COMPENSATION COMMITTEE REPORT

Introduction

      The Compensation Committee of the Board of Directors (the “Committee”) is responsible for establishing, monitoring and implementing the Company’s overall compensation philosophy and strategy. Each member of the Committee qualifies as an independent director under applicable NASDAQ rules, as a “non-employee director” under applicable SEC rules and as an “outside director” under applicable IRS rules. The Committee determines compensation for “executive officers” (as that term is defined for purposes of Section 16 of the 1934 Act, and referred to as the “executive officers” throughout this report), other than members of the Office of the Chairman. The Committee makes recommendations regarding compensation of members of the Office of the Chairman for review and final determination by the Board of Directors. The Office of the Chairman presently consists of Mr. Alter, Chairman and Chief Executive Officer (“CEO”), and Mr. Rosoff, President and Vice Chairman of the Board. Additionally, members of the Committee serve as the Plan Administration Committee, established under the Company’s 2000 Omnibus Stock Incentive Plan (the “Omnibus Plan”), which is responsible for administering the Omnibus Plan with respect to the Company’s executive officers, including the Named Executive Officers. The Committee, functioning in its capacity as the Plan Administration Committee administers the granting of equity-based and annual incentive awards with respect to the Company’s executive officers. Recommendations made by the Plan Administration Committee with respect to the members of the Office of the Chairman are recommended for review and final determination by the Board of Directors.

      This report describes the cash and equity-based compensation for 2003 of Mr. Alter and each of the four most highly compensated executive officers other than the CEO who were serving as executive officers as of December 31, 2003 (collectively referred to in this report as the “Named Executive Officers”).

Compensation Philosophy for Executive Officers

      Compensation programs for the Company’s leaders are intended to further the short- and long-term business objectives of the Company by securing, retaining and motivating management employees of high caliber and potential. The Company’s compensation programs are also designed to link executive compensation to overall business objectives and results and to align executive compensation with stockholder return.

      The executive compensation program includes base salary, annual bonuses, and long-term incentives. Executive compensation may also include special performance and retention awards. Target levels of overall compensation are intended to be competitive with the pay practices of other financial services companies that compete with the Company for executive talent (the “peer group”). While peer group data provides a useful guide for comparative purposes, we believe that a successful compensation program also requires the application of sound judgment with respect to individuals’ financial and non-financial performance, in order to achieve the Company’s objectives of motivating and retaining valued employees.

Components of Executive Compensation

      Base Salary. The Company establishes base salaries based upon periodic comparison to the salaries paid by companies in the peer group. Salary increases are based on several factors, including the nature and scope of the executive’s responsibilities, an evaluation of the executive’s performance, and the impact of the executive’s activities on the Company’s business objectives and overall performance. The Company’s philosophy is to offer competitive fixed compensation in addition to

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      Annual Bonuses. The Company’s compensation program for executives includes an annual bonus program. Each executive officer has an annual “target bonus,” specified as a percentage of his or her base salary. Target bonuses vary depending on the executive officer’s position in the Company and can range from 15% to 75% of base salary. Actual bonuses awarded are paid at amounts above, below or equal to the executive’s target bonus based on the extent to which individual and Company business objectives and performance goals are satisfied or exceeded. The annual bonus may be paid to the executive in cash and/or in shares of the Company’s Class B Common Stock, pursuant to the Advanta Management Incentive Program (“AMIP”) described below.

      Long-Term Incentives. The Committee believes the share ownership opportunity provided by equity-based compensation emphasizes and reinforces the mutuality of interests among employees and the other stockholders. The Omnibus Plan provides the Company with the ability to create and tailor a variety of equity-based long-term compensation programs that align with stockholder returns.

      AMIP. The Company offers its executive officers long-term incentives through its AMIP Programs, which are administered by the Plan Administration Committee under the Omnibus Plan. The AMIP program offers participants, with the exception of the members of the Office of the Chairman, the opportunity to elect to receive up to 100% of their target bonuses in restricted shares of Class B Common Stock instead of cash (the “election percentage”). The members of the Office of the Chairman are automatically enrolled in AMIP with a 100% election percentage. Upon the program’s commencement (or an executive officer’s becoming eligible to participate in the program if that occurs after the program’s commencement), an executive officer electing to receive a portion of his or her target bonus in stock is issued restricted shares of Class B Common Stock. The number of restricted shares (“AMIP shares”) awarded to the participant equals the executive officer’s target bonus for each performance year, divided by the grant date price of the shares (determined in accordance with the administrative guidelines for the applicable AMIP Program), and multiplied by the election percentage.

      AMIP shares ultimately vest ten years after they have been issued (as long as the participant remains employed by the Company). However, if individual and Company business objectives and performance goals are achieved for a particular performance year, the executive officer may “earn” accelerated vesting of up to 100% of the portion of AMIP shares relating to the target bonus for that year. Awards that are above the target bonus for a particular performance year are generally paid in cash. If, at the time of accelerated vesting of AMIP shares for a given performance year, the share price exceeds the price at which the restricted shares were originally issued, the executive officer receives the benefit of a long-term incentive. The long-term incentive is realized in the form of the stock’s appreciation in value.

      The current AMIP Program, “AMIP V,” covers performance years 2002 through 2005. Under AMIP V, each Named Executive Officer (other than Mr. Alter) received restricted shares of Class B Common Stock with a value (based on the share price on the date of grant determined in accordance with the terms of the Omnibus Plan) equal to 100% of his or her target bonus for performance years 2002 through 2005. See the Summary Compensation table for details. Instead of cash bonuses, under AMIP V each of the Named Executive Officers (other than Mr. Alter) is eligible to receive accelerated vesting of restricted shares of Class B Common Stock with a value (based on the share price on the date of grant determined in accordance with the terms of the Omnibus Plan) up to a maximum of 100% of his or her target bonus for each performance year from 2002 through 2005. Restricted shares granted under AMIP V will vest 10 years after the grant date if accelerated vesting is not earned and the executive officer is still employed by the Company. Bonuses for the 2003 performance year were administered in accordance with the AMIP V program.

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      As described in “The Chief Executive Officer’s 2003 Compensation” below, Mr. Alter is participating in AMIP V for performance year 2005 only, given his voluntary relinquishment of all salary and annual bonus compensation for performance years 2002 through 2004 in exchange for options granted.

      Stock Options. The Company’s Stock Option Program is administered under the Omnibus Plan pursuant to applicable administrative guidelines. The Stock Option Program is designed to reward long-term accomplishment through increases in the market value of the Company’s stock. Options or stock appreciation rights (“SARs”) are generally granted to executive officers upon hire and annually thereafter. The exercise price of an option or SAR is 100% of fair market value on the date of grant, based on the closing price of the underlying stock. Stock options and SARs generally vest in equal portions over a four-year period and expire 10 years after the grant date. Generally, if employees leave the Company before options become vested, they forfeit the unvested portions of these awards.

      The number of stock options awarded is generally based on an assessment of the executive’s current and anticipated contributions to the Company’s achievement of business objectives and performance goals, as well as individual performance. Stock option grants made to Named Executive Officers during 2003 are reflected in the Option Grants in Last Fiscal Year table.

      Restricted Stock. In addition to restricted shares that may be granted under the AMIP Programs, restricted shares of Class A or Class B Common Stock may, from time to time, be granted pursuant to the terms of executive employment agreements. Restricted shares granted under executive employment agreements will typically vest in equal increments on the first four anniversaries of the date of grant so long as the executive continues to be employed by the Company on such dates.

2003 Compensation

      Annual Incentives for 2003. The Company offers senior management employees annual incentives through the AMIP Program described above. Each Named Executive Officer has an annual “target” bonus, specified as a percentage of base salary, and, except for Mr. Alter (as described below), received restricted shares of Class B Common Stock pursuant to AMIP V with a value equal to 100% of the executive officer’s target bonus for performance years 2002 through 2005. The actual bonus awarded, if any, to each executive officer (other than members of the Office of the Chairman) for a given year’s performance is determined by the Plan Administration Committee. In the case of members of the Office of the Chairman, bonus awards are recommended by the Plan Administration Committee and are reviewed and approved by the Board of Directors. The decision regarding each bonus award is based on a number of factors, such as the achievement of individual and Company business and performance objectives, including financial and non-financial goals. The decision may take into account external factors, such as the results of regulatory examinations and the overall competitive and regulatory environment in which results were achieved.

      The criteria for bonuses awarded for the 2003 performance year were multi-faceted. The decision took into account the degree to which the Company achieved its financial goals established in the Company’s guidance, the continuing improvement in credit quality and other improvements over prior year performance, while also considering the extent to which the more aspirational financial and non-financial goals set forth in the Company’s strategic plan were achieved. The criteria also included subjective factors, such as an assessment of the executive’s performance and the executive’s impact on building a strong foundation for the Company’s future, as well as consideration of factors beyond the executive’s control such as the economic environment. There is no formal weighting of each factor. Based on these and other considerations, the Plan Administration Committee authorized (or recommended to the Board of Directors, in the case of the Office of the Chairman) bonus awards of less than the target bonus amount for each of the Named Executive

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The Chief Executive Officer’s 2003 Compensation

      In November of 2001, Mr. Alter elected to forego his base salary compensation from January 1, 2002 until July 31, 2003 and to forego participation in the Company’s annual AMIP bonus program for the 2002 performance year. In exchange, the Board of Directors granted Mr. Alter 700,000 nonqualified options to purchase Advanta Class B Common Stock at an exercise price of $8.08, the closing price of the Class B Common Stock on the date of grant. The options have a seven-year term and vest in two increments, so that 469,000 became vested in February 2003 and 231,000 became vested in July 2003. In 2001, the Board also authorized the Company to allow Mr. Alter to take a distribution of the balance in his deferred compensation plan account during 2002, penalty-free.

      In January of 2002, Mr. Alter elected to relinquish his base salary through December 31, 2004, and to forego participation in the annual AMIP bonus program for performance years 2003 and 2004. In exchange, the Board of Directors granted Mr. Alter 800,000 additional nonqualified options to purchase Advanta Class B Common Stock at an exercise price of $8.359, the closing price of the Class B Common Stock on the date of the grant. The options have a seven-year term and vest in two increments, such that 360,000 became vested in February 2004 and the remainder are scheduled to vest in February 2005. Upon the advice of independent consultants, the Board defined the terms of the aforementioned stock option grants such that the expected present value of each grant appropriately and competitively replaced the expected present value of Mr. Alter’s foregone salary and AMIP bonuses, and reflected Mr. Alter’s past, present, and expected future contributions to the Company, based upon the same criteria used to determine salaries and bonuses for other executive officers at that time.

      In January 2003, as stipulated by the Board of Directors in January 2002, and under the terms of the AMIP Program, Mr. Alter was granted 55,781 restricted shares of Class B Common Stock intended to cover his participation in the AMIP Program for the performance year 2005. See the Summary Compensation Table. Mr. Alter received a grant under the Stock Option Program for 2003, as did the other Named Executive Officers. Mr. Alter was granted 100,000 options to purchase shares of Class B Common Stock. See the Option Grants in Last Fiscal Year table. The decision takes into account the same factors and criteria described above under “Long-Term Incentives — Stock Options.”

Impact of IRS Pay Cap Regulation

      Section 162(m) of the Internal Revenue Code limits the types of annual compensation in excess of $1,000,000 that may be deducted for federal income tax purposes for payments to a company’s chief executive officer and its four other most highly compensated executive officers. The Committee believes that payment of compensation that is not deductible under Section 162(m) is sometimes in the best interests of the Company, and the Committee and the Board of Directors have accordingly approved such arrangements in certain circumstances.

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