10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
x	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended February 1, 2003 or
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File Number 1-7562
THE GAP, INC.
(Exact name of registrant as specified in its charter)
Delaware		94-1697231
(State of Incorporation)		(I.R.S. Employer Identification No.)
Two Folsom Street San Francisco, California 94105
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (650) 952-4400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.05 par value		New York Stock Exchange, Inc.
(Title of class)		Pacific Exchange, Inc.
		(Name of each exchange where registered)
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x 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. o

Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   x No   o

The aggregate market value of the common equity held by non-affiliates of the registrant as of August 3, 2002 was approximately $7,135,000,000 based upon the last price reported for such date in the NYSE-Composite transactions.

The number of shares of the registrant’s Common Stock outstanding as of March 17, 2003 was 889,164,488.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 2003 (hereinafter referred to as the “2003 Proxy Statement”) are incorporated into Parts I and III.

Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended February 1, 2003 (hereinafter referred to as the “2002 Annual Report to Shareholders”) are incorporated into Parts II and IV.

The Exhibit Index is located on Page 15 hereof.

          This Annual Report on Form 10-K and the information incorporated herein by reference contain certain forward-looking statements which reflect our current view with respect to future events and financial performance.  Whenever used, the words “expect,” “plan,” “anticipate,” “believe,” “may” and similar expressions identify forward-looking statements.

          Any such forward-looking statements are subject to risks and uncertainties and our future results of operations could differ materially from historical results or current expectations.  Some of these risks are discussed in Item 1 of this report below, and include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging domestic and international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where our goods are manufactured, impact of legal proceedings, and/or other factors that may be described in our filings with the Securities and Exchange Commission.  Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict.

          We assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

PART I

Item 1 – Business

General

          We are a global specialty retailer operating stores selling casual apparel, accessories, and personal care products for men, women and children under the Gap, Banana Republic and Old Navy brands.  We operate stores in the United States, Canada, the United Kingdom, France, Germany and Japan.  All references to “we,” “our,” “us,” and “the Company” in this Annual Report mean The Gap, Inc. and its subsidiaries.

          We design virtually all of our products, which in turn are manufactured by independent sources, and sell them under our brands in the following store formats:

          Gap.  Founded in 1969, Gap stores offer extensive selections of classically-styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics such as denim, khakis and T-shirts to fashion apparel, accessories and personal care products for men and women, ages teen through adult.  We entered the children’s apparel market with the introduction of GapKids in 1986 and babyGap in 1989.  These stores offer casual apparel and accessories in the tradition of Gap style and quality for children, ages newborn through pre-teen.  We launched GapBody in 1998 offering men’s and women’s underwear, sleepwear and personal care products.  As of February 1, 2003, we operated 2,969 Gap brand store concepts at 1,834 locations in the United States, Canada, the United Kingdom, France, Germany, and Japan.  Gap brand store concepts are any Gap Adult, GapKids, babyGap or GapBody that meets a certain square footage threshold even when residing within a single physical location.

          Banana Republic.  Acquired in 1983 with two stores, Banana Republic now offers sophisticated, fashionable collections of dress-casual and tailored apparel, shoes and accessories for men and women at higher price points than Gap.  Banana Republic products range from apparel, including intimate apparel, to personal care products and home products.  As of February 1, 2003, we operated 441 Banana Republic stores in the United States and Canada.

          Old Navy.  We launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes and accessories for adults, children and infants as well as other items, including personal care products, in an innovative, exciting shopping environment.  As of February 1, 2003, we operated 842 Old Navy stores in the United States and Canada.

          As of February 1, 2003, we operated a total of 4,252 store concepts at 3,117 locations.  For more information on the number of store concepts by brand and country, see our Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Part II, Item 7 of this form by reference to pages 22 to 30 of our 2002 Annual Report to Shareholders.

          We established Gap Online, a web-based store located at www.gap.com, in 1997.  Products comparable to those carried in Gap, GapKids and babyGap stores can be purchased on-line.  In addition, a line of maternity apparel is available at Gap Online.  Banana Republic introduced Banana Republic Online, a web-based store located at www.bananarepublic.com, in 1999, which offers products comparable to those carried in the store collections.  In 2000, we established Old Navy Online, a web-based store located at www.oldnavy.com.  Old Navy Online also offers apparel and accessories comparable to those carried in the store collections, plus a line of maternity apparel.  Our online businesses are offered as an extension of our store experience and are intended to strengthen our relationship with our customers.

          The Company was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988.

Store Operations

          Our stores offer a shopper-friendly environment with an assortment of casual apparel and accessories which emphasize style, quality and good value.  The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store.

          Our stores generally are open seven days per week (where permitted by law) and most holidays.  All sales are tendered for cash, personal checks, debit cards, or credit cards, including Gap, Banana Republic and Old Navy private label credit cards which are issued by a third party.

Merchandise Vendors

          We purchase merchandise from more than 1,000 vendors with facilities in over 50 countries. No vendor accounted for more than 5% of the dollar amount of our fiscal 2002 purchases.  Of our merchandise sold during fiscal 2002, approximately 5% of all units (representing approximately 3% of total cost) was produced domestically while the remaining 95% of all units (representing approximately 97% of total cost) was made outside the United States. Approximately 14% of our total merchandise units (representing approximately 17% of total cost) was from China, including Hong Kong, with the remainder coming from more than 50 other countries.  Any event causing a sudden disruption of imports from China or other foreign countries, including the imposition of additional import restrictions, could have a material adverse effect on our operations.  Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars.

          We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions.  Trade restrictions, including increased tariffs or quotas, embargoes, and customs restrictions, against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition and results of operations.  Our sourcing operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions.

Seasonal Business

          Our business follows a seasonal pattern, with sales peaking over a total of about 13 weeks during the Back-to-School (mid-August through early September) and Holiday (November through December) periods.  During fiscal 2002, these periods accounted for approximately 34% of our net sales.

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Brand Building

          Our ability to continually change and evolve our brands is a key source of competitive advantage.  We believe our three distinct brands are among our most important assets.  All aspects of brand development from product design and distribution, to marketing, merchandising and shopping environments are controlled by us.  We continue to invest in the development of our brands through advertising.  We have also made investments to enhance the customer experience through the expansion and remodeling of existing stores, the closure of under-performing stores, and a focus on customer service.

Advertising

          We place print ads in major metropolitan newspapers and their Sunday magazines, major news weeklies and lifestyle and fashion magazines.  Our ads also appear in various outdoor venues, such as mass transit posters, exterior bus panels, bus shelters and billboards.  We have also run TV ads for Gap and Old Navy and radio ads for Old Navy.  We plan to continue our investments in advertising and marketing in 2003.  There can be no assurances that these investments will result in increased sales or profitability.

Employees

          On February 1, 2003, we had a work force of approximately 169,000 employees, which includes a combination of part and full-time employees.  We hire temporary employees during the peak Back-to-School and Holiday seasons. 

Trademarks and Service Marks

          Gap, GapKids, babyGap, GapBody, Banana Republic and Old Navy trademarks and service marks, and certain other trademarks, either have been registered, or are the subject of pending trademark applications, with the United States Patent and Trademark Office and with the registries of many foreign countries.

Certain Additional Business Risk Factors

          We must successfully gauge fashion trends and changing consumer preferences to succeed. 

          Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner.  The global specialty retail business fluctuates according to changes in consumer preferences dictated, in part, by fashion and season.  To the extent we misjudge the market for our merchandise, our sales will be adversely affected and the markdowns required to move the resulting excess inventory will adversely affect our operating results.  A disproportionate part of our past product offerings may have been too fashion-forward for our broad and diverse customer base.  While we believe our current strategies and initiatives appropriately address these issues, merchandise misjudgments could have a material adverse effect on our image with our customers and on our operating results.

          Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other staff.  Competition for these personnel is intense, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. 

          Fluctuations in the global specialty retail business especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and frequently before fashion trends are evidenced by customer purchases.  In addition, the cyclical nature of the global specialty retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we build up our inventory levels.  We must enter into contracts for the purchase and manufacture of merchandise well in advance of the applicable selling season.  As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases.  In the past, we did not predict our customers’ preferences and acceptance levels of our fashion items with the same accuracy we had previously experienced.  In addition, lead

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times for many of our purchases are long, which may make it more difficult for us to respond rapidly to new or changing fashion trends or consumer acceptance for our products.

          Our business is highly competitive and depends on consumer spending patterns.

          The global specialty retail industry is highly competitive.  We compete with national and local department stores, specialty and discount store chains, independent retail stores and internet businesses that market similar lines of merchandise.  We face a variety of competitive challenges including:

• anticipating and quickly responding to changing consumer demands;

• maintaining favorable brand recognition and effectively marketing our products to consumers in several diverse market segments;

• developing innovative, high-quality products in sizes, colors and styles that appeal to consumers of varying age groups and tastes;

• competitively pricing our products and achieving customer perception of value; and

• providing strong and effective marketing support.

          Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as the current recessionary environment, the levels of disposable consumer income, consumer debt, interest rates and consumer confidence. Further declines in consumer spending on apparel and accessories could have an adverse effect on our operating results.

          We are faced with competition in European, Japanese and Canadian markets from established regional and national chains. Our success in the European market depends on determining a sustainable profit formula to build brand loyalty and gain market share in these especially challenging retail environments.  If international business is not successful, our results of operations could be adversely affected. 

          Certain financial information about international operations is set forth under the heading “Segments” in Note A to Notes to Consolidated Financial Statements, incorporated by reference in Item 8 – Financial Statements and Supplementary Data.

          We experience fluctuations in our comparable store sales and margins.

          Our continued success depends, in part, upon our ability to continue to further improve sales and margins at our stores.  Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that they will continue to fluctuate in the future.  For example, over the past 2 years, our quarterly comparable store sales have ranged from decreases of 16% and 12% in the final two fiscal quarters of fiscal 2001 to an increase of 8% in the fourth quarter of 2002.  A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions.  These factors may cause our comparable store sales results to differ materially from prior periods and from expectations.  Over the past three years our reported gross margins have ranged from 37% in fiscal 2000 to 30% in fiscal 2001 and fiscal 2002. Any failure to meet the expectations of investors, security analysts or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline.  Our ability to further improve our comparable store sales results and margins depends in large part on improving our forecasting of demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base and using more effective pricing strategies.

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          Downgrades in our credit ratings may have a negative impact on our financing costs and structure in future periods.

          On February 14, 2002, Moody’s Investors Service reduced our long- and short-term senior unsecured credit ratings from Baa3 to Ba2 and from Prime-3 to Not Prime, respectively, with a negative outlook on our long-term ratings, and Standard & Poor’s Rating Service reduced our long- and short-term credit ratings from BBB+ to BB+ and from A-2 to B, respectively, with a stable outlook on our long-term ratings.  On February 27, 2002, Moody’s reduced our long-term senior unsecured credit ratings from Ba2 to Ba3 and stated that its outlook on our long-term ratings was stable. In April 2002, Standard & Poor’s assigned a BBB- rating to our $1.4 billion secured two-year credit facility. On May 9, 2002 and May 24, 2002, the outlook on our credit ratings was changed from stable to negative by Standard & Poor’s and Moody’s, respectively.

          As a result of the downgrades in our long-term credit ratings, effective June 15, 2002, the interest rates payable by us on $700 million of our outstanding notes increased by 175 basis points to 9.90 percent per annum on $200 million of our outstanding notes due in 2005, and to 10.55 percent per annum on $500 million of our outstanding notes due in 2008. The interest rate payable on the notes is subject to increase by 0.25 percent for each rating category downgrade by either rating agency.  The interest rates payable on these notes is subject to decrease upon upgrades by these rating agencies. In no event will the interest rate be reduced below the original interest rate payable on the notes.  As a result of the downgrades in our short-term credit ratings, we no longer have meaningful access to commercial paper.  In addition any future, lowering of the ratings on our debt to result in reduced access to the capital markets and higher interest costs on future financings.

          We are planning certain system changes that may disrupt our supply chain.

          Our success depends on our ability to continue sourcing merchandise efficiently. We continue to evaluate and are currently implementing modifications to our information technology systems supporting the product pipeline, including merchandise planning, forecasting, and purchase order, inventory and price management.  Modifications may involve replacing legacy systems with successor systems.  We are aware of inherent risks associated with replacing these core systems, including accurately capturing data and supply chain disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation.  We anticipate that the launch of these successor systems will take place in a phased approach over an approximate five-year period which began in 2002.  There can be no assurances that we will successfully launch these new systems as planned or that they will occur without supply chain disruptions.  Any resulting supply chain disruptions could have a material adverse effect on our operations.

Available Information

          We make available on our website, www.GapInc.com, under “Financials & Media, SEC Filings” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”).

Executive Officers of the Registrant

          Donald G. Fisher is our Chairman.  Paul S. Pressler is our President and Chief Executive Officer.  Donald G. Fisher and Paul S. Pressler are directors. The required information for each of them is set forth in the table located in the section entitled “Nominees for Election as Directors” of the 2003 Proxy Statement and is incorporated by reference herein.  The following are also executive officers:

Name, Age, Position and Principal Occupation During Past Five Years:

Charles K. Crovitz, 49, Executive Vice President, Chief Supply Chain Officer since 2000; Executive Vice President, Supply Chain and Technology from 1998 to 2000; Senior Vice President of Strategy, Logistics and Information Systems in 1998.  Joined in 1993.

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Anne B. Gust, 45, Executive Vice President, Chief Administrative Officer since 2000; Executive Vice President, Human Resources, Legal, Global Compliance and Corporate Administration from 1999 to 2000; Executive Vice President, Human Resources, Legal and Corporate Administration from 1998 to 1999; Senior Vice President and General Counsel from 1994 to 1998.  Joined in 1991.

Jenny Ming, 47, President, Old Navy Brand since 1998; Executive Vice President, Merchandising, Old Navy Brand from 1996 to 1998.  Joined in 1986.

Gary Muto, 43, President, Gap Brand since 2002; President of Banana Republic Brand from 2001 to 2002; Executive Vice President Banana Republic Merchandising from 1999 to 2001; Senior Vice President Merchandising from 1993 to 1999.  Joined in 1988.

Byron H. Pollitt, Jr., 51, Executive Vice President and Chief Financial Officer since January 2003; Executive Vice President and Chief Financial Officer of Walt Disney Parks and Resorts from 1999 to 2003; Senior Vice President, Chief Financial Officer of Disneyland Resorts from 1995 to 1999.

Eva Sage-Gavin, 44, Executive Vice President Human Resources since March 2003; Senior Vice President Human Resources of Sun Microsystems, Inc. from 2000 to 2003; Senior Vice President Human Resources of Disney Consumer Products from 1997 to 2000.

Item 2 – Properties

          We operate stores in the United States, Canada, the United Kingdom, France, Germany and Japan.  The stores operated as of February 1, 2003 aggregated approximately 37.3 million square feet.  Almost all our stores are leased either on a short term basis with one or more options after our initial term, or slightly longer terms with negotiated sales termination clauses at predetermined sales thresholds. Economic terms vary by type of location.

          As of February 1, 2003, we owned approximately 1.2 million square feet of headquarters office space located in San Francisco and San Bruno, California.  We leased approximately 1.5 million square feet of headquarters office space, located in San Francisco, San Bruno and Rocklin, California; New York, New York; and Albuquerque, New Mexico.  Of the 1.5 million square feet of office space leased, approximately 115,000 square feet was under sublease to others and approximately 450,000 square feet was being marketed for sublease to others. We also leased approximately 25 domestic regional offices and 35 international offices.  We owned approximately 9.5 million square feet of distribution space located in Fresno, California; Edgewood, Maryland; Fishkill, New York; Groveport, Ohio; Gallatin, Tennessee; Brampton, Ontario, Canada; and Rugby, England.   We leased approximately 2.2 million square feet of distribution space located in Columbus, Ohio and in the Northern Kentucky suburbs outside Cincinnati, Ohio.  A 130,000 square feet distribution warehouse in Funabashi City, Chiba, Japan was owned and operated by a third-party logistics provider.

          In fiscal 2002, we recorded certain charges relating to certain facilities.  See Note J to Notes to Consolidated Financial Statements, incorporated by reference in Item 8 - Financial Statements and Supplementary Data.

Item 3 – Legal Proceedings

          As a multinational company, we are subject to various proceedings, lawsuits, disputes and claims (“Actions”) arising in the ordinary course of our business.  Many of these Actions raise complex factual and legal issues and are subject to uncertainties.  Actions filed against us include commercial, intellectual property, customer, and labor and employment related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour laws.  The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both.  Actions are in various procedural stages, and some are covered in part by insurance.

          We cannot predict with assurance the outcome of Actions brought against us.  Accordingly, adverse settlements or resolutions may occur and negatively impact earnings in the quarter of settlement or resolution.

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However, we do not believe that the outcome of any current Action would have a material adverse effect on our results from operations, liquidity or financial position taken as a whole.

Item 4 – Submission of Matters to a Vote of Security Holders

          Not applicable.

PART II

Item 5 – Market For Registrant’s Common Equity and Related Stockholder Matters

          The information required by this item is incorporated herein by reference to page 50 of the 2002 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K and the section entitled "Equity Plan Compensation Information" in the 2003 Proxy Statement.

Item 6 – Selected Financial Data

          The information required by this item is incorporated herein by reference to pages 20 through 21 of the 2002 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The information required by this item is incorporated herein by reference to pages 22 to 30 of the 2002 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

Item 7A – Quantitative and Qualitative Disclosures about Market Risk

          The information required by this item is incorporated herein by reference to pages 30 through 31 of the 2002 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

Item 8 – Financial Statements and Supplementary Data

          The information required by this item is incorporated herein by reference to pages 33 through 49 of the 2002 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

Item 9 – Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

          Not applicable.

PART III

Item 10 – Directors and Executive Officers of the Registrant

          The information required by this item is incorporated herein by reference to the section entitled “Nominees for Election as Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2003 Proxy Statement.  See also Item 1 above in the section entitled “Executive Officers of the Registrant.”

Item 11 – Executive Compensation

          The information required by this item is incorporated herein by reference to the sections entitled “Compensation of Directors,” “Summary of Executive Compensation,” “Stock Options,” “Compensation Committee Interlocks and Insider Participation,” and “Employment Contracts, Termination of Employment and Change in Control Provisions” in the 2003 Proxy Statement.

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Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

          The information required by this item is incorporated herein by reference to the section entitled “Equity Plan Compensation Information” and “Beneficial Ownership of Shares” in the 2003 Proxy Statement.

Item 13 – Certain Relationships and Related Transactions

          The information required by this item is incorporated herein by reference to the section entitled “Other Reportable Transactions” in the 2003 Proxy Statement.

Item 14 – Controls and Procedures

          Evaluation of Disclosure Controls and Procedures

          Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended, within 90 days of the filing of this Annual Report on Form 10-K.  Based on such evaluation, they have concluded that as of such date, our disclosure controls and procedures are effective.

          Changes in Internal Controls

          There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART IV

Item 15 – Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

(a)	The following consolidated financial statements, schedules and exhibits are filed as part of this report or are incorporated herein as indicated.
		(1)	Financial Statements
			(i)	Independent Auditors’ Report.  Incorporated by reference to page 32 of the 2002 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
			(ii)	The consolidated balance sheets as of February 1, 2003 and February 2, 2002 and the related consolidated statements of operations, shareholders’ equity, cash flows, and notes thereto for each of the three fiscal years in the period ended February 1, 2003 are incorporated by reference to pages 33 through 49 of the 2002 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.
		(2)	Financial Statement Schedules
			Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto.
		(3)	Exhibits
			Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index which begins on sequentially numbered page 15 of this Annual Report on Form 10-K.

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(b)	The following reports were filed or required to be filed for the last quarter of the fiscal year:
		(1)	Form 8-K, dated November 7, 2002, regarding the announcement of our October 2002 sales, filed with the SEC on November 7, 2002;
		(2)	Form 8-K, dated November 14, 2002, regarding the announcement of our earnings for the third quarter of fiscal 2002, filed with the SEC on November 15, 2002;
		(3)	Form 8-K, dated November 21, 2002, regarding the announcement of John M. Lillie’s resignation from the Company, filed with the SEC on November 22, 2002, and attaching thereto as Exhibit 10.1 the Transition Agreement , effective on November 21, 2002, between the Company and John Lillie;
		(4)	Form 8-K, dated December 5, 2002, regarding the announcement of our November 2002 sales, filed with the SEC on December 5, 2002;
		(5)	Form 8-K, dated January 9, 2002, regarding the announcement of our December 2002 sales, filed with the SEC on January 9, 2003; and
		(6)	Form 8-K, dated January 18, 2003, regarding the announcement of the appointment of Byron H. Pollitt, Jr. as Executive Vice President and Chief Financial Officer of the Company, filed with the SEC on January 21, 2003, and attaching thereto as Exhibit 10.1 the Offer Letter, dated January 15, 2003, between the Company and Byron Pollitt.

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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.

	THE GAP, INC.
Date:  March 31, 2003	By	/s/ PAUL S. PRESSLER
		Paul S. Pressler, Chief Executive Officer (Principal Executive Officer)
Date:  March 31, 2003	By	/s/ BYRON H. POLLITT, JR.
		Byron H. Pollitt, Jr., Executive Vice President and Chief Financial Officer (Principal Financial and Accounting 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 the registrant and in the capacities and on the dates indicated.

Date:  March 31, 2003	By	/s/ ADRIAN D.P. BELLAMY
		Adrian D. P. Bellamy, Director
Date:  March 31, 2003	By	/s/ DONALD G. FISHER
		Donald G. Fisher, Director
Date:  March 31, 2003	By	/s/ DORIS F. FISHER
		Doris F. Fisher, Director
Date:  March 31, 2003	By	/s/ ROBERT J. FISHER
		Robert J. Fisher, Director
Date:  March 31, 2003	By	/s/ GLENDA A. HATCHETT
		Glenda A. Hatchett, Director

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SIGNATURES (con’t.)

Date:  March 31, 2003	By	/s/ PENELOPE L. HUGHES
		Penelope L. Hughes, Director
Date:  March 31, 2003	By	/s/ BOB L. MARTIN
		Bob L. Martin, Director
Date:  March 31, 2003	By	/s/ PAUL S. PRESSLER
		Paul S. Pressler, Director
Date:  March 31, 2003	By	/s/ ARUN SARIN
		Arun Sarin, Director
Date:  March 31, 2003	By	/s/ CHARLES R. SCHWAB
		Charles R. Schwab, Director
Date:  March 31, 2003	By	/s/ MAYO A. SHATTUCK III
		Mayo A. Shattuck III, Director

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CERTIFICATIONS

I, Paul S. Pressler, certify that:

1.	I have reviewed this annual report on Form 10-K of The Gap, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	(c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	March 31, 2003
/s/ PAUL S. PRESSLER
Paul S. Pressler President and Chief Executive Officer (Principal Executive Officer)

13

I, Byron Pollitt, certify that:

1.	I have reviewed this annual report on Form 10-K of The Gap, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	(c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	March 31, 2003
/s/ BYRON H. POLLITT, JR.
Byron H. Pollitt, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer)

14

Exhibit Index

3.1	Registrant’s Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed as Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for year ended January 29, 2000, Commission File No. 1-7562
3.3	Registrant’s Amended and Restated Bylaws (effective January 28, 2003), filed as Exhibit 4.4 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-103128
4.1	Indenture, dated September 1, 1997, between the Registrant and Harris Trust Company of California, filed as Exhibit 4 to Registrant’s Form 10-Q for the quarter ended November 1, 1997, Commission File No. 1-7562
4.2	Indenture, dated November 21, 2001, between the Registrant and The Bank of New York, filed as Exhibit 4.2 to Registrant’s Annual Report on Form 10-K for the year ended February 2, 2002, Commission File No. 1-7562
4.3	Indenture, dated March 5, 2002, between the Registrant and The Bank of New York filed as Exhibit 4.1 to Registrant’s Form S-3, dated May 2, 2002, Commission File No. 333-87442
10.1	Third Amended and Restated Credit Agreement, dated as of June 26, 2001 among the Registrant, Banana Republic, Inc., Old Navy Inc., Banana Republic (Canada) Inc., Old Navy (Canada) Inc., Gap (Canada) Inc., Gap International Sourcing Limited, Gap International Sourcing Pte. Ltd., Gap (Japan) K.K., Gap International Sourcing (Holdings) Limited, Gap (Netherlands) B.V., Gap International BV, GPS Consumer Direct, Inc., Citicorp USA, Inc., Salomon Smith Barney, Inc., Bank of America, N.A., HSBC Bank USA, ABN AMRO Bank N.V., The Chase Manhattan Bank, Banca Nazionale Del Lavoro S.p.A. New York Branch, Société Générale, Sumitomo Mitsui Banking Corporation, Bank One, NA (Main Office Chicago), Fleet National Bank, Wells Fargo, National Association, The Bank of New York, The Fuji Bank, Limited, US Bank National Association, Bank of Nova Scotia, and Citibank, N.A. filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended August 4, 2001, Commission File No. 1-7562
10.2	Credit Agreement, dated as of March 7, 2002, among The Gap, Inc., the LC Subsidiaries, the Subsidiary Borrowers, the Lenders and the Issuing Banks (as such terms are defined in the Credit Agreement), Salomon Smith Barney Inc.,  (“SSB”) and Banc of America Securities, LLC (“BAS”) as Joint Book Managers,

15

	BAS, HSBC Bank USA and JP Morgan Securities, Inc. (“JPM”) as Co-Syndication Agents, ABN AMRO Bank N.V. as Documentation Agent, SSB, BAS, and JPM as Joint Lead Arrangers, and Citicorp USA, Inc. as Agent for the Lenders and the Issuing Banks thereunder, filed as Exhibit 10.1 to Registrant’s Registrant’s Form 8-K, filed on March 22, 2002, Commission File No. 1-7562
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.3	1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 33-54690
10.4	Management Incentive Restricted Stock Plan II, filed as exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 33-54686
10.5	Description of Management Incentive Cash Award Plan, filed as Exhibit 10.34 to Registrant’s Annual Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562
10.6	Executive Management Incentive Cash Award Plan (January 28, 2002 Amendment and Restatement), filed as Exhibit 10.8 to Registrant’s Form 10-K for the year ended February 2, 2002, Commission File No. 1-7562
10.7	The Gap, Inc. Executive Deferred Compensation Plan, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No.1-7562
10.8	1996 Stock Option and Award Plan, filed as Exhibit A to the Registrant’s definitive proxy statement for its annual meeting of stockholders held on May 21, 1996, Commission File No. 1-7562
10.9	Amendment Number 1 to the Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.10	Amendment Number 2 to the Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.15 to Registrant’s Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562
10.11	Amendment Number 3 to the Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.12	Amendment Number 4 to the Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended July 29, 2000, Commission File No. 1-7562

16

10.13	Amendment Number 5 to the Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.13 to the Registrant’s Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562
10.14	Amendment Number 6 to the Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562
10.15	Form of Nonqualified Stock Option Agreement for employees under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.16	Form of Nonqualified Stock Option Agreement for directors under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.17	Form of Restricted Stock Agreement under Registrant’s 1996 Stock Option and Award Plan filed, as Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562
10.18	Form of Restricted Stock Agreement effective February 2, 2002 under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.20 to Registrant’s Form 10-K for the year ended February 2, 2002, Commission File No. 1-7562
10.19	Form of Nonqualified Stock Option Agreement for consultants under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.20	Form of Nonqualified Stock Option Agreement for employees in  France under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.21	Form of Nonqualified Stock Option Agreement for international employees under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.22	Form of Nonqualified Stock Option Agreement for employees in Japan under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.23	Form of Nonqualified Stock Option Agreement for directors effective April 3, 2001 under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.4

17

	to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562
10.24	Form of Stock Option Agreement for employees under the UK Sub-plan to the U.S. Stock Option and Award Plan, filed as Exhibit 10.8 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.25	Relocation Loan Plan, filed as Exhibit A to Registrant’s definitive proxy statement for its annual meeting of stockholders held on October 25, 1977, Commission File No. 1-7562
10.26	Certificate of Corporate Resolution amending the Relocation Loan Plan, adopted by the Board of Directors on November 27, 1990, filed as Exhibit 10.34 to Registrant’s Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562
10.27	Non-Employee Director Retirement Plan, dated October 27, 1992, filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562
10.28	Statement Regarding Non-Employee Director Retirement Plan, filed as Exhibit 10.25 to Registrant’s Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562
10.29	Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-36265
10.30	Amendment Number 1 to the Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562
10.31	Amendment Number 2 to the Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended July 29, 2000, Commission File No. 1-7562
10.32	Amendment Number 3 to the Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562
10.33	Nonemployee Director Deferred Compensation Plan, as amended and restated on October 30, 2001, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562

18

10.34	Form of Discounted Stock Option Agreement under the Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.5 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-36265
10.35	Form of Nonqualified Stock Option Agreement for directors effective April 3, 2001 under Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562
10.36	UK Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-47508
10.37	1999 Stock Option Plan, filed as Exhibit as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-76523
10.38	Amendment Number 1 to the Registrant’s 1999 Stock Option Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-59292
10.39	Form of Nonqualified Stock Option Agreement under the Registrant’s 1999 Stock Option Plan, filed as Exhibit 4.6 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-76523
10.40	Stock Up On Success, The Gap, Inc.’s Stock Option Bonus Program, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-72921
10.41	2002 Stock Option Plan, as amended, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-103128
10.42	Form of Domestic Nonqualified Stock Option Agreement under the Registrant’s 2002 Stock Option Plan, as amended, filed as Exhibit 4.6 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-72921
10.43	Form of International Nonqualified Stock Option Agreement under the Registrant’s 2002 Stock Option Plan, as amended, filed as Exhibit 4.7 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-72921
10.44	Employment Agreement, dated September 25, 2002, by and between Registrant and Paul S. Pressler, filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on September 26, 2002, Commission File No. 1-7562
10.45	Offer Letter, dated as of January 15, 2003, by and between Registrant and Byron Hall Pollitt, Jr., filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on January 21, 2003, Commission File No. 1-7562

19

10.46	Transition Agreement dated as of November 21, 2002 by and between Registrant and John M. Lillie, filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on November 22, 2002, Commission File No. 1-7562
10.47	Non-qualified Stock Option Agreement, dated January 23, 2001, between Registrant and John M. Lillie, filed as Exhibit 10.36 to Registrant’s Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562
10.48	Form of Amended and Restated Nonqualified Stock Option Agreement, dated October 19, 2001, amending option agreement dated January 23, 2001, between Registrant and John M. Lillie, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562
10.49	Form of Nonqualified Stock Option Agreement under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562
10.50	Amendment to the Nonqualified Stock Option Agreements, dated April 3, 2001, between Registrant and Brooks Walker, Jr., filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562
13	Portions of Registrant’s annual report to security holders for the fiscal year ended February 1, 2003
21	Subsidiaries of Registrant
23	Consent of Deloitte & Touche LLP
99.1	Certifications of the Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 regarding facts and circumstances relating to the Exchange Act filing

20

EX-13

Exhibit 13

10-YEAR SELECTED FINANCIAL DATA

	Compound Annual Growth Rate									Fiscal Year (in weeks)
	3-year			5-year			10-year			2002 (52)			2001 (52)			2000 (53)
Operating Results ($ in thousands)
Net sales		8	%		17	%		17	%	$	14,454,709		$	13,847,873		$	13,673,460
Cost of goods sold and occupancy expenses, excluding depreciation and amortization		—			—			—			8,781,580			8,905,064			8,025,374
Percentage of net sales		—			—			—			60.8	%		64.3	%		58.7	%
Depreciation and amortization (a)		—			—			—		$	759,978		$	799,325		$	574,068
Operating expenses		—			—			—			3,900,522			3,805,968			3,629,257
Net interest expense (income)		—			—			—			211,754			95,875			62,876
Earnings before income taxes		(23	)		(1	)		9			800,875			241,641			1,381,885
Percentage of net sales		—			—			—			5.5	%		1.7	%		10.1	%
Income taxes		—			—			—		$	323,418		$	249,405		$	504,388
Net earnings (loss)		(25	)		(2	)		9			477,457			(7,764	)		877,497
Percentage of net sales		—			—			—			3.3	%		(0.1	%)		6.4	%
Cash dividends paid		—			—			—		$	78,352		$	76,373		$	75,488
Purchase of property and equipment		—			—			—			303,284			957,054			1,882,125
Per Share Data
Net earnings (loss) — basic		(25	%)		(2	%)		9	%	$	0.55		$	(0.01	)	$	1.03
Net earnings (loss) — diluted		(24	)		(1	)		9			0.54			(0.01	)		1.00
Cash dividends paid (b)		—			—			—			0.09			0.09			0.09
Shareholders’ equity (book value)		—			—			—			4.18			3.48			3.43
Financial Position ($ in thousands)
Property and equipment, net		12	%		23	%		19	%	$	3,776,843		$	4,161,290		$	4,007,685
Merchandise inventory		12			23			19			2,047,879			1,768,613			1,904,153
Total assets		24			24			22			9,902,004			7,682,823			7,012,908
Working capital		—			—			—			3,013,151			1,022,567			(151,094	)
Current ratio		—			—			—			2.11:1			1.48:1			0.95:1
Total long-term debt and senior convertible notes, less current maturities		—			—			—		$	2,895,794		$	1,961,397		$	780,246
Ratio of long-term debt and senior convertible notes to shareholders’ equity (c)		—			—			—			0.93:1			0.65:1			0.35:1
Shareholders’ equity		—			—			—		$	3,658,212		$	3,009,581		$	2,928,239
Return on average assets		—			—			—			5.4	%		(0.1	%)		14.4	%
Return on average shareholders’ equity		—			—			—			14.3	%		(0.3	%)		34.0	%
Statistics
Number of store concepts opened (d)		(31	%)		(9	%)		5	%		188			587			731
Number of store concepts expanded (d)		—			—			—			35			311			268
Number of store concepts closed (d)		—			—			—			107			92			73
Number of store concepts open at year-end (d)		12			15			13			4,252			4,171			3,676
Net increase in number of store concepts (d)		—			—			—			2	%		13	%		22	%
Comparable store sales increase (decrease) percentage (52-week basis)		—			—			—			(3	%)		(13	)%		(5	%)
Sales per square foot (52-week basis) (e)		—			—			—		$	349		$	394		$	482
Square footage of gross store space at year-end		16			19			19			37,251,520			36,333,400			31,373,400
Percentage increase in square feet		—			—			—			3	%		16	%		31	%
Number of employees at year-end		6			16			16			169,000			165,000			166,000
Weighted-average number of shares — basic		—			—			—			875,545,551			860,255,419			849,810,658
Weighted-average number of shares — diluted		—			—			—			881,477,888			860,255,419			879,137,194
Number of shares outstanding at year-end, net of treasury stock		—			—			—			887,322,707			865,726,890			853,996,984

(a)	Excludes amortization of restricted stock, discounted stock options and discount on long-term debt.
(b)	Excludes a dividend of $.0222 per share declared in January 2003 but paid in the first quarter of fiscal 2003.
(c)	Long-term debt includes current maturities.

20

		Fiscal Year (in weeks)
	1999 (52)			1998 (52)			1997 (52)			1996 (52)			1995 (53)			1994 (52)			1993 (52)
Operating Results ($ in thousands)
Net sales	$	11,635,398		$	9,054,462		$	6,507,825		$	5,284,381		$	4,395,253		$	3,722,940		$	3,295,679
Cost of goods sold and occupancy expenses, excluding depreciation and amortization		6,360,704			5,013,473			3,775,957			3,093,709			2,645,736			2,202,133			1,996,929
Percentage of net sales		54.7	%		55.4	%		58.0	%		58.5	%		60.2	%		59.2	%		60.6	%
Depreciation and amortization (a)	$	414,558		$	304,745		$	245,584		$	191,457		$	175,719		$	148,863		$	124,860
Operating expenses		3,043,432			2,403,365			1,635,017			1,270,138			1,004,396			853,524			748,193
Net interest expense (income)		31,755			13,617			(2,975	)		(19,450	)		(15,797	)		(10,902	)		809
Earnings before income taxes		1,784,949			1,319,262			854,242			748,527			585,199			529,322			424,888
Percentage of net sales		15.3	%		14.6	%		13.1	%		14.2	%		13.3	%		14.2	%		12.9	%
Income taxes	$	657,884		$	494,723		$	320,341		$	295,668		$	231,160		$	209,082		$	166,464
Net earnings (loss)		1,127,065			824,539			533,901			452,859			354,039			320,240			258,424
Percentage of net sales		9.7	%		9.1	%		8.2	%		8.6	%		8.1	%		8.6	%		7.8	%
Cash dividends paid	$	75,795		$	76,888		$	79,503		$	83,854		$	66,993		$	64,775		$	53,041
Purchase of property and equipment		1,238,722			797,592			465,843			371,833			302,260			232,776			212,340
Per Share Data
Net earnings (loss) — basic	$	1.32		$	0.95		$	0.60		$	0.48		$	0.38		$	0.34		$	0.27
Net earnings (loss) — diluted		1.26			0.91			0.58			0.47			0.37			0.33			0.27
Cash dividends paid (b)		0.09			0.09			0.09			0.09			0.07			0.07			0.05
Shareholders’ equity (book value)		2.63			1.83			1.79			1.79			1.69			1.41			1.15
Financial Position ($ in thousands)
Property and equipment, net	$	2,715,315		$	1,876,370		$	1,365,246		$	1,135,720		$	957,752		$	828,777		$	740,422
Merchandise inventory		1,462,045			1,056,444			733,174			578,765			482,575			370,638			331,155
Total assets		5,188,756			3,963,919			3,337,502			2,626,927			2,343,068			2,004,244			1,763,117
Working capital		444,911			318,721			839,399			554,359			728,301			555,827			494,194
Current ratio		1.25:1			1.21:1			1.85:1			1.72:1			2.32:1			2.11:1			2.07:1
Total long-term debt and senior convertible notes, less current maturities	$	784,925		$	496,455		$	496,044			—			—			—		$	75,000
Ratio of long-term debt and senior convertible notes to shareholders’ equity (c)		0.35:1			0.32:1			0.31:1			N/A			N/A			N/A			0.07:1
Shareholders’ equity	$	2,233,045		$	1,573,679		$	1,583,986		$	1,654,470		$	1,640,473		$	1,375,232		$	1,126,475
Return on average assets		24.6	%		22.6	%		17.9	%		18.2	%		16.3	%		17.0	%		16.4	%
Return on average shareholders’ equity		59.2	%		52.2	%		33.0	%		27.5	%		23.5	%		25.6	%		25.7	%
Statistics
Number of store concepts opened (d)		570			356			298			203			225			172			108
Number of store concepts expanded (d)		129			135			98			42			55			82			130
Number of store concepts closed (d)		18			20			22			30			53			34			45
Number of store concepts open at year-end (d)		3,018			2,466			2,130			1,854			1,680			1,508			1,370
Net increase in number of store concepts (d)		22	%		16	%		15	%		10	%		11	%		10	%		5	%
Comparable store sales increase (decrease) percentage (52-week basis)		7	%		17	%		6	%		5	%		0	%		1	%		1	%
Sales per square foot (52-week basis) (e)	$	548		$	532		$	463		$	441		$	425		$	444		$	463
Square footage of gross store space at year-end		23,978,100			18,757,400			15,312,700			12,645,000			11,100,200			9,165,900			7,546,300
Percentage increase in square feet		28	%		22	%		21	%		14	%		21	%		21	%		16	%
Number of employees at year-end		140,000			111,000			81,000			66,000			60,000			55,000			44,000
Weighted-average number of shares — basic		853,804,924			864,062,060			891,404,945			938,579,921			939,866,394			948,699,959			940,287,006
Weighted-average number of shares — diluted		895,029,176			904,374,383			922,951,706			961,351,245			962,443,160			971,144,612			965,110,280
Number of shares outstanding at year-end, net of treasury stock		850,498,941			857,960,032			884,549,313			926,495,994			971,149,446			977,162,057			980,428,914

(d)

Since the beginning of fiscal 2000, Gap brand stores have been reported based on concepts and locations. Any Gap Adult, GapKids, babyGap or GapBody that meets a certain square footage threshold has been counted as a store, even when residing within a single physical location that may have other concepts. The number of stores by location at the end of fiscal 2002, 2001 and 2000 was 3,117, 3,097 and 2,848, respectively.

(e)

Based on weighted-average gross square footage.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations

The information below and elsewhere in this Annual Report contains certain forward-looking statements that reflect the current view of Gap Inc. (the “Company,” “we,” “our”) with respect to future events and financial performance. Whenever used, the words “expect,” “plan,” “anticipate,” “believe,” “may” and similar expressions identify forward-looking statements.

Any such forward-looking statements are subject to risks and uncertainties, and our future results of operations could differ materially from historical results or current expectations. Some of these risks include, without limitation, ongoing competitive pressures in the apparel industry, risks associated with challenging domestic and international retail environments, changes in the level of consumer spending or preferences in apparel, trade restrictions and political or financial instability in countries where our goods are manufactured, impact of legal proceedings and/or other factors that may be described in our Annual Report on Form 10-K and/or other filings with the Securities and Exchange Commission. Future economic and industry trends that could potentially impact revenues and profitability are difficult to predict.

We assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Management continually reviews its accounting policies, how they are applied and how they are reported and discussed in the consolidated financial statements.

Management believes these critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Inventory Valuation Method

Inventory is valued using the cost method which values inventory at the lower of the actual cost or market, at the individual item level. Cost is determined using the FIFO (first-in, first-out) method. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. Inventory value is reduced immediately when the selling price is marked down below cost. We estimate and accrue shortage for the period between the last physical count and the balance sheet date. Our shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends. The change in shortage expense as a percentage of sales was an improvement (deterioration) of 0.1 percentage points, (0.5) percentage points and (0.3) percentage points for fiscal 2002, 2001 and 2000, respectively.

Long-lived Assets, Impairment and Excess Facilities

We have a significant investment in property and equipment. Depreciation and amortization are computed using estimated useful lives of up to 39 years. Any reduction in these estimated useful lives would result in higher annual depreciation expense for the related assets.

We review long-lived assets for impairment whenever events, such as decisions to close a store or changes in circumstances, indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the long-lived assets are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the asset’s fair value, which is indicated by the discounted future cash flows of the asset using a weighted-average cost of capital rate, for a store or distribution center asset. We recorded a charge for the impairment of store assets of $39.9 million, $13.9 million and $23.5 million during fiscal 2002, 2001 and 2000, respectively. Decisions to close a store or facility space can also result in accelerated depreciation over the revised useful life. Most store closures occur upon the lease expiration.

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For locations to be closed which are under long-term leases, we record a charge for lease buyout expense or the difference between our rent and the rate at which we expect to be able to sublease the properties, net of related costs, when a location is no longer in use. This charge is discounted using a credit adjusted risk-free rate. Our estimate of future cash flows is based on our experience, knowledge and typically third-party advice or market data. However, these estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that can be difficult to predict. We recorded a charge for excess facilities of $77.4 million and $47.3 million during fiscal 2002 and 2001, respectively. We did not have a charge for excess facilities during fiscal 2000. Our sublease reserve is sensitive to the level of sublease rent anticipated and the estimated timing of sublease commencement. A 10 percent reduction in our sublease rate assumptions would have resulted in an additional $4.7 million of charges as of the end of fiscal 2002. A one-year delay in sublease commencement would have resulted in an additional $6.1 million charge as of the end of fiscal 2002. Additional reserves would also be required if management decided to sublease additional space based on changes in future needs.

Income Taxes

We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We also record a valuation allowance against our deferred tax assets arising from certain net operating losses when it is more likely than not that some portion or all of such net operating losses will not be realized. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings, changes in the expected outcome of audit controversies or changes in the deferred tax valuation allowance. We currently expect the 2003 effective tax rate to fall within a range of 39 percent to 42 percent. The actual rate will ultimately depend on several variables, including the mix of earnings between domestic and international operations, and the overall level of earnings.

Results of Operations

Net Sales

	52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002			53 Weeks Ended Feb. 3, 2001
Net sales ($ in thousands)	$	14,454,709		$	13,847,873		$	13,673,460
Total net sales growth percentage		4	%		1	%		18	%
Comparable store sales increase (decrease) percentage (a)		(3	)%		(13	)%		(5	)%
Net sales per average gross square foot (a)	$	349		$	394		$	482
Square footage of gross store space at year-end (in thousands)		37,252			36,333			31,373
Number of new store concepts (b)		188			587			731
Number of expanded store concepts (b)		35			311			268
Number of closed store concepts (b)		107			92			73

(a)	52-week basis
(b)	Gap brand stores are reported based on concepts. Any Gap Adult, GapKids, babyGap or GapBody that meets a certain square footage threshold has been counted as a store, even when residing within a single physical location that may have other concepts. The number of stores by location at the end of fiscal 2002, 2001 and 2000 was 3,117, 3,097 and 2,848, respectively.

A store is included in comparable store sales (“Comp”) when it has been open at least one year and it has not been expanded or remodeled by more than 15 percent or permanently relocated within that year. Therefore, a store is included in Comp on the first day it has comparable prior year sales. Stores in which square footage has been expanded or remodeled by 15 percent or more are excluded from Comp until the first day they have comparable prior year sales.

A store is considered non-comparable (“Non-comp”) when, in general, the store had no comparable prior year sales. For example, a new store, or a store that has been expanded by more than 15 percent or permanently relocated within the last year. Non-store sales such as online operations are also considered Non-comp.

Net sales increased $607 million in fiscal 2002 from 2001. Non-comparable store sales increased $960 million, partially offset by a $353 million decrease in comparable store sales.

Net sales increased $174 million in fiscal 2001 from 2000. Non-comparable store sales increased $1.7 billion, partially offset by a $1.5 billion decrease in comparable store sales.

The non-comparable store sales increases in fiscal 2002 and 2001 were primarily due to the increase in retail selling space, both through the opening of new stores (net of stores closed) and the expansion of existing stores. The effects of increased markdown selling and lower markdown margins earlier in the year and negative comparable traffic throughout the year drove the decrease in comparable store sales in fiscal 2002. The decline in comparable store sales in fiscal 2001 was driven by weak product acceptance by customers, particularly in the men’s division, which led to a greater percentage of merchandise sold at markdown.

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Comparable store sales by division for fiscal 2002 and 2001 were as follows:

•	Gap U.S. reported negative 7% in 2002 versus negative 12% in 2001
•	Gap International reported negative 5% in 2002 versus negative 11% in 2001
•	Banana Republic reported negative 1% in 2002 versus negative 8% in 2001
•	Old Navy reported positive 1% in 2002 versus negative 16% in 2001
Total sales by division for fiscal 2002, 2001 and 2000 were as follows:
•	Gap U.S. Reported $5.1 billion in 2002 versus $5.2 billion in 2001 versus $5.5 billion in 2000
•	Gap International reported $1.7 billion in 2002 versus $1.6 billion in 2001 versus $1.6 billion in 2000
•	Banana Republic reported $1.9 billion in 2002 versus $1.9 billion in 2001 versus $1.8 billion in 2000
•	Old Navy reported $5.8 billion in 2002 versus $5.1 billion in 2001 versus $4.7 billion in 2000

The decrease in net sales per average square foot for fiscal 2002 and 2001 was primarily attributable to decreases in comparable store sales. Store count and square footage growth were as follows:

		Feb. 1, 2003									Feb. 2, 2002
		Number of Store Concepts (a)			Number of Store Locations (a)			Sq. Ft. (in millions)			Number of Store Concepts (a)			Number of Store Locations (a)			Sq. Ft. (in millions)
Gap U.S.			2,309			1,460			13.2			2,298			1,494			13.2
Gap International
	United Kingdom		241			149			1.4			225			140			1.3
	Canada		191			108			1.0			192			110			1.0
	France		55			36			0.3			54			35			0.3
	Japan		153			71			0.8			143			69			0.8
	Germany		20			10			0.1			20			10			0.1
Banana Republic (b)			441			441			3.7			441			441			3.6
Old Navy (c)			842			842			16.8			798			798			16.0
Total			4,252			3,117			37.3			4,171			3,097			36.3
Increase			2	%		1	%		3	%		13	%		9	%		16	%

(a)	Gap brand stores are reported based on concepts and locations. Any Gap Adult, GapKids, babyGap or GapBody that meets a certain square footage threshold has been counted as a store, even when residing within a single physical location that may have other concepts.
(b)	Includes 16 store concepts in Canada in fiscal 2002 and 2001.
(c)	Includes 28 and 17 store concepts in Canada in fiscal 2002 and 2001, respectively.

Cost of Goods Sold and Occupancy Expenses

Cost of goods sold and occupancy expenses as a percentage of net sales decreased 4.1 percentage points in fiscal 2002 from 2001 and increased 7.2 percentage points in fiscal 2001 from 2000.

The decrease in fiscal 2002 from 2001 was driven by an increase in merchandise margins and decreased occupancy expenses of 3.9 percentage points and 0.2 percentage points, respectively. The increase in merchandise margins of 3.9 percentage points in fiscal 2002 was primarily driven by a decrease in markdown selling and higher markdown margins compared to fiscal 2001.

The increase in fiscal 2001 from 2000 was driven by a decrease in merchandise margins and increased occupancy expenses of 4.9 percentage points and 2.3 percentage points, respectively. Of the 4.9 percentage points decline in merchandise margins, 4.5 percentage points were attributable to lower margins on regular-priced and marked-down goods and a greater percentage of merchandise sold at markdown. The lower margins and the increase in proportion of goods sold at markdown were driven by weak product acceptance, particularly in the men’s division. After a thorough review of our planned merchandise programs, primarily for the first quarter of fiscal 2002, we cancelled certain product orders in the third quarter of fiscal 2001. This resulted in a $52 million charge, which accounted for an additional 0.4 percentage points of the 4.9 percentage points decline in merchandise margins. We chose to cancel these programs in order to manage our inventory levels consistent with current business and also as a result of changes made to the product assortment for the fourth quarter of fiscal 2001 and first quarter of fiscal 2002.

The increase in occupancy expenses as a percentage of net sales in fiscal 2001 compared to 2000 was primarily due to a loss of sales leverage, which accounted for 2.0 percentage points of the 2.3 percentage points increase.

As a general business practice, we review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise.

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Operating Expenses

Total operating expenses as a percentage of net sales decreased 0.5 percentage points in fiscal 2002 from 2001. This decrease was driven by cost reductions and expense savings which accounted for a 1.6 percentage point decrease, partially offset by a loss of sales leverage which accounted for a 0.7 percentage point increase in operating expenses as a percentage of net sales. Incremental advertising, which included TV campaigns and circulars, and additional excess corporate facilities charges drove an additional 0.4 percentage point increase in operating expenses as a percentage of net sales.

In fiscal 2001, total operating expenses as a percentage of net sales increased 1.0 percentage point from 2000. This increase was driven by a loss of sales leverage and a number of significant charges, which accounted for 2.7 percentage points and 0.7 percentage points of the increase, respectively. This increase was partially offset by lower spending on advertising, travel and entertainment, and other operating expenses, which accounted for a 2.4 percentage decrease in operating expenses as a percentage of net sales. The significant charges included in operating expenses totaled $88 million and fell into three major categories: exit costs on excess facilities, reductions in workforce and distribution center closures of $51 million, $25 million and $12 million, respectively.

Excess Facilities, Severance and Sublease Loss Charges

During 2001, as a result of the evaluation of our global distribution center network, we announced plans to close four distribution facilities, located in Ventura, California; Erlanger, Kentucky; Basildon, England; and Roosendaal, Holland. The closure of the Ventura and Basildon facilities were completed by the first quarter of fiscal 2002, the Roosendaal facility was closed during the second quarter of fiscal 2002 and the Erlanger facility was closed during the third quarter of fiscal 2002.

The land and building of the distribution center in Roosendaal, Holland, is classified as held for sale in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” In fiscal 2002, we recorded an impairment charge of $1.0 million to reduce the net book value of the facility to the estimated net selling price. The total carrying value of the land and building as of February 1, 2003, was $7.5 million. The Ventura, California, facility and the adjacent land were sold in October 2002.

Facilities-related charges associated with distribution center closures include costs associated with lease terminations, facilities restoration and equipment removal. Remaining cash expenditures of $4.2 million associated with facility closures as of February 1, 2003, are expected to be paid by the third quarter of fiscal 2003. As of February 1, 2003, all employee separation expenditures have been paid.

During 2001, we consolidated and downsized headquarters facilities in our San Francisco and San Bruno campuses as part of our cost-containment efforts. We identified 361,383 square feet of excess facility space and recorded charges of $47.3 million during fiscal 2001, which primarily related to the difference between our contract rent obligations and the rate at which we expect to be able to sublease the properties. In 2002, based on a review of real estate market conditions, we revised our sublease income and sublease commencement projections and assumptions. Additionally, in 2002 we considered our corporate facilities space needs and identified additional excess facility space of 193,228 square feet. As a result of these actions, we recorded an additional sublease loss charge of $77.4 million in fiscal 2002. The additional sublease loss charge was recorded in operating expenses on our Consolidated Statements of Operations. Remaining cash expenditures associated with the sublease loss reserve are expected to be paid over the remaining various lease terms through 2017. Based on the current assumptions set forth above as of February 1, 2003, we expect the sublease of our excess facilities to result in a total reduction of approximately $289 million in future rent expense and $112 million in cash savings over the various remaining lease terms through 2017.

Interest Expense

The increase in interest expense between fiscal 2002 and 2001 was primarily due to an increase in long-term borrowings in 2002 and late 2001 and higher fees on the credit facility.

The increase in interest expense between fiscal 2001 and 2000 was primarily due to an increase in long-term borrowings and a decrease in interest capitalized as a result of fewer construction projects.

For fiscal 2003, we expect our gross interest expense, excluding interest income on cash investments, to be approximately $250 million to $255 million for the full year.

Interest Income

The increase in interest income between fiscal 2002 and 2001 was due to increases in average cash available for investment, primarily due to the issuance of senior convertible notes in March 2002, partially offset by a decrease in interest rates.

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Interest Income

The increase in interest income between fiscal 2002 and 2001 was due to increases in average cash available for investment, primarily due to the issuance of senior convertible notes in March 2002, partially offset by a decrease in interest rates.

The increase in interest income between fiscal 2001 and 2000 was primarily due to increases in average cash available for investment, partially offset by a decrease in interest rates. The average cash balances increased due to the debt issuances in April and November 2001 and positive cash flows in fiscal 2001. We attained a higher cash position in advance of repayment of debt maturing in the third and fourth quarters of fiscal 2001.

Income Taxes

The effective tax rate was 40.4 percent, 49 percent, excluding the $131 million tax charge discussed below, and 36.5 percent in fiscal 2002, 2001 and 2000, respectively.

The decrease in the effective tax rate in fiscal 2002 from 2001 (excluding the $131 million tax charge during fiscal 2001) was primarily driven by an improvement in the mix of earnings in domestic and international operations and improved earnings performance.

The increase in the effective tax rate in fiscal 2001 resulted from a $131 million tax charge recorded during fiscal 2001 and an earnings performance that was below expectations. The tax charge of $131 million primarily reflected changes in the estimates of probable settlements of foreign and domestic tax audits. In addition, the level and mix of earnings caused our tax rate to increase well above earlier expectations. As a result, the effective tax rate for fiscal 2001 (exclusive of the $131 million tax charge) was 49 percent.

We currently expect the 2003 effective tax rate to fall within a range of 39 percent to 42 percent. The actual rate will ultimately depend on several variables, including the mix of earnings between domestic and international operations, and the overall level of earnings.

Liquidity and Capital Resources

Cash Flows

The following sets forth certain measures of our liquidity:

	Fiscal Year 2002		Fiscal Year 2001		Fiscal Year 2000
Cash provided by operating activities ($ in thousands)	$	1,238,356	$	1,334,815	$	1,314,668
Working capital ($ in thousands)		3,013,151		1,022,567		(151,094	)
Current ratio		2.11:1		1.48:1		0.95:1

For fiscal 2002, the decrease in cash flows provided by operating activities was primarily due to an increase in merchandise inventory and a decrease in the relative growth in accounts payable and long-term liabilities, partially offset by an increase in net earnings (exclusive of depreciation and amortization). An increase in cash due to the issuance of $1.38 billion senior convertible notes in March 2002 and a decrease in capital expenditures primarily drove the increase in working capital and the current ratio.

For fiscal 2001, the increase in cash flows provided by operating activities was primarily due to a decrease in merchandise inventory and an increase in accrued expenses, partially offset by a decrease in net earnings (exclusive of depreciation and amortization). The increase in working capital and the current ratio was primarily due to a decrease in current maturities of long-term debt and an increase in cash.

We fund inventory expenditures during normal and peak periods through a combination of cash flows from operations as well as long-term financing arrangements. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. During fiscal 2002 and 2001, these periods accounted for 34 percentage points and 32 percentage points, respectively, of our annual net sales.

Credit Facility

In March 2002, we entered into a $1.4 billion secured two-year credit facility (the “Facility”). The Facility is used for general corporate purposes, primarily as backup for our trade letters of credit issuance. The fees related to the Facility fluctuate based on our senior unsecured credit ratings.

The Facility contains financial and other covenants, including, but not limited to, limitations on capital expenditures, liens and cash dividends, and maintenance of certain financial ratios, including a fixed-charge coverage ratio and an asset coverage ratio. Violation of these covenants could result in a default under the Facility, which would permit the participating banks to restrict our ability to further access the Facility for letters of credit or advances and to require the immediate repayment of any outstanding advances under the Facility. In addition, such a default could, under certain circumstances, permit the holders of our outstanding unsecured debt to accelerate the payment of such obligations. We were in compliance with these covenants as of February 1, 2003.

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Letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a given amount of money upon presentation of specific documents demonstrating that merchandise has shipped. Vendor payables are recorded in the balance sheet at the time of merchandise title transfer, although the letters of credit are generally issued prior to this.

At February 1, 2003, we had $840 million in trade letters of credit issued under the Facility.

Summary Disclosures about Contractual Obligations and Commercial Commitments

The following table reflects a summary of our contractual cash obligations as of February 1, 2003:

Contractual Obligations

($ in millions)	1–3 Years		4–5 Years		After 5 Years		Total
Long-term debt	$	969	$	997	$	50	$	2,016
Senior convertible notes		—		—		1,380		1,380
Operating leases		2,484		1,075		1,965		5,524
Total contractual cash obligations	$	3,453	$	2,072	$	3,395	$	8,920

We also have standby letters of credit, surety bonds and bank guarantees outstanding as of February 1, 2003, amounting to $30 million, $21 million and $6 million, respectively.

On May 1, 2003, $500 million aggregate principal amount of debt securities with a fixed annual interest rate of 5.625 percent, is due and payable.

In November 2001, we issued $200 million aggregate principal amount of debt securities at an original annual interest rate of 8.15 percent, due December 15, 2005 (the “2005 notes”), and $500 million aggregate principal amount of debt securities at an original annual interest rate of 8.80 percent, due December 15, 2008 (the “2008 notes”). The net proceeds were used for general corporate purposes. Interest on the notes of each series is payable semi-annually. The interest rate payable on the notes of each series is subject to adjustment from time to time if either Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Rating Services (“Standard & Poor’s”) reduces the rating ascribed to the notes below Baa2, in the case of Moody’s, or below BBB+, in the case of Standard & Poor’s. The interest rate payable on the notes is subject to increase by 0.25 percent for each rating category downgrade by either rating agency. In addition, if Moody’s or Standard & Poor’s subsequently increases the rating ascribed to the notes, the ongoing interest rate then payable on the notes will be decreased by 0.25 percent for each rating category upgrade by either rating agency up to Baa2, in the case of Moody’s, or BBB+, in the case of Standard & Poor’s. In no event will the interest rate be reduced below the original interest rate payable on the notes.

On February 14, 2002, Moody’s reduced our long- and short-term senior unsecured credit ratings from Baa3 to Ba2 and from Prime-3 to Not Prime, respectively, with a negative outlook on our long-term ratings, and Standard & Poor’s reduced our long- and short-term credit ratings from BBB+ to BB+ and from A-2 to B, respectively, with a stable outlook on our long-term ratings. On February 27, 2002, Moody’s reduced our long-term senior unsecured credit ratings from Ba2 to Ba3 and stated that its outlook on our long-term ratings was stable. In April 2002, Standard & Poor’s assigned a BBB- rating to our Facility. On May 9, 2002, and May 24, 2002, the outlook on our credit ratings was changed from stable to negative by Standard & Poor’s and Moody’s, respectively. On December 20, 2002, Moody’s assigned a speculative grade liquidity rating of SGL-2; this type of rating is only for speculative grade issuers and is intended to give bondholders a short-term (12-18 month) view of a company’s ability to meet its operating and financing obligations. The rating is a scale of 1-to-4, with 1 being the highest.

As a result of the downgrades in our long-term credit ratings, effective June 15, 2002, the interest rates payable by us on $700 million of our outstanding notes increased by 175 basis points—to 9.90 percent per annum on the 2005 notes and to 10.55 percent per annum on the 2008 notes. Any further downgrades of our long-term credit ratings by these rating agencies would result in further increases in the interest rates payable by us on the notes. The interest rates payable on these notes is subject to decrease upon upgrades of our long-term credit rating by these rating agencies. As a result of the downgrades in our short-term credit ratings, we no longer have meaningful access to the commercial paper market; however, we replaced this borrowing capacity with proceeds from the issuance of senior convertible notes in March 2002. In addition, any future lowering of the ratings on our debt could result in reduced access to the capital markets and higher interest costs on future financings.

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In March 2002, we issued $1.38 billion aggregate principal amount of 5.75 percent senior convertible notes due March 15, 2009, and received net proceeds of $1.35 billion in cash net of underwriting and other fees. Interest is payable semi-annually on March 15 and September 15 of each year. The first payment was made on September 15, 2002. These debt securities are recorded in the balance sheet at their issuance amounts net of unamortized discount. We have an option to call the notes on or after March 20, 2005. The notes are convertible, unless previously redeemed or repurchased, at the option of the holder at any time prior to maturity, into shares of our common stock at a conversion price of $16.12 per share, subject to adjustment in certain events, for a total of 85,607,940 shares. If converted, these additional shares would reduce our future earnings per share. Prior to conversion, the convertible notes are potentially dilutive at certain earnings levels. The effects of these dilutive securities are computed using the if-converted method. The net proceeds were used for general corporate purposes.

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge substantially all merchandise purchases for foreign operations using foreign exchange forward contracts. Additional information is presented in the Notes to Consolidated Financial Statements (Note E). Quantitative and qualitative disclosures about market risk for financial instruments are presented on page 30.

Capital expenditures, net of tenant allowances, totaled approximately $272 million in fiscal 2002. The majority of these expenditures were used for expansion of stores and remodels and information technology. These expenditures resulted in a net increase in store space in fiscal 2002 of approximately 0.9 million square feet, or 3.0 percent, due to a net addition of 81 new store concepts, the expansion of 35 store concepts and the remodeling of certain stores. Capital expenditures for fiscal 2001 and 2000 were $1.0 billion and $1.8 billion, respectively, resulting in a net increase in store space of 5.0 million square feet in fiscal 2001 and 7.4 million square feet in fiscal 2000.

For fiscal 2003, we expect capital expenditures, net of tenant allowances to be about $350 million to $400 million. Approximately, $190 million of the capital spending is for information technology. Of the remaining capital spending, store capital is estimated to be about $180 million, with about $40 million for new stores and about $140 million for remodels. We expect to fund such capital expenditures with cash flows from operations.

For fiscal 2003, we anticipate new store openings of approximately 30 to 40 locations, which translates to 40 to 60 concepts. We expect store closures will likely be higher than fiscal 2002, such that net square footage is expected to decline about 2 percent for the full year.

Related Party Transactions

We have a construction industry standard, non-exclusive agreement with Fisher Development, Inc. (“FDI”), a company which is wholly owned by the brother of Donald G. Fisher (our Chairman) and the brother’s immediate family. The standard agreement, used for all of our qualified general contractors, sets forth the terms under which FDI may act as one of our general contractors in connection with our construction activities. Prior to 2002, we used FDI as our primary, non-exclusive general contractor under a cost-plus arrangement. During periods of rapid growth, we benefited from using FDI as our primary, non-exclusive contractor because of FDI’s national and international capabilities, overall quality of work, flexibility to changes and ability to consistently meet aggressive timetables. FDI also provided construction project management capabilities that we lacked internally. In 2001, based on evolving business needs and a changing economic environment, we began developing the in-house, project management expertise necessary to qualify and manage numerous general contractors and solicit bids from multiple general contractors. This competitive bidding process, which was fully implemented in July 2002, enhances our ability to cost-effectively manage our construction needs on an ongoing basis. Since fully implementing the competitive bidding process in July 2002, FDI chose to competitively bid on 7 of 20 projects through March 1, 2003. FDI was awarded 3 of the 7 projects on which they competitively bid, representing 15 percent of total project bid dollars. We now have more than 40 general contractors, including FDI, qualified to competitively bid. In fiscal 2002, we managed 155 construction projects using 27 general contractors. In fiscal 2002, FDI acted as the general contractor for leasehold improvements for 87 new store concepts, compared with 282 and 675, respectively, in fiscal years 2001 and 2000. FDI also supervised construction of 19 store concept expansions, remodels (other than minor remodels) and relocations, as well as headquarters facilities, in fiscal 2002, compared with 171 and 262, respectively, in fiscal years 2001 and 2000. The total amount paid under the agreement for fiscal 2002 was approximately $81 million, including profit and overhead costs of approximately $9 million. This compares with approximately $416 million, including profit and overhead costs of approximately $42 million, in fiscal 2001, and approximately $741 million, including profit and overhead costs of approximately $59 million, in fiscal 2000. On February 1, 2003, and February 2, 2002, amounts due to FDI were approximately $1.3 million and approximately $15 million, respectively. The Audit and Finance Committee of the Board of Directors reviews this relationship annually.

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In October 2001, the Audit and Finance Committee of the Board of Directors reviewed and approved the terms of the agreements to lease to Donald G. Fisher and Doris F. Fisher, directors, and respectively, Chairman and merchandiser, a total of approximately 26,000 square feet of space in our One Harrison and Two Folsom corporate San Francisco locations to display a portion of their personal art collections. The agreements provide for base rent ranging from $30.00 to $42.35 per square foot per year over a 15-year term. We believe that these rental rates were at least competitive when the agreement was entered into and are currently above market rates in San Francisco’s commercial real estate market. The agreements also provide us significant benefits, including the use of the space on a regular basis for corporate functions. In addition, Mr. and Mrs. Fisher allow employees to visit the galleries at no charge.

New Accounting Pronouncements

Effective February 3, 2002, we adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 requires that indefinite life goodwill and other intangible assets be tested for impairment and those intangible assets, which have finite useful lives, be amortized over that period. Intangible assets subject to amortization consist of temporary lease rights, which are amortized over the useful lives of the respective leases, not to exceed 20 years. The adoption of SFAS 142 did not have a significant impact on our financial statements. The gross carrying value and accumulated amortization of finite lived intangible assets was $169 million and $59 million, respectively, as of February 1, 2003, and $150 million and $50 million, respectively, as of February 2, 2002. Aggregate amortization of finite lived intangible assets was $9.2 million and $9.5 million for fiscal 2002 and 2001, respectively. We expect amortization expense to be $8.5 million in 2003, $8.3 million in 2004, $7.9 million in 2005, $7.4 million in 2006 and $7.0 million in 2007.

During fiscal 2002, we adopted Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30. The adoption of SFAS 144 did not have a significant impact on our financial statements.

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS 146 supercedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3 (“Issue 94-3”), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” We adopted the provisions as required by SFAS 146 for restructuring activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a significant impact on our financial statements. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing exit and restructuring costs, if any, as well as the amounts recognized.

During November 2002, the Financial Accounting Standards Board issued Financial Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002. As of February 1, 2003, we did not have any material guarantees that were issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002, and are applicable to our guarantees issued before December 31, 2002. We did not have any significant guarantees issued before December 31, 2002, which are subject to the disclosure requirements of FIN 45.

During December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure an Amendment of FASB Statement No. 123.” SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The alternative methods of transition of SFAS 148 are effective for fiscal years ending after December 15, 2002. The disclosure provision of SFAS 148 is effective for interim periods beginning after December 15, 2002. We follow APB 25 in accounting for our employee stock options. The adoption of SFAS 148 did not have a significant impact on our operating results or financial position.

29

During January 2003, the Financial Accounting Standards Board issued Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. We do not have any variable interest entities created after January 31, 2003. For any arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. We do not expect the adoption of FIN 46 to have a significant impact on our operating results or financial position.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the financial accounting and reporting for obligations and retirement costs related to the retirement of tangible long-lived assets. We do not expect the adoption of SFAS 143 to have a significant impact on our financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table on the right provides information about our market-sensitive financial instruments as of February 1, 2003, and February 2, 2002.

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge substantially all merchandise purchases for foreign operations using foreign exchange forward contracts. We also use forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain loans denominated in currencies other than the functional currency of the entity holding or issuing the loan. These contracts are entered into with large reputable financial institutions, thereby minimizing the risk of credit loss. Additional information is presented in the Notes to Consolidated Financial Statements (Note E).

During fiscal 1997, we issued $500 million aggregate principal amount of debt securities, due September 15, 2007, with a fixed interest rate of 6.90 percent. Interest on these debt securities is payable semi-annually. These debt securities are recorded in the balance sheet at their issuance amount net of unamortized discount. In connection with the debt issuance, we entered into interest rate swaps in order to reduce interest rate risk. The agreements were settled in the third quarter of fiscal 1997 when the debt issuance was priced, and the net gains of approximately $2.9 million associated with these agreements are amortized over the life of the debt securities.

During fiscal 1999, our Japanese subsidiary, Gap (Japan) KK, issued $50 million aggregate principal amount of debt securities due March 1, 2009, with a fixed interest rate of 6.25 percent, payable in U.S. dollars. Interest on these debt securities is payable semiannually We swapped the interest and principal payable under these debt securities to Japanese yen with a fixed interest rate of 2.43 percent. These debt securities are recorded in the balance sheet at their issuance amount net of unamortized discount and the associated cross-currency interest rate swap is recorded in the balance sheet at its fair market value as of February 1, 2003.

During fiscal 1999, our Netherlands subsidiary, Gap International B.V., issued debt securities in the aggregate principal amount of 250 million Euro, approximately $262 million at issuance, with a fixed interest rate of 5.00 percent, due September 30, 2004. Interest on these debt securities is payable annually. These debt securities are recorded in the balance sheet at their issuance amount net of unamortized discount and are translated into U.S. Dollars at the period-end exchange rate.

In April 2001, we issued $500 million aggregate principal amount of debt securities at a fixed annual interest rate of 5.625 percent, due May 1, 2003. Interest on the notes is payable semiannually The notes are recorded in the balance sheet at their issuance amount net of unamortized discount. In connection with the debt issuance, we entered into forward rate agreements in order to reduce interest rate risk. The agreements were settled in the first quarter of fiscal 2001, and the net losses of approximately $2.2 million associated with these agreements are amortized over the life of the debt securities.

In November 2001, we issued $200 million aggregate principal amount of debt securities at an original annual interest rate of 8.15 percent, due December 15, 2005 (the “2005 notes”), and $500 million aggregate principal amount of debt securities at an original annual interest rate of 8.80 percent, due December 15, 2008 (the “2008 notes”). Interest on the notes of each series is payable semiannually As a result of the downgrades in our long-term credit ratings, effective June 15, 2002, the interest rates payable by us on $700 million of our outstanding notes increased by 175 basis points—to 9.90 percent per annum on the 2005 notes and to 10.55 percent per annum on the 2008 notes. These debt securities are recorded in the balance sheet at their issuance amount net of unamortized discount.

30

In March 2002, we issued $1.38 billion aggregate principal amount of 5.75 percent senior convertible notes due March 15, 2009, and received net proceeds of $1.35 billion in cash. Interest is payable semi-annually on March 15 and September 15 of each year. The first payment was made on September 15, 2002. These debt securities are recorded in the balance sheet at their issuance amount net of unamortized discount.

By entering into the fixed-rate borrowings, we avoid interest rate risk from variable rate fluctuations. A portion of our fixed-rate borrowings used to finance foreign operations is denominated in foreign currencies. By borrowing and repaying the loans in local currencies, we avoid the risk associated with exchange rate fluctuations.

(Amounts in thousands except average contract rate)					Notional Maturity Dates
	Average Contract Rate		Notional Amount in Local Currency		2003		2004		2005		2006 and Beyond (a)		Unrealized Gain (Loss) in U.S. Dollars (b)
Foreign Exchange Forward Contracts
Sell Contracts — Merchandise Hedges
British Pounds for U.S. Dollars		0.66		148,400		148,400		—		—		—		(16,180	)
Canadian Dollars for U.S. Dollars		1.56		352,700		352,700		—		—		—		(3,854	)
Japanese Yen for U.S. Dollars		120.02		14,264,900		14,264,900		—		—		—		(934	)
Buy Contracts — Merchandise Hedges
Euros for U.S. Dollars		1.00		28,500		28,500		—		—		—		1,866
Sell Contracts — Loan and Intercompany Hedges
U.S. Dollars for Euros		1.06		5,975		325		325		5,325		—		(1	)
British Pounds for Japanese Yen		0.01		21,290		430		430		20,430		—		(10,365	)
British Pounds for Euros		0.67		2,910		970		970		970		—		(73	)
Canadian Dollars for U.S. Dollars		1.43		114,284		7,111		7,111		100,062		—		6,697
Buy Contracts — Loan and Intercompany Hedges
Canadian Dollars for U.S. Dollars		1.57		11,780		250		765		10,765		—		(17	)
Japanese Yen for Euros		81.83		540,823		—		—		540,823		—		(2,157	)
Japanese Yen for British Pounds		157.54		4,000,000		4,000,000		—		—		—		(7,679	)
Euros for British Pounds		1.50		126,000		20,500		105,500		—		—		(166	)
U.S. Dollars for Canadian Dollars		0.66		18,916		18,916		—		—		—		(41	)
Cross-Currency Interest Rate Swap
Japanese Yen for U.S. Dollars		121.60		6,080,000		—		—		—		6,080,000		308
Total foreign exchange forward contracts and interest rate and principal swap														(32,596	)

(a)

No amounts mature in 2006.

(b)

The unrealized gain (loss) represents the effect of the changes in the forward rates compared to the average contract rates at February 1, 2003. Of the $32.6 million pre-tax total unrealized loss, approximately $19.1 million relates to merchandise hedges, of which approximately $11.4 million (net of tax) was included in accumulated other comprehensive losses on our Consolidated Balance Sheets as of February 1, 2003. When these unrealized losses are recognized in future periods we expect them to be offset to a great extent by a corresponding gain on the merchandise transactions being hedged. Approximately $13.8 million of the $32.6 million balance relates to forward contracts used to hedge the remeasurement of intercompany loans and balances. The changes in fair value of these forward contracts are recognized immediately in our Consolidated Statements of Operations and are offset to a great extent by the corresponding remeasurement for underlying loans and intercompany balances.

	Feb. 1, 2003				Feb. 2, 2002
($ in thousands)	Carrying Amount in U.S. Dollars		Fair Value (a)		Carrying Amount in U.S. Dollars		Fair Value (a)
Notes payable, due 2003	$	499,979	$	500,625	$	499,897	$	470,000
Notes payable, due 2004		269,162		246,250		215,589		174,596
Notes payable, due 2005		199,670		214,000		199,553		183,000
Notes payable, due 2007		498,099		491,875		497,688		420,000
Notes payable, due 2008		499,037		551,250		498,873		467,500
Notes payable, due 2009		49,826		47,250		49,797		39,000
Total long-term debt, including current maturities		2,015,773		2,051,250		1,961,397		1,754,096
Senior convertible notes payable, due 2009		1,380,000		1,690,969		—		—
Total long-term debt and senior convertible notes, including current maturities	$	3,395,773	$	3,742,219	$	1,961,397	$	1,754,096

(a) Based on the rates at which we could borrow funds with similar terms and remaining maturities at the dates presented.

31

MANAGEMENT’S REPORT ON FINANCIAL INFORMATION

Management is responsible for the integrity and consistency of all financial information presented in the Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include certain amounts based on Management’s best estimates and judgments.

In fulfilling its responsibility for the reliability of financial information, Management has established and maintains accounting systems and procedures appropriately supported by internal accounting controls. Such controls include the selection and training of qualified personnel, an organizational structure providing for division of responsibility, communication of requirement for compliance with approved accounting control and business practices and a program of internal audit. The extent of our system of internal accounting control recognizes that the cost should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgments by Management. Although no system can ensure that all errors or irregularities have been eliminated, Management believes that the internal accounting controls in use provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with Management’s authorization and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The consolidated financial statements of the Company and subsidiaries have been audited by Deloitte & Touche LLP, independent auditors, whose report appears below.

The Audit and Finance Committee (the “Committee”) of the Board of Directors is comprised solely of directors who are not officers or employees of the Company. The Committee is responsible for recommending to the Board of Directors the retention and compensation of the independent auditors. It meets periodically with Management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities. The Committee also reviews and monitors the financial, accounting and auditing procedures of the Company in addition to reviewing the Company’s financial reports. Deloitte & Touche LLP and the internal auditors have full and free access to the Committee, with and without Management’s presence.

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders of The Gap, Inc.:

We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of February 1, 2003, and February 2, 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three fiscal years in the period ended February 1, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as of February 1, 2003, and February 2, 2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California
March 7, 2003

32

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except share and per share amounts)		52 Weeks Ended Feb. 1, 2003			Percentage to Sales			52 Weeks Ended Feb. 2, 2002			Percentage to Sales			53 Weeks Ended Feb. 3, 2001			Percentage to Sales
Net sales		$	14,454,709			100.0	%	$	13,847,873			100.0	%	$	13,673,460			100.0	%
Costs and expenses
	Cost of goods sold and occupancy expenses		9,541,558			66.0			9,704,389			70.1			8,599,442			62.9
	Operating expenses		3,900,522			27.0			3,805,968			27.5			3,629,257			26.5
	Interest expense		248,599			1.7			109,190			0.8			74,891			0.5
	Interest income		(36,845	)		(0.2	)		(13,315	)		(0.1	)		(12,015	)		0.0
Earnings before income taxes			800,875			5.5			241,641			1.7			1,381,885			10.1
Income taxes			323,418			2.2			249,405			1.8			504,388			3.7
Net earnings (loss)		$	477,457			3.3	%	$	(7,764	)		(0.1	)%	$	877,497			6.4	%
Weighted-average number of shares — basic			875,545,551						860,255,419						849,810,658
Weighted-average number of shares — diluted			881,477,888						860,255,419						879,137,194
Earnings (loss) per share — basic		$	0.55					$	(0.01	)				$	1.03
Earnings (loss) per share — diluted (a)			0.54						(0.01	)					1.00

See Notes to Consolidated Financial Statements.

(a) Diluted losses per share for the 52 weeks ended February 2, 2002, are computed using the basic weighted-average number of shares outstanding and exclude 13,395,045 dilutive shares, as their effects are antidilutive when applied to losses.

33

CONSOLIDATED BALANCE SHEETS

(In thousands except  share and par value)	Feb. 1, 2003			Feb. 2, 2002
Assets
Current Assets
Cash and equivalents	$	3,388,514		$	1,035,749
Merchandise inventory		2,047,879			1,768,613
Other current assets		303,332			331,685
Total current assets		5,739,725			3,136,047
Property and Equipment
Leasehold improvements		2,241,831			2,127,966
Furniture and equipment		3,438,805			3,327,819
Land and buildings		942,845			917,055
Construction-in-progress		202,839			246,691
		6,826,320			6,619,531
Accumulated depreciation and amortization		(3,049,477	)		(2,458,241	)
Property and equipment, net		3,776,843			4,161,290
Lease rights and other assets		385,436			385,486
Total assets	$	9,902,004		$	7,682,823
Liabilities and Shareholders’ Equity
Current Liabilities
Notes payable	$	—		$	41,889
Current maturities of long-term debt		499,979			—
Accounts payable		1,159,301			1,196,614
Accrued expenses and other current liabilities		1,067,294			874,977
Total current liabilities		2,726,574			2,113,480
Long-Term Liabilities
Long-term debt		1,515,794			1,961,397
Senior convertible notes (a)		1,380,000			—
Deferred lease credits and other liabilities		621,424			598,365
Total long-term liabilities		3,517,218			2,559,762
Shareholders’ Equity
Common stock $.05 par value
Authorized 2,300,000,000 shares; issued 968,010,453 and 948,597,949 shares; outstanding 887,322,707 and 865,726,890 shares		48,401			47,430
Additional paid-in capital		638,306			461,408
Retained earnings		5,289,480			4,890,375
Accumulated other comprehensive losses		(16,766	)		(61,824	)
Deferred compensation		(13,574	)		(7,245	)
Treasury stock, at cost		(2,287,635	)		(2,320,563	)
Total shareholders’ equity		3,658,212			3,009,581
Total liabilities and shareholders’ equity	$	9,902,004		$	7,682,823

See Notes to Consolidated Financial Statements.

(a) See Note B.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)		52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002			53 Weeks Ended Feb. 3, 2001
Cash Flows from Operating Activities
Net earnings (loss)		$	477,457		$	(7,764	)	$	877,497
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
	Depreciation and amortization		780,876			810,486			590,365
	Tax benefit from exercise of stock options and vesting of restricted stock		44,219			58,444			130,882
	Deferred income taxes		6,090			(28,512	)		(38,872	)
	Loss on disposal		117,256			64,250			23,463
Change in operating assets and liabilities:
	Merchandise inventory		(258,222	)		121,570			(454,595	)
	Prepaid expenses and other		32,802			(13,303	)		(61,096	)
	Accounts payable		(46,669	)		133,702			249,545
	Accrued expenses		135,733			175,500			(56,541	)
	Deferred lease credits and other long-term liabilities		(51,186	)		20,442			54,020
Net cash provided by operating activities			1,238,356			1,334,815			1,314,668
Cash Flows from Investing Activities
Purchase of property and equipment			(303,284	)		(957,054	)		(1,882,125	)
Proceeds from sale of property and equipment			8,513			—			—
Acquisition of lease rights, net increase (decrease) of other assets			3,416			(10,549	)		(16,252	)
Net cash used for investing activities			(291,355	)		(967,603	)		(1,898,377	)
Cash Flows from Financing Activities
Net increase (decrease) in notes payable			(41,942	)		(734,927	)		621,420
Net issuance of long-term debt			—			1,194,265			250,000
Net issuance of senior convertible notes			1,345,500			—			—
Payments of long-term debt			—			(250,000	)		—
Issuance of common stock			153,272			139,105			152,105
Net purchase of treasury stock			—			(785	)		(392,558	)
Cash dividends paid			(78,352	)		(76,373	)		(75,488	)
Net cash provided by financing activities			1,378,478			271,285			555,479
Effect of exchange rate fluctuations on cash			27,286			(11,542	)		(13,328	)
Net increase (decrease) in cash and equivalents			2,352,765			626,955			(41,558	)
Cash and equivalents at beginning of year			1,035,749			408,794			450,352
Cash and equivalents at end of year		$	3,388,514		$	1,035,749		$	408,794

See Notes to Consolidated Financial Statements.

35

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock						Additional Paid-in Capital
(In thousands except share and per share amounts)	Shares			Amount
Balance at January 29, 2000		1,007,356,790		$	50,368		$	669,490
Issuance of common stock pursuant to stock option plans		13,078,981			654			115,167
Net cancellations of common stock pursuant to management incentive restricted stock plans		(185,563	)		(10	)		(364	)
Tax benefit from exercise of stock options by employees and from vesting of restricted stock								130,882
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($6,456)
Reclassification of amounts to net earnings, net of tax ($1,675)
Amortization of restricted stock and discounted stock options								45
Purchase of treasury stock								1,873
Reissuance of treasury stock								15,458
Retirement of treasury stock		(81,027,337	)		(4,051	)		(637,584	)
Net earnings
Cash dividends ($.09 per share)
Balance at February 3, 2001		939,222,871		$	46,961		$	294,967
Issuance of common stock pursuant to stock option plans		9,346,228			468			107,130
Net issuance of common stock pursuant to management incentive restricted stock plans		28,850			1			683
Tax benefit from exercise of stock options by employees and from vesting of restricted stock								58,444
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($6,835)
Reclassification of amounts to net earnings, net of tax $9,174
Amortization of restricted stock and discounted stock options
Purchase of treasury stock
Reissuance of treasury stock								184
Net earnings (loss)
Cash dividends ($.09 per share)
Balance at February 2, 2002		948,597,949		$	47,430		$	461,408
Issuance of common stock pursuant to stock option plans		19,488,004			975			142,180
Net cancellations of common stock pursuant to management incentive restricted stock plans		(75,500	)		(4	)		(1,957	)
Tax benefit from exercise of stock options by employees and from vesting of restricted stock								44,219
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value of financial instruments, net of tax $9,683
Reclassification of amounts to net earnings, net of tax $2,408
Amortization of restricted stock and discounted stock options
Reissuance of treasury stock								(7,544	)
Net earnings
Cash dividends ($.09 per share)
Balance at February 1, 2003		968,010,453		$	48,401		$	638,306

See Notes to Consolidated Financial Statements.

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(In thousands except share and per share amounts)	Retained Earnings			Accumulated Other Comprehensive Earnings (Loss)			Deferred Compensation			Treasury Stock						Total			Comprehensive Earnings (Loss)
										Shares			Amount
Balance at January 29, 2000	$	4,172,796		$	(6,759	)	$	(23,150	)		(156,857,849	)	$	(2,629,700	)	$	2,233,045		$	1,132,824
Issuance of common stock pursuant to stock option plans								(4,249	)								111,572
Net cancellations of common stock pursuant to management incentive restricted stock plans								(919	)								(1,293	)
Tax benefit from exercise of stock options by employees and from vesting of restricted stock																	130,882
Adjustments for foreign currency translation					(24,286	)											(24,286	)		(24,286	)
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($6,456)					8,009												8,009			8,009
Reclassification of amounts to net earnings, net of tax ($1,675)					2,863												2,863
Amortization of restricted stock and discounted stock options								16,156									16,201
Purchase of treasury stock											(11,020,038	)		(392,558	)		(390,685	)
Reissuance of treasury stock											1,624,663			24,496			39,954
Retirement of treasury stock											81,027,337			641,635			—
Net earnings		877,497															877,497			877,497
Cash dividends ($.09 per share)		(75,520	)														(75,520	)
Balance at February 3, 2001	$	4,974,773		$	(20,173	)	$	(12,162	)		(85,225,887	)	$	(2,356,127	)	$	2,928,239		$	861,220
Issuance of common stock pursuant to stock option plans								(5,006	)								102,592
Net issuance of common stock pursuant to management incentive restricted stock plans								(704	)								(20	)
Tax benefit from exercise of stock options by employees and from vesting of restricted stock																	58,444
Adjustments for foreign currency translation					(33,534	)											(33,534	)		(33,534	)
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($6,835)					7,843												7,843			7,843
Reclassification of amounts to net earnings, net of tax $9,174					(15,960	)											(15,960	)
Amortization of restricted stock and discounted stock options								10,627									10,627
Purchase of treasury stock											(34,500	)		(785	)		(785	)
Reissuance of treasury stock											2,389,328			36,349			36,533
Net earnings (loss)		(7,764	)														(7,764	)		(7,764	)
Cash dividends ($.09 per share)		(76,634	)														(76,634	)
Balance at February 2, 2002	$	4,890,375		$	(61,824	)	$	(7,245	)		(82,871,059	)	$	(2,320,563	)	$	3,009,581		$	(33,455	)
Issuance of common stock pursuant to stock option plans								(14,049	)								129,106
Net cancellations of common stock pursuant to management incentive restricted stock plans								743									(1,218	)
Tax benefit from exercise of stock options by employees and from vesting of restricted stock																	44,219
Adjustments for foreign currency translation					60,150												60,150			60,150
Adjustments for fluctuations in fair market value of financial instruments, net of tax $9,683					(12,585	)											(12,585	)		(12,585	)
Reclassification of amounts to net earnings, net of tax $2,408					(2,507	)											(2,507	)
Amortization of restricted stock and discounted stock options								6,977									6,977
Reissuance of treasury stock											2,183,313			32,928			25,384
Net earnings		477,457															477,457			477,457
Cash dividends ($.09 per share)		(78,352	)														(78,352	)
Balance at February 1, 2003	$	5,289,480		$	(16,766	)	$	(13,574	)		(80,687,746	)	$	(2,287,635	)	$	3,658,212		$	525,022

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 52 Weeks Ended February 1, 2003 (Fiscal 2002), 52 Weeks Ended February 2, 2002 (Fiscal 2001), and 53 Weeks Ended February 3, 2001 (Fiscal 2000).

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Gap Inc. (the “Company,” “we,” “our”) is a global specialty retailer selling casual apparel, accessories and personal care products for men, women and children under a variety of brand names including Gap, Banana Republic and Old Navy. Our principal markets consist of the United States, Canada, Europe and Japan, with the United States being the most significant. We sell our products through both traditional retail stores and online stores.

Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions have been eliminated.

Translation adjustments result from translating foreign subsidiaries’ financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. Resulting translation adjustments are included in accumulated other comprehensive earnings (loss) in shareholders’ equity.

Fiscal Year

Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal years 2002, 2001 and 2000 consisted of 52, 52 and 53 weeks, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Equivalents

Cash and equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less. Outstanding checks classified in Accounts Payable on the balance sheet totaled $89 and $120 million as of the end of fiscal 2002 and 2001, respectively.

Merchandise Inventory

Inventory is valued using the cost method which values inventory at the lower of the actual cost or market, at the individual item level. Cost is determined using the FIFO (first-in, first-out) method. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. Inventory value is reduced immediately when the selling price is marked down below cost. We estimate and accrue shortage for the period between the last physical count and the balance sheet date. Our shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are as follows:

Category	Term
Leasehold improvements for offices and stores	Life of the lease, not to exceed 12 years
Furniture and equipment	Up to 10 years
Buildings	39 years

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Interest costs related to assets under construction are capitalized during the construction period. Interest of $11 million, $25 million and $41 million was capitalized in fiscal 2002, 2001 and 2000, respectively.

Lease Rights

Lease rights are recorded at cost and are amortized over the estimated useful lives of the respective leases, not to exceed 20 years. The gross carrying value and accumulated amortization of lease rights was $169 million and $59 million, respectively, as of February 1, 2003, and $150 million and $50 million, respectively, as of February 2, 2002.

Long-lived Assets, Impairment and Excess Facilities

We have a significant investment in property and equipment. Depreciation and amortization are computed using estimated useful lives of up to 39 years. Any reduction in these estimated useful lives would result in higher annual depreciation expense for the related assets.

We review long-lived assets for impairment whenever events, such as decisions to close a store or changes in circumstances, indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the long-lived assets are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the asset’s fair value, which is indicated by the discounted future cash flows of the asset using a weighted-average cost of capital rate, for a store or distribution center asset. We recorded a charge for the impairment of store assets of $39.9 million, $13.9 million and $23.5 million during fiscal 2002, 2001 and 2000, respectively. Decisions to close a store or facility space can also result in accelerated depreciation over the revised useful life. Most store closures occur upon the lease expiration.

For locations to be closed which are under long-term leases, we record a charge for lease buyout expense or the difference between our rent and the rate at which we expect to be able to sublease the properties, net of related costs, when a location is no longer in use. This charge is discounted using a credit adjusted risk-free rate. Our estimate of future cash flows is based on our experience, knowledge and typically third-party advice or market data. However, these estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that can be difficult to predict. We recorded a charge for excess facilities of $77.4 million and $47.3 million during fiscal 2002 and 2001, respectively. We did not have a charge for excess facilities during fiscal 2000.

Advertising

Costs associated with the production of advertising, such as writing copy, printing and other costs, are expensed as incurred. Costs associated with communicating advertising that has been produced, such as television and magazine, are expensed when the advertising event takes place. Direct response costs of catalogs were capitalized and amortized over the expected lives of the related catalogs, not to exceed six months. Advertising costs were $496 million, $423 million and $487 million in fiscal 2002, 2001 and 2000, respectively.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Stock-based Awards

We account for stock-based awards to employees and directors using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under the intrinsic value method, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in our Consolidated Statements of Operations. Restricted stock and discounted stock option awards, which are granted at less than fair market value, result in the recognition of deferred compensation. Deferred compensation is shown as a reduction of shareholders’ equity and is amortized to operating expenses over the vesting period of the stock award. We amortize deferred compensation for each vesting layer of a stock award using the straight-line method.

Based on additional disclosure requirements under Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure of Amendment of FASB Statement No. 123,” and Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” the following table illustrates the effect on net earnings (loss) and earnings (loss) per share if we had applied the fair-value recognition provisions of SFAS 123.

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	52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002			53 Weeks Ended Feb. 3, 2001.
Net earnings (loss) ($ in thousands)
As reported	$	477,457		$	(7,764	)	$	877,497
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects		3,826			5,157			9,842
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(42,445	)		(86,462	)		(127,742	)
Pro forma	$	438,838		$	(89,069	)	$	759,597
Earnings (loss) per share
As reported — basic	$	0.55		$	(0.01	)	$	1.03
Pro forma — basic		0.50			(0.10	)		0.89
As reported — diluted		0.54			(0.01	)		1.00
Pro forma — diluted		0.50			(0.10	)		0.86

Segments

Our brands have been aggregated into one reportable segment given the similarities of economic characteristics between the operations represented by our three brands. Revenues of international retail operations were $1.9 billion, $1.8 billion and $1.7 billion, and represented 13.3 percent, 13.1 percent and 12.2 percent of our revenues for fiscal 2002, 2001 and 2000, respectively. Long-term assets of international operations, including retail and sourcing, were $633 million and $618 million, and represented 15.3 percent and 13.6 percent of our long-term assets as of the end of fiscal 2002 and 2001, respectively. No single country accounted for 10 percent or more of our consolidated revenues or long-term assets during fiscal 2002 or 2001.

Derivatives

We record the fair value of derivatives on the balance sheet. See Note E for further discussion.

Revenue Recognition

We recognize revenue for store sales at the point at which the customer pays at the register. For online sales, revenue is recognized at the time goods are shipped. Goods are typically received by customers within a few days of being shipped. Allowances for estimated returns are recorded for store sales as well as online and catalog sales.

Insurance / Self-Insurance

We use a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability, automobile liability and employee-related health care benefits, a portion of which is paid by our employees. Liabilities associated with these risks are estimated in part by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.

Reclassifications

Certain amounts from the prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income as previously reported.

Accounting Pronouncements

Effective February 3, 2002, we adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 requires that indefinite life goodwill and other intangible assets be tested for impairment and those intangible assets, which have finite useful lives, be amortized over that period. Intangible assets subject to amortization consist of temporary lease rights, which are amortized over the useful lives of the respective leases, not to exceed 20 years. The adoption of SFAS 142 did not have a significant impact on our financial statements. The gross carrying value and accumulated amortization of finite lived intangible assets was $169 million and $59 million, respectively, as of February 1, 2003, and $150 million and $50 million, respectively, as of February 2, 2002. Aggregate amortization of finite lived intangible assets was $9.2 million and $9.5 million for fiscal 2002 and 2001, respectively. We expect amortization expense to be $8.5 million in 2003, $8.3 million in 2004, $7.9 million in 2005, $7.4 million in 2006 and $7.0 million in 2007.

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During fiscal 2002, we adopted Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30. The adoption of SFAS 144 did not have a significant impact on our financial statements.

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS 146 supercedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3 (“Issue 94-3”), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” We adopted the provisions as required by SFAS 146 for restructuring activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a significant impact on our financial statements. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing exit and restructuring costs, if any, as well as the amounts recognized.

During November 2002, the Financial Accounting Standards Board issued Financial Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002. As of February 1, 2003, we did not have any material guarantees that were issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for interim and annual periods ending after December 15, 2002, and are applicable to our guarantees issued before December 31, 2002. We did not have any significant guarantees issued before December 31, 2002, which are subject to the disclosure requirements of FIN 45.

During December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure an Amendment of FASB Statement No. 123.” SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The alternative methods of transition of SFAS 148 are effective for fiscal years ending after December 15, 2002. The disclosure provision of SFAS 148 is effective for interim periods beginning after December 15, 2002. We follow APB 25 in accounting for our employee stock options. The adoption of SFAS 148 did not have a significant impact on our operating results or financial position.

During January 2003, the Financial Accounting Standards Board issued Financial Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. We do not have any variable interest entities created after January 31, 2003. For any arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. We do not expect the adoption of FIN 46 to have a significant impact on our operating results or financial position.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the financial accounting and reporting for obligations and retirement costs related to the retirement of tangible long-lived assets. We do not expect the adoption of SFAS 143 to have a significant impact on our financial statements.

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NOTE B: DEBT, SENIOR CONVERTIBLE NOTES AND OTHER CREDIT ARRANGEMENTS

In March 2002, we issued $1.38 billion aggregate principal amount of 5.75 percent senior convertible notes due March 15, 2009, and received net proceeds of $1.35 billion in cash net of underwriting and other fees. Interest is payable semi-annually on March 15 and September 15 of each year. The first payment was made on September 15, 2002. These debt securities are recorded in the balance sheet at their issuance amounts net of unamortized discount. We have an option to call the notes on or after March 20, 2005. The notes are convertible, unless previously redeemed or repurchased, at the option of the holder at any time prior to maturity, into shares of our common stock at a conversion price of $16.12 per share, subject to adjustment in certain events, for a total of 85,607,940 shares. If converted, these additional shares would reduce our future earnings per share. Prior to conversion, the convertible notes are potentially dilutive at certain earnings levels. The effects of these dilutive securities are computed using the if-converted method. The net proceeds were used for general corporate purposes.

In March 2002, we entered into a $1.4 billion secured two-year credit facility (the “Facility”). The Facility is used for general corporate purposes, primarily as back up for our trade letters of credit issuance. The Facility contains financial and other covenants, including, but not limited to, limitations on capital expenditures, liens and cash dividends, and maintenance of certain financial ratios, including a fixed-charge coverage ratio and an asset coverage ratio. Violation of these covenants could result in a default under the Facility, which would permit the participating banks to restrict our ability to further access the Facility for letters of credit or advances and to require the immediate repayment of any outstanding advances under the Facility. In addition, such a default could, under certain circumstances, permit the holders of our outstanding unsecured debt to accelerate the payment of such obligations. We were in compliance with these covenants as of February 1, 2003.

As of February 1, 2003, we had $840 million in trade letters of credit issued under the Facility.

Gross interest payments were approximately $209 million, $117 million and $104 million in fiscal 2002, 2001 and 2000, respectively.

A summary of our long-term debt and senior convertible notes is as follows:

	Feb. 1, 2003				Feb. 2, 2002
($ in thousands)	Carrying Amount in U.S. Dollars		Fair Value (a)		Carrying Amount in U.S. Dollars		Fair Value (a)
$500 million notes payable, 5.625%, interest due semi-annually, due May 2003	$	499,979	$	500,625	$	499,897	$	470,000
250 million Euro notes payable, 5.00%, interest due annually, due September 2004		269,162		246,250		215,589		174,596
$200 million notes payable, 8.15% (9.90%), interest due semi-annually, due December 2005 (b)		199,670		214,000		199,553		183,000
$500 million notes payable, 6.90%, interest due semi-annually, due September 2007		498,099		491,875		497,688		420,000
$500 million notes payable, 8.80% (10.55%), interest due semi-annually, due December 2008 (b)		499,037		551,250		498,873		467,500
$50 million notes payable, 6.25%, interest due semi-annually, due March 2009		49,826		47,250		49,797		39,000
Total long-term debt, including current maturities		2,015,773		2,051,250		1,961,397		1,754,096
$1.38 billion senior convertible notes payable, 5.75%, interest due semi-annually, due May 2009		1,380,000		1,690,969		—		—
Total long-term debt and senior convertible notes, including current maturities	$	3,395,773	$	3,742,219	$	1,961,397	$	1,754,096

(a)	Based on the rates at which we could borrow funds with similar terms and remaining maturities at the dates presented.
(b)	The interest rate payable on these notes is subject to increase by 0.25 percent for each rating downgrade by the rating agencies. The rate in parentheses reflects the increase effective as of June 15, 2002.

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NOTE C: INCOME TAXES

Income taxes consisted of the following:

($ in thousands)	52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002			53 Weeks Ended Feb. 3, 2001
Current
Federal	$	251,944		$	110,206		$	442,264
State		22,687			56,454			47,814
Foreign		62,976			108,922			53,182
Total current		337,607			275,582			543,260
Deferred
Federal		(23,251	)		(18,917	)		(30,005	)
State		14,156			1,650			(8,082	)
Foreign		(5,094	)		(8,910	)		(785	)
Total deferred		(14,189	)		(26,177	)		(38,872	)
Total provision	$	323,418		$	249,405		$	504,388

The foreign component of pretax earnings before eliminations and corporate allocations in fiscal 2002, 2001 and 2000 was approximately $318 million, $282 million and $334 million, respectively. No provision was made for U.S. income taxes on the undistributed earnings of the foreign subsidiaries, as we intend to utilize those earnings in the foreign operations for an indefinite period of time or repatriate such earnings only when tax effective to do so. Accumulated undistributed earnings of foreign subsidiaries were approximately $676 million at February 1, 2003.

The difference between the effective income tax rate and the U.S. federal income tax rate is summarized as follows:

	52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002			53 Weeks Ended Feb. 3, 2001
Federal tax rate		35.0	%		35.0	%		35.0	%
State income taxes, less federal benefit		3.1			3.5			1.8
Foreign		2.3			9.4			(1.0	)
Other		0.0			1.1			0.7
Tax rate before charge		40.4	%		49.0	%		36.5	%
Tax charge (a)		—			54.2			—
Effective tax rate		40.4	%		103.2	%		36.5	%

(a) The tax charge of $131 million in fiscal 2001 primarily reflected changes in estimates of probable settlements of foreign and domestic tax audits.

Deferred tax assets (liabilities) consisted of the following:

($ in thousands)	Feb. 1, 2003			Feb. 2, 2002
Compensation and benefits accruals	$	32,545		$	57,892
Scheduled rent		63,702			61,432
Inventory capitalization and other adjustments		47,824			61,774
Nondeductible accruals		58,882			23,121
Other		17,198			43,767
State NOL		50,033			15,418
Gross deferred tax assets		270,184			263,404
State NOL valuation allowance		(34,539	)		(15,418	)
Depreciation		(16,568	)		(14,816	)
Fair value of financial instruments included in accumulated other comprehensive earnings (loss)		6,298			(5,793	)
Other		(13,333	)		(9,246	)
Gross deferred tax liabilities		(23,603	)		(29,855	)
Net deferred tax assets	$	212,042		$	218,131

Net deferred tax assets at February 1, 2003, and February 2, 2002, are included in other current assets (approximately $67 million and $78 million, respectively), and lease rights and other assets (approximately $145 million and $140 million, respectively) in the Consolidated Balance Sheets.

43

At February 1, 2003, we had $50.0 million of state net operating loss carryovers that may be utilized to reduce the tax liabilities of future years. A portion of the state net operating loss carryover was reduced by a valuation allowance of $34.5 million for the losses of various members of the affiliated group in states that require separate company filings. The losses begin to expire in fiscal 2004.

Cash tax payments were approximately $156 million, $136 million and $427 million in fiscal 2002, 2001 and 2000, respectively.

NOTE D: LEASES

We lease most of our store premises and some of our headquarters facilities and distribution centers. These operating leases expire at various dates through 2033.

The aggregate minimum non-cancelable annual lease payments under leases in effect on February 1, 2003, are as follows:

Fiscal Year	($ in thousands)
2003	$	899,930
2004		846,009
2005		738,174
2006		597,560
2007		477,748
Thereafter		1,965,233
Total minimum lease commitment	$	5,524,654

Many leases also provide for payment of operating expenses such as common area charges, real estate taxes and additional rent based on a percentage of sales.

Many leases we enter into include options that may extend the lease term beyond the initial commitment periods, subject to terms agreed to at lease inception. Some leases also include early termination options which can be exercised under specific conditions.

For leases that contain predetermined fixed escalations of the minimum rentals, we recognize the related rental expense on a straight-line basis and record the difference between the recognized rental expense and amounts payable under the leases as deferred lease credits. At February 1, 2003, and February 2, 2002, this liability amounted to approximately $197 million and $178 million, respectively.

Cash or rent abatements received upon entering into certain store leases are recognized on a straight-line basis as a reduction to rent expense over the lease term. The unamortized portion is included in deferred lease credits and other liabilities. At February 1, 2003, and February 2, 2002, the long-term deferred credit was approximately $299 million and $303 million, respectively.

Rental expense for all operating leases was as follows:

($ in thousands)	52 Weeks Ended Feb. 1, 2003		52 Weeks Ended Feb. 2, 2002		53 Weeks Ended Feb. 3, 2001
Minimum rentals	$	854,541	$	788,123	$	705,760
Contingent rentals		123,116		135,184		135,406
Total	$	977,657	$	923,307	$	841,166

NOTE E: FINANCIAL INSTRUMENTS

Derivative Financial Instruments

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge substantially all merchandise purchases for foreign operations using foreign exchange forward contracts. Forward contracts used to hedge forecasted merchandise purchases are designated as cash-flow hedges. Forward contracts used to hedge merchandise purchases based on firm commitments are designated as fair-value hedges. At February 1, 2003, we had forward contracts designated as cash flow hedges of forecasted merchandise purchases with a fair-value loss of $19 million. These forward contracts mature at various dates through January 2004 to buy and sell the equivalent of approximately $598 million in foreign currencies (Buy contracts: approximately 29 million Euro; Sell contracts: approximately 148 million British pounds, 353 million Canadian dollars and 14.3 billion Japanese yen) at the contracted rates. At February 1, 2003, there were no outstanding forward contracts designated as fair-value hedges.

Changes in the fair value of forward contracts designated as fair-value hedges, along with the offsetting changes in fair value of the related firm commitments to purchase foreign merchandise, are recorded in cost of goods sold and occupancy expenses in the

44

current period. Changes in the fair value of forward contracts designated as cash-flow hedges are recorded as a component of comprehensive earnings, and are recognized in cost of goods sold and occupancy expenses in the period in which the hedged merchandise inventory is sold. Approximately $11 million, net of tax, unrealized loss included in accumulated other comprehensive earnings (losses) at February 1, 2003, will be recognized in costs of goods sold and occupancy expenses over the next 12 months. The majority of the critical terms of the forward contracts, and the respective firm commitments and forecasted foreign purchase transactions, are essentially the same. As a result, there were no amounts reflected in fiscal 2002 earnings resulting from hedge ineffectiveness.

We also use forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain loans and intercompany balances which are denominated in currencies other than the functional currency of the entity holding or issuing the loan and intercompany balance. At February 1, 2003, the fair value of these forward contracts was approximately $7 million in assets and $20 million in liabilities. Gains and losses on these currency forward contracts, as well as on the underlying loans and intercompany balances, are recognized in operating expenses in the same period and offset to a great extent. We do not enter into derivative financial instruments for trading purposes.

In addition, we use cross-currency interest rate swaps to swap the interest and principal payable of $50 million debt securities of our Japanese subsidiary, Gap (Japan) KK, from a fixed interest rate of 6.25 percent, payable in U.S. dollars, to Japanese yen with a fixed interest rate of 2.43 percent. At February 1, 2003, the fair market value of the swaps was $0.3 million.

NOTE F: EMPLOYEE BENEFIT AND INCENTIVE STOCK COMPENSATION PLANS

Retirement Plans

We have a qualified defined contribution retirement plan, called GapShare, which is available to employees who meet certain age and service requirements. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. Under the plan, we match in cash all or a portion of employees’ contributions under a predetermined formula. Our contributions vest immediately. Our contributions to the retirement plan in fiscal 2002, 2001 and 2000 were approximately $26 million, $23 million and $18 million, respectively.

A nonqualified Executive Deferred Compensation Plan, established on January 1, 1999, allows eligible employees to defer compensation up to a maximum amount. We do not match any employees’ contributions under the current plan.

A Deferred Compensation Plan was established on August 26, 1997, for nonemployee members of the Board of Directors. Under this plan, Board members may elect to defer receipt of eligible compensation on a pre-tax basis for serving as our nonemployee directors. In exchange for compensation deferred, Board members are granted options to purchase shares of our common stock at an exercise price which is discounted to reflect an amount up to the foregone retainer. All options are fully exercisable upon the date granted and expire seven years after grant or three years after retirement from the Board, if earlier. We may issue up to 675,000 shares under the plan. Outstanding options at February 1, 2003, February 2, 2002, and February 3, 2001, were 143,467, 101,282 and 94,842, respectively.

Incentive Stock Compensation Plans

The 1996 Stock Option and Award Plan (the “1996 Plan”) was established on March 26, 1996. The Board authorized 93,341,342 shares for issuance under the 1996 Plan, which includes shares available under the Management Incentive Restricted Stock Plan (“MIRSP”) and an earlier stock option plan established in 1981, both of which were superseded by the 1996 Plan. On January 28, 2003, subject to shareholder approval at the Annual Meeting of Shareholders, the Board authorized an additional 30,000,000 shares, increasing the number of shares available for issuance under the 1996 Plan to 123,341,342. The 1996 Plan empowers the Compensation and Management Development Committee of the Board of Directors (the “Committee”) to award compensation primarily in the form of non-qualified stock options or restricted stock to key employees. The 1999 Stock Option Plan (the “1999 Plan”) was established on March 29, 1999. The Board authorized 52,500,000 shares for issuance under the 1999 Plan. On December 13, 2002, the Board approved the merger of the 1999 Plan into the 2002 Stock Option Plan (the “2002 Plan”), formerly known as Stock Up On Success, and authorized an additional 20,000,000 shares, increasing the number of shares available for issuance under the combined 1999 and 2002 Plans to 78,500,000 (includes 6,000,000 shares previously authorized for issuance under the 2002 Plan). The 2002 Plan empowers the Committee to award nonqualified stock options to non-officer employees. Stock options generally expire 10 years from the grant date, three months after termination, or one year after the date of retirement or death, if earlier. Stock options generally vest over a four-year period, with shares becoming exercisable in equal annual installments of 25 percent. Nonqualified stock options are generally issued at fair market value but may be issued at prices less or greater than the fair market value at the date of grant as determined by the Committee. Total compensation cost for those stock options issued at less than fair market value and for the restricted shares issued was approximately $4 million, $5 million and $10 million in fiscal 2002, 2001 and 2000, respectively.

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Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan (the “ESPP”) under which eligible U.S. employees may purchase our common stock at 85 percent of the lower of the closing price on the New York Stock Exchange on the first or last day of the six-month purchase period. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 percent to 15 percent. There were 2,159,217, 2,350,049 and 1,624,663 shares issued under the plan during fiscal 2002, 2001 and 2000, respectively. All shares were acquired from treasury stock. In 2002, the Board of Directors amended and the shareholders approved the ESPP to reserve an additional 11,000,000 shares of common stock for issuance under the plan. At February 1, 2003, there were 11,650,877 shares reserved for future subscriptions.

During fiscal 2000, we established an Employee Stock Purchase Plan for employees in the United Kingdom. Under the plan, all eligible employees may purchase our common stock at the lower of the closing price on the New York Stock Exchange on the first or last day of the six-month purchase period. We provide a match of one share for every seven shares purchased. Employees pay for their stock purchases through payroll deductions from £10 to £125 per month, not to exceed the lesser of either £750 per each six-month purchase period or 10 percent of gross annual base salary per tax year. At February 1, 2003, £1 was equivalent to $1.64. During fiscal 2002, 29,740 shares were issued under the plan. All shares were acquired from reissued treasury stock. At February 1, 2003, there were 945,225 shares reserved for future subscriptions.

NOTE G: SHAREHOLDERS’ EQUITY AND STOCK OPTIONS

Common and Preferred Stock

We are authorized to issue 60,000,000 shares of Class B common stock, which is convertible into shares of common stock on a share-for-share basis. Transfer of the shares is restricted. In addition, the holders of the Class B common stock have six votes per share on most matters and are entitled to a lower cash dividend. No Class B shares have been issued.

The Board of Directors is authorized to issue 30,000,000 shares of one or more series of preferred stock and to establish at the time of issuance the issue price, dividend rate, redemption price, liquidation value, conversion features and such other terms and conditions of each series (including voting rights) as the Board of Directors deems appropriate, without further action on the part of the shareholders. No preferred shares have been issued.

Stock Options

Under our stock option plans, nonqualified options to purchase common stock are granted to officers, directors and eligible employees at exercise prices equal to the fair market value of the stock at the date of grant, or at other prices as determined by the Compensation and Management Development Committee of the Board of Directors.

The following table summarizes stock option activity for all employee benefit plans:

	Shares			Weighted-Average Exercise Price
Balance at January 29, 2000		92,513,626		$	15.61
Granted		28,593,295			33.66
Exercised		(13,090,888	)		8.82
Canceled		(10,939,938	)		20.44
Balance at February 3, 2001		97,076,095		$	21.29
Granted		30,450,716			15.85
Exercised		(9,367,810	)		11.27
Canceled		(9,027,433	)		29.12
Balance at February 2, 2002		109,131,568		$	19.95
Granted		14,170,528			12.50
Exercised		(19,475,687	)		6.73
Canceled		(23,334,240	)		25.89
Balance at February 1, 2003		80,492,169		$	20.12

Outstanding options at February 1, 2003, have expiration dates ranging from March 2003 to January 2013.

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At February 1, 2003, we reserved 154,668,062 shares of our common stock, including 1,111,485 treasury shares, for the exercise of stock options. There were 73,667,304, 44,245,584 and 35,810,440 shares available for granting of options at February 1, 2003, February 2, 2002, and February 3, 2001, respectively. Options for 39,249,141, 44,670,144 and 27,675,466 shares were exercisable as of February 1, 2003, February 2, 2002, and February 3, 2001, respectively, and had a weighted-average exercise price of $21.55, $14.21 and $9.59 for those respective periods.

The following table summarizes information about stock options outstanding and exercisable at February 1, 2003:

					Options Outstanding						Options Exercisable
Range of Exercise Prices					Number Outstanding at Feb. 1, 2003		Weighted-Average Remaining Contractual Life (in years)		Weighted-Average Exercise Price		Number Exercisable at Feb. 1, 2003		Weighted-Average Exercise Price
$	2.85	to	$	14.23		20,164,717		6.49	$	9.68		10,538,234	$	8.88
	14.27	to		14.79		21,196,954		8.75		14.30		5,406,601		14.28
	14.83	to		23.86		22,104,574		7.05		20.76		13,241,620		21.01
	23.89	to		50.29		17,025,924		6.79		38.91		10,062,686		39.43
$	2.85	to	$	50.29		80,492,169		7.31	$	20.12		39,249,141	$	21.55

We account for stock-based awards to employees and directors using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in our Consolidated Statements of Operations.

We are required under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” to disclose pro forma information regarding option grants made to our employees based on specified valuation techniques that produce estimated compensation charges.

Pro forma information under SFAS 123 is as follows:

	52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002			53 Weeks Ended Feb. 3, 2001
Net earnings (loss) ($ in thousands)
As reported	$	477,457		$	(7,764	)	$	877,497
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects		3,826			5,157			9,842
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(42,445	)		(86,462	)		(127,742	)
Pro forma	$	438,838		$	(89,069	)	$	759,597
Earnings (loss) per share
As reported — basic	$	0.55		$	(0.01	)	$	1.03
Pro forma — basic		0.50			(0.10	)		0.89
As reported — diluted		0.54			(0.01	)		1.00
Pro forma — diluted		0.50			(0.10	)		0.86

The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted- average assumptions:

	Feb. 1, 2003			Feb. 2, 2002			Feb. 3, 2001
Expected dividend		0.61	%		0.63	%		0.30	%
Risk-free interest rate		1.1 to 4.2	%		1.3 to 5.3	%		4.1 to 5.2	%
Expected volatility		43 to 56	%		43 to 47	%		39 to 43	%
Expected life (in years)		0.83 to 8.9			1.75 to 6.2			3.3 to 8.4

Under the Black-Scholes option pricing model, the weighted-average fair value of the stock options granted during fiscal 2002, 2001 and 2000 was $5.41, $5.74 and $11.42, respectively.

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NOTE H: EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share includes the additional dilutive effect of our potentially dilutive securities, which includes certain stock options and unvested shares of restricted stock, calculated using the treasury stock method, and convertible notes which are potentially dilutive at certain earnings levels and calculated using the if-converted method. The following summarizes the incremental shares from these potentially dilutive securities:

		52 Weeks Ended Feb. 1, 2003		52 Weeks Ended Feb. 2, 2002			53 Weeks Ended Feb. 3, 2001
Earnings (loss) — basic		$	477,457	$	(7,764	)	$	877,497
Earnings (loss) — diluted			477,457		(7,764	)		877,497
Weighted-average number of shares — basic			875,545,551		860,255,419			849,810,658
Incremental shares from:
	Stock options		5,932,337		—			28,811,344
	Restricted stock		—		—			515,192
Weighted-average number of shares — diluted			881,477,888		860,255,419			879,137,194
Earnings (loss) per share — basic		$	0.55	$	(0.01	)	$	1.03
Earnings (loss) per share — diluted			0.54		(0.01	)		1.00

Excluded from the above computations of weighted-average shares for diluted earnings (loss) per share were options to purchase 73,472,472, 43,282,284 and 20,106,485 shares of common stock and 88,080, 123,303 and 47,659 shares of unvested restricted stock for fiscal 2002, 2001 and 2000, respectively. The calculation above also excludes senior convertible notes which are convertible to 79,728,274 shares of common stock during the 52 weeks ended February 1, 2003, because their inclusion would have an anti-dilutive effect on earnings per share. In addition, diluted loss per share in fiscal 2001 is computed using the basic weighted-average number of shares outstanding and excludes 13,395,045 dilutive shares as their effect is antidilutive when applied to losses. Additionally, a put option to repurchase 400,000 shares in fiscal 2000 was excluded from the above computations, as their inclusion would have resulted in an antidilutive effect on earnings (loss) per share.

NOTE I: RELATED PARTY TRANSACTIONS

We have a construction industry standard, non-exclusive agreement with Fisher Development, Inc. (“FDI”), a company which is wholly owned by the brother of Donald G. Fisher (our Chairman) and the brother’s immediate family. The standard agreement, used for all of our qualified general contractors, sets forth the terms under which FDI may act as one of our general contractors in connection with our construction activities. Prior to 2002, we used FDI as our primary, non-exclusive general contractor under a cost-plus arrangement. During periods of rapid growth, we benefited from using FDI as our primary, non-exclusive contractor because of FDI’s national and international capabilities, overall quality of work, flexibility to changes and ability to consistently meet aggressive timetables. FDI also provided construction project management capabilities that we lacked internally. In 2001, based on evolving business needs and a changing economic environment, we began developing the in-house, project management expertise necessary to qualify and manage numerous general contractors and solicit bids from multiple general contractors. This competitive bidding process, which was fully implemented in July 2002, enhances our ability to cost-effectively manage our construction needs on an ongoing basis. Since fully implementing the competitive bidding process in July 2002, FDI chose to competitively bid on 7 of 20 projects through March 1, 2003. FDI was awarded 3 of the 7 projects on which they competitively bid, representing 15 percent of total project bid dollars. We now have more than 40 general contractors, including FDI, qualified to competitively bid. In fiscal 2002, we managed 155 construction projects using 27 general contractors. In fiscal 2002, FDI acted as the general contractor for leasehold improvements for 87 new store concepts, compared with 282 and 675, respectively, in fiscal years 2001 and 2000. FDI also supervised construction of 19 store concept expansions, remodels (other than minor remodels) and relocations, as well as headquarters facilities, in fiscal 2002, compared with 171 and 262, respectively, in fiscal years 2001 and 2000. The total amount paid under the agreement for fiscal 2002 was approximately $81 million, including profit and overhead costs of approximately $9 million. This compares with approximately $416 million, including profit and overhead costs of approximately $42 million, in fiscal 2001, and approximately $741 million, including profit and overhead costs of approximately $59 million, in fiscal 2000. On February 1, 2003, and February 2, 2002, amounts due to FDI were approximately $1.3 million and approximately $15 million, respectively. The Audit and Finance Committee of the Board of Directors reviews this relationship annually.

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In October 2001, the Audit and Finance Committee of the Board of Directors reviewed and approved the terms of the agreements to lease to Donald G. Fisher and Doris F. Fisher, directors, and respectively, Chairman and merchandiser, a total of approximately 26,000 square feet of space in our One Harrison and Two Folsom corporate San Francisco locations to display a portion of their personal art collections. The agreements provide for base rent ranging from $30.00 to $42.35 per square foot per year over a 15-year term. We believe that these rental rates were at least competitive when the agreement was entered into and are currently above market rates in San Francisco’s commercial real estate market. The agreements also provide us significant benefits, including the use of the space on a regular basis for corporate functions. In addition, Mr. and Mrs. Fisher allow employees to visit the galleries at no charge.

NOTE J: EXCESS FACILITIES, SEVERANCE AND SUBLEASE LOSS CHARGES

During 2001, as a result of the evaluation of our global distribution center network, we announced plans to close four distribution facilities in Ventura, California; Erlanger, Kentucky; Basildon, England; and Roosendaal, Holland. The closure of the Ventura and Basildon facilities were completed by the first quarter of fiscal 2002, the Roosendaal facility was closed during the second quarter of fiscal 2002 and the Erlanger facility was closed during the third quarter of fiscal 2002.

The land and building of the distribution center in Roosendaal, Holland, is classified as held for sale in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” In fiscal 2002, we recorded an impairment charge of $1.0 million to reduce the net book value of the facility to the estimated net selling price. The total carrying value of the land and building as of February 1, 2003, was $7.5 million. The Ventura, California, facility and the adjacent land were sold in October 2002.

Facilities-related charges associated with distribution center closures include costs associated with lease terminations, facilities restoration and equipment removal. Remaining cash expenditures of $4.2 million associated with facility closures as of February 1, 2003, are expected to be paid by the third quarter of fiscal 2003. As of February 1, 2003, all employee separation expenditures have been paid.

During 2001, we consolidated and downsized headquarters facilities in our San Francisco and San Bruno campuses as part of our cost-containment efforts. We identified 361,383 square feet of excess facility space and recorded charges of $47.3 million during fiscal 2001, which primarily related to the difference between our contract rent obligations and the rate at which we expect to be able to sublease the properties. In 2002, based on a review of real estate market conditions, we revised our sublease income and sublease commencement projections and assumptions. Additionally, in 2002 we considered our corporate facilities space needs and identified additional excess facility space of 193,228 square feet. As a result of these actions, we recorded an additional sublease loss charge of $77.4 million in fiscal 2002. The additional sublease loss charge was recorded in operating expenses on our Consolidated Statements of Operations. Remaining cash expenditures associated with the sublease loss reserve are expected to be paid over the remaining various lease terms through 2017. Based on the current assumptions set forth above as of February 1, 2003, we expect the sublease of our excess facilities to result in a total reduction of approximately $289 million in future rent expense and $112 million in cash savings over the various remaining lease terms through 2017.

The remaining reserve balance related to the distribution center exit costs and excess headquarters facilities as of February 1, 2003, was as follows:

($ in thousands)	Severance and Outplacement			Facilities Charges			Sublease Loss Reverse			Total
Balance at February 3, 2001	$	—		$	—		$	—		$	—
Provision		29,945			7,040			47,274			84,259
Cash payments		(24,510	)		—			(2,566	)		(27,076	)
Adjustments		—			—			(488	)		(488	)
Balance at February 2, 2002		5,435			7,040			44,220			56,695
Additional provision		—			—			77,380			77,380
Cash payments		(5,435	)		(1,904	)		(9,349	)		(16,688	)
Adjustments		—			(979	)		2,435			1,456
Balance at February 1, 2003	$	—		$	4,157		$	114,686		$	118,843

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QUARTERLY INFORMATION
(Unaudited)

Financial Data

	Fiscal 2002
($ in thousands except per share amounts)	13 Weeks Ended May 4, 2002		13 Weeks Ended Aug. 3, 2002		13 Weeks Ended Nov. 2, 2002		13 Weeks Ended Feb. 1, 2003		52 Weeks Ended Feb. 1, 2003
Net sales	$	2,890,840	$	3,268,309	$	3,644,956	$	4,650,604	$	14,454,709
Gross profit		879,078		1,090,535		1,315,609		1,627,929		4,913,151
Net earnings		36,678		56,780		135,270		248,729		477,457
Earnings per share — basic		0.04		0.07		0.15		0.28		0.55
Earnings per share — diluted		0.04		0.06		0.15		0.27		0.54

	Fiscal 2001
($ in thousands except per share amounts)	13 Weeks Ended May 5, 2001		13 Weeks Ended Aug. 4, 2001		13 Weeks Ended Nov. 3, 2001			13 Weeks Ended Feb. 2, 2002			52 Weeks Ended Feb. 2, 2002
Net sales	$	3,179,656	$	3,245,219	$	3,333,373		$	4,089,625		$	13,847,873
Gross profit		1,125,174		1,041,082		950,639			1,026,589			4,143,484
Net earnings (loss)		115,480		89,751		(178,837	)(a)		(34,158	)		(7,764	)
Earnings (loss) per share — basic		0.14		0.10		(0.21	)		(0.04	)		(0.01	)
Earnings (loss) per share — diluted		0.13		0.10		(0.21	)		(0.04	)		(0.01	)

(a) Includes $131 million tax charge.

Per Share Data

	Market Prices								Cash Dividends Paid (a)
Fiscal	2002				2001				2002		2001
	High		Low		High		Low
1st Quarter	$	15.90	$	11.85	$	31.73	$	22.02	$	0.0222	$	0.0222
2nd Quarter		17.14		9.10		34.98		25.38		0.0222		0.0222
3rd Quarter		13.45		8.35		28.40		11.12		0.0222		0.0222
4th Quarter		16.75		12.25		17.00		11.69		0.0222		0.0222
Year									$	0.0888	$	0.0888

The principal markets on which our stock is traded are the New York Stock Exchange and the Pacific Exchange. The number of holders of record of our stock as of March17, 2003, was 10,604.
(a)	Our $1.4 billion secured revolving credit facility restricts cash dividends to an amount not in excess of$.0888 per year per share, with such per share amount to be adjusted ratably in respect of common stock distributions to holders of our equity interests, recapitalizations, stock splits or any similar event.

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EX-21

Exhibit 21

Subsidiaries of Registrant

Banana Republic (Apparel) Inc.	California
Banana Republic (California) LLC	Delaware
Banana Republic (East) L.P.	California
Banana Republic (Florida) LLC	California
Banana Republic (Holdings) Inc.	California
Banana Republic (ITM) Inc.	California
Banana Republic (New York) LLC	Delaware
Banana Republic, Inc.	Delaware
GPS (Bermuda) Insurance Services Limited	Bermuda
GPs (Great Britain) Limited	England and Wales
GPs (Maryland), Inc.	Maryland
GPs Brand Services, Inc.	California
GPs Consumer Direct, Inc.	California
GPs Corporate Facilities, Inc.	California
GPs Employee Services, Inc.	California
GPs Park Restaurant, Inc.	California
GPs Real Estate, Inc.	California
GPs Realty Company Inc.	Delaware
GPs Sourcing (South Africa) (Proprietary) Limited	Durban, South Africa
GPSDC (CADC) LLC	California
GPSDC (Fresno) LLC	California
GPSDC (New York) Inc.	Delaware
GPSDC (WDC) LLC	California
Gap (Apparel), Inc.	California
Gap (Canada) Inc.	Canada
Gap (Deutschland) GmbH	Dusseldorf, Germany
Gap (Florida) LLC	California
Gap (France) S.A.S.	Paris, France
Gap (Georgia) LP	California
Gap (ITM) Inc.	California
Gap (Indiana) LP	California
Gap (Ireland) Limited	Dublin, Ireland
Gap (Japan) K.K.	Tokyo, Japan
Gap (Kentucky) LP	California
Gap (Netherlands) B.V.	Amsterdam, The Netherlands
Gap (Puerto Rico), Inc.	Puerto Rico
Gap (RHC) BV	Amsterdam, The Netherlands
Gap (Tennessee) LP	California
Gap (Texas) LP	California
Gap (UK Holdings) Limited	England and Wales
Gap (Wisconsin) LP	California
Gap Holdings, Inc.	California
Gap International BV	Amsterdam, The Netherlands
Gap International Sourcing (Americas) LLC	California

Gap International Sourcing (California) Inc.	California
Gap International Sourcing (Holdings) Limited	Hong Kong
Gap International Sourcing (Honduras) S.A. de C.V.	Honduras
Gap International Sourcing (JV) LLC	California
Gap International Sourcing (Mexico) S.A. de C.V.	Mexico
Gap International Sourcing (Thailand) Limited	Thailand
Gap International Sourcing (U.S.A.) Inc.	California
Gap International Sourcing FZE	Free Zone, United Arab Emirates
Gap International Sourcing Limited	Hong Kong
Gap International Sourcing Pte. Ltd.	Singapore
Gap International Sourcing, Inc.	California
Gap International Sourcing, Srl.	Florence, Italy
Old Navy (Apparel) Inc.	California
Old Navy (California) LLC	Delaware
Old Navy (Canada) Inc.	Canada
Old Navy (East) L.P.	California
Old Navy (Florida) LLC	California
Old Navy (Holdings) Inc.	California
Old Navy (ITM) Inc.	California
Old Navy (Puerto Rico) Inc.	Puerto Rico
Old Navy Inc.	Delaware
The Fisher Gap Stores Inc.	California
WCB Twenty-Eight Limited Partnership	Delaware

EX-23

Exhibit 23

Deloitte &Touche LLP
50 Fremont Street	Telephone: (415) 783-4000
San Francisco, California 94105-2230	Facsimile: (415) 783-4329

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in the Registration Statements of The Gap, Inc. on Form S-8: No. 2-72586, No. 2-60029, No. 33-39089, No. 33-40505, No. 33-54686, No. 33-54688, No. 33-54690, No. 33-56021, No. 333-00417, No. 333-12337, No. 333-36265, No. 333-68285, No. 333-72921, No. 333-76523, No. 333-47508, No. 333-59292, No. 333-88470, No. 333-90414 and No. 333-103128 and Registration Statement No. 333-87442 on Form S-3 of our report dated March 7, 2003, appearing in the Annual Report on Form 10-K of The Gap, Inc. for the year ended February 1, 2003.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

March 31, 2003

EX-99.1

Exhibit 99.1

Certification of the Chief Executive Officer
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 The Gap, Inc. (the “Company”) on Form 10-K for the period ended February 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Paul S. Pressler, the President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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/ PAUL S. PRESSLER

Paul S. Pressler
President and Chief Executive Officer

March 31, 2003

Certification of the Chief Financial Officer
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 The Gap, Inc. (the “Company”) on Form 10-K for the period ended February 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Byron H. Pollitt, Jr., the Executive Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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/ BYRON H. POLLITT, JR.

Byron H. Pollitt, Jr.
Executive Vice President and
Chief Financial Officer

March 31, 2003