |   |            |          

Note 7  Property and
Equipment

The carrying value of property and equipment is
as follows:

|                                |                        |                 |        |         |  |   |        |         | 
|------------------------------- | ---------------------- | --------------- | ------ | ------- |  | - | ------ | ------- | 
|                                |                        |                
|                                |                        | At December 31,
|                                |                        |                
|                                |                        | 2004            |        | 2003   
|                                |                        |                 |        |        
|Furniture and equipment         |                        | $               | 24,221 |         |  | $ | 36,363 |        
|Computer software and equipment |                        |                 | 72,119 |         |  |   | 68,923 |        
|Buildings and land              |                        |                 | 4,421  |         |  |   | 4,604  |        
|Leasehold improvements          |                        |                 | 9,084  |         |  |   | 12,638 |        
|                                |                        |                 |        |         |  |   |        |        
|                                | Total                  |                 | $      | 109,845 |  |   | $      | 122,528 | 
|Less: Accumulated depreciation  |                        |                 | 85,710 |         |  |   | 88,848 |        
|                                |                        |                 |        |         |  |   |        |        
|                                | Balance at end of year |                 | $      | 24,135  |  |   | $      | 33,680  | 
|                                |                        |                 |        |         |  |   |        |        

Depreciation expense for the years ended
December 31, 2004, 2003 and 2002 was $11.8 million,
$18.2 million and $25.6 million, respectively.

Note 8  Purchased Portfolio
Premium

The carrying value of the Purchased
portfolio premium was $9.3 million and
$17.6 million as of December 31, 2004 and 2003,
respectively, net of accumulated amortization of
$144.9 million and $136.6 million, respectively.
Amortization expense for the years ended December 31, 2004,
2003 and 2002 was $8.3 million, $25.0 million and
$30.2 million, respectively. During 2003,
$22.0 million of Purchased portfolio premium
was written-off due to asset sales. Purchased portfolio
premium is amortized based on account attrition. On a
quarterly basis, Purchased portfolio premium is
analyzed for impairment on a portfolio by portfolio basis by
comparing the expected account attrition to actual account
attrition. In the event actual attrition significantly exceeds
forecasted attrition, an appropriate adjustment for impairment
is made.

Note 9  Portfolio
Sales

On April 30, 2004, we sold approximately
$38.0 million in Credit card loans from Direct
Merchants Bank. Proceeds from the sale approximated the carrying
value of those loans.

On September 16, 2003, we sold approximately
160,000 credit card accounts amounting to $590.9 million in
Credit card loans to a third party for cash proceeds
of $488.3 million. The sale included $144.4 million of
receivables from Direct Merchants Bank and $446.5 million
of receivables from MRI. On November 13, 2003, we sold
approximately 125,000 credit card accounts amounting to

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Notes to Consolidated Financial
Statements  (CONTINUED)

$494.3 million of Credit card
loans from MRI to a third party for cash proceeds of
$396.5 million. During the third quarter of 2003, we
recorded a loss of $117.2 million related to these
transactions.

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

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

Note 10  Convertible Preferred
Stock

Investors in a Thomas H. Lee Partners, L.P.
(THL Partners) fund hold 100% of the outstanding
shares of our preferred stock. In general, the preferred
stockholders are entitled to receive quarterly dividends payable
in additional shares of preferred stock (dividends
in-kind). The annual dividend rate is 9% through
December 8, 2008, and 15% thereafter (except following a
Change in Control Triggering Event, as described below).
Preferred stockholders are also entitled to receive cash
dividends paid on our common stock based on the number of shares
of common stock into which the preferred stock would convert on
the record date of the dividend. The preferred stockholders may
also receive, in lieu of a dividend in-kind, dividends payable
in cash, property or other securities equivalent to a dividend
in-kind if approved by 80% of the Board of Directors, which must
include a majority of the directors elected by the preferred
stockholders.

So long as THL Partners or their affiliates own
at least 25% of the originally issued preferred stock (or any
shares of common stock issued upon conversion thereof), the
holders of a majority of the shares of preferred stock are
entitled to elect four of 11 directors of the
Companys Board of Directors. So long as THL Partners or
their affiliates own at least 10% but less than 25% of the
originally issued preferred stock (or any shares of common stock
issued upon conversion thereof), the holders of a majority of
the shares of preferred stock are entitled to elect one
director. Preferred stockholders have the right to vote on
general corporate matters with common stockholders on a
converted basis.

Each share of preferred stock is convertible into
30 shares of common stock and, if converted before
December 9, 2005, a premium amount guaranteeing dividends
at the 9% rate through December 9, 2005. The preferred
stockholders are able to convert at any time, and the preferred
shares automatically convert into common shares after
December 9, 2005 if the common stock trades at a share
price of $21.33 or more for 20 consecutive days. As of
December 31, 2004, the preferred stock is convertible into
45,053,541 common shares, or approximately 43.7% of the
outstanding common stock on a converted basis.

Before December 9, 2008, all of the
preferred stock may be redeemed by paying 103% of the redemption
price of $372.50 per share and any accrued dividends at the
time of redemption, but only when (i) the common stock has
traded at a share price of $21.33 or more for the most recent 20
consecutive trading days, and (ii) the Company has an
unsecured corporate debt rating of at least Baa3 from
Moodys and BBB- from S&P. After December 9, 2008,
we also have the option to redeem the preferred stock without
restriction, and without a premium, at $372.50 per share
and any accrued dividends.

If a Change in Control were to occur, we are
obligated to offer redemption of the preferred stock for cash at
101% of the greater of (i) the as-converted value of the
preferred stock, or (ii) $372.50 per share of
preferred stock plus accrued and unpaid dividends payable at the
rate of 9% per annum through December 9, 2005 (such
greater amount referred to as the Liquidation
Preference). THL Partners has the right, but is not
obligated, to accept redemption of the preferred stock. If an
offer of redemption is not made, a Change in Control Trigger
Event occurs and, as a result, (i) additional shares of
preferred stock are issued to the holders of preferred stock
such that the total number of outstanding shares of preferred
stock equal the Liquidation Preference divided by $372.50,
(ii) the preferred stock dividend rate increases to 11.5%
before December 9, 2008, and 15% thereafter, and are due
quarterly in cash, and (iii) the

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Notes to Consolidated Financial
Statements  (CONTINUED)

Company becomes subject to limitations on
indebtedness, the issuance of capital stock and we cannot pay
any dividends or make distributions on stock. If the Company
fails to comply with any of the changes in terms, the dividend
rate increases another 2% and THL Partners can require the
Company to purchase the preferred stock at 101% of the
Liquidation Preference.

Note 11  Stock-Based
Compensation

We provide the Metris Companies Inc. Amended
and Restated Long-Term Incentive and Stock Option Plan,which permits a variety of stock-based grants and awards and
gives us flexibility in tailoring our long-term compensation
programs. Under this plan we are authorized to issue up to
19.0 million shares of common stock to employees. As of
December 31, 2004, 8.7 million shares remained
available for grant. We do not provide loans to employees for
the purchase of stock or the exercise of stock options.

The Compensation Committee of the MCI Board of
Directors has the authority to determine the exercise prices,
vesting dates or conditions, expiration dates and other material
conditions upon which options or awards may be exercised, except
that the option price for Incentive Stock Options
(ISOs) may not be less than 100% of the fair market
value of the common stock on the date of grant (and not less
than 110% of the fair market value in the case of an ISO granted
to any employee owning more than 10% of the common stock) and
the terms of nonqualified stock options may not exceed
15 years from the date of grant (not more than ten years
for ISOs and five years for ISOs granted to any employee owning
more than 10% of the common stock). Full- or part-time
employees, consultants or independent contractors are eligible
to receive nonqualified options and awards. Only full- or
part-time employees are eligible to receive ISOs. Our
non-qualified stock options expire ten years from the date of
grant and vest over periods ranging from one to six years with
some options vesting at 25% to 33.3% per year.

We also issue restricted stock and restricted
stock units under the stock option plan. During 2003, a total of
305,600 shares of restricted stock were issued to various
employees with an approximate aggregated market value of
$0.5 million at the time of grant. As of the date
restricted stock is granted, deferred compensation is recorded
as a reduction of equity for the fair value of the shares
granted. The deferred compensation is amortized to compensation
expense on a straight-line basis over the vesting period. During
2004, we issued 971,300 restricted stock units to employees. The
units vest over a four-year period with possible acceleration of
vesting if certain earnings targets are met. The majority of the
restricted stock units are subject to forfeiture if the Company
does not have cumulative net income for specified years
preceding the scheduled vesting dates. Upon vesting, each
restricted stock unit converts to one share of common stock that
is distributable to the employee. The fair value is adjusted at
each balance sheet date. Any changes in fair value are recorded
in the current period and included in Employee
compensation on the consolidated statements of income and
Accrued expenses and other liabilities on the
consolidated balance sheets. For the year ended
December 31, 2004, we expensed $3.2 million related to
restricted stock units.

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

We also provide the Metris Companies Inc.
Amended and Restated Non-Employee Director Stock Option
Plan, which provides up to 750,000 shares of common
stock for awards of options, subject to adjustments in certain
circumstances. During 2004, 2003 and 2002, we granted 135,000,
105,000 and 100,000 options, respectively. At December 31,
2004, 13,500 shares remained available for grant.

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Notes to Consolidated Financial
Statements  (CONTINUED)

Information regarding our stock option plans for
2004, 2003, and 2002, is as follows:

|                                                                   |  |                         |           |           |  |        |       |           |  |        |            |           |  |   |       |  |  |  |            |  |  |   |       | 
|------------------------------------------------------------------ |  | ----------------------- | --------- | --------- |  | ------ | ----- | --------- |  | ------ | ---------- | --------- |  | - | ----- |  |  |  | ---------- |  |  | - | ----- | 
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31,
|                                                                   |  |                        
|                                                                   |  |                         |           |           |  |       
|                                                                   |  | 2004                    |           | 2003      |  | 2002  
|                                                                   |  |                         |           |           |  |       
|                                                                   |  |                         |           | Weighted- |  |        |       | Weighted- |  |        |            | Weighted-
|                                                                   |  |                         |           | Average   |  |        |       | Average   |  |        |            | Average  
|                                                                   |  |                         |           | Exercise  |  |        |       | Exercise  |  |        |            | Exercise 
|                                                                   |  | Shares                  |           | Price     |  | Shares |       | Price     |  | Shares |            | Price    
|                                                                   |  |                         |           |           |  |        |       |           |  |        |            |          
|Options outstanding, beginning of year                             |  |                         | 5,827,243 |           |  | $      | 15.53 |           |  |        | 11,729,444 |           |  | $ | 19.05 |  |  |  | 10,604,136 |  |  | $ | 19.73 | 
|Options exercised                                                  |  |                         | 367,122   |           |  |        | 1.63  |           |  |        | 2,500      |           |  |   | 5.33  |  |  |  | 49,899     |  |  |   | 13.67 | 
|Options granted                                                    |  |                         | 1,106,300 |           |  |        | 1.00  |           |  |        | 1,622,794  |           |  |   | 1.48  |  |  |  | 2,180,885  |  |  |   | 12.09 | 
|Options canceled/ forfeited                                        |  |                         | 1,439,385 |           |  |        | 17.40 |           |  |        | 7,522,495  |           |  |   | 17.99 |  |  |  | 1,005,678  |  |  |   | 11.45 | 
|                                                                   |  |                         |           |           |  |        |       |           |  |        |            |           |  |   |       |  |  |  |            |  |  |   |       | 
|Options outstanding, end of year                                   |  |                         | 5,127,036 |           |  |        | 12.86 |           |  |        | 5,827,243  |           |  |   | 15.53 |  |  |  | 11,729,444 |  |  |   | 19.05 | 
|                                                                   |  |                         |           |           |  |        |       |           |  |        |            |           |  |   |       |  |  |  |            |  |  |   |       | 
|Weighted-average fair value of options granted
    during the year |  |                         |          |           |  | $      | 6.93  |           |  |        |           |           |  | $ | 1.34  |  |  |  |           |  |  | $ | 8.19  | 

The following table summarizes information about
stock options outstanding at December 31, 2004:

|                |  |                     |           |                     |  |           |     |             |  |           |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | --------- | --- | ----------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Weighted-           |  |           |     |            
|                |  |                     |           | Average             |  | Weighted- |     |             |  | Weighted-
|                |  | Number              |           | Remaining           |  | Average   |     | Number      |  | Average  
|                |  | Outstanding         |           | Contractual         |  | Exercise  |     | Exercisable |  | Exercise 
|Exercise Price  |  | at 12/31/04         |           | Life                |  | Price     |     | at 12/31/04 |  | Price    
|                |  |                     |           |                     |  |           |     |             |  |          
|$0  $16.77     |  |                     | 3,295,381 |                     |  |           | 6.0 |             |  | $         | 8.40  |  |  |  | 1,501,328 |  |  | $ | 9.35  | 
|$17.10  $24.42 |  |                     | 1,100,082 |                     |  |           | 5.5 |             |  |           | 22.19 |  |  |  | 953,041   |  |  |   | 22.36 | 
|$24.67  $38.88 |  |                     | 731,573   |                     |  |           | 6.0 |             |  |           | 29.01 |  |  |  | 627,250   |  |  |   | 29.07 | 
|                |  |                     |           |                     |  |           |     |             |  |           |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 5,127,036 |                     |  |           | 5.9 |             |  |           | 15.51 |  |  |  | 3,081,619 |  |  |   | 17.39 | 



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

We provide the Metris Companies Inc. Employee
Stock Purchase Plan (ESPP), whereby eligible
employees may authorize payroll deductions of the lesser of up
to 15% of their salary or the fair market value of $25,000
annually to purchase shares of our common stock. Under the plan,
shares of our common stock may be purchased at the end of each
monthly offering period at 85% of the lower of the fair market
value on the first or last day of the monthly offering period.
Employees contributed $557,809 and $752,358 to
purchase 93,376 and 353,794 shares of common stock
under the ESPP during 2004 and 2003, respectively. We are
authorized to issue up to 2.6 million shares of common
stock to employees under the plan, and as of December 31,
2004, approximately 1.4 million shares remained available
for future issuance.

We offer certain employees the Non-Qualified
Employee Stock Purchase Plan (NQ ESPP). Eligible
employees may purchase shares of our common stock at 85% of the
lower of fair market value of common shares on the first or last
day of the monthly offering period. Employees contributed
$128,276 and $84,091 to purchase 16,388 and
28,187 shares of common stock under the NQ ESPP during 2004
and 2003, respectively. We are authorized to issue up to
500,000 shares of common stock to employees under the plan,
and as of December 31, 2004, there were approximately
400,000 shares available for future issuance.

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Notes to Consolidated Financial
Statements  (CONTINUED)



| |                                    
| | -----------------------------------
| | Management Stock Purchase
    Plans

We provide the Metris Companies Inc.
Management Stock Purchase Plan (MSPP), whereby
any employee who is a Senior Vice President level or above,
excluding corporate officers designated by the Board of
Directors, who participates in the Metris Management
Incentive Bonus Plan, is eligible to participate.
Participants may elect to defer up to 50% of their bonus
received under the Management Bonus Plan,which is
credited to a stock purchase account as restricted stock units.
We will match $1 for every $3 contributed by the participant.
The participants contributions are vested immediately and
our matching contributions vest after three years. During 2004
and 2003, employees contributed $4,551 and $6,750 to
purchase 758 and 1,502 restricted stock units under the
plan, respectively. The restricted stock units convert to common
stock when distributed from the plans. We are authorized to
issue up to 450,000 shares of common stock to employees
under the MSPP, and as of December 31, 2004, 278,697 of the
authorized shares remained available for future issuance.

We provide an additional management stock
purchase plan, whereby officers designated by the Board of
Directors to participate in the Metris Companies Inc. Annual
Incentive Bonus Plan for Designated Corporate Officers(Designated Corporate Officers Plan) are
eligible to participate. Participants may elect to defer up to
50% of their bonus received under the Management Bonus
Plan, which is credited to a stock purchase account as
restricted stock units. We will match $1 for every $3
contributed by the participant. The participants
contributions vest immediately and our matching contributions
vest after three years. The restricted stock units convert to
common stock when distributed from the plans. We are authorized
to issue up to 600,000 shares of common stock to employees
under the Designated Corporate Officers Plan, and as of
December 31, 2004, all authorized shares were available for
future issuance. No contributions were made to the plan during
2004 or 2003.

Note 12  Employee Benefit
Plans



| |                          
| | -------------------------
| | Defined Contribution Plan

We offer a defined contribution plan that is
intended to qualify under section 401(k) of the Internal
Revenue Code. The 401(k) Plan provides retirement benefits for
eligible employees. Eligible employees may elect to contribute
to the 401(k) Plan, and we match a portion of employee
contributions and make discretionary contributions based upon
our financial performance. For the years ended December 31,
2004, 2003, and 2002, we contributed $2.3 million,
$3.3 million and $2.6 million to the 401(k) Plan,
respectively.

The Company previously offered a Deferred
Restorative Retirement Plan (DRRP) for a select
group of management or highly compensated employees. The DRRP
provided saving and investment opportunities to those
individuals who elected to defer a portion of their salary. The
Company matched a portion of the employee contribution and made
discretionary contributions based on the Companys
financial performance. We contributed $0.4 million to the
plan for the year ended December 31, 2002. During 2003, the
DRRP was discontinued and all vested balances were distributed
to participants.



| |                                           
| | ------------------------------------------
| | Supplemental Executive Retirement
    Plan

Our Supplemental Executive Retirement Plan(SERP) provides officers and other members of
senior management with supplemental retirement benefits in
excess of limits imposed on qualified plans by federal tax law.
The SERP is an account balance plan to which we will make annual
contributions targeted to provide 40%-60% of the average of the
participants final three years of salary and bonus with
us. These benefits will be paid in 15 annual installments
beginning the year after the participant becomes eligible to
receive benefits. Participants are eligible to receive benefits
upon leaving our employment if they are at least 65 years
of age or at least age 55 with five years of plan
participation; or if a change of control

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Notes to Consolidated Financial
Statements  (CONTINUED)

occurs; in the event of death; or at the
discretion of the Compensation Committee. We recognized
$2.7 million, $3.4 million, and $0.9 million of
expense in 2004, 2003, and 2002, respectively, related to the
SERP. Our liability was $9.7 million and $7.1 million
at December 31, 2004 and 2003, respectively, for future
payments under this plan. We calculate this expense and
liability based on actuarial assumptions regarding years of
participation, future investment returns and participants
continuing in the SERP until age 65.

Note 13  Income
Taxes

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

|          |         |                         |        |        |  |      |         |         |   |   |         |         |  
|--------- | ------- | ----------------------- | ------ | ------ |  | ---- | ------- | ------- | - | - | ------- | ------- | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2004                    |        | 2003   |  | 2002
|          |         |                         |        |        |  |     
|Current:  |         |                         |        |        |  |      |         |         |   |   |         |        
|          | Federal |                         | $      | 6,103  |  |      | $       | (93,725 | ) |   | $       | (28,893 | )
|          | State   |                         |        | 508    |  |      |         | 557     |   |   |         | 138     |  
|          |         |                         |        |        |  |      |         |         |   |   |         |        
|          |         |                         | 6,611  |        |  |      | (93,168 | )       |   |   | (28,755 | )      
|Deferred: |         |                         |        |        |  |      |         |         |   |   |         |        
|          | Federal |                         |        | 15,299 |  |      |         | 22,940  |   |   |         | 29,840  |  
|          | State   |                         |        | 301    |  |      |         | 702     |   |   |         | 782     |  
|          |         |                         |        |        |  |      |         |         |   |   |         |        
|          |         |                         | 15,600 |        |  |      | 23,642  |         |   |   | 30,622  |        
|Total     |         | $                       | 22,211 |        |  | $    | (69,526 | )       |   | $ | 1,867   |        
|          |         |                         |        |        |  |      |         |         |   |   |         |        

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

|                                           |  |                         |      |      |  |      |      |   |  |  |       |  
|------------------------------------------ |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ----- | -
|                                           |  |                        
|                                           |  | Year Ended December 31,
|                                           |  |                        
|                                           |  | 2004                    |      | 2003 |  | 2002
|                                           |  |                         |      |      |  |     
|Statutory federal income tax rate          |  |                         | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0  | %
|State income taxes, net of federal benefit |  |                         | 0.9  |      |  |      | (0.4 | ) |  |  | 211.3 |  
|Valuation allowance                        |  |                         | 2.7  |      |  |      | (1.1 | ) |  |  |      |  
|Other, net                                 |  |                         | 1.1  |      |  |      | (1.5 | ) |  |  | 413.4 |  
|                                           |  |                         |      |      |  |      |      |   |  |  |       |  
|Effective income tax rate                  |  |                         | 39.7 | %    |  |      | 32.0 | % |  |  | 659.7 | %
|                                           |  |                         |      |      |  |      |      |   |  |  |       |  

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METRIS COMPANIES INC. AND
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Notes to Consolidated Financial
Statements  (CONTINUED)

Our deferred tax assets and liabilities, which
are included in Accrued expenses and other
liabilities on the consolidated balance sheets are as
follows:

|                                                                                                        |                                |                           |         |         |         |   |         |         |         | 
|------------------------------------------------------------------------------------------------------- | ------------------------------ | ------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                        |                                |                          
|                                                                                                        |                                | At December 31,          
|                                                                                                        |                                |                          
|                                                                                                        |                                | 2004                      |         | 2003   
|                                                                                                        |                                |                           |         |        
|Deferred income tax assets resulting from future
    deductible and taxable temporary differences:      |                                |                           |         |         |         |   |         |        
|Allowance for loan losses and retained interests
    fair value adjustments                             |                                | $                         | 49,280  |         |         | $ | 122,852 |        
|Intangible amortization                                                                                 |                                |                           | 41,437  |         |         |   | 30,343  |        
|Net operating loss and credit carryforwards                                                             |                                |                           | 10,305  |         |         |   | 28,200  |        
|Other                                                                                                   |                                |                           | 23,728  |         |         |   | 32,369  |        
|Valuation allowance                                                                                     |                                |                           | (3,935  | )       |         |   | (2,427  | )      
|                                                                                                        |                                |                           |         |         |         |   |         |        
|                                                                                                        |                                | Total deferred tax assets |         | $       | 120,815 |   |         | $       | 211,337 | 
|Deferred income tax liabilities resulting from
    future taxable and deductible temporary differences: |                                |                           |         |         |         |   |         |        
|Accrued interest on credit card loans                                                                   |                                |                           | 129,284 |         |         |   | 194,766 |        
|Other                                                                                                   |                                |                           | 9,948   |         |         |   | 19,388  |        
|                                                                                                        |                                |                           |         |         |         |   |         |        
|                                                                                                        | Total deferred tax liabilities |                           |         | 139,232 |         |   |         | 214,154 |        
|                                                                                                        |                                |                           |         |         |         |   |         |        
|                                                                                                        | Net deferred tax liabilities   |                           | $       | (18,417 | )       |   | $       | (2,817  | )      
|                                                                                                        |                                |                           |         |         |         |   |         |        

During 2004, the Company recorded a
$1.5 million valuation allowance against its deferred tax
assets due to uncertainties related to their realization. The
valuation allowances at December 31, 2004 and 2003
primarily relate to alternative minimum tax credit
carryforwards. We believe, based on our operating earnings in
prior years and expected reversal of taxable temporary
differences, the remaining deferred tax assets are fully
realizable.

The Companys 1998 through 2002 federal
income tax returns are under examination by the Internal Revenue
Service (IRS). Both the Company and the IRS have
proposed adjustments involving the tax treatment of certain
credit card fees as original issue discount (OID).
These fees include late, overlimit, interchange, cash advance
and annual fees. Although these fees are primarily reported as
income when billed for financial reporting purposes, we believe
the fees create OID that should be deferred and amortized over
the remaining life of the underlying credit card loans for tax
purposes. As of December 31, 2004, and December 31,
2003, the Company had deferred cumulative federal income tax
related to this issue of approximately $129 million and
$179 million, respectively. The decrease is primarily
attributable to the decrease in managed receivables. Our
treatment of these fees is consistent with that of many other
United States credit card issuers. Furthermore, we believe our
treatment of these fees is appropriate based on relevant
technical authority and specific guidance issued by the IRS
regarding late fees. However, the timing and amount of any final
resolution remain uncertain. We continue to work with the IRS to
resolve this matter and do not expect to pay any incremental tax
related to this issue in the next 12 months, nor do we
expect the resolution of this matter to have a material adverse
effect on future earnings.

Note 14  Stockholders
Equity

Under our current Credit Agreement we cannot make
dividend payments that exceed either $.01 per share of our
capital stock (as defined in that Credit Agreement) in any
fiscal quarter, or $4.0 million in any fiscal year. Under a
prior credit facility agreement, which expired in June 2003, we
were unable to pay dividends in any year in amount greater than
40% of the previous years net income. Further, under our
immediately preceding credit facility agreement, which expired
in May 2004, we could not make dividend

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Notes to Consolidated Financial
Statements  (CONTINUED)

payments that exceeded either $.01 per share
of our capital stock (as defined in that credit agreement) and
stock options outstanding, or $1.0 million per quarter. As
a result of these restrictions, during the years ended
December 31, 2004 and 2003, we did not pay cash dividends.
During the year ended December 31, 2002, we paid cash
dividends totaling $3.7 million, or $.04 per common
share.

Note 15  Related Party
Transactions

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

On May 7, 1999, we entered into a loan
agreement with our former Chairman and Chief Executive Officer,
Ronald N. Zebeck. The loans original and current principal
balance is $5 million. The loan is unsecured and bears
interest at a rate of 6.25% per annum. Mr. Zebeck was
terminated effective December 15, 2002. On January 23,
2004, a complaint was filed in Hennepin County District Court in
Minneapolis, Minnesota, against MCI, certain members of its
Board of Directors and a number of other entities, by
Mr. Zebeck. The complaint alleges breach of contract,
intentional interference with contract, breach of covenant of
good faith, defamation, and violation of Minnesotas
whistleblower act. On February  1, 2004, defendants
filed an answer in which they denied the allegations in the
complaint, and MCI filed counterclaims against Mr. Zebeck
alleging breach of fiduciary duty and duty of loyalty, unjust
enrichment, breach of covenant not to compete, requesting an
accounting, and seeking declaratory judgment against
Mr. Zebeck for the principal amount ($5 million) of
the loan, plus interest. The lawsuit is in the pretrial
discovery phase. We believe Mr. Zebecks claims are
without factual and legal support, and we have numerous
substantive legal defenses to his claims. We intend to
vigorously defend against Mr. Zebecks claims and will
aggressively prosecute our case against him.

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

Note 16  Commitments and
Contingencies

Commitments to extend credit to consumers
represent the unused credit limits on open credit card accounts.
These commitments were $6.7 billion and $8.0 billion
as of December 31, 2004 and 2003, respectively. While these
amounts represent the total lines of credit available to our
customers, we have not experienced, and do not anticipate, that
all of our customers would exercise their entire available line
at any given point in time. We also have the right to increase,
reduce, cancel, alter or amend the terms of these available
lines of credit at any time.

We lease certain office facilities and equipment
under various cancelable and non-cancelable operating lease
agreements that provide for the payment of a proportionate share
of property taxes, insurance and other maintenance expenses.
These leases also may include scheduled rent increases and
renewal options. Rental expense, net of sublease revenue, for
these operating leases for the years ended December 31,
2004, 2003 and 2002 was $8.3 million, $14.0 million
and $15.5 million, respectively. In 2004, 2003 and 2002, we
recognized $0.3 million, $14.1 million and
$6.4 million, respectively, of expense due to excess
capacity in our operating leases in Asset impairments,
lease write-offs and severance on the consolidated
statements of income.

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METRIS COMPANIES INC. AND
SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

Future minimum lease commitments at
December 31, 2004, under cancelable and non-cancelable
operating leases are as follows:

|           |                              |   |       |        | 
|---------- | ---------------------------- | - | ----- | ------ | 
|           |                              |  
|2005       |                              | $ | 8,283 |       
|2006       |                              |   | 7,168 |       
|2007       |                              |   | 6,598 |       
|2008       |                              |   | 5,758 |       
|2009       |                              |   | 5,669 |       
|Thereafter |                              |   | 7,643 |       
|           |                              |   |       |       
|           | Total minimum lease payments |   |       | 41,119 | 
|           |                              |   |       |       

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

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

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

Note 17  Capital Requirements
and Restricted Payments

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

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

Direct Merchants Bank is subject to certain
capital adequacy guidelines adopted by the OCC. Furthermore,
FFIEC guidelines indicate that an institution with a
concentration in subprime lending should hold one and one-half
to three times the normal minimum capital required. At
December 31, 2004 and 2003, Direct Merchants Banks
Tier 1 risk-based capital ratio, risk-based total capital
ratio and Tier 1

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Notes to Consolidated Financial
Statements  (CONTINUED)

leverage ratio exceeded the minimum required
capital levels, and Direct Merchants Bank was considered a
well-capitalized depository institution under
regulations of the OCC.

Direct Merchants Bank and MCI have entered into a
Capital Assurance and Liquidity Maintenance Agreement that
requires MCI to make such capital infusions or provide the Bank
with financial assistance so as to permit the Bank to meet its
liquidity requirements.

Direct Merchants Bank also entered into a
Liquidity Reserve Deposit Agreement under which the Bank has
established restricted deposits with third-party depository
institutions for the purpose of supporting Direct Merchants
Banks funding needs. These deposits are invested in
short-term liquid assets and are classified on the consolidated
balance sheets as the Liquidity reserve deposit. As
of December 31, 2004 and 2003, the balance in the liquidity
reserve accounts was $79.7 million and $80.2 million,
respectively.

On December 11, 2003, MCI and Direct
Merchants Bank entered into a Modified Operating Agreement with
the OCC, which replaced the original Operating Agreement dated
March 18, 2003. The Modified Operating Agreement requires,
among other things, that:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Bank must maintain minimum capital at the
    dollar amount reported on its September 30, 2003, Call
    Report ($213 million), unless otherwise approved by the OCC.                            
|
| |  | The Bank may continue to pay dividends in
    accordance with applicable statutory and regulatory requirements
    provided capital remains at the required level.                                   
|
| |  | The Bank must maintain liquid assets at the
    greater of $35 million or 100% of the average highest daily
    funding requirement for managed receivables ($31.5 million
    at December 31, 2004).
|
| |  | The Bank must comply with the terms of the
    Liquidity Reserve Deposit Agreement and Capital Assurance and
    Liquidity Maintenance Agreement.                                                    
|
| |  | MCI must comply with the Capital Assurance and
    Liquidity Maintenance Agreement.                                                                                                                  

The Company believes it is currently in
compliance with all of the terms of the Modified Operating
Agreement. If the OCC were to conclude that the Bank failed to
adhere to any provisions of the Modified Operating Agreement,
the OCC could pursue various enforcement options. If any of
these options were to be pursued by the OCC, it could have a
material adverse affect on our operations or capital position.

In general, federal law prohibits a national bank
such as Direct Merchants Bank from making dividend distributions
on common stock if the dividend would exceed currently available
undistributed profits. In addition, a national bank such as
Direct Merchants Bank must obtain OCC approval prior to paying a
dividend if distribution would exceed current year net income
combined with retained earnings from the prior two years. Due to
the dividend paid by the Bank in March of 2003, Direct Merchants
Bank was required to obtain prior approval from the OCC in order
to pay dividends during the years ended December 31, 2004 and
2003. In addition, Direct Merchants Bank cannot pay a dividend
if the distribution would cause it to fail to meet applicable
capital adequacy standards. During the years ended December 31,
2004 and 2003, the Bank paid dividends in the amount of $66.0
million and $190.8 million, respectively. Subsequent to December
31, 2004, the Bank paid $15.0 million in dividends.

Note 18  Concentrations of
Credit Risk

A concentration of credit risk is defined as
significant credit exposure with an individual or group engaged
in similar activities or affected similarly by economic
conditions. We are active in originating credit card loans
throughout the United States, and no individual or group had a
significant concentration of credit risk at December 31,
2004 or 2003.

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Notes to Consolidated Financial
Statements  (CONTINUED)

We target the marketing of our consumer lending
products primarily to middle-market 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.

The banking regulators have issued guidelines to
further segregate a credit card issuers loan portfolio
between subprime loans and prime loans. The banking regulators
deem subprime loans to have higher credit risk. Subprime
receivables (defined as loans to consumers who have a FICO
credit score of 660 or less) held by Direct Merchants Bank were
$44.1 million or 64.6% of its credit card portfolio as of
December 31, 2004, compared to $83.5 million or 65.7%
of its credit card portfolio as of December 31, 2003.
Subprime receivables held by the Metris Master Trust were
$3.95 billion or 60.7% of its credit card portfolio as of
December 31, 2004, compared to $4.85 billion or 60.6%
of its credit card portfolio as of December 31, 2003.

Note 19  Fair Value of
Financial Instruments

We have estimated the fair value of our financial
instruments in accordance with SFAS No. 107,
Disclosures About Fair Value of Financial
Instruments.Financial instruments include both assets
and liabilities, whether or not recognized in our consolidated
balance sheets, for which it is practicable to estimate fair
value. The fair value of an asset is the amount at which the
asset could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or liquidation
sale. Additionally, certain intangible assets recorded on the
consolidated balance sheets, such as purchased credit card
relationships, and other intangible assets not recorded on the
consolidated balance sheets (such as the value of the credit
card relationships for originated loans and the franchise values
of our various lines of business), are not considered financial
instruments and, accordingly, are not valued for purposes of
this disclosure. Accordingly, the aggregate estimated fair value
amounts presented do not represent our entire underlying value.

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

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



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Cash and due from banks, Federal funds
    sold, Short-term investments and Liquidity reserve
    deposit

Carrying amounts approximate fair value due to
the liquid and short-term nature of these instruments.



| |                              
| | -----------------------------
| | Available for sale securities

Our available for sale securities portfolio
consists solely of investments in AA/ Aa2 or higher rated
auction rate securities. Auction rate securities are term debt
and/or equity securities earning income at a rate that is
frequently reset to reflect current market conditions via an
auction. On each reset date, we buy and sell securities at par.
We only invest in securities with reset dates of 90 days or
less. Due to the frequency with which the yields on these
securities resets, cost approximates fair market value.

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Notes to Consolidated Financial
Statements  (CONTINUED)



| |                       
| | ----------------------
| | Credit card loans, net

Credit card loans are originated with
variable rates of interest that adjust with changing market
interest rates. Thus, the carrying value of the Credit
card loans, less the Allowance for loan
losses, approximates fair value. This valuation does not
include the value that relates to estimated cash flows generated
from new loans to existing cardholders over the life of the
cardholder relationship. Accordingly, the aggregate fair value
of the Credit card loans does not represent the
underlying value of the established cardholder relationships.



| |                                            
| | -------------------------------------------
| | Retained interests in loans
    securitized

The fair value of the Retained interests in
loans securitized are estimated by discounting the
expected future cash flows from the Metris Master Trust and each
of the conduits at rates that we believe to be consistent with
those that would be used by an independent third party. However,
because there is no active market for these Retained
interests in loans securitized, the fair values presented
may not be indicative of the value negotiated in an actual sale.
The future cash flows used to estimate fair value are limited to
the securitized receivables that exist at year end and do not
reflect the value associated with future receivables generated
by accountholder activity.



| |                   
| | ------------------
| | Interest rate caps

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



| |     
| | ----
| | Debt

We obtain the fair value of our long-term fixed
rate debt from quoted market prices. The carrying value of our
variable rate long-term debt approximates its fair value.

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

|                                        |  |                 |         |            |  |          |         |            |  |   |         |  |  |   |         | 
|--------------------------------------- |  | --------------- | ------- | ---------- |  | -------- | ------- | ---------- |  | - | ------- |  |  | - | ------- | 
|                                        |  |                
|                                        |  | At December 31,
|                                        |  |                
|                                        |  |                 |         |           
|                                        |  | 2004            |         | 2003      
|                                        |  |                 |         |           
|                                        |  | Carrying        |         | Estimated  |  | Carrying |         | Estimated 
|                                        |  | Amount          |         | Fair Value |  | Amount   |         | Fair Value
|                                        |  |                 |         |            |  |          |         |           
|                                        |  |                
|                                        |  | (In thousands) 
|Cash and due from banks                 |  | $               | 25,198  |            |  | $        | 25,198  |            |  | $ | 32,076  |  |  | $ | 32,076  | 
|Federal funds sold                      |  |                 | 22,450  |            |  |          | 22,450  |            |  |   | 25,300  |  |  |   | 25,300  | 
|Short-term investments                  |  |                 | 43,070  |            |  |          | 43,070  |            |  |   | 73,134  |  |  |   | 73,134  | 
|Available for sale securities           |  |                 | 306,409 |            |  |          | 306,409 |            |  |   | 47,975  |  |  |   | 47,975  | 
|Liquidity reserve deposit               |  |                 | 79,746  |            |  |          | 79,746  |            |  |   | 80,158  |  |  |   | 80,158  | 
|Credit card loans, net                  |  |                 | 55,821  |            |  |          | 55,821  |            |  |   | 83,123  |  |  |   | 83,123  | 
|Retained interests in loans securitized |  |                 | 784,135 |            |  |          | 784,135 |            |  |   | 836,901 |  |  |   | 836,901 | 
|Interest rate caps                      |  |                 | 1,498   |            |  |          | 1,498   |            |  |   | 9,787   |  |  |   | 9,787   | 
|Debt                                    |  |                 | 373,624 |            |  |          | 376,596 |            |  |   | 350,448 |  |  |   | 315,951 | 

Note 20  Derivative Financial
Instruments

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

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SUBSIDIARIES


Notes to Consolidated Financial
Statements  (CONTINUED)

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

The interest rate caps do not meet the criteria
for hedge accounting treatment under Statement of Financial
Accounting Standards No. 133 Derivative Instruments and
Hedging Activities. The change in the fair value of the caps
is included in the consolidated income statement under
Transaction costs and other or Other
expenses, as appropriate. We recognized expense of
$10.2 million, $5.3 million and $22.6 million
from the mark-to-market adjustments on the interest rate caps
for the years ended December 31, 2004, 2003 and 2002,
respectively.



|          |                                                  
|--------- | -------------------------------------------------
|Note 21  | Sale of Membership Club and Warranty
    Business

During the third quarter of 2003, we sold our
membership club and warranty business to CPP Group for cash
proceeds of $45 million. We recorded a gain on the sale of
$84.8 million. Included in the gain was the recognition of
$90.8 million of Deferred income and the
write-off of $45.4 million of deferred costs.

Note 22  Asset Impairments,
Lease Write-Offs and Severance

Asset impairments, lease write-offs and
severance were $5.2 million for the year ended
December 31, 2004, and were primarily comprised of expenses
related to employment severance costs resulting from workforce
reductions. During the year ended December 31, 2003,
Asset impairments, lease write-offs and severance
were $56.2 million and included $8.3 million for workforce
reductions, $20.8 million in write-downs of excess property,
equipment, and operating leases, a $22.0 million write-off of
purchased portfolio premium on Credit card loans
sold in the third and fourth quarters of 2003, and a $5.1
million write-off of commitment fees related to a backup
financing facility entered into in March of 2003 with Thomas H.
Lee Equity Fund IV, L.P. During the year ended December 31,
2002, we recorded a write-down of $10.6 million for portfolios
of charged-off loans purchased in 2001 and 2000, a $17.1 million
write-down of excess property, equipment, operating leases, and
the then-pending sale of our Arizona facility, which are also
recorded in Asset impairments, lease write-offs and
severance.

Note 23  Debt and
Deposits

In May 2004, we paid off the $95.3 million
remaining outstanding on our $125 million term loan due
June 2004 and closed on a $300 million term loan that
matures in May 2007. The $300 million senior secured loan
was issued pursuant to a Senior Secured Credit Agreement dated
May 6, 2004 (Credit Agreement). The loan
carries a floating annual interest rate equal to the one-month
LIBOR for the applicable interest period plus 9.50%. The
proceeds of the loan were used in part for early repayment of
our $100 million 10% Senior Notes, which came due in
November 2004 (together with accrued and unpaid interest and
prepayment premium due thereon), and to pay fees and transaction
expenses related to the loan. During the fourth quarter of 2004,
we made two prepayments totaling $75 million on the Credit
Agreement. Amounts expensed associated with these prepayments
totaled $6.9 million and are classified as
Other on our consolidated statements of income for
the period ended December 31, 2004. We are bound by certain
covenants under our Credit Agreement and as of December 31,
2004 we were in compliance with all financial covenants under
the Credit Agreement.

As of December 31, 2004, we had
$150.0 million outstanding of 10.125% Senior Notes due
2006. The carrying value of these Senior Notes was
$148.6 million as of December 31, 2004. These Senior
Notes

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Notes to Consolidated Financial
Statements  (CONTINUED)

were issued at a discount of $6.3 million to
yield an effective interest rate of 11%. Subsequent to
December 31, 2004, we made a prepayment of $50 million
on the Senior Notes due 2006. We paid a call premium on the
prepayment of approximately 2.5% of the principal pre-paid, or
approximately $1.3 million, to the holders of the notes.
The remaining principal outstanding on the original unsecured
senior notes is $100 million as a result of this prepayment.

Our debt outstanding as of December 31,
2004, matures as follows:

|     |                        |   |         |         | 
|---- | ---------------------- | - | ------- | ------- | 
|     |                        |  
|2005 |                        | $ |        |        
|2006 |                        |   | 148,624 |        
|2007 |                        |   | 225,000 |        
|     |                        |   |         |        
|     | Total debt outstanding |   | $       | 373,624 | 
|     |                        |   |         |        

In the third quarter of 2003, we sold all of the
brokered and retail jumbo CDs issued by Direct Merchants Bank.
The face value of the Deposits sold was
$559.3 million. We recorded a loss on that sale of
$33.0 million.

The remaining Deposits the Bank has
established relate to its secured card product. These accounts
do not have a set maturity date and pay a fixed interest rate of
2%. As of December 31, 2004 and 2003, $3.4 million and
$6.3 million of secured card deposits were outstanding,
respectively.

The Senior Notes due 2006 and the Credit
Agreement are unconditionally guaranteed on a senior basis,
jointly and severally, by Metris Direct, Inc., magnUS Services,
Inc., Metris Card Services, LLC and Metris Credit Card Services,
Inc. (the Guarantors). Any subsidiaries we form in
the future may provide a guarantee of this indebtedness. The
guarantee is an unsecured obligation of the Guarantors and ranks
equally with all existing and future unsubordinated
indebtedness. We also have various indirect subsidiaries, which
do not guarantee MCIs debt. We have prepared condensed
consolidating financial statements, which follow the detail
Guarantor subsidiaries and the non-guarantor subsidiaries for
purposes of complying with SEC reporting requirements. Separate
financial statements of the guaranteeing subsidiaries and the
non-guaranteeing subsidiaries are not presented because we have
determined that the subsidiaries financial information
would not be material to investors.

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METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING BALANCE
SHEETS

December 31, 2004


|                                                                |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|--------------------------------------------------------------- |  | ---------------------- | --------- | ------------ |  | ------------ | --------- | ------------ |  | ------------ | --------- |  |  | - | ---------- | - |  | - | --------- | 
|                                                                |  | Metris                 |           |              |  | Non-         |           |              |  |             
|                                                                |  | Companies              |           | Guarantor    |  | Guarantor    |           |              |  |             
|                                                                |  | Inc.                   |           | Subsidiaries |  | Subsidiaries |           | Eliminations |  | Consolidated
|                                                                |  |                        |           |              |  |              |           |              |  |             
|                                                                |  |                       
|                                                                |  | (Dollars in thousands)
|ASSETS:                                                         |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|Cash and due from banks                                         |  | $                      | (1,102    | )            |  | $            | (178      | )            |  | $            | 26,478    |  |  | $ |           |   |  | $ | 25,198    | 
|Federal funds sold                                              |  |                        |          |              |  |              |          |              |  |              | 22,450    |  |  |   |           |   |  |   | 22,450    | 
|Short-term investments                                          |  |                        | 6,065     |              |  |              |          |              |  |              | 37,005    |  |  |   |           |   |  |   | 43,070    | 
|Available for sale securities                                   |  |                        | 50,000    |              |  |              |          |              |  |              | 256,409   |  |  |   |           |   |  |   | 306,409   | 
|Liquidity reserve deposit                                       |  |                        |          |              |  |              |          |              |  |              | 79,746    |  |  |   |           |   |  |   | 79,746    | 
|Net credit card loans                                           |  |                        | 99        |              |  |              |          |              |  |              | 55,722    |  |  |   |           |   |  |   | 55,821    | 
|Retained interests in loans securitized                         |  |                        | 8,686     |              |  |              |          |              |  |              | 775,449   |  |  |   |           |   |  |   | 784,135   | 
|Property and equipment, net                                     |  |                        |          |              |  |              | 24,135    |              |  |              |          |  |  |   |           |   |  |   | 24,135    | 
|Purchased portfolio premium                                     |  |                        |          |              |  |              |          |              |  |              | 18,337    |  |  |   | (9,076     | ) |  |   | 9,261     | 
|Other receivables due from credit card
    securitizations, net |  |                        | 4         |              |  |              |          |              |  |              | 68,017    |  |  |   |           |   |  |   | 68,021    | 
|Other assets                                                    |  |                        | 34,117    |              |  |              | 29,541    |              |  |              | 36,493    |  |  |   | (36,918    | ) |  |   | 63,233    | 
|Investment in subsidiaries                                      |  |                        | 1,302,122 |              |  |              | 1,110,022 |              |  |              | 782       |  |  |   | (2,412,926 | ) |  |   |          | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|Total assets                                                    |  | $                      | 1,399,991 |              |  | $            | 1,163,520 |              |  | $            | 1,376,888 |  |  | $ | (2,458,920 | ) |  | $ | 1,481,479 | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|                                                               
|LIABILITIES:                                                    |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|Deposits                                                        |  | $                      | (500      | )            |  | $            |          |              |  | $            | 3,907     |  |  | $ |           |   |  | $ | 3,407     | 
|Debt                                                            |  |                        | 462,282   |              |  |              | (213,993  | )            |  |              | 168,335   |  |  |   | (43,000    | ) |  |   | 373,624   | 
|Accounts payable                                                |  |                        | 1,598     |              |  |              | 21,761    |              |  |              | 28,493    |  |  |   | (14,233    | ) |  |   | 37,619    | 
|Deferred income                                                 |  |                        |          |              |  |              |          |              |  |              | 18,980    |  |  |   | (8,450     | ) |  |   | 10,530    | 
|Accrued expenses and other                                      |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|liabilities                                                     |  |                        | (10,691   | )            |  |              | 14,743    |              |  |              | 81,398    |  |  |   | 23,547     |   |  |   | 108,997   | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|Total liabilities                                               |  |                        | 452,689   |              |  |              | (177,489  | )            |  |              | 301,113   |  |  |   | (42,136    | ) |  |   | 534,177   | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|Total stockholders equity                                      |  |                        | 947,302   |              |  |              | 1,341,009 |              |  |              | 1,075,775 |  |  |   | (2,416,784 | ) |  |   | 947,302   | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 
|Total liabilities and stockholders
    equity                  |  | $                      | 1,399,991 |              |  | $            | 1,163,520 |              |  | $            | 1,376,888 |  |  | $ | (2,458,920 | ) |  | $ | 1,481,479 | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |  |  |   |            |   |  |   |           | 

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##### Table of Contents



METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING BALANCE
SHEETS

December 31, 2003


|                                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|--------------------------------------------------------------- |  | ---------------------- | --------- | ------------ |  | ------------ | --------- | ------------ |  | ------------ | --------- | - |  | - | ---------- | - |  | - | --------- | 
|                                                                |  | Metris                 |           |              |  | Non-         |           |              |  |             
|                                                                |  | Companies              |           | Guarantor    |  | Guarantor    |           |              |  |             
|                                                                |  | Inc.                   |           | Subsidiaries |  | Subsidiaries |           | Eliminations |  | Consolidated
|                                                                |  |                        |           |              |  |              |           |              |  |             
|                                                                |  |                       
|                                                                |  | (Dollars in thousands)
|ASSETS:                                                         |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|Cash and due from banks                                         |  | $                      | (2,096    | )            |  | $            | 3,034     |              |  | $            | 31,138    |   |  | $ |           |   |  | $ | 32,076    | 
|Federal funds sold                                              |  |                        |          |              |  |              |          |              |  |              | 25,300    |   |  |   |           |   |  |   | 25,300    | 
|Short-term investments                                          |  |                        | 1,015     |              |  |              |          |              |  |              | 72,119    |   |  |   |           |   |  |   | 73,134    | 
|Available for sale securities                                   |  |                        |          |              |  |              |          |              |  |              | 47,975    |   |  |   |           |   |  |   | 47,975    | 
|Liquidity reserve deposit                                       |  |                        |          |              |  |              |          |              |  |              | 80,158    |   |  |   |           |   |  |   | 80,158    | 
|Net credit card loans                                           |  |                        | 15,203    |              |  |              |          |              |  |              | 67,920    |   |  |   |           |   |  |   | 83,123    | 
|Retained interests in loans securitized                         |  |                        |          |              |  |              |          |              |  |              | 822,900   |   |  |   | 14,001     |   |  |   | 836,901   | 
|Property and equipment, net                                     |  |                        |          |              |  |              | 33,663    |              |  |              | 17        |   |  |   |           |   |  |   | 33,680    | 
|Purchased portfolio premium                                     |  |                        | 80        |              |  |              |          |              |  |              | 17,481    |   |  |   |           |   |  |   | 17,561    | 
|Other receivables due from credit card
    securitizations, net |  |                        | 5         |              |  |              |          |              |  |              | 80,709    |   |  |   |           |   |  |   | 80,714    | 
|Other assets                                                    |  |                        | 21,242    |              |  |              | 30,934    |              |  |              | 54,917    |   |  |   | (25,319    | ) |  |   | 81,774    | 
|Investment in subsidiaries                                      |  |                        | 1,296,461 |              |  |              | 878,810   |              |  |              |          |   |  |   | (2,175,271 | ) |  |   |          | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|Total assets                                                    |  | $                      | 1,331,910 |              |  | $            | 946,441   |              |  | $            | 1,300,634 |   |  | $ | (2,186,589 | ) |  | $ | 1,392,396 | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|                                                               
|LIABILITIES:                                                    |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|Deposits                                                        |  | $                      | (1,000    | )            |  | $            |          |              |  | $            | 7,262     |   |  | $ |           |   |  | $ | 6,262     | 
|Debt                                                            |  |                        | 384,684   |              |  |              | (413,842  | )            |  |              | 422,606   |   |  |   | (43,000    | ) |  |   | 350,448   | 
|Net intercompany                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |           |   |  |   |          | 
|Accounts payable                                                |  |                        | 489       |              |  |              | 15,406    |              |  |              | 16,805    |   |  |   | (303       | ) |  |   | 32,397    | 
|Deferred income                                                 |  |                        |          |              |  |              |          |              |  |              | 18,060    |   |  |   |           |   |  |   | 18,060    | 
|Accrued expenses and other liabilities                          |  |                        | 38,544    |              |  |              | 48,416    |              |  |              | (42,909   | ) |  |   | 31,985     |   |  |   | 76,036    | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|Total liabilities                                               |  |                        | 422,717   |              |  |              | (350,020  | )            |  |              | 421,824   |   |  |   | (11,318    | ) |  |   | 483,203   | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|Total stockholders equity                                      |  |                        | 909,193   |              |  |              | 1,296,461 |              |  |              | 878,810   |   |  |   | (2,175,271 | ) |  |   | 909,193   | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 
|Total liabilities and stockholders
    equity                  |  | $                      | 1,331,910 |              |  | $            | 946,441   |              |  | $            | 1,300,634 |   |  | $ | (2,186,589 | ) |  | $ | 1,392,396 | 
|                                                                |  |                        |           |              |  |              |           |              |  |              |           |   |  |   |            |   |  |   |           | 

87



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##### Table of Contents



METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF
INCOME

Year Ended December 31, 2004


|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |         |  |   |          |          |   |   |         |         | 
|------------------------------------------------------------------------------------------ | -------------- | ---------------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | ------- |  | - | -------- | -------- | - | - | ------- | ------- | 
|                                                                                           |                | Metris                 |         |              |  | Non-         |         |              |  |             
|                                                                                           |                | Companies              |         | Guarantor    |  | Guarantor    |         |              |  |             
|                                                                                           |                | Inc.                   |         | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Consolidated
|                                                                                           |                |                        |         |              |  |              |         |              |  |             
|                                                                                           |                |                       
|                                                                                           |                | (Dollars in thousands)
|Revenues:                                                                                  |                |                        |         |              |  |              |         |              |  |              |         |         |  |   |          |          |   |   |         |        
|Securitization income                                                                      |                | $                      | 2,491   |              |  |              |        |              |  |              | 204,989 |         |  |   | 121,830  |          |   |   | 329,310 |        
|Servicing income on securitized receivables                                                |                |                        | (194    | )            |  |              |        |              |  |              | 133,859 |         |  |   |         |          |   |   | 133,665 |        
|Credit card loan and other interest income                                                 |                |                        | 1,121   |              |  |              |        |              |  |              | 18,979  |         |  |   |         |          |   |   | 20,100  |        
|Credit card loan fees, interchange and other
    income                                    |                |                        | 2,740   |              |  |              | 88,629  |              |  |              | 129,954 |         |  |   | (199,357 | )        |   |   | 21,966  |        
|Enhancement services income                                                                |                |                        |        |              |  |              | 166     |              |  |              | 24,954  |         |  |   | (33      | )        |   |   | 25,087  |        
|Intercompany allocations                                                                   |                |                        | 354     |              |  |              | 158,391 |              |  |              | 2,257   |         |  |   | (161,002 | )        |   |   |        |        
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |         |  |   |          |          |   |   |         |        
|                                                                                           | Total revenues |                        |         | 6,512        |  |              |         | 247,186      |  |              |         | 514,992 |  |   |          | (238,562 | ) |   |         | 530,128 | 
|Expenses:                                                                                  |                |                        |         |              |  |              |         |              |  |              |         |         |  |   |          |          |   |   |         |        
|Interest expense                                                                           |                |                        | 61,304  |              |  |              | (9,447  | )            |  |              | 8,584   |         |  |   |         |          |   |   | 60,441  |        
|Provision for loan losses                                                                  |                |                        | (1,271  | )            |  |              |        |              |  |              | (3,491  | )       |  |   |         |          |   |   | (4,762  | )      
|Credit card account and other product
    solicitation and marketing expenses              |                |                        | 105     |              |  |              | 66,857  |              |  |              | 87,834  |         |  |   | (76,138  | )        |   |   | 78,658  |        
|Employee compensation                                                                      |                |                        |        |              |  |              | 138,583 |              |  |              | 2,770   |         |  |   |         |          |   |   | 141,353 |        
|Data processing services and communication                                                 |                |                        | 11      |              |  |              | (51,988 | )            |  |              | 118,935 |         |  |   | (12,017  | )        |   |   | 54,941  |        
|Credit protection claims expense                                                           |                |                        |        |              |  |              |        |              |  |              | 17,891  |         |  |   |         |          |   |   | 17,891  |        
|Occupancy and equipment                                                                    |                |                        |        |              |  |              | 22,573  |              |  |              | 18      |         |  |   |         |          |   |   | 22,591  |        
|Purchased portfolio premium amortization                                                   |                |                        | 80      |              |  |              |        |              |  |              | 6,732   |         |  |   | 1,488    |          |   |   | 8,300   |        
|Asset impairments, lease write-offs and severance                                          |                |                        |        |              |  |              | 5,198   |              |  |              | (1      | )       |  |   |         |          |   |   | 5,197   |        
|Other                                                                                      |                |                        | 13,981  |              |  |              | 60,345  |              |  |              | 15,236  |         |  |   |         |          |   |   | 89,562  |        
|Intercompany allocations                                                                   |                |                        | 158     |              |  |              | 39,914  |              |  |              | 120,930 |         |  |   | (161,002 | )        |   |   |        |        
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |         |  |   |          |          |   |   |         |        
|                                                                                           | Total expenses |                        |         | 74,368       |  |              |         | 272,035      |  |              |         | 375,438 |  |   |          | (247,669 | ) |   |         | 474,172 | 
|(Loss) Income Before Income Tax (Benefit)
    Expense and Equity in Income of Subsidiaries |                |                        | (67,856 | )            |  |              | (24,849 | )            |  |              | 139,554 |         |  |   | 9,107    |          |   |   | 55,956  |        
|Income tax (benefit) expense                                                               |                |                        | (26,939 | )            |  |              | (10,214 | )            |  |              | 55,751  |         |  |   | 3,613    |          |   |   | 22,211  |        
|Equity in income of subsidiaries                                                           |                |                        | 74,662  |              |  |              | 98,844  |              |  |              | 200     |         |  |   | (173,706 | )        |   |   |        |        
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |         |  |   |          |          |   |   |         |        
|Net Income                                                                                 |                | $                      | 33,745  |              |  | $            | 84,209  |              |  | $            | 84,003  |         |  | $ | (168,212 | )        |   | $ | 33,745  |        
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |         |  |   |          |          |   |   |         |        

88



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##### Table of Contents



METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF
INCOME

Year Ended December 31, 2003


|                                                                              |                |                        |          |              |  |              |          |              |  |              |          |         |  |   |          |          |   |   |          |         | 
|----------------------------------------------------------------------------- | -------------- | ---------------------- | -------- | ------------ |  | ------------ | -------- | ------------ |  | ------------ | -------- | ------- |  | - | -------- | -------- | - | - | -------- | ------- | 
|                                                                              |                | Metris                 |          |              |  | Non-         |          |              |  |             
|                                                                              |                | Companies              |          | Guarantor    |  | Guarantor    |          |              |  |             
|                                                                              |                | Inc.                   |          | Subsidiaries |  | Subsidiaries |          | Eliminations |  | Consolidated
|                                                                              |                |                        |          |              |  |              |          |              |  |             
|                                                                              |                |                       
|                                                                              |                | (Dollars in thousands)
|Revenues:                                                                     |                |                        |          |              |  |              |          |              |  |              |          |         |  |   |          |          |   |   |          |        
|Securitization income                                                         |                |                        | (158     | )            |  |              |         |              |  |              | 174,976  |         |  |   | (1,451   | )        |   |   | 173,367  |        
|Servicing income on securitized receivables                                   |                |                        |         |              |  |              |         |              |  |              | 176,627  |         |  |   |         |          |   |   | 176,627  |        
|Credit card loan and other income                                             |                |                        | 1,604    |              |  |              |         |              |  |              | 88,926   |         |  |   |         |          |   |   | 90,530   |        
|Credit card loan fees, interchange and other
    income                       |                |                        | 2,535    |              |  |              | 66,153   |              |  |              | 89,383   |         |  |   | (78,579  | )        |   |   | 79,492   |        
|Enhancement services income                                                   |                |                        |         |              |  |              |         |              |  |              | 107,930  |         |  |   |         |          |   |   | 107,930  |        
|Loss on sale of credit card loans                                             |                |                        |         |              |  |              |         |              |  |              | (117,183 | )       |  |   |         |          |   |   | (117,183 | )      
|Gain on sale of membership club and warranty
    business                     |                |                        | (624     | )            |  |              | 28,011   |              |  |              | 45,787   |         |  |   | 11,613   |          |   |   | 84,787   |        
|Intercompany allocations                                                      |                |                        | 2,375    |              |  |              | 243,873  |              |  |              | 22,520   |         |  |   | (268,768 | )        |   |   |         |        
|                                                                              |                |                        |          |              |  |              |          |              |  |              |          |         |  |   |          |          |   |   |          |        
|                                                                              | Total revenues |                        |          | 5,732        |  |              |          | 338,037      |  |              |          | 588,966 |  |   |          | (337,185 | ) |   |          | 595,550 | 
|Expenses:                                                                     |                |                        |          |              |  |              |          |              |  |              |          |         |  |   |          |          |   |   |          |        
|Interest expense                                                              |                |                        | 46,869   |              |  |              | (4,873   | )            |  |              | 32,425   |         |  |   |         |          |   |   | 74,421   |        
|Provision for loan losses                                                     |                |                        | 2,568    |              |  |              |         |              |  |              | 124,182  |         |  |   | (102     | )        |   |   | 126,648  |        
|Credit card account and other product
    solicitation and marketing expenses |                |                        |         |              |  |              | 50,144   |              |  |              | 101,137  |         |  |   | (57,932  | )        |   |   | 93,349   |        
|Employee compensation                                                         |                |                        |         |              |  |              | 170,597  |              |  |              | 4,942    |         |  |   |         |          |   |   | 175,539  |        
|Data processing services and communications                                   |                |                        | 18       |              |  |              | (78,471  | )            |  |              | 161,584  |         |  |   | (14,416  | )        |   |   | 68,715   |        
|Credit protection claims expense                                              |                |                        |         |              |  |              |         |              |  |              | 30,882   |         |  |   |         |          |   |   | 30,882   |        
|Occupancy and equipment                                                       |                |                        |         |              |  |              |         |              |  |              | 36,564   |         |  |   |         |          |   |   | 36,564   |        
|Purchased portfolio premium amortization                                      |                |                        | 48       |              |  |              |         |              |  |              | 28,457   |         |  |   | (3,505   | )        |   |   | 25,000   |        
|Asset impairments, lease write-offs and severance                             |                |                        |         |              |  |              |         |              |  |              | 56,222   |         |  |   |         |          |   |   | 56,222   |        
|Loss on sale of deposits                                                      |                |                        |         |              |  |              |         |              |  |              | 32,963   |         |  |   |         |          |   |   | 32,963   |        
|Other                                                                         |                |                        | 2,914    |              |  |              | 124,418  |              |  |              | (17,429  | )       |  |   | (17,391  | )        |   |   | 92,512   |        
|Intercompany allocations                                                      |                |                        | 90       |              |  |              | 80,690   |              |  |              | 187,988  |         |  |   | (268,768 | )        |   |   |         |        
|                                                                              |                |                        |          |              |  |              |          |              |  |              |          |         |  |   |          |          |   |   |          |        
|                                                                              | Total expenses |                        |          | 52,507       |  |              |          | 342,505      |  |              |          | 779,917 |  |   |          | (362,114 | ) |   |          | 812,815 | 
|Loss Before Income Tax Benefit and Equity in
    Loss of Subsidiaries         |                |                        | (46,775  | )            |  |              | (4,468   | )            |  |              | (190,951 | )       |  |   | 24,929   |          |   |   | (217,265 | )      
|Income tax benefit                                                            |                |                        | (14,969  | )            |  |              | (6,791   | )            |  |              | (53,256  | )       |  |   | 5,490    |          |   |   | (69,526  | )      
|Equity in loss of subsidiaries                                                |                |                        | (115,933 | )            |  |              | (130,400 | )            |  |              |         |         |  |   | 246,333  |          |   |   |         |        
|                                                                              |                |                        |          |              |  |              |          |              |  |              |          |         |  |   |          |          |   |   |          |        
|Net Loss                                                                      |                | $                      | (147,739 | )            |  | $            | (128,077 | )            |  | $            | (137,695 | )       |  | $ | 265,772  |          |   | $ | (147,739 | )      
|                                                                              |                |                        |          |              |  |              |          |              |  |              |          |         |  |   |          |          |   |   |          |        

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METRIS COMPANIES INC.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF
INCOME

Year Ended December 31, 2002


|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |           |  |   |          |          |   |   |         |           | 
|------------------------------------------------------------------------------------------ | -------------- | ---------------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | --------- |  | - | -------- | -------- | - | - | ------- | --------- | 
|                                                                                           |                | Metris                 |         |              |  | Non-         |         |              |  |             
|                                                                                           |                | Companies              |         | Guarantor    |  | Guarantor    |         |              |  |             
|                                                                                           |                | Inc.                   |         | Subsidiaries |  | Subsidiaries |         | Eliminations |  | Consolidated
|                                                                                           |                |                        |         |              |  |              |         |              |  |             
|                                                                                           |                |                       
|                                                                                           |                | (Dollars in thousands)
|Revenues:                                                                                  |                |                        |         |              |  |              |         |              |  |              |         |           |  |   |          |          |   |   |         |          
|Securitization income                                                                      |                |                        | 3,168   |              |  |              |        |              |  |              | 324,872 |           |  |   | (4,523   | )        |   |   | 323,517 |          
|Servicing income on securitized receivables                                                |                |                        |        |              |  |              |        |              |  |              | 195,214 |           |  |   |         |          |   |   | 195,214 |          
|Credit card loan and other interest income                                                 |                |                        | 584     |              |  |              |        |              |  |              | 228,818 |           |  |   |         |          |   |   | 229,402 |          
|Credit card loan fees, interchange and other
    income                                    |                |                        | 1,748   |              |  |              | 94,941  |              |  |              | 166,747 |           |  |   | (100,262 | )        |   |   | 163,174 |          
|Enhancement services revenue                                                               |                |                        |        |              |  |              | 58,664  |              |  |              | 154,519 |           |  |   | (59,667  | )        |   |   | 153,516 |          
|Intercompany allocations                                                                   |                |                        | 166     |              |  |              | 266,604 |              |  |              | 45,742  |           |  |   | (312,512 | )        |   |   |        |          
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |           |  |   |          |          |   |   |         |          
|                                                                                           | Total revenues |                        |         | 5,666        |  |              |         | 420,209      |  |              |         | 1,115,912 |  |   |          | (476,964 | ) |   |         | 1,064,823 | 
|Expenses:                                                                                  |                |                        |         |              |  |              |         |              |  |              |         |           |  |   |          |          |   |   |         |          
|Interest expense                                                                           |                |                        | 31,168  |              |  |              | 389     |              |  |              | 71,959  |           |  |   |         |          |   |   | 103,516 |          
|Provision for loan losses                                                                  |                |                        | (603    | )            |  |              |        |              |  |              | 220,305 |           |  |   | 102      |          |   |   | 219,804 |          
|Credit card account and other product
    solicitation and marketing expenses              |                |                        | 16      |              |  |              | 112,249 |              |  |              | 181,196 |           |  |   | (120,192 | )        |   |   | 173,269 |          
|Employee compensation                                                                      |                |                        | (1,101  | )            |  |              | 183,701 |              |  |              | 28,226  |           |  |   |         |          |   |   | 210,826 |          
|Data processing services and communications                                                |                |                        | 52      |              |  |              | (92,080 | )            |  |              | 184,702 |           |  |   | (8,800   | )        |   |   | 83,874  |          
|Credit protection claims expense                                                           |                |                        |        |              |  |              | 1,334   |              |  |              | 43,216  |           |  |   |         |          |   |   | 44,550  |          
|Occupancy and equipment                                                                    |                |                        |        |              |  |              |        |              |  |              | 48,013  |           |  |   |         |          |   |   | 48,013  |          
|Purchased portfolio premium amortization                                                   |                |                        | 119     |              |  |              |        |              |  |              | 33,727  |           |  |   | (3,626   | )        |   |   | 30,220  |          
|Asset impairments, lease write-offs and severance                                          |                |                        |        |              |  |              |        |              |  |              | 27,736  |           |  |   |         |          |   |   | 27,736  |          
|Other                                                                                      |                |                        | 7,214   |              |  |              | 143,488 |              |  |              | (18,579 | )         |  |   | (9,391   | )        |   |   | 122,732 |          
|Intercompany allocations                                                                   |                |                        | 80      |              |  |              | 92,814  |              |  |              | 219,618 |           |  |   | (312,512 | )        |   |   |        |          
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |           |  |   |          |          |   |   |         |          
|                                                                                           | Total expenses |                        |         | 36,945       |  |              |         | 441,895      |  |              |         | 1,040,119 |  |   |          | (454,419 | ) |   |         | 1,064,540 | 
|(Loss) Income Before Income Tax (Benefit)
    Expense and Equity in Income of Subsidiaries |                |                        | (31,279 | )            |  |              | (21,686 | )            |  |              | 75,793  |           |  |   | (22,545  | )        |   |   | 283     |          
|Income tax (benefit) expense                                                               |                |                        | (9,377  | )            |  |              | (20,107 | )            |  |              | 38,110  |           |  |   | (6,759   | )        |   |   | 1,867   |          
|Equity in income of subsidiaries                                                           |                |                        | 20,318  |              |  |              | 37,683  |              |  |              |        |           |  |   | (58,001  | )        |   |   |        |          
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |           |  |   |          |          |   |   |         |          
|Net (Loss) Income                                                                          |                | $                      | (1,584  | )            |  | $            | 36,104  |              |  | $            | 37,683  |           |  | $ | (73,787  | )        |   | $ | (1,584  | )        
|                                                                                           |                |                        |         |              |  |              |         |              |  |              |         |           |  |   |          |          |   |   |         |          

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METRIS COMPANIES INC.

SUPPLEMENTAL CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS

Year Ended December 31,2004


|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---------------------- | -------- | ------------ |  | ------------ | -------- | ----------- |  | ------------ | ---------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                  |  | Metris                 |          |              |  | Non-         |          |             |  |             
|                                                                                  |  | Companies              |          | Guarantor    |  | Guarantor    |          |             |  |             
|                                                                                  |  | Inc.                   |          | Subsidiaries |  | Subsidiaries |          | Elimination |  | Consolidated
|                                                                                  |  |                        |          |              |  |              |          |             |  |             
|                                                                                  |  |                       
|                                                                                  |  | (Dollars in thousands)
|Operating Activities:                                                             |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash provided by (used in) operating
    activities                           |  | $                      | 45,976   |              |  | $            | (28,701  | )           |  | $            | 368,855    |   |  | $ | (133,735 | ) |  | $ | 252,395    |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Investing Activities:                                                             |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Proceeds from sales of available for sale
    securities                          |  |                        | 656,102  |              |  |              |         |             |  |              | 2,774,874  |   |  |   |         |   |  |   | 3,430,976  |  
|Purchases of available for sale securities                                        |  |                        | (706,102 | )            |  |              |         |             |  |              | (2,983,308 | ) |  |   |         |   |  |   | (3,689,410 | )
|Net cash from loan originations and principal
    collections on loans receivable |  |                        | 7,690    |              |  |              |         |             |  |              | (85,700    | ) |  |   | 14,000   |   |  |   | (64,010    | )
|Proceeds from sales of credit card portfolios to
    third parties                |  |                        |         |              |  |              |         |             |  |              | 27,870     |   |  |   |         |   |  |   | 27,870     |  
|Net disposals of property and equipment                                           |  |                        |         |              |  |              | (2,297   | )           |  |              |           |   |  |   |         |   |  |   | (2,297     | )
|Investment in subsidiaries                                                        |  |                        | (5,662   | )            |  |              | (231,212 | )           |  |              | (782       | ) |  |   | 237,656  |   |  |   |           |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash used in investing activities                                             |  |                        | (47,972  | )            |  |              | (233,509 | )           |  |              | (267,046   | ) |  |   | 251,656  |   |  |   | (296,871   | )
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Financing Activities:                                                             |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net increase (decrease) in debt                                                   |  |                        | 6,250    |              |  |              | 199,849  |             |  |              | (254,271   | ) |  |   | 54,422   |   |  |   | 6,250      |  
|Net increase(decrease)in deposits                                                 |  |                        | 501      |              |  |              |         |             |  |              | (3,356     | ) |  |   |         |   |  |   | (2,855     | )
|Proceeds from issuance of common stock                                            |  |                        | 1,289    |              |  |              |         |             |  |              |           |   |  |   |         |   |  |   | 1,289      |  
|Capital contributions                                                             |  |                        |         |              |  |              | 59,149   |             |  |              | 113,194    |   |  |   | (172,343 | ) |  |   |           |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash provided by (used in) financing
    activities                           |  |                        | 8,040    |              |  |              | 258,998  |             |  |              | (144,433   | ) |  |   | (117,921 | ) |  |   | 4,684      |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net increase (decrease) in cash and cash
    equivalents                          |  |                        | 6,044    |              |  |              | (3,212   | )           |  |              | (42,624    | ) |  |   |         |   |  |   | (39,792    | )
|Cash and cash equivalents at beginning of year                                    |  |                        | (1,081   | )            |  |              | 3,034    |             |  |              | 128,557    |   |  |   |         |   |  |   | 130,510    |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Cash and cash equivalents at end of year                                          |  | $                      | 4,963    |              |  | $            | (178     | )           |  | $            | 85,933     |   |  | $ |         |   |  | $ | 90,718     |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  

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METRIS COMPANIES INC.

SUPPLEMENTAL CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS

Year Ended December 31, 2003


|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---------------------- | -------- | ------------ |  | ------------ | -------- | ----------- |  | ------------ | ---------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                  |  | Metris                 |          |              |  | Non-         |          |             |  |             
|                                                                                  |  | Companies              |          | Guarantor    |  | Guarantor    |          |             |  |             
|                                                                                  |  | Inc.                   |          | Subsidiaries |  | Subsidiaries |          | Elimination |  | Consolidated
|                                                                                  |  |                        |          |              |  |              |          |             |  |             
|                                                                                  |  |                       
|                                                                                  |  | (Dollars in thousands)
|Operating Activities:                                                             |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash used in operating activities                                             |  | $                      | (165,368 | )            |  | $            | (114,182 | )           |  | $            | (330,567   | ) |  | $ | 271,997  |   |  | $ | (338,120   | )
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Investing Activities:                                                             |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Proceeds from sales of available for sale
    securities                          |  |                        |         |              |  |              |         |             |  |              | 1,473,108  |   |  |   |         |   |  |   | 1,473,108  |  
|Purchases of available for sale securities                                        |  |                        |         |              |  |              |         |             |  |              | (1,411,083 | ) |  |   |         |   |  |   | (1,411,083 | )
|Proceeds from transfers of portfolios to the
    Metris Master Trust              |  |                        |         |              |  |              |         |             |  |              | 695,459    |   |  |   |         |   |  |   | 695,459    |  
|Net cash from loan originations and principal
    collections on loans receivable |  |                        | (13,962  | )            |  |              |         |             |  |              | (766,070   | ) |  |   | (14,001  | ) |  |   | (794,033   | )
|Proceeds from sales of credit card portfolios to
    third-parties                |  |                        |         |              |  |              |         |             |  |              | 891,256    |   |  |   |         |   |  |   | 891,256    |  
|Proceeds from sale of membership club and
    warranty business                   |  |                        |         |              |  |              | 8,100    |             |  |              | 36,900     |   |  |   |         |   |  |   | 45,000     |  
|Net disposals of property and equipment                                           |  |                        |         |              |  |              | 5,717    |             |  |              | 20,225     |   |  |   |         |   |  |   | 25,942     |  
|Investment in subsidiaries                                                        |  |                        | 180,419  |              |  |              | 275,006  |             |  |              | 512,963    |   |  |   | (968,388 | ) |  |   |           |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash provided by investing activities                                         |  |                        | 166,457  |              |  |              | 288,823  |             |  |              | 1,452,758  |   |  |   | (982,389 | ) |  |   | 925,649    |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Financing Activities:                                                             |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net increase (decrease) in debt                                                   |  |                        | 1,320    |              |  |              | (9,421   | )           |  |              |           |   |  |   |         |   |  |   | (8,101     | )
|Sale of deposits                                                                  |  |                        |         |              |  |              |         |             |  |              | (559,282   | ) |  |   |         |   |  |   | (559,282   | )
|Net decrease in deposits                                                          |  |                        |         |              |  |              |         |             |  |              | (327,210   | ) |  |   |          |   |  |   | (327,210   | )
|Premium and transaction costs paid on sale of
    deposits                        |  |                        |         |              |  |              |         |             |  |              | (32,963    | ) |  |   |         |   |  |   | (32,963    | )
|Proceeds from issuance of common stock                                            |  |                        | 305      |              |  |              |         |             |  |              |           |   |  |   |         |   |  |   | 305        |  
|Capital contributions                                                             |  |                        |         |              |  |              | (170,295 | )           |  |              | (540,097   | ) |  |   | 710,392  |   |  |   |           |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash provided by (used in) financing
    activities                           |  |                        | 1,625    |              |  |              | (179,716 | )           |  |              | (1,459,552 | ) |  |   | 710,392  |   |  |   | (927,251   | )
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net increase (decrease) in cash and cash
    equivalents                          |  |                        | 2,714    |              |  |              | (5,075   | )           |  |              | (337,361   | ) |  |   |         |   |  |   | (339,722   | )
|Cash and cash equivalents at beginning of year                                    |  |                        | (3,795   | )            |  |              | 8,109    |             |  |              | 465,918    |   |  |   |         |   |  |   | 470,232    |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Cash and cash equivalents at end of year                                          |  | $                      | (1,081   | )            |  | $            | 3,034    |             |  | $            | 128,557    |   |  | $ |         |   |  | $ | 130,510    |  
|                                                                                  |  |                        |          |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  

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METRIS COMPANIES INC.

SUPPLEMENTAL CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS

Year Ended December 31, 2002


|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ------- | ------------ |  | ------------ | -------- | ----------- |  | ------------ | ---------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                  |  | Metris                 |         |              |  | Non-         |          |             |  |             
|                                                                                  |  | Companies              |         | Guarantor    |  | Guarantor    |          |             |  |             
|                                                                                  |  | Inc.                   |         | Subsidiaries |  | Subsidiaries |          | Elimination |  | Consolidated
|                                                                                  |  |                        |         |              |  |              |          |             |  |             
|                                                                                  |  |                       
|                                                                                  |  | (Dollars in thousands)
|Operating Activities:                                                             |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash provided by operating activities                                         |  | $                      | 80,005  |              |  | $            | 51,110   |             |  | $            | 293,601    |   |  | $ | (30,787  | ) |  | $ | 393,929    |  
|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Investing Activities:                                                             |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Proceeds from sales of available for sale
    securities                          |  |                        |        |              |  |              |         |             |  |              | 4,440,526  |   |  |   |         |   |  |   | 4,440,526  |  
|Purchases of available for sale securities                                        |  |                        |        |              |  |              |         |             |  |              | (4,550,526 | ) |  |   |         |   |  |   | (4,550,526 | )
|Proceeds from transfers of portfolios to the
    Metris Master Trust              |  |                        |        |              |  |              |         |             |  |              | 2,087,097  |   |  |   |         |   |  |   | 2,087,097  |  
|Net cash from loan originations and principal
    collections on loans receivable |  |                        | (1,554  | )            |  |              |         |             |  |              | (786,804   | ) |  |   |         |   |  |   | (788,358   | )
|Proceeds from sales of credit card portfolios to
    third parties                |  |                        |        |              |  |              |         |             |  |              | 16,278     |   |  |   |         |   |  |   | 16,278     |  
|Net additions to property and equipment                                           |  |                        |        |              |  |              | (5,161   | )           |  |              | (998       | ) |  |   |         |   |  |   | (6,159     | )
|Investment in subsidiaries                                                        |  |                        | (96,479 | )            |  |              | 248,588  |             |  |              | 243,969    |   |  |   | (396,078 | ) |  |   |           |  
|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash (used in) provided by investing
    activities                           |  |                        | (98,033 | )            |  |              | 243,427  |             |  |              | 1,449,542  |   |  |   | (396,078 | ) |  |   | 1,198,858  |  
|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Financing Activities:                                                             |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net increase (decrease) in debt                                                   |  |                        | 45,304  |              |  |              | (559     | )           |  |              | (292,000   | ) |  |   | (43,000  | ) |  |   | (290,255   | )
|Net decrease in deposits                                                          |  |                        |        |              |  |              |         |             |  |              | (1,165,254 | ) |  |   |         |   |  |   | (1,165,254 | )
|Cash dividends paid                                                               |  |                        | (3,728  | )            |  |              |         |             |  |              |           |   |  |   |         |   |  |   | (3,728     | )
|Proceeds from issuance of common stock                                            |  |                        | 337     |              |  |              |         |             |  |              |           |   |  |   |         |   |  |   | 337        |  
|Repurchase of common stock                                                        |  |                        | (45,294 | )            |  |              |         |             |  |              |           |   |  |   |         |   |  |   | (45,294    | )
|Capital contributions                                                             |  |                        |        |              |  |              | (287,374 | )           |  |              | (182,491   | ) |  |   | 469,865  |   |  |   |           |  
|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net cash used in financing activities                                             |  |                        | (3,381  | )            |  |              | (287,933 | )           |  |              | (1,639,745 | ) |  |   | 426,865  |   |  |   | (1,504,194 | )
|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Net (decrease) increase in cash and cash
    equivalents                          |  |                        | (21,409 | )            |  |              | 6,604    |             |  |              | 103,398    |   |  |   |         |   |  |   | 88,593     |  
|Cash and cash equivalents at beginning of year                                    |  |                        | 17,614  |              |  |              | 1,505    |             |  |              | 362,520    |   |  |   |         |   |  |   | 381,639    |  
|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  
|Cash and cash equivalents at end of year                                          |  | $                      | (3,795  | )            |  | $            | 8,109    |             |  | $            | 465,918    |   |  | $ |         |   |  | $ | 470,232    |  
|                                                                                  |  |                        |         |              |  |              |          |             |  |              |            |   |  |   |          |   |  |   |            |  

93



---



##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

SUMMARY OF CONSOLIDATED QUARTERLY FINANCIAL
INFORMATION

AND STOCK DATA


(Unaudited  see accompanying
accountants report)


|                                                             |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |        | 
|------------------------------------------------------------ | ------- | ------------------------------------- | ------- | ------- | - | ------- | ------- | ------- |  | - | ------- | ------ | - | - | ------- | ------ | 
|                                                             |         |                                      
|                                                             |         | 2004                                 
|                                                             |         |                                      
|                                                             |         | Fourth                                |         | Third   |   | Second  |         | First  
|                                                             |         | Quarter                               |         | Quarter |   | Quarter |         | Quarter
|                                                             |         |                                       |         |         |   |         |         |        
|                                                             |         |                                      
|                                                             |         | (In thousands, except per-share data)
|Summary of Operations:                                       |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|Securitization income                                        |         | $                                     | 86,693  |         |   | $       | 147,975 |         |  | $ | (24,343 | )      |   | $ | 118,985 |       
|Credit card loan and other interest income                   |         |                                       | 5,435   |         |   |         | 4,549   |         |  |   | 5,010   |        |   |   | 5,106   |       
|Total revenues                                               |         |                                       | 130,302 |         |   |         | 194,448 |         |  |   | 26,754  |        |   |   | 178,624 |       
|                                                            
|Interest expense                                             |         |                                       | 13,740  |         |   |         | 14,056  |         |  |   | 18,714  |        |   |   | 13,931  |       
|Provision for loan losses                                    |         |                                       | 413     |         |   |         | 1,408   |         |  |   | (491    | )      |   |   | (6,092  | )     
|Total expenses                                               |         |                                       | 127,397 |         |   |         | 109,259 |         |  |   | 123,204 |        |   |   | 114,312 |       
|                                                            
|Income (loss) before income taxes                            |         |                                       | 2,905   |         |   |         | 85,189  |         |  |   | (96,450 | )      |   |   | 64,312  |       
|Income tax expense (benefit)                                 |         |                                       | 2,208   |         |   |         | 23,425  |         |  |   | (26,124 | )      |   |   | 22,702  |       
|                                                             |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|Net income (loss)                                            |         |                                       | 697     |         |   |         | 61,764  |         |  |   | (70,326 | )      |   |   | 41,610  |       
|Convertible preferred stock dividends                        |         |                                       | 11,323  |         |   |         | 11,073  |         |  |   | 10,830  |        |   |   | 10,591  |       
|                                                             |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|Net (loss) income after preferred dividends                  |         | $                                     | (10,626 | )       |   | $       | 50,691  |         |  | $ | (81,156 | )      |   | $ | 31,019  |       
|                                                             |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|Per Common Share:                                            |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|(Loss) earnings per common share:(1)                         |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|                                                             | Basic   |                                       | $       | (0.18   | ) |         | $       | 0.49    |  |   | $       | (1.40  | ) |   | $       | 0.30   | 
|                                                             | Diluted |                                       |         | (0.18   | ) |         |         | 0.48    |  |   |         | (1.40  | ) |   |         | 0.30   | 
|Shares used to compute earnings (loss) per common
    share: |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|                                                             | Basic   |                                       |         | 58,083  |   |         |         | 57,981  |  |   |         | 57,924 |   |   |         | 57,791 | 
|                                                             | Diluted |                                       |         | 58,083  |   |         |         | 58,710  |  |   |         | 57,924 |   |   |         | 58,318 | 
|Market Prices:                                               |         |                                       |         |         |   |         |         |         |  |   |         |        |   |   |         |       
|                                                             | High    |                                       | $       | 12.93   |   |         | $       | 9.78    |  |   | $       | 9.09   |   |   | $       | 8.04   | 
|                                                             | Low     |                                       |         | 9.11    |   |         |         | 5.88    |  |   |         | 6.17   |   |   |         | 4.46   | 
|                                                             | Close   |                                       |         | 12.75   |   |         |         | 9.78    |  |   |         | 8.69   |   |   |         | 8.04   | 



---



|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the quarter ended March 31, 2004,
    earnings per share amounts have been restated to comply with the
    provisions of EITF 03-6, which was adopted effective
    April 1, 2004.

94



---



##### Table of Contents



METRIS COMPANIES INC. AND
SUBSIDIARIES

SUMMARY OF CONSOLIDATED QUARTERLY FINANCIAL
INFORMATION

AND STOCK DATA


(Unaudited  see accompanying
accountants report)


|                                                                |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |        |  
|--------------------------------------------------------------- | ------- | ------------------------------------- | ------- | ------- |  | ------- | ------- | ------- | - | - | ------- | ------ | - | - | -------- | ------ | -
|                                                                |         |                                      
|                                                                |         | 2003                                 
|                                                                |         |                                      
|                                                                |         | Fourth                                |         | Third   |  | Second  |         | First  
|                                                                |         | Quarter                               |         | Quarter |  | Quarter |         | Quarter
|                                                                |         |                                       |         |         |  |         |         |        
|                                                                |         |                                      
|                                                                |         | (In thousands, except per-share data)
|Summary of Operations:                                          |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|Securitization income                                           |         | $                                     | 99,851  |         |  | $       | 93,781  |         |   | $ | 17,707  |        |   | $ | (37,970  | )     
|Credit card loan and other interest income                      |         | $                                     | 2,281   |         |  | $       | 24,656  |         |   | $ | 31,432  |        |   | $ | 32,161   |       
|Total revenues                                                  |         |                                       | 166,119 |         |  |         | 159,975 |         |   |   | 157,624 |        |   |   | 111,832  |       
|                                                               
|Interest expense                                                |         |                                       | 14,068  |         |  |         | 22,296  |         |   |   | 18,716  |        |   |   | 19,341   |       
|Provision for loan losses                                       |         |                                       | 18,810  |         |  |         | 33,019  |         |   |   | 30,033  |        |   |   | 44,786   |       
|Total expenses                                                  |         |                                       | 126,168 |         |  |         | 252,151 |         |   |   | 195,223 |        |   |   | 239,273  |       
|                                                               
|Income (loss) before income taxes                               |         |                                       | 39,951  |         |  |         | (92,176 | )       |   |   | (37,599 | )      |   |   | (127,441 | )     
|Income tax expense (benefit)                                    |         |                                       | 5,134   |         |  |         | (17,198 | )       |   |   | (12,851 | )      |   |   | (44,611  | )     
|                                                                |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|Net income (loss)                                               |         |                                       | 34,817  |         |  |         | (74,978 | )       |   |   | (24,748 | )      |   |   | (82,830  | )     
|Convertible preferred stock dividends                           |         |                                       | 10,358  |         |  |         | 10,131  |         |   |   | 9,908   |        |   |   | 9,689    |       
|                                                                |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|Net income (loss) after preferred dividends                     |         | $                                     | 24,459  |         |  | $       | (85,109 | )       |   | $ | (34,656 | )      |   | $ | (92,519  | )     
|                                                                |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|Per Common Share:                                               |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|Earnings (loss) per common share:(1)                            |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|                                                                | Basic   |                                       | $       | 0.24    |  |         | $       | (1.48   | ) |   | $       | (0.60  | ) |   | $        | (1.62  | )
|                                                                | Diluted |                                       |         | 0.24    |  |         |         | (1.48   | ) |   |         | (0.60  | ) |   |          | (1.62  | )
|Shares used to compute earnings (loss) per common
    share:(1) |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|                                                                | Basic   |                                       |         | 57,607  |  |         |         | 57,546  |   |   |         | 57,462 |   |   |          | 57,257 |  
|                                                                | Diluted |                                       |         | 57,607  |  |         |         | 57,546  |   |   |         | 57,462 |   |   |          | 57,257 |  
|Market Prices:                                                  |         |                                       |         |         |  |         |         |         |   |   |         |        |   |   |          |       
|                                                                | High    |                                       | $       | 5.06    |  |         | $       | 6.68    |   |   | $       | 6.87   |   |   | $        | 2.92   |  
|                                                                | Low     |                                       |         | 3.80    |  |         |         | 2.78    |   |   |         | 2.11   |   |   |          | 1.25   |  
|                                                                | Close   |                                       |         | 4.44    |  |         |         | 4.12    |   |   |         | 5.55   |   |   |          | 2.35   |  



---



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Prior period earnings per share amounts have been
    restated to comply with the provisions of EITF 03-6, which
    was adopted effective April 1, 2004.

Stock Data

Our common stock, which is traded under the
symbol MXT, has been listed on the New York Stock
Exchange since May 7, 1999. Prior to its listing on the New
York Stock Exchange, our common stock traded under the symbol
MTRS on the Nasdaq Stock Market since its initial
public offering on October 25, 1996. As of March 7,
2005, there were approximately 327 holders of record and
approximately 20,107 beneficial holders of our common stock.
Under our current Credit Agreement we cannot make dividend
payments that exceed either $.01 per share of our capital
stock (as defined in that Credit Agreement) in any fiscal
quarter, or $4.0 million in any fiscal year.

95



---



##### Table of Contents



MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL
STATEMENTS

AND INTERNAL CONTROL OVER FINANCIAL
REPORTING


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

Management of MCI is responsible for establishing
and maintaining adequate internal control over financial
reporting. MCIs internal control system was designed to
provide reasonable assurance to MCIs management and Board
of Directors regarding the preparation and fair presentation of
published financial statements.

All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation.

MCIs management assessed the effectiveness
of our internal control over financial reporting as of
December 31, 2004. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control 
Integrated Framework. Based on our assessment, we believe
that, as of December 31, 2004, MCIs internal control
over financial reporting was effective based on those criteria.

MCIs independent registered public
accounting firm, KPMG LLP, has issued an attestation report on
our assessment of our internal control over financial reporting.
That report is included herein and appears on pages 98-99.

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

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

|                                                            |  |                                                                                 
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------
|                                                           
|/s/ DAVID D. WESSELINK                                      |  | /s/ WILLIAM A. HOULIHAN                                                         
|                                                            |  |                                                                                 
|DAVID D. WESSELINK
    Chairman and Chief Executive Officer |  | WILLIAM A. HOULIHAN
    Executive Vice President and
    Chief Financial Officer

96



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

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, 2004 and 2003, 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, 2004. 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 the
standards of the Public Company Accounting Oversight Board
(United States). 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, 2004 and 2003, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting
principles.

As discussed in Note 2 to the consolidated
financial statements, the Company changed its method of
calculating earnings per share in 2004.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Metris Companies
Inc.s internal control over financial reporting as of
December 31, 2004, based on Internal Control 
Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 11, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.



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

Minneapolis, Minnesota

March 11, 2005


97



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors and Stockholders

Metris Companies Inc.:


We have audited managements assessment,
included in the accompanying Management Report on Consolidated
Financial Statements and Internal Control over Financial
Reporting, that Metris Companies Inc. maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control-Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Metris Companies Inc.s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.

A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.

In our opinion, managements assessment that
Metris Companies Inc. maintained effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects based on criteria established
in Internal Control-Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, Metris Companies Inc. maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).

98



---



##### Table of Contents



We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Metris
Companies Inc. and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of income,
comprehensive income, stockholders equity, and cash flows
for each of the years in the three-year period ended
December 31, 2004, and our report dated March 11, 2005
expressed an unqualified opinion on those consolidated financial
statements.

As discussed in Note 2 to the consolidated
financial statements, the Company changed its method of
calculating earnings per share in 2004.



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

Minneapolis, Minnesota

March 11, 2005


99



---



##### Table of Contents








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

None




Item 9a.Controls
and Procedures

Under the supervision and with the participation
of the Companys management, including the Chairman and
Chief Executive Officer (CEO) and the Chief
Financial Officer (CFO), we evaluated the
effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in
Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of
December 31, 2004. Based on that evaluation, our
management, including the CEO and CFO, have concluded that, as
of December 31, 2004, our disclosure controls and
procedures were effective in ensuring that information required
to be disclosed in the reports we file under the Securities
Exchange Act of 1934, as amended (Exchange Act), is
recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. During the quarter
ended December 31, 2004, there were no changes in our
internal controls over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that
have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

The Management Report on Consolidated Financial
Statements and Internal Control over Financial Reporting, and
the related Report of the Independent Registered Public
Accounting Firm, are set forth immediately after the Financial
Statements and Supplementary Data on pages 96-99 of this
Report.




Item 9b.Other
Information

None




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this item with
respect to directors is set forth under Proposal One:
Election of Directors, in our Proxy Statement for the
Annual Meeting of Stockholders to be held on May 11, 2005,
which will be filed within 120 days of December 31,
2004, and is incorporated herein by reference. The information
required by this item with respect to executive officers is,
pursuant to instruction 3 of Item 401(b) of
Regulation S-K, set forth in Part I of this
Form 10-K under Executive Officers of the
Registrant. The information required by this item with
respect to audit committee and director nomination procedures is
set forth under Corporate Governance in the Proxy
Statement and is incorporated herein by reference. 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.

We have adopted a Code of Conduct and Business
Ethics for Senior Financial Management that applies to our
principal executive officer, principal financial officer,
principal accounting officer or controller, or persons
performing similar functions. This code of ethics is posted on
the Companys website (www.metriscompanies.com). We intend
to satisfy the disclosure requirement under Item 10 of
Form 8-K regarding an amendment to, or waiver from, a
provision of the code of ethics that applies to our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, by posting such information on our website, at the
address specified above.

Information on our website is not deemed to be
incorporated by reference into this Annual Report on
Form 10-K

100



---



##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item with
respect to executive compensation is set forth under
Compensation Tables and Compensation Matters and
with respect to director compensation is set forth under
Corporate Governance in the Proxy Statement and is
incorporated herein by reference. The Compensation Report
on Executive Compensation in the Proxy Statement is not
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, Persons Owning More Than Five Percent of
Companys Common Stock and Equity Compensation
Plan Information in the Proxy Statement and is
incorporated herein by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

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






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item is set
forth under Information Regarding Independent Registered
Public Accounting Firm in the Proxy Statement and is
incorporated herein by reference.

With the exception of the information
incorporated by reference in Items 10-14, the Proxy
Statement is not to be deemed filed as part of this
Form 10-K.




PART IV






|         |                                               
|-------- | ----------------------------------------------
|Item 15. | Exhibits and Financial Statement
    Schedules

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



| |                                                             
| | ------------------------------------------------------------
| | 1. Consolidated Financial
    Statements  See Item 8 above.
|
| | 2. Financial Statement Schedules                            



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



| |                                                                    
| | -------------------------------------------------------------------
| | 3. Exhibits: See Exhibit Index on
    pages 108-111 of this Report.

(b) See Item 15(a)(3).

(c) See Item 15(a)(2).

101



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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 11th day of March,
2005.



| |                      
| | ---------------------
| | METRIS COMPANIES INC.
| | (Registrant)         



| |    |                       
| | -- | ----------------------
| | By | /s/ DAVID D. WESSELINK

| |                                     
| | ------------------------------------
| |                                     
| | David D. Wesselink                  
| | Chairman and Chief Executive Officer

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

|                                           |  |                                                       |  |                |  | 
|------------------------------------------ |  | ----------------------------------------------------- |  | -------------- |  | 
|                                           |  |                                                       |  |               
|Signature                                  |  | Title                                                 |  | Date          
|                                           |  |                                                       |  |               
|Principal executive officer:               |  |                                                       |  |               
|                                          
|/s/ DAVID D. WESSELINKDavid D. Wesselink   |  | Chairman of the Board,
    Chief Executive Officer    |  | March 11, 2005
|Principal financial officer:               |  |                                                       |  |               
|                                          
|/s/ WILLIAM A. HOULIHANWilliam A. Houlihan |  | Executive Vice President,
    Chief Financial Officer |  | March 11, 2005
|Principal accounting officer:              |  |                                                       |  |               
|                                          
|/s/ MARK P. WAGENERMark P. Wagener         |  | Senior Vice President, Controller                     |  | March 11, 2005
|Directors:                                 |  |                                                       |  |               
|                                          
|/s/ C. HUNTER BOLLC. Hunter Boll           |  | Director                                              |  | March 11, 2005
|                                          
|/s/ LEO R. BREITMANLeo R. Breitman         |  | Director                                              |  | March 11, 2005
|                                          
|/s/ JOHN A. CLEARYJohn A. Cleary           |  | Director                                              |  | March 11, 2005
|                                          
|/s/ THOMAS M. HAGERTYThomas M. Hagerty     |  | Director                                              |  | March 11, 2005
|                                          
|/s/ DAVID V. HARKINSDavid V. Harkins       |  | Director                                              |  | March 11, 2005

102



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|                                       |  |          |  |                |  | 
|-------------------------------------- |  | -------- |  | -------------- |  | 
|                                       |  |          |  |               
|Signature                              |  | Title    |  | Date          
|                                       |  |          |  |               
|                                      
|/s/ JEROME J. JENKOJerome J. Jenko     |  | Director |  | March 11, 2005
|                                      
|/s/ THOMAS H. LEEThomas H. Lee         |  | Director |  | March 11, 2005
|                                      
|/s/ DONALD J. SANDERSDonald J. Sanders |  | Director |  | March 11, 2005
|                                      
|/s/ EDWARD B. SPENOEdward B. Speno     |  | Director |  | March 11, 2005
|                                      
|/s/ FRANK D. TRESTMANFrank D. Trestman |  | Director |  | March 11, 2005

103



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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002


I, David D. Wesselink, certify that:

1. I have reviewed this Annual Report on
Form 10-K for the year ended December 31, 2004 of
Metris Companies, Inc.;

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

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

4. The registrants other certifying
officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    report is being prepared;         
|
| | (b) Designed such internal control over
    financial reporting, or caused such internal control over
    financial reporting to be designed under our supervision, to
    provide reasonable assurance regarding the reliability of
    financial reporting and the preparation of financial statements
    for external purposes in accordance with generally accepted
    accounting principles;                
|
| | (c) Evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this report our conclusions about the effectiveness
    of the disclosure controls and procedures, as of the end of the
    period covered by this report based on such evaluation; and                                                                                                            
|
| | (d) Disclosed in this report any change in
    the registrants internal control over financial reporting
    that occurred during the registrants most recent fiscal
    quarter (the registrants fourth fiscal quarter in the case
    of an annual report) that has materially affected, or is
    reasonably likely to materially affect, the registrants
    internal control over financial reporting; and

5. The registrants other certifying
officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies and
    material weaknesses in the design or operation of internal
    control over financial reporting which are reasonably likely to
    adversely affect the registrants ability to record,
    process, summarize and report financial information; and
|
| | (b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal control over financial
    reporting.                                                                                                   



| |                                     
| | ------------------------------------
| | /s/  DAVID D. WESSELINK             
| |                                     
| | David D. Wesselink                  
| | Chairman and Chief Executive Officer
| | (Principal Executive Officer)       

Date: March 11, 2005

104



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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002


I, William A. Houlihan, certify that:

1. I have reviewed this Annual Report on
Form 10-K for the year ended December 31, 2004 of
Metris Companies, Inc.;

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

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

4. The registrants other certifying
officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and
    procedures, or caused such disclosure controls and procedures to
    be designed under our supervision, to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    report is being prepared;         
|
| | (b) Designed such internal control over
    financial reporting, or caused such internal control over
    financial reporting to be designed under our supervision, to
    provide reasonable assurance regarding the reliability of
    financial reporting and the preparation of financial statements
    for external purposes in accordance with generally accepted
    accounting principles;                
|
| | (c) Evaluated the effectiveness of the
    registrants disclosure controls and procedures and
    presented in this report our conclusions about the effectiveness
    of the disclosure controls and procedures, as of the end of the
    period covered by this report based on such evaluation; and                                                                                                            
|
| | (d) Disclosed in this report any change in
    the registrants internal control over financial reporting
    that occurred during the registrants most recent fiscal
    quarter (the registrants fourth fiscal quarter in the case
    of an annual report) that has materially affected, or is
    reasonably likely to materially affect, the registrants
    internal control over financial reporting; and

5. The registrants other certifying
officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies and
    material weaknesses in the design or operation of internal
    control over financial reporting which are reasonably likely to
    adversely affect the registrants ability to record,
    process, summarize and report financial information; and
|
| | (b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal control over financial
    reporting.                                                                                                   



| |                                                         
| | --------------------------------------------------------
| | /s/  WILLIAM A. HOULIHAN                                
| |                                                         
| | William A. Houlihan                                     
| | Executive Vice President and Chief Financial
    Officer
| | (Principal Financial Officer)                           

Date: March 11, 2005

105



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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002


In connection with the Annual Report of Metris
Companies Inc. (the Company) on Form 10-K for
the year ended December 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, David D. Wesselink, Chairman and
Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and

2. The information contained in the Report
fairly presents, in all material respects, the financial
condition and results of operations of the Company.



| |                                     
| | ------------------------------------
| | /s/ DAVID D. WESSELINK              
| |                                     
| | David D. Wesselink                  
| | Chairman and Chief Executive Officer

March 11, 2005

106



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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002


In connection with the Annual Report of Metris
Companies Inc. (the Company) on Form 10-K for
the year ended December 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, William A. Houlihan, Executive Vice
President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

1. The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and

2. The information contained in the Report
fairly presents, in all material respects, the financial
condition and results of operations of the Company.



| |                             
| | ----------------------------
| | /s/ WILLIAM A. HOULIHAN     
| |                             
| | William A. Houlihan         
| | Executive Vice President and
| | Chief Financial Officer     

March 11, 2005

107



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##### Table of Contents






EXHIBIT INDEX

|                             |   |                        |  |                                                                                                                                                                                                                                                                                                                                                                      
|---------------------------- | - | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                      |   |                       
|Number                       |   | Description of Exhibit
|                             |   |                       
|Charter Documents:          
|                             | 3 | .1                     |  | Amended and Restated Certificate of Incorporation
    of the (incorporated by reference to Exhibit 3.1 to the
    Companys Registration Statement on Form 8-A12B dated
    April 26, 1999 (File No. 1-12351)).                                                                                                                                                      
|                            
|                             |   |                        |  | (a) Certificate of Amendment to the Amended
    and Restated Certificate of Incorporation of the Company dated
    June 4, 2003 (incorporated by reference to Exhibit 3.1
    to the Companys Report on Form 10-K dated April 12,
    2004 (File No. 1-12351)).                                                                                                     
|                            
|                             |   |                        |  | (b) Certificate of Amendment to the Amended
    and Restated Certificate of Incorporation of the Company dated
    September 19, 2000 (incorporated by reference to
    Exhibit 3.3 to the Companys Registration Statement on
    Form S-3 dated September 29, 2000.
    (File No. 1-12351)).                                                                       
|                            
|                             |   |                        |  | (c) Certificate of Amendment to the Amended
    and Restated Certificate of Incorporation of the Company dated
    March 24, 1999 (incorporated by reference to
    Exhibit 3.1 to the Companys Registration Statement on
    Form 8-A12B dated April 26, 1999.
    (File No. 1-12351)).                                                                            
|                            
|                             | 3 | .2                     |  | Amended and Restated Bylaws of the Company
    (incorporated by reference to Exhibit 3.1 to the
    Companys Quarterly Report on Form 10-Q for the period
    ended June 30, 1999 (File No. 1-12351)).                                                                                                                                                              
|                            
|Instruments Defining Rights:
|                            
|                             | 4 | .1                     |  | Certificate of Designation of Series C
    Perpetual Preferred Stock (incorporated by reference to
    Exhibit 4.2 of MCIs Current Report on Form 8-K dated
    December 22, 1998 (File No. 1-12351)).                                                                                                                                                              
|                            
|                             |   |                        |  | (a) Amended Certificate of Designation of
    Series C Perpetual Convertible Preferred Stock
    (incorporated by reference to Exhibit 3.3 to MCIs
    Registration Statement on Form S-3 (File
    No. 333-82007)).                                                                                                                                                
|                            
|                             | 4 | .3                     |  | Certificate of Designation of Series D
    Junior Participating Convertible Preferred Stock (incorporated
    by reference to Exhibit 4.3 of MCIs Current Report on
    Form 8-K dated December 22, 1998
    (File No. 1-12351)).                                                                                                                                   
|                            
|                             | 4 | .4                     |  | Registration Rights Agreement, dated as of
    December 9, 1998, between MCI and the Investors named
    therein (incorporated by reference to Exhibit 10.3 to
    MCIs Current Report on Form 8-K dated December 22,
    1998 (File No. 1-12351)).                                                                                                                 
|                            
|                             | 4 | .5                     |  | Form of common stock certificate of MCI
    (incorporated by reference to Exhibit 4.3 to MCIs
    Registration Statement on Form S-8
    (File No. 333-91917)).                                                                                                                                                                                                     
|                            
|                             | 4 | .6                     |  | Indenture, dated as of July 13, 1999, by and
    among MCI, Metris Direct, Inc. and The Bank of New York,
    including Form of 10 1/8% Senior Notes due 2006 and Form of
    Guarantee (incorporated by reference to Exhibit 4.1 to
    MCIs Registration Statement on Form S-4
    (File No. 333-86695)).                                                         
|                            
|                             |   |                        |  | (a) First Supplemental Indenture, dated as
    of February 28, 2000, among MCI, the Guarantors named
    therein and The Bank of New York, (incorporated by reference to
    Exhibit 4.1 to MCIs Quarterly Report on Form 10-Q for
    the period ended March 31, 2000
    (File No. 1-12351)).                                                                     
|                            
|                             |   |                        |  | (b) Second Supplemental Indenture, dated as
    of February 2, 2001, among MCI, the Guarantors named
    therein and The Bank of New York (incorporated by reference to
    Exhibit 4.7(b) to MCIs Annual Report on Form 10-K for
    the year ended December 31, 2001
    (File No. 1-12351)).                                                                     
|                            
|                             |   |                        |  | (c) Agreement of Resignation, Appointment
    and Acceptance, dated as of February 20, 2002, among MCI,
    The Bank of New York, as Prior Trustee, and US Bank National
    Association, as Successor Trustee (incorporated by reference to
    Exhibit 4.7(c) to MCIs Annual Report on
    Form 10-K for the year ended December 31, 2002
    (File No. 1-12351)).

108



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##### Table of Contents



|                   |    |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------ | -- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit            |    |                       
|Number             |    | Description of Exhibit
|                   |    |                       
|                  
|                   | 4  | .7                     |  | Exchange and Registration Rights Agreement, dated
    as of July 13, 1999, by and among MCI, Bear,
    Stearns & Co. Inc., Chase Securities Inc., Salomon
    Smith Barney Inc. and Barclays Capital Inc., relating to the new
    notes (incorporated by reference to Exhibit 4.2 to
    MCIs Registration Statement on Form S-4
    (File No. 333-86695)).                                                                                               
|                  
|Material Contracts
|                   | 10 | .1                     |  | Second Amended and Restated Pooling and Servicing
    Agreement, dated as of January 22, 2002, among Metris
    Receivables, Inc. (MRI), as Transferor, Direct
    Merchants Credit Card Bank, National Association (Direct
    Merchants Bank), as Servicer, and U.S. Bank National
    Association, as Trustee (incorporated by reference to
    Exhibit 4.3 to MRIs Current Report on Form 8-K dated
    January 24, 2002 (File No. 0-23961)).      
|                  
|                   |    |                        |  | (a) Amendment No. 1 to the Second
    Amended and Restated Bank Receivables Purchase Agreement, dated
    as of June 14, 2002, between Metris Companies Inc., as
    Buyer, and Direct Merchants Credit Card Bank, National
    Association, as Seller (incorporated by reference to
    Exhibit 4.1 to MRIs Current Report on Form 8-K dated
    June 18, 2002 (File No. 0-23961).                                                                        
|                  
|                   | 10 | .2                     |  | Second Amended and Restated Bank Receivables
    Purchase Agreement, dated as of January 22, 2002, between
    Direct Merchants Bank and MCI (incorporated by reference to
    Exhibit 4.1 to MRIs Current Report on Form 8-K dated
    January 24, 2002 (File No. 0-23961)).                                                                                                                                                                              
|                  
|                   |    |                        |  | (a) Amendment No. 1 to the Second
    Amended and Restated Purchase Agreement, dated as of
    June 14, 2002, between Metris Receivables, Inc., as Buyer,
    and Metris Companies Inc., as Seller (incorporated by reference
    to Exhibit 4.2 to MRIs Current Report on Form 8-K
    dated June 18, 2002 (File No. 0-23961).                                                                                                                            
|                  
|                   | 10 | .3                     |  | Second Amended and Restated Bank Receivables
    Purchase Agreement, dated as of January 22, 2002, between
    MCI and MRI (incorporated by reference to Exhibit 4.2 to
    MRIs Current Report on Form 8-K dated January 24,
    2002 (File No. 0-23961)).                                                                                                                                                                                                
|                  
|                   |    |                        |  | (a) Amendment No. 1 to the Metris
    Master Trust Second Amended and Restated Pooling and Servicing
    Agreement, dated as of June 14, 2002, among Metris
    Receivables, Inc., as Transferor, Direct Merchants Credit Card
    Bank, National Association, as Servicer, and U.S. Bank
    National Association, as Trustee (incorporated by reference to
    Exhibit 4.3 to MRIs Current Report on Form 8-K dated
    June 18, 2002 (File No. 0-23961).
|                  
|                   | 10 | .4*                    |  | Change of Control Severance Agreement, dated as
    of May 12, 1999, by and between MCI and David D. Wesselink.                                                                                                                                                                                                                                                                                                                                             
|                  
|                   | 10 | .5*                    |  | Change of Control Severance Agreement, dated as
    of April 21, 1998, by and between MCI and Matthew S. Melius.                                                                                                                                                                                                                                                                                                                                            
|                  
|                   |    |                        |  | (a) Amendment No. 1 to the Change of
    Control Severance Agreement, dated as of March 10, 2005, by
    and between MCI and Matthew S. Melius.                                                                                                                                                                                                                                                                                                             
|                  
|                   | 10 | .6*                    |  | Change of Control Severance Agreement, dated as
    of June 25, 2002, by and between MCI and Richard G. Evans.                                                                                                                                                                                                                                                                                                                                              
|                  
|                   | 10 | .7*                    |  | Change of Control Severance Agreement, dated as
    of October 21, 2004, by and between MCI and William A.
    Houlihan.                                                                                                                                                                                                                                                                                                                                    
|                  
|                   |    |                        |  | (a) Amendment No. 1 to the Change of
    Control Severance Agreement, dated as of March 10, 2005, by
    and between MCI and William A. Houlihan.                                                                                                                                                                                                                                                                                                           
|                  
|                   | 10 | .8*                    |  | Change of Control Severance Agreement, dated as
    of June 25, 2002, by and between MCI and Dan N. Piteleski.                                                                                                                                                                                                                                                                                                                                              
|                  
|                   | 10 | .9*                    |  | Change of Control Severance Agreement, dated as
    of June 25, 2002, by and between MCI and Mark P. Wagener.                                                                                                                                                                                                                                                                                                                                               
|                  
|                   | 10 | .10*                   |  | Form of Change of Control Severance Agreement.                                                                                                                                                                                                                                                                                                                                                                                                              

109



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|               |    |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------- | -- | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit        |    |                       
|Number         |    | Description of Exhibit
|               |    |                       
|              
|               | 10 | .11*                   |  | Retention Agreement, dated May 17, 1999,
    between Ronald N. Zebeck and MCI (incorporated by reference to
    Exhibit 10.2 to MCIs Quarterly Report on Form 10-Q
    for the quarter ended June 30, 1999
    (File No. 1-12351)).                                                                                                                                                                                                                                                                           
|              
|               | 10 | .12                    |  | Capital Assurance and Liquidity Maintenance
    Agreement, dated as of March 18, 2003, between Direct
    Merchants Bank, and MCI (Incorporated by reference to
    Exhibit 99.3 to MCIs Current Report on Form 8-K dated
    March 19, 2003 (File No. 1-12351)).                                                                                                                                                                                                                                             
|              
|               | 10 | .13                    |  | Liquidity Reserve Deposit Agreement, dated as of
    March 18, 2003, among Direct Merchants Bank, JPMorgan Chase
    Bank, and the Office of the Comptroller of the Currency
    (Incorporated by reference to Exhibit 99.4 to MCIs
    Current Report on Form 8-K dated March 19, 2003
    (File No. 1-12351))                                                                                                                                                                                               
|              
|               | 10 | .14                    |  | Senior Secured Credit Agreement, dated as of
    May 6, 2004, among Metris Companies Inc., the Lenders from
    time to time parties thereto, and Deutsche Bank Trust Companies
    America as Administrative Agent and as Collateral Agent
    (Incorporated by reference to Exhibit 99.1 to MCIs
    Current Report on Form 8-K dated May 11, 2004
    (File No. 1-12351)).                                                                                                                                 
|              
|               |    |                        |  | (a) First Amendment to the Senior Secured
    Credit Agreement, dated as of December 21, 2004, among
    Metris Companies Inc., the Lenders from time to time parties
    thereto, and Deutsche Bank Trust Companies America as
    Administrative Agent and Collateral Agent.**                                                                                                                                                                                                                               
|              
|               |    |                        |  | (b) Second Amendment to the Senior Secured
    Credit Agreement, dated as of March 1, 2005 among Metris
    Companies Inc., the Lenders from time to time parties thereto,
    and Deutsche Bank Trust Companies America as Administrative
    Agent and Collateral Agent. (Certain information in this exhibit
    has been omitted and filed separately with the Securities and
    Exchange Commission pursuant to a confidential treatment request
    under Rule 24b-2 under the Securities Exchange Act.)
|              
|               | 10 | .15                    |  | Modified Operating Agreement, effective as of
    December 11, 2003, by and between Direct Merchants Bank,
    Metris Companies Inc., and the Office of the Comptroller of the
    Currency. (Incorporated by reference to Exhibit 99-1 to
    MCIs Current Report on Form 8-K dated December 12,
    2003 (File No. 1- 12351)).                                                                                                                                                                              
|              
|               | 10 | .15*                   |  | MCI Non-Employee Director Stock Option Plan
    (incorporated by reference to Exhibit 10.3 to MCIs
    Registration Statement on Form S-4/A
    (File No. 333-86695)).                                                                                                                                                                                                                                                                                                                                        
|              
|               | 10 | .16*                   |  | MCI Management Stock Purchase Plan (incorporated
    by reference to Exhibit 10.4 to MCIs Registration
    Statement on Form S-4/A (File No. 333-86695)).                                                                                                                                                                                                                                                                                                                                                     
|              
|               | 10 | .17*                   |  | MCI Annual Incentive Bonus Plan for Designated
    Corporate Officers (incorporated by reference to Appendix D
    to MCIs Proxy Statement (DEF 14A) filed July 28, 2004
    (File No. 1-12351)).                                                                                                                                                                                                                                                                                                             
|              
|               | 10 | .18*                   |  | MCI Amended and Restated Long-Term Incentive and
    Stock Option Plan (incorporated by reference to
    Exhibit 10.6 to MCIs Registration Statement on
    Form S-4/A (File No. 333-86695)).                                                                                                                                                                                                                                                                                                                 
|              
|               |    |                        |  | (a) Form of Non-Qualified Stock Option
    Agreement (incorporated by reference to Exhibit 10.8 to
    MCIs Annual Report on Form 10-K for the year ended
    December 31, 1998 (File No. 1-12351)).                                                                                                                                                                                                                                                                                                          
|              
|               |    |                        |  | (b) Form of Non-Qualified Performance
    Accelerated Stock Option Agreement (incorporated by reference to
    Exhibit 10.10(b) to MCIs Annual Report on Form 10-K
    for the year ended December 31, 2001
    (File No. 1-12351)).                                                                                                                                                                                                                                                                          
|              
|               |    |                        |  | (c) Form of Restricted Stock Award Agreement
    (incorporated by reference to Exhibit 10.10(c) to
    MCIs Annual Report on Form 10-K for the year ended
    December 31, 2001 (File No. 1-12351)).                                                                                                                                                                                                                                                                                                          
|              
|               |    |                        |  | (d) Form of Restricted Stock Unit Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|              
|               | 10 | .19                    |  | Metris Companies Inc. Supplemental Executive
    Retirement Plan Master Plan Document, effective January 1,
    1999, as amended.                                                                                                                                                                                                                                                                                                                                                                              
|              
|Other Exhibits
|               | 12 | (a)                    |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                             

110



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##### Table of Contents



|        |    |                        |  |                                                                                                                                   
|------- | -- | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                       
|Number  |    | Description of Exhibit
|        |    |                       
|       
|        | 12 | (b)                    |  | Computation of Ratio of Earnings to Fixed Charges
    and Preferred Dividends.                                                    
|       
|        | 21 |                        |  | Subsidiaries of MCI.                                                                                                              
|       
|        | 23 |                        |  | Consent of Independent Registered Public
    Accounting Firm.                                                                     
|       
|        | 31 | .1                     |  | Certification of Principal Executive Officer
    Pursuant to Rule 13a-14(a)/15d-14(a).                                            
|       
|        | 31 | .2                     |  | Certification of Principal Financial Officer
    Pursuant to Rule 13a-14(a)/15d-14(a).                                            
|       
|        | 32 | .1                     |  | Certification of Principal Executive Officer
    Pursuant to Section 1350 of Chapter 63 of
    Title 18 of the United States Code.
|        | 32 | .2                     |  | Certification of Principal Financial Officer
    Pursuant to Section 1350 of Chapter 63 of
    Title 18 of the United States Code.



---



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



|   |                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Pursuant to Rule 24b-2 of the Securities
    Exchange Act of 1934, as amended, confidential portions of
    Exhibits 10.14(a) and 10.14(b) have been deleted and filed
    separately with the Securities and Exchange Commission pursuant
    to a request for confidential treatment.

111