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 January 31, 2004

or

¨ 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. Pacific Exchange, Inc
(Title of class)	(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  ¨

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.  x

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

The aggregate market value of the common equity held by non-affiliates of the registrant as of August 2, 2003 was approximately $11,938,000,000 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 15, 2004 was 898,095,233.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 2004 (hereinafter referred to as the “2004 Proxy Statement”) are incorporated into Parts I and III.

Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended January 31, 2004 (hereinafter referred to as the “2003 Annual Report to Shareholders”) are incorporated into Parts II and IV.

The Exhibit Index is located on Page 13 hereof.

This Annual Report on Form 10-K and the information incorporated herein by reference contain certain forward-looking statements that reflect the current view of The Gap, Inc. (the “Company”, “we”, and “our”) with respect to future events and financial performance. Wherever used, the words “estimate”, “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

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.

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.

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. Launched in 1998, GapBody offers women’s underwear, sleepwear and personal care products. As of January 31, 2004, we operated 1,747 Gap brand store locations in the United States, Canada, the United Kingdom, France, Germany and Japan, of which 151 were Gap Outlet stores. We have reached an agreement to sell our German operations, with 10 store locations, effective August 1, 2004.

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 January 31, 2004, we operated 435 Banana Republic stores in the United States and Canada, of which 43 were Banana Republic Outlet stores.

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 January 31, 2004, we operated 840 Old Navy stores in the United States and Canada, of which 42 were Old Navy Outlet stores.

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As of January 31, 2004, we operated a total of 3,022 store locations. For more information on the number of stores by brand and country, see the table in 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 page 25 of our 2003 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, as well as a line of maternity apparel, can be purchased on-line. 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.

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. We also issue and redeem gift cards through our brands.

Merchandise Vendors

We purchase merchandise on average from more than 800 vendors with facilities in approximately 50 countries. No vendor accounted for more than 5% of the dollar amount of our fiscal 2003 purchases. Of our merchandise sold during fiscal 2003, 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 16% of our total merchandise units (representing approximately 17% of total cost) was made in China, 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. Also see the section entitled “Certain Additional Business Risk Factors” below in this Item 1.

Seasonal Business

Our business follows a seasonal pattern, with sales peaking over a total of about 13 weeks during the Back-to-School (August) and Holiday (November through December) periods. During fiscal 2003, these periods accounted for approximately 33% of our net sales.

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.

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We plan to continue our investments in advertising and marketing in 2004. There can be no assurances that these investments will result in increased sales or profitability.

Employees

On January 31, 2004, we had a work force of approximately 153,000 employees, which includes a combination of part and full-time employees. We hire temporary employees primarily 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, 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 and/or are protected by common law.

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 functions. Competition for this 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 have not always predicted our customers’ preferences and acceptance levels of our fashion items with accuracy. In addition, lead 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;

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

• sourcing merchandise efficiently;

• 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 recessionary environments, the levels of disposable consumer income, consumer debt, interest rates and consumer confidence. Declines in consumer spending on apparel and accessories could have an adverse effect on our operating results.

We are also faced with competition in European, Japanese and Canadian markets from established regional and national chains. Our success in these markets 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 or if we cannot effectively take advantage of international growth opportunities, 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, as well as both gross margins and operating margins. 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 17% and 7% in the first two fiscal quarters of fiscal 2002 to an increase of 12% and 10% in the first two fiscal quarters of 2003. 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 four years our reported gross margins have ranged from 37% in fiscal 2000 to 30% in fiscal 2001 to 34% in fiscal 2002 to 38% in fiscal 2003. In addition, over the past four years our reported operating margins have ranged from 10.6% in fiscal 2000 to 2.4% in fiscal 2001 to 7.0% in fiscal 2002 to 11.9% in fiscal 2003.

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, managing inventory effectively, using more effective pricing strategies, and optimizing store performance by closing under performing stores. 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.

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

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 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 Service (“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 on the notes will be increased by 0.25 percent for each rating category downgrade by either rating

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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. As a result of downgrades to our long-term credit ratings, the interest rate payable by us on the 2005 notes has increased by 175 basis points to 9.90 percent per annum and the interest rate payable by us on the 2008 notes has increased by 175 basis points to 10.55 percent per annum. 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 reduction in our long-term senior unsecured credit rating could result in reduced access to the capital markets and higher interest costs on future financings.

For further information on our credit rating including outlook see the section entitled “Other debt information” in 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 page 30 our 2003 Annual Report to Shareholders.

Trade matters and IT systems changes may disrupt our supply chain.

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. Effective January 1, 2005, the quota system established by the Agreement on Textiles and Clothing will be completely phased out. There can be no assurances that quota will not be reestablished for certain categories in specific countries. We are unable to determine the impact of these changes to the quota system on our global sourcing operations, including China. Our sourcing operations may be adversely affected by quota (or the elimination of quota) or 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.

Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We continue to evaluate and are currently implementing modifications and upgrades to our information technology systems supporting the product pipeline, including merchandise planning and forecasting, inventory and price management. Modifications involve replacing legacy systems with successor systems or making changes to legacy systems. We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data and possibly encountering supply chain disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. We anticipate that the launch of these successor systems will take place in a phased approach over an approximate five-year period that 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 or other disruptions. Supply chain disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

We are implementing certain other changes to our IT systems that may disrupt operations.

In addition to modifying and replacing our systems related to sourcing and distributing merchandise, we continue to evaluate and are currently implementing modifications and upgrades to our information technology systems for financial reporting, point of sales (cash registers), real estate portfolio management, and human resources. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. We anticipate that the launch of these successor systems will take place in a phased approach over an approximate five year period that began in 2002. There can be no assurances that we will successfully launch these new systems as planned or that

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they will occur without disruptions to operations. Information technology system disruptions, if not anticipated and appropriately mitigated, 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”).

Our Code of Business Conduct, Board of Directors Committee Charters, and Corporate Governance Guidelines are also available on our website. The Code of Business Conduct can be found at www.gapinc.com, under “Financials & Media, Corporate Compliance, Code of Business Conduct.” Any amendments and waivers to the code will also be available on the website. The Committee Charters and Governance Guidelines can be found on our website under “Financials & Media, Corporate Governance.” All of these documents are also available in print to any shareholder who requests them.

Executive Officers of the Registrant

Donald G. Fisher is our Chairman. Mr. Fisher will assume the role of Founder and Chairman Emeritus effective in May 2004, at which time Robert J. Fisher will assume the role of non-executive 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 2004 Proxy Statement and is incorporated by reference herein. The following are also executive officers:

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

Nick Cullen, 49, Executive Vice President and Chief Supply Chain Officer since October 2003; President, North America Supply, Diageo PLC, a division of a global beer, wine and spirits distributor from 2000 to 2003; Director UK Operations Diageo PLC from 1999 to 2000; Director, Integration and Transformation Diageo PLC from 1998 to 1999.

Anne Gust, 46, Executive Vice President, Chief Administrative Officer since 2000 and Chief Compliance Officer since 1998; Executive Vice President, Human Resources, Legal, Global Compliance and Corporate Administration from 1999 to 2000. Joined in 1991.

Jenny Ming, 48, President, Old Navy Brand since 1998. Joined in 1986.

Gary Muto, 44, President, Gap Brand since 2002; President of Banana Republic Brand from 2001 to 2002; Executive Vice President Banana Republic Merchandising from 1999 to 2001. Joined in 1988.

Byron Pollitt, 52, 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, 45, 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 January 31, 2004 aggregated approximately 36.5 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

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negotiated sales termination clauses at predetermined sales thresholds. Economic terms vary by type of location. We have reached an agreement to sell our German operations, with 10 store locations, effective August 1, 2004.

We own approximately 1.2 million square feet of headquarters office space located in San Francisco, San Bruno and Rocklin, California. We lease 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 125,000 square feet is under sublease to others and approximately 440,000 square feet is being marketed for sublease to others. We also lease approximately 25 domestic regional offices and 35 international offices. We own 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 lease approximately 1.7 million square feet of distribution space located in Grove City, Ohio and in the Northern Kentucky suburbs outside Cincinnati, Ohio. A 390,000 square feet distribution warehouse in Funabashi City, Chiba, Japan is owned and operated by a third-party logistics provider.

In fiscal 2003 we recorded certain charges relating to certain facilities. See Note E 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. 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 and Issuer Purchases of Equity Securities

The information required by this item is incorporated herein by reference to page 57 of the 2003 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 2004 Proxy Statement.

Item 6—Selected Financial Data

The information required by this item is incorporated herein by reference to page 22 of the 2003 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 23 through 33 of the 2003 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

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Item 7A—Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is incorporated herein by reference to pages 34 through 35 of the 2003 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 37 through 56 of the 2003 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.

Item 9A—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-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of January 31, 2004. Based on such evaluation, they have concluded that as of such date, our disclosure controls and procedures are effective.

Changes in Internal Controls

During our last fiscal quarter, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

Item 10—Directors and Executive Officers of the Registrant

The information required by this item is incorporated herein by reference to the sections entitled “Nominees for Election as Directors,” “Board Committees – Audit and Finance Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2004 Proxy Statement. See also Item 1 above in the section entitled “Executive Officers of the Registrant.”

The Company has adopted a code of ethics, our Code of Business Conduct, that applies to all employees including our principal executive officer, principal financial officer, controller and persons performing similar functions. Our Code of Business Conduct is available on our website, www.gapinc.com, under “Financials & Media, Corporate Compliance, Code of Business Conduct” and in print to any shareholder who requests it. Any amendments and waivers to the code will also available on the website.

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 2004 Proxy Statement.

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 sections entitled “Equity Plan Compensation Information” and “Beneficial Ownership of Shares” in the 2004 Proxy Statement.

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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 2004 Proxy Statement.

Item 14—Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to the section entitled “Principal Accounting Firm Fees” in the 2004 Proxy Statement.

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 36 of the 2003 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

(ii) The consolidated balance sheets as of January 31, 2004 and February 1, 2003 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 January 31, 2004 are incorporated by reference to pages 37 through 56 of the 2003 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 13 of this Annual Report on Form 10-K.

(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 6, 2003, regarding the announcement of our sales for the month and quarter ended November 1, 2003, filed with the SEC on November 6, 2003;

(2) Form 8-K, dated November 20, 2003, regarding the announcement of our earnings for the third quarter ended November 1, 2003, filed with the SEC on November 20, 2003;

(3) Form 8-K, dated December 4, 2003, regarding the announcement of our sales for the month ended November 29, 2003, filed with the SEC on December 4, 2003; and

(4) Form 8-K, dated January 8, 2004, regarding the announcement of our sales for the month ended January 3, 2004, filed with the SEC on January 8, 2004.

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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 22, 2004	By:	/s/    Paul S. Pressler
		Paul S. Pressler President and Chief Executive Officer (Principal Executive Officer)
Date: March 22, 2004		/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 22, 2004	By	/s/    Howard Behar
		Howard Behar, Director
Date: March 22, 2004	By	/s/    Adrian D. P. Bellamy
		Adrian D. P. Bellamy, Director
Date: March 22, 2004	By	/s/    Donald G. Fisher
		Donald G. Fisher, Director
Date: March 22, 2004	By	/s/    Doris F. Fisher
		Doris F. Fisher, Director
Date: March 22, 2004	By	/s/    Robert J. Fisher
		Robert J. Fisher, Director
Date: March 22, 2004	By	/s/    Glenda A. Hatchett
		Glenda A. Hatchett, Director

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SIGNATURES (con’t.)

Date: March 22, 2004	By	/s/ Penelope L. Hughes
		Penelope L. Hughes, Director
Date: March 22, 2004	By	/s/ Bob L. Martin
		Bob L. Martin, Director
Date: March 22, 2004	By	/s/ Paul Pressler
		Paul S. Pressler, Director
Date: March 22, 2004	By	/s/ James Schneider
		James Schneider, Director
Date: March 22, 2004	By	/s/ Charles R. Schwab
		Charles R. Schwab, Director
Date: March 22, 2004	By	/s/ Mayo A. Shattuck III
		Mayo A. Shattuck III, Director
Date: March 22, 2004	By	/s/ Meg Whitman
		Meg Whitman, Director

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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 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 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 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	Credit Agreement, dated as of June 25, 2003, 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), Citigroup Global Markets Inc. (“CGMI”) and Banc of America Securities LLC (“BAS”) as joint book managers (the “Joint Managers”), BAS, HSBC Bank USA (“HSBC”) and J.P. Morgan Inc. (“JP Morgan”) as co-syndication agents, CGMI, BAS, and JP Morgan as joint lead arrangers and Citigroup USA, Inc., as agent for the Lenders and the Issuing Banks thereunder, filed as Exhibit 10.1 to Registrant’s Form 8-K, dated June 25, 2003, Commission File No. 1-7562
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.2	1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 33-54690
10.3	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
10.4	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

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10.5	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
10.6	Executive Management Incentive Cash Award Plan (March 23, 2004 Amendment and Restatement) filed as Appendix B to Registrant’s definitive proxy statement for its annual meeting of stockholders held on May 12, 2004, 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 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 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 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 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 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
10.13	Amendment Number 5 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.13 to Registrant’s Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562
10.14	Amendment Number 6 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562
10.15	1996 Stock Option and Award Plan (As Amended and Restated Effective as of January 28, 2003), filed as Appendix C to Registrant’s definitive proxy statement for its annual meeting of stockholders held on May 14, 2003, Commission File No. 1-7562
10.16	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

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10.17	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
10.18	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
10.19	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
10.20	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
10.21	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
10.22	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
10.23	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
10.24	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 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562
10.25	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
10.26	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
10.27	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
10.28	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
10.29	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

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10.30	Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-36265
10.31	Amendment Number 1 to 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
10.32	Amendment Number 2 to 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
10.33	Amendment Number 3 to 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
10.34	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
10.35	Nonemployee Director Deferred Compensation Plan, as amended and restated on December 9, 2003
10.36	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
10.37	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
10.38	UK Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-47508
10.39	Form of Nonqualified Stock Option Agreement under Registrant’s 2002 Stock Option Plan (formerly the 1999 Stock Option Plan as amended), filed as Exhibit 4.6 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-76523
10.40	2002 Stock Option Plan, as amended, (formerly the 1999 Stock Option Plan as amended and 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. 333-103128
10.41	Form of Domestic Nonqualified Stock Option Agreement under 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

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10.42	Form of International Nonqualified Stock Option Agreement under 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
10.43	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
10.44	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
10.45	Letter Agreement entered into as of February 7, 2003 by and between Registrant and Heidi Kunz, filed as exhibit 10.1 to the Company’s Form 8-K, dated February 11, 2003, Commission File No. 1-7562
10.46	Offer Letter dated as of February 25, 2003 by and between Registrant and Eva Sage-Gavin, filed as Exhibit 10.1 to the Company’s Form 8-K, dated February 27, 2003, Commission File No. 1-7562
10.47	Agreement of termination of employment, dated as of July 21, 2003, by and between Charles K. Crovitz and Registrant, filed as Exhibit 10.1 to Registrant’s Form 8-K, dated July 22, 2003, Commission File No. 1-7562
10.48	Offer Letter dated as of October 8, 2003 by and between The Gap, Inc. and Nick Cullen, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended November 1, 2003, Commission File No. 1-7562.
13	Portions of Registrant’s annual report to security holders for the fiscal year ended January 31, 2004
14	Code of Business Conduct
21	Subsidiaries of Registrant
23	Consent of Deloitte & Touche LLP
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1	Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EX-10.35

Exhibit 10.35

THE GAP, INC.

NONEMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN

AMENDED AND RESTATED DECEMBER 9, 2003

THE GAP, INC., hereby adopts The Gap, Inc. Nonemployee Director Deferred Compensation Plan, as follows:

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BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date. The Plan is effective as of August 26, 1997.

1.2 Purpose of the Plan. The Plan is intended to increase incentive and to encourage Share ownership on the part of directors of the Company who are employees of neither the Company nor of any Affiliate, and to provide such directors with the opportunity to defer compensation on a pre-tax basis. The Plan also is intended to further the growth and profitability of the Company.

2

DEFINITIONS

The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context:

2.1 “Affiliate” means any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with the Company.

2.2 “Board” means the Board of Directors of the Company.

2.3 “Company” means The Gap, Inc., a Delaware corporation, or any successor thereto.

2.4 “Compensation” means a Nonemployee Director’s quarterly cash retainer for serving as a Nonemployee Director including chair fees and attendance fees for Board and committee meetings. A Participant’s Compensation shall not include any other type of remuneration.

2.5 “Director” means any individual who is a member of the Board.

2.6 “Disability” means the permanent and total disability of the Participant, as determined by the Board in its discretion in accordance with uniform and nondiscriminatory standards adopted by the Board from time to time.

2.7 “Exercise Price” means the price at which a Share may be purchased by a Participant pursuant to the exercise of an Option.

2.8 “Fair Market Value” means the arithmetic mean of the highest and lowest quoted per Share selling prices for Shares on the relevant date, as quoted in the New York Stock Exchange Composite Transactions Index published in the Wall Street Journal, or if there were no sales on such date, the arithmetic mean of the highest and lowest quoted selling prices on the nearest day after the relevant date, as determined by the Committee.

2.9 “Fiscal Quarter” means a fiscal quarter of the Company.

2.10 “Fiscal Year” means the fiscal year of the Company.

2.11 “Grant Date” means, with respect to an Option, the date on which the Option was granted.

2.12 “Nonemployee Director” means a Director who is an employee of neither the Company nor of any Affiliate.

2.13 “Option” means an option to purchase Shares granted pursuant to Sections 5.2 and 5.3.

2.14 “Option Agreement” means the written agreement setting forth the terms and provisions applicable to each Option granted under the Plan.

2.15 “Participant” means a Nonemployee Director who has elected to make Compensation deferrals under the Plan and to receive an Option in lieu of such Compensation.

2.16 “Plan” means The Gap, Inc. Nonemployee Director Deferred Compensation Plan, as set forth in this instrument and as hereafter amended from time to time.

2.17 “Retirement” means termination of service on the Board on account of retirement pursuant to The Gap, Inc. Nonemployee Director Retirement Plan.

2.18 “Rule 16b-3” means Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and any future regulation amending, supplementing or superseding such regulation.

2.19 “Shares” means the shares of the Company’s common stock, $0.05 par value.

2.20 “Termination of Service” means a cessation of the Participant’s service on the Board for any reason.

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ADMINISTRATION

3.1 Authority of the Board. The Plan shall be administered by the Board. It shall be the duty of the Board to administer the Plan in accordance with the Plan’s provisions. The Board shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (a) interpret the Plan and the Options, (b) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, (c) interpret, amend or revoke any such rules, and (d) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Nonemployee Directors who are foreign nationals or employed outside of the United States.

3.2 Delegation by the Board. The Board, in its sole discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority and powers under the Plan to one or more Directors or officers of the Company; provided, however, that the Board may not delegate its authority and powers in any way which would jeopardize the Plan’s qualification under Rule 16b-3.

3.3 Decisions Binding. All determinations and decisions made by the Board, and any delegate of the Board pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law.

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SHARES SUBJECT TO THE PLAN

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3, the total number of Shares available for grant under the Plan shall not exceed 675,000. Shares issued under the Plan shall be treasury Shares only.

4.2 Lapsed Options. If an Option terminates, expires, or lapses for any reason, any Shares subject to such Option again shall be available to be the subject of an Option.

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4.3 Adjustments in Options and Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, the Board shall adjust the number and class of Shares which may be delivered under the Plan, and the number, class, and Exercise Price of Shares subject to outstanding Options, as the Board (in its sole discretion) shall determine to be appropriate to prevent the dilution or diminution of such Options. Beginning October 28, 1998 any such adjustments by stock dividend or split-up shall not apply to the future grants provided by Section 5. Notwithstanding the preceding, the number of Shares subject to any Option always shall be a whole number.

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COMPENSATION DEFERRALS AND OPTIONS

5.1 Elections by Nonemployee Directors. Each Nonemployee Director’s decision to become a Participant shall be entirely voluntary.

5.1.1 Current Nonemployee Directors. A Nonemployee Director who is such on August 26, 1997, may elect to become a Participant in the Plan by electing, no later than October 31, 1997, to defer receipt of all of his or her Compensation in exchange for an Option. An election under this Section 5.1.1 to make Compensation deferrals shall be effective for the remainder of the 1997 Fiscal Year (beginning with the quarterly payment that would be made for and in the fourth quarter ending January 31, 1998) and for each succeeding Fiscal Year, until changed by the Nonemployee Director in accordance with such procedures as the Board (in its discretion) may specify from time to time.

5.1.2 New Nonemployee Directors. A Nonemployee Director who first becomes such after August 26, 1997, may elect to become a Participant in the Plan by electing, within thirty (30) days of the date on which he or she first becomes a Nonemployee Director, to defer receipt of all of his or her Compensation in exchange for an Option. An election under this Section 5.1.2 to make Compensation deferrals shall be effective for the remainder of the Fiscal Year in which the election is made and for each succeeding Fiscal Year, until changed by the Nonemployee Director in accordance with such procedures as the Board (in its discretion) may specify from time to time.

5.1.3 Timing and Form of Elections. Notwithstanding any contrary provision of the Plan, the Board (in its sole discretion) shall determine the manner and deadlines for Participants to make elections under the Plan.

5.2 Terms of Options.

5.2.1 Grant Date of Options. Each Option shall be granted on the last business day of the Fiscal Quarter in which the Compensation deferred by the Nonemployee Director otherwise would have been paid to him or her.

5.2.2 Option Agreement. Each Option shall be evidenced by a written stock option agreement which shall be executed by the Participant and the Company.

5.2.3 Exercisability. Each Option shall be fully exercisable on its Grant Date.

5.2.4 Not Incentive Stock Options. Options granted under the Plan are not incentive stock options intended to meet the requirements of section 422 of the Internal Revenue Code of 1986, as amended.

5.2.5 Exercise. Options shall be exercised by the Participant’s delivery of a written notice of exercise to the Secretary of the Company (or its designee), setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. Upon the exercise of any Option, the Exercise Price shall be payable to the Company in full in cash or its equivalent. The Board, in its sole discretion, also may permit exercise (a) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price, or (b) by any other means which the Board, in its sole discretion, determines to both provide legal consideration for the Shares, and to be consistent with the purposes of the Plan. As soon as administratively practicable after receipt of a written notification of exercise and full payment for the Shares purchased, the Company shall

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deliver to the Participant (or the Participant’s designated broker), Share certificates (which may be in book entry form) representing such Shares.

5.3 Additional Terms of Options.

5.3.1 Number of Shares. The number of Shares subject to each Option shall be 937. However, if the Exercise Price per Share as calculated in Section 5.3.2 is equal to 25% of the Fair Market Value per Share on the applicable Grant Date, beginning October 30, 2001, the number of Shares covered by each Option shall equal (a), divided by the quantity of (b) minus (c). For purposes of this Section 5.3.1, (a) shall equal the amount of the Participant’s Compensation deferrals for the Fiscal Quarter which includes the Grant Date, (b) shall equal the Fair Market Value per Share on the applicable Grant Date, and (c) shall equal 25% of the Fair Market Value per Share on the applicable Grant Date as determined in Section 5.3.2. For example, if the Participant’s Compensation deferrals for the Fiscal Quarter are $9,000, the Fair Market Value per Share is $12.00 and the Exercise Price per Share is $3.00 (25% of $12.00), the number of shares subject to each Option will equal 1,000 (i.e. $9,000 divided by the quantity of $12.00 minus $3.00). In no event shall the amount of Shares subject to the Option with respect to any Fiscal Quarter exceed 2,500 Shares. Additional amounts will be paid in cash. For example, if the Participant’s Compensation deferrals for the Fiscal Quarter are $17,000, the Fair Market Value per Share is $8.00 and the Exercise Price per Share is $2.00 (25% of $8.00), the number of shares subject to each Option will be limited to 2,500 ($17,000 divided by the quantity of $8.00 minus $2.00 equals 2,833). The remaining $2,000 (i.e. $8.00 minus $2.00 multiplied by 333 Shares) will be paid in cash.

5.3.2 Exercise Price. The Exercise Price per Share for the Shares subject to each Option shall equal (a) minus (b), divided by (c). For purposes of this Section 5.3.2, (a) shall equal the Fair Market Value of such Shares on the applicable Grant Date, (b) shall equal the amount of the Participant’s Compensation deferrals for the Fiscal Quarter which includes the Grant Date, and (c) shall equal 937. For example, if the Fair Market Value of the Shares covered by an Option is $12,181and the Participant’s Compensation deferrals for the Fiscal Quarter are $9,000, the Exercise Price per Share will equal $3.39 (i.e., $12,181minus $9,000, divided by 937). However, in no event shall the Exercise Price per Share be less than 25% of the Fair Market Value per Share on the applicable Grant Date. In such an event, the Exercise Price per Share subject to each Option shall equal 25% of the Fair Market Value per Share on the applicable Grant Date and the number of Shares subject to the Option shall be increased in accordance with Section 5.3.1.

5.3.3 Expiration of Options. Each Option shall terminate upon the first to occur of the following events:

(a) The expiration of seven (7) years from the Grant Date; or

(b) The expiration of three (3) months from the date of the Participant’s Termination of Service for a reason other than death, Disability or Retirement; or

(c) The expiration of three (3) years from the date of the Participant’s Termination of Service by reason of Disability or Retirement.

5.3.4 Death of Participant. Notwithstanding Section 5.3.3, if a Director dies prior to the expiration of his or her Option pursuant to Section 5.3.3, such Option shall terminate three (3) years after the date of his or her death.

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MISCELLANEOUS

6.1 No Effect on Service. Neither the establishment or maintenance of the Plan, nor any action of the Company or the Board, shall be held or construed to confer upon any individual any right to continue as a member of the Board.

6.2 Indemnification. Each person who is or shall have been a member of the Board shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or

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failure to act under the Plan or any Option Agreement, and (b) from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.

6.3 Successors. All obligations of the Company under the Plan, with respect to Options granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company.

6.4 Beneficiary Designations. If permitted by the Board, a Participant under the Plan may name a beneficiary or beneficiaries to whom any vested Option shall be paid in the event of the Participant’s death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Board. In the absence of any such designation, any vested Option remaining unexercised and unexpired at the Participant’s death shall be paid to the Participant’s estate and, subject to the terms of the Plan and of the Option Agreement, any unexercised vested Option may be exercised by the administrator or executor of the Participant’s estate.

6.5 Nontransferability of Options. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 6.4. All rights with respect to an Option granted to a Participant shall be available during his or her lifetime only to the Participant.

6.6 No Rights as Stockholder. Except to the limited extent provided in Sections 6.4 and 6.5, no Participant (nor any beneficiary) shall have any of the rights or privileges of a stockholder of the Company with respect to any Shares issuable pursuant to an Option, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant (or beneficiary).

6.7 Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Option (or exercise thereof), the Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant’s FUTA obligation) required to be withheld with respect to such Option (or exercise thereof).

6.8 Withholding Arrangements. The Board, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit or require a Participant to satisfy all or part of the tax withholding obligations in connection with an Option by (a) having the Company withhold otherwise deliverable Shares, or (b) delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld. The amount so withheld shall not exceed the amount determined by using the minimum federal, state, local or foreign jurisdiction statutory withholding rates applicable to the Participant with respect to the award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered shall be determined as of the date that the taxes are required to be withheld.

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AMENDMENT, TERMINATION, AND DURATION

7.1 Amendment, Suspension, or Termination. The Board, in its sole discretion, may amend or terminate the Plan, at any time and for any reason. The amendment or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Option theretofore granted to such Participant.

7.2 Duration of the Plan. The Plan shall commence on the date specified herein, and subject to Section 7.1 (regarding the Board’s right to amend or terminate the Plan), shall remain in effect thereafter.

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8

LEGAL CONSTRUCTION

8.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

8.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

8.3 Requirements of Law. The granting of Options and the issuance of Shares pursuant to the exercise of Options shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

8.4 Compliance with Rule 16b-3. All transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan, an Option Agreement or action by the Board fails to so comply, it shall be deemed null and void, to the extent deemed advisable by the Board. Notwithstanding any contrary provision of the Plan, if the Board specifically determines that compliance with Rule 16b-3 no longer is required, all references in the Plan to Rule 16b-3 shall be null and void.

8.5 Governing Law. The Plan and all Option Agreements shall be construed in accordance with and governed by the laws of the State of California.

8.6 Captions. Captions are provided herein for convenience only, and shall not serve as a basis for interpretation or construction of the Plan.

	EXECUTION
Dated: December 9, 2003	By	/s/    Lauri M. Shanahan
	Title:	Senior Vice President, General Counsel

6

EX-13

EXHIBIT 13

FIVE-YEAR SELECTED FINANCIAL DATA

Compound Annual Growth Rate					Fiscal Year (in weeks)
	3-year		5-year		2003 (52)			2002 (52)			2001 (52)			2000 (53)			1999 (52)
Operating Results ($ in millions)
Net sales	5	%	12	%	$	15,854		$	14,455		$	13,848		$	13,673		$	11,635
Cost of goods sold and occupancy expenses	—		—			9,886			9,542			9,705			8,599			6,776
Percentage of net sales	—		—			62.4	%		66.0	%		70.1	%		62.9	%		58.2	%
Operating expenses	—		—		$	4,089		$	3,901		$	3,806		$	3,629		$	3,043
Net interest expense	—		—			196			212			96			63			32
Earnings before income taxes	7		5			1,683			800			241			1,382			1,785
Percentage of net sales	—		—			10.6	%		5.5	%		1.7	%		10.1	%		15.3	%
Income taxes	—		—		$	653		$	323		$	249		$	504		$	658
Net earnings (loss)	6		5			1,030			477			(8	)		878			1,127
Percentage of net sales	—		—			6.5	%		3.3	%		(0.1	%)		6.4	%		9.7	%
Cash dividends paid	—		—		$	79		$	78		$	76		$	75		$	76
Purchase of property and equipment	—		—			272			303			957			1,882			1,239
Depreciation and amortization	—		—			664			693			732			536			402
Per Share Data
Net earnings (loss)—basic	4	%	4	%	$	1.15		$	0.54		$	(0.01	)	$	1.03		$	1.32
Net earnings (loss)—diluted	3		4			1.09			0.54			(0.01	)		1.00			1.26
Cash dividends paid (a)	—		—			0.09			0.09			0.09			0.09			0.09
Shareholders’ equity (book value)	—		—			5.37			4.18			3.48			3.43			2.63
Financial Position ($ in millions)
Property and equipment, net	(6	%)	13	%	$	3,368		$	3,777		$	4,161		$	4,008		$	2,715
Merchandise inventory	(4	)	10			1,704			2,048			1,769			1,904			1,462
Total assets	14		21			10,343			9,902			7,683			7,013			5,189
Inventory per square foot	—		—			45			53			47			59			59
Inventory per square foot (decrease) increase	—		—			(15.5	%)		13.5	%		(20.3	%)		0.1	%		14.7	%
Working capital	—		—		$	4,197		$	3,014		$	1,023		$	(151	)	$	445
Current ratio	—		—			2.68:1			2.11:1			1.48:1			0.95:1			1.25:1
Total long-term debt and senior convertible notes, less current maturities	—		—		$	2,487		$	2,896		$	1,961		$	780		$	785
Ratio of long-term debt and senior convertible notes to shareholders’ equity (b)	—		—			0.52:1			0.79:1			0.65:1			0.35:1			0.35:1
Shareholders’ equity	—		—		$	4,783		$	3,658		$	3,010		$	2,928		$	2,233
Return on average assets	—		—			10.2	%		5.4	%		(0.1	%)		14.4	%		24.6	%
Return on average shareholders’ equity	—		—			24.4	%		14.3	%		(0.3	%)		34.0	%		59.2	%
Statistics
Number of store locations opened	—		—			35			115			324			434			315
Number of store locations closed	—		—			130			95			75			60			17
Number of store locations open at year-end	(6	%)	4	%		3,022			3,117			3,097			2,848			2,474
Net (decrease) increase in number of store locations	—		—			(3	%)		1	%		9	%		15	%		14	%
Comparable store sales increase (decrease) percentage (52-week basis)	—		—			7	%		(3	%)		(13	%)		(5	%)		7	%
Net sales per average square foot (52-week basis) (c)	—		—		$	415		$	378		$	394		$	482		$	548
Square footage of store space at year-end (d)	5		14			36,518			37,252			36,333			31,373			23,978
Percentage (decrease) increase in square feet	—		—			(2	%)		3	%		16	%		31	%		28	%
Number of employees at year-end	1		9			153,000			169,000			165,000			166,000			140,000
Weighted-average number of shares—basic (d)	—		—			892,555			875,546			860,255			849,811			853,805
Weighted-average number of shares—diluted (d)	—		—			988,178			881,478			860,255			879,137			895,029
Number of shares outstanding at year-end, net of treasury stock (d)	—		—			897,202			887,328			865,727			853,997			850,499

^(a) Excludes a dividend of $.0222 per share declared in January 2004 (fiscal 2003) but paid in the first quarter of fiscal 2004.

^(b) Long-term debt includes current maturities.

^(c) Based on monthly average store square footage.

^(d) In thousands.

22 FIVE-YEAR SELECTED FINANCIAL DATA

MANAGEMENT’S DISCUSSION AND ANALYSIS

of Financial Condition and Results of Operations

The information made available 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. Wherever used, the words “estimate,” “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.

Overview

Overall for fiscal 2003, we executed well against our strategic priorities of driving quality earnings by improving margins, improving our inventory turns, flowing our earnings through to strong cash flow and increasing our returns on capital by optimizing the productivity of our store fleet through selective closures and repositioning. We’re pleased that total sales and comparable stores sales were up in each division and we had positive comparable store sales each month of fiscal 2003. We better satisfied our customers, and we delivered more value to our shareholders.

Key to these gains was more disciplined inventory management and better product assortments. During fiscal 2003, we began implementing initiatives to better manage inventory and improve inventory turns. These initiatives include optimizing receipt timing, re-evaluating optimal in-store and distribution center inventory levels and re-evaluating replenishment frequency. Better product assortments were driven by our consumer insight initiatives. Consumer insights are now embedded in our product development process through ongoing consumer and competitor research, customer fit camps and focus groups, and feedback from our store associates. This work helps ensure that assortments are well balanced and that each brand is appropriately interpreting fashion and style trends to satisfy customers’ needs. At lower inventory levels and better product assortments than prior year, we supported positive comparable store sales growth while meeting customer expectations and minimizing fashion and markdown risk.

We ended fiscal 2003 with $4.7 billion in cash and short-term investments, representing an increase in cash and short-term investments compared with fiscal 2002 of $1.3 billion. A portion of our total cash is restricted; the majority of which serves as collateral to our letter of credit agreements. Driving our significant year-over-year cash flow performance were improved earnings, lower working capital uses related to inventory purchases and reduced capital spending. While we added $1.3 billion in cash and short-term investments to our Consolidated Balance Sheets, we reduced our debt balances by $626 million. In the first quarter of fiscal 2003, we repaid a maturing $500 million two-year bond, and during the second half of fiscal 2003, we executed open market debt repurchases of Euro and domestic bonds, using cash flows from operating activities. In addition, in June 2003 we executed a new credit facility with improved terms and covenants and increased flexibility based on creditors’ acknowledgment of our improved financial position.

As we continue to improve our product assortments, marketing and customer service, we will continue to focus on improving margins, increasing the efficiency of our capital resources and reducing our debt.

GAP INC. 2003 ANNUAL REPORT 23

Results of Operations

Net Sales

	52 Weeks Ended Jan. 31, 2004			52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002
Net sales (in millions)	$	15,854		$	14,455		$	13,848
Total net sales growth percentage		10	%		4	%		1	%
Comparable store sales increase (decrease) percentage		7	%		(3	%)		(13	%)
Net sales per average square foot	$	415		$	378		$	394
Square footage of store space at year-end (in thousands)		36,518			37,252			36,333
Number of new store locations		35			115			324
Number of closed store locations		130			95			75

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 at the expanded or remodeled location.

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 is considered Non-comp. Non-store sales such as online operations are also considered Non-comp.

Net sales increased $1.4 billion in fiscal 2003 compared with fiscal 2002. This increase is due to an increase in our comparable store sales of $993 million and an increase in our non-comparable store sales of $406 million. The increase in our comparable store sales was driven by better product assortments, which drove an increase in the number of customers making a purchase, primarily at Gap U.S., Old Navy and Gap International. Better product assortments and improved inventory management drove higher average unit retail sales, primarily at Banana Republic, Gap U.S. and Gap International, and increased units per transaction, primarily at Old Navy and Gap U.S.

Because we translate foreign currencies into U.S. dollars for reporting purposes, currency fluctuations can have an impact on our results. The impact of changes in foreign currency exchange rates during fiscal 2003 positively affected the translation of foreign currency sales into U.S. dollars. For fiscal 2003, currency fluctuations accounted for $224 million of the increase in net sales.

Comparable store sales percentage by division for fiscal 2003 and 2002 were as follows:

• Gap U.S. reported positive 7 percent in 2003 versus negative 7 percent in 2002

• Gap International reported positive 6 percent in 2003 versus negative 5 percent in 2002

• Banana Republic reported positive 7 percent in 2003 versus negative 1 percent in 2002

• Old Navy reported positive 8 percent in 2003 versus positive 1 percent in 2002

Total sales by division for fiscal 2003, 2002 and 2001 were as follows:

• Gap U.S. reported $5.3 billion in 2003 versus $5.1 billion in 2002 and $5.2 billion in 2001

• Gap International reported $2.0 billion in 2003 versus $1.7 billion in 2002 and $1.6 billion in 2001

• Banana Republic reported $2.1 billion in 2003 versus $1.9 billion in 2002 and $1.9 billion in 2001

• Old Navy reported $6.5 billion in 2003 versus $5.8 billion in 2002 and $5.1 billion in 2001

Sales productivity in fiscal 2003 improved 19% to $415 per average square foot, compared with $378 per average square foot in fiscal 2002. The increase in net sales per average square foot for fiscal 2003 was primarily attributable to increases in comparable store sales.

24 MANAGEMENT’S DISCUSSION AND ANALYSIS

Store count and square footage activity were as follows:

	Jan. 31, 2004				Feb. 1, 2003
	Number of Store Locations		Sq. Ft. (In Millions)		Number of Store Locations		Sq. Ft. (In Millions)
Gap U.S.	1,249		11.3		1,327		11.9
Gap Outlet	140		1.4		133		1.3
Gap International
United Kingdom	133		1.3		142		1.3
United Kingdom Outlet	7		0.1		7		0.1
Canada	102		1.0		106		1.0
Canada Outlet	2		—		2		—
France	35		0.3		36		0.3
Japan	67		0.8		69		0.8
Japan Outlet	2		—		2		—
Germany	10		0.1		10		0.1
Banana Republic U.S.	376		3.2		382		3.2
Banana Republic Canada	16		0.1		16		0.1
Banana Republic Outlet	43		0.4		43		0.3
Old Navy U.S.	765		15.4		774		15.7
Old Navy Canada	33		0.7		28		0.6
Old Navy Outlet	42		0.6		40		0.6
Total	3,022		36.5		3,117		37.3
(Decrease) Increase	(3	%)	(2	%)	1	%	3	%

Cost of Goods Sold and Occupancy Expenses

Cost of goods sold and occupancy expenses include the cost of merchandise, rent, occupancy and depreciation for our stores and distribution centers.

Cost of goods sold and occupancy expenses as a percentage of net sales decreased 3.6 percentage points to 62.4 percent in fiscal 2003 compared with 66.0 percent in fiscal 2002.

The decrease in fiscal 2003 compared with fiscal 2002 was driven by an increase in merchandise margins and decreased occupancy expenses of 2.4 percentage points and 1.3 percentage points, respectively. The increase in merchandise margins as a percentage of net sales of 2.4 percentage points in fiscal 2003 was primarily driven by strong product assortments, which drove our improved markdown margins, and an increase in the percentage of goods sold at regular price across all divisions compared with fiscal 2002. In addition, favorable shortage results from annual inventory counts completed during fiscal 2003 contributed to our merchandise margin improvement as a percentage of net sales. The 1.3 percentage point improvement in our occupancy expenses was primarily driven by a 0.9 percentage point improvement from leveraging our rent, occupancy and depreciation expenses combined with the decrease in square footage on improved sales.

Cost of goods sold and occupancy expenses as a percentage of net sales decreased 4.1 percentage points to 66.0 percent in fiscal 2002 compared with 70.1 percent in fiscal 2001. The decrease in fiscal 2002 compared with fiscal 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 as a percentage of net sales of 3.9 percentage points in fiscal 2002 was primarily driven by a decrease in markdown selling and higher markdown margins compared with fiscal 2001.

GAP INC. 2003 ANNUAL REPORT 25

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 the majority of this merchandise.

Operating Expenses

Operating expenses increased $188 million in fiscal 2003, but decreased 1.2 percentage points as a percentage of net sales from 27.0 percent to 25.8 percent compared with fiscal 2002. This decrease was due primarily to higher leverage on store payroll, benefit costs and operating expenses. The increase in total operating expense dollars compared with fiscal 2002 was primarily due to higher repair and maintenance expenses to support our aging store fleet, higher store payroll to support increased sales and market price premiums paid for our open market bond repurchases made during fiscal 2003. These increases were partially offset by insurance recovery proceeds of about $20 million received in the second quarter of fiscal 2003, that were primarily related to the World Trade Center stores.

In support of our ongoing goal to return to an investment grade credit rating, we reduced our outstanding debt by $626 million by repaying $500 million of maturing debt and repurchasing $168 million of Euro and domestic bonds. The debt reduction was partially offset by a $42 million increase in the carrying value of our Euro bond as a result of foreign currency translation. Although the bond repurchases are net present value positive, we incurred $21 million in operating expenses related to the market price premiums that we paid to retire our bonds.

Operating expenses increased $95 million in fiscal 2002, but decreased 0.5 percentage points as a percentage of net sales from 27.5 percent to 27.0 percent compared with fiscal 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.

Other operating charges

The following discussion should be read in conjunction with Note E to the accompanying consolidated financial statements.

In January 2004, we signed an agreement to sell our Gap brand operations in Germany, effective August 1, 2004. Gap brand operations in Germany represent our smallest international retail business, and with only 10 store locations, account for well under 1 percent of total company sales. As a result of our decision, we recognized an operating expense charge of $14 million for asset write-downs. This decision represents a strategic move toward re-allocating our international resources to optimize growth in our other existing markets and focusing our attention on more attractive, longer-term growth opportunities in new markets.

During fiscal 2003 and fiscal 2002, due to the continued deterioration of the commercial real estate market, we revised our sublease income and sublease commencement projections and assumptions related to corporate facilities in our San Francisco and San Bruno campuses. Additionally, in fiscal 2002, we considered our corporate facilities space needs and identified and abandoned additional excess facility space. As a result of these actions, we recorded additional sublease loss charges of $8.6 million and $77.4 million in fiscal 2003 and fiscal 2002, respectively. The sublease loss charges were recorded in operating expenses in the 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 our current assumptions as of January 31, 2004, we expect the sublease of our excess facilities to result in a total reduction of approximately $247 million in future rent expense. Our accrued liability related to the sublease loss charges of about $102 million at January 31, 2004, was net of approximately $111 million of estimated sublease income to be generated from sublease contracts, which have not yet been identified. Our ability to generate this amount of sublease income is highly dependent upon economic conditions and commercial real estate market conditions at the time we negotiate sublease arrangements with third parties. While the amount we have accrued represents our best estimate of the remaining obligations we expect to incur in connection with these facilities, estimates are subject to change and may require additional adjustments as conditions and facts change. If adverse macroeconomic conditions continue, particularly as they pertain to the commercial real estate market, we may be required to further reduce our estimated future sublease income and, accordingly, incur a charge to increase our estimated accrued liability.

26 MANAGEMENT’S DISCUSSION AND ANALYSIS

As a result of improved business performance, new business initiatives and opportunities for future growth, and continued high levels of office vacancy in the San Francisco Bay Area market, management is commencing a thorough assessment of our available space and future needs. The results of this analysis could positively or negatively impact the level of our sublease reserves.

Interest Expense

The decrease of $15 million in interest expense for fiscal 2003, compared with fiscal 2002, was primarily due to lower fees related to our new three-year secured $750 million revolving credit facility and $1.2 billion letter of credit agreements, and to the maturity of our $500 million two-year bond in May 2003. This decrease was partially offset by a full year of interest expense in fiscal 2003 on our senior convertible notes issued in March 2002, plus a full year of higher coupon interest rates on our outstanding notes maturing in fiscal 2005 and fiscal 2008. The higher coupon interest rates on these notes, which took effect on June 15, 2002, is a result of downgrades in our long-term senior unsecured credit ratings in the first quarter of fiscal 2002.

The increase of $139 million in interest expense for fiscal 2002 compared with fiscal 2001 was primarily due to an increase in long-term borrowings in fiscal 2002 and late fiscal 2001 and higher fees on the $1.4 billion secured two-year credit facility entered into in March 2002. For fiscal 2004, we expect our gross interest expense, excluding interest income on cash investments, to be $210 million to $220 million for the full year.

Interest Income

The increase of $1.2 million in interest income in fiscal 2003 compared with fiscal 2002 was primarily due to increases in average cash available for investment as a result of improved cash flows from operations.

The increase of $24 million in interest income in fiscal 2002 compared with fiscal 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.

Income Taxes

The effective tax rate was 38.8 percent, 40.4 percent and 49 percent (excluding the $131 million tax charge recorded during fiscal 2001) in fiscal 2003, 2002 and 2001, respectively.

The decrease in the effective tax rate in fiscal 2003 from fiscal 2002 was primarily driven by an improvement in the mix of earnings from domestic and international operations, improved earnings performance and the determination that it is more likely than not that certain accumulated state net operating losses will be available to offset future income.

The decrease in the effective tax rate in fiscal 2002 from fiscal 2001 (excluding the $131 million tax charge recorded 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 fiscal 2004 effective tax rate to be within a range of 38.5 percent to 39.5 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 and could also be affected by the resolution of tax contingencies for amounts different from our current estimates.

GAP INC. 2003 ANNUAL REPORT 27

Financial Condition

Liquidity

The following sets forth certain measures of our liquidity:

Fiscal Year	2003		2002		2001
Working capital (in millions)	$	4,197	$	3,014	$	1,023
Current ratio		2.68:1		2.11:1		1.48:1

We ended fiscal 2003 with $4.7 billion in cash, of which $1.4 billion was restricted and $1.1 billion was held in short-term investments. Our restricted cash primarily serves as collateral to our letter of credit agreements, which are used to pay vendors for inventory. These agreements enabled us to lower interest expense in fiscal 2003. Our total outstanding debt was $2.8 billion. We believe the combination of cash on hand and cash from operations will provide adequate liquidity for business operations, capital expenditures, debt reduction, dividend payments and growth opportunities. At January 31, 2004, our working capital and current ratio calculation included the $1.4 billion of restricted cash.

Cash flows from operating activities

For fiscal 2003, the $933 million increase in net cash provided by operating activities compared with fiscal 2002 was primarily attributable to improvement in our net earnings (exclusive of depreciation and amortization) and a decrease in the relative growth of merchandise inventory. This was offset by changes in other operating assets and liabilities, which were primarily driven by timing of certain payments.

Our inventory balance at January 31, 2004, was $1.7 billion, a decrease from February 1, 2003, of $344 million. Inventory per square foot was $45, or $8 per square foot lower than in fiscal 2002. Inventory management remains an area of focus as we continue to execute against our strategies to optimize inventory productivity and more effectively manage slower turning inventory while maintaining appropriate in-store merchandise levels to support sales growth.

For fiscal 2002, the $97 million decrease in net cash provided by operating activities compared with fiscal 2001 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).

Our inventory balance at February 1, 2003, was $2.0 billion, an increase from February 2, 2002, of $279 million. Inventory per square foot was $53, or $6 per square foot higher than in fiscal 2001. The increase in our inventory at February 1, 2003, was primarily a result of unusually low inventory levels at February 2, 2002, as we had aggressively liquidated slow moving merchandise and restrained inventory investments until the second half of fiscal 2002, when we were more confident in our product.

We fund inventory expenditures during normal and peak periods through cash flow from operations. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. During fiscal 2003 and fiscal 2002, these periods accounted for 33 percent and 34 percent, respectively, of our annual net sales. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

28 MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash flows from investing activities

For fiscal 2003, net cash used for investing activities increased $422 million compared with fiscal 2002. For fiscal 2002, net cash used for investing activities decreased $364 million compared with fiscal 2001. The increase in fiscal 2003 was driven by increased purchases of short-term investments due to our improved cash position. The decrease in fiscal 2002 were driven by reduced capital expenditures for our new stores as a result of our decision to reduce our square footage growth rate offset by our short-term investing activity. For fiscal 2003 our net square footage decreased 2 percent.

In fiscal 2003, capital expenditures totaled approximately $272 million. The majority of these expenditures were used for 35 new store locations, store remodels and information technology. Capital expenditures for fiscal 2002 and fiscal 2001 were $303 million and $957 million, respectively, resulting in a net increase in store space of 0.9 million square feet in fiscal 2002 and 5.0 million in fiscal 2001.

For fiscal 2004, we expect capital expenditures to be about $500 million. Approximately $155 million of the capital spending is for information technology. Store capital is estimated to be about $320 million, with about $120 million for new stores and about $200 million for existing stores. Capital spending for headquarters and distribution centers is estimated to be about $25 million. We expect to open about 125 new store locations and to close about 135 store locations. New store locations will be weighted toward Old Navy, while Gap U.S. stores will account for the majority of locations closed. As a result, we expect net square footage to remain flat for the full year fiscal 2004. We expect to fund those capital expenditures with cash flows from operations.

Cash flows from financing activities

For fiscal 2003, the $3.3 billion decrease in net cash provided by financing activities compared with fiscal 2002 was primarily due to the restriction of cash that serves as collateral to our letter of credit agreements. In the first quarter of fiscal 2003, we repaid a maturing $500 million two-year bond. Additionally, in the third quarter of fiscal 2003 we repurchased the equivalent of $27 million of Eurobonds in the open market, and in the fourth quarter of fiscal 2003 we repurchased about $141 million of domestic bonds in the open market.

For fiscal 2002, the $1.1 billion increase in net cash provided by financing activities compared with fiscal 2001 was a result of the issuance of $1.38 billion senior convertible notes in March 2002.

Credit facility

In June 2003, we replaced our existing $1.4 billion secured two-year credit facility scheduled to expire in March 2004 with a new three-year secured $750 million revolving credit facility (the “new Facility”). In addition, we executed agreements securing $1.2 billion in letter of credit issuing capacity. The letter of credit agreements also have three-year terms and are secured by approximately $1.24 billion in cash, which is included in restricted cash on our Consolidated Balance Sheets. The new Facility is available for general corporate purposes. The fees related to the new Facility fluctuate based on our long-term senior unsecured credit ratings and our leverage ratio.

The new 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 a leverage ratio. The letter of credit agreements contain a fixed charge coverage ratio that is more lenient than the ratio in the new Facility. Violation of these covenants could result in a default under the new Facility and letter of credit agreements, which would permit the participating banks to restrict our ability to further access the new Facility for letters of credit and advances, terminate our ability to request letters of credit pursuant to the letter of credit agreements and require the immediate repayment of any outstanding advances under the new Facility. In addition, such a default could, under certain circumstances, permit the holders of our outstanding unsecured debt to accelerate payment of such obligations.

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 Consolidated Balance Sheets at the time of merchandise title transfer, although the letters of credit are generally issued prior to this.

As of January 31, 2004, we had $732 million in trade letters of credit issued under our letter of credit agreements. There were no drawings under the new Facility.

GAP INC. 2003 ANNUAL REPORT 29

Other debt information

On February 27, 2004, Standard & Poor’s Rating Services (“Standard & Poor’s”) changed our long-term senior unsecured credit ratings outlook from negative to stable. On February 9, 2004, Moody’s Investors Service (“Moody’s”) placed our credit on review for possible upgrade. On December 22, 2003, Moody’s changed our long-term ratings outlook from stable to positive. On August 12, 2003, Moody’s changed our long-term senior unsecured credit ratings outlook from negative to stable and raised our speculative grade liquidity (SGL) rating from SGL-2 to SGL-1. The SGL rating is intended to give bondholders a short-term (12-18 month) view of a company’s ability to meet operating and financing obligations. The rating is based on a scale of 1 to 4, with 1 being the highest.

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 8.8 percent, due December 15, 2008 (the “2008 notes”). The interest rate payable on the notes of each series is subject to adjustment from time to time if either Moody’s or 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 on the notes will be increased 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. Since we have experienced downgrades in our credit ratings since the notes were issued, the interest rate payable by us on the 2005 notes has increased by 175 basis points to 9.90 percent per annum and the interest rate payable by us on the 2008 notes has increased by 175 basis points to 10.55 percent per annum. 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 reduction in our long-term senior unsecured credit rating could result in reduced access to the capital markets and higher interest costs on future financings.

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. These debt securities are recorded in the Consolidated Balance Sheets at their issuance amounts net of unamortized discount and redemptions. 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 85,607,630 shares. If converted, these additional shares would reduce our future basic earnings per share. Prior to conversion, the convertible notes are potentially dilutive to our earnings per share at certain earnings levels. The effects of these dilutive securities on our earnings per share are computed using the if-converted method. The net proceeds are available for general corporate purposes.

Contractual cash obligations and commercial commitments

The following table sets forth a summary of our contractual cash obligations as of January 31, 2004. Certain of these contractual obligations are reflected in the Consolidated Balance Sheets, while others are disclosed as future obligations.

(In millions)	Less than 1 Year		1-3 Years		4-5 Years		More than 5 Years		Total
Amounts reflected in Consolidated Balance Sheets:
Long-term debt (a)	$	283	$	180	$	877	$	50	$	1,390
Senior convertible notes		—		—		—		1,380		1,380
Other cash obligations not reflected in Consolidated Balance Sheets:
Operating leases		924		1,528		1,048		1,929		5,429
Unconditional purchase obligations (b)		3,077		69		2		—		3,148
Total contractual cash obligations	$	4,284	$	1,777	$	1,927	$	3,359	$	11,347

^(a) Represents principal maturities, net of unamortized discount, excluding interest. See Note B to the accompanying consolidated financial statements.

^(b) Represents legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements.

30 MANAGEMENT’S DISCUSSION AND ANALYSIS

Amounts reflected in Consolidated Balance Sheets

We have other commercial commitments, not reflected in the table above, that were incurred in the normal course of business to support our operations, including standby letters of credit, surety bonds and bank guarantees. Amounts outstanding at January 31, 2004, relating to our standby letters of credit, surety bonds and bank guarantees were $65 million, $25 million and $6 million, respectively.

We have other long-term liabilities reflected in the Consolidated Balance Sheets, including deferred income taxes and insurance accruals. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of these payments cannot be determined, except for amounts estimated to be payable in 2004 that are included in current liabilities.

Other cash obligations not reflected in Consolidated Balance Sheets

The amounts that are reflected in the table on the left for operating leases represent future minimum lease payments under noncancellable operating leases. In accordance with accounting principles generally accepted in the United States, our operating leases are not recorded in the Consolidated Balance Sheets; however, the minimum lease payments related to these leases are disclosed in Note D to the accompanying consolidated financial statements, as well as in the table on the left.

We have applied the measurement and disclosure provisions of FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” to our agreements that contain guarantee and certain indemnification clauses. 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 the guarantee. The initial recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. As of January 31, 2004, we did not have any material guarantees that were issued or modified subsequent to December 31, 2002.

However, we are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements and various other agreements. Under these contracts we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined.

Generally, the maximum obligation under such indemnifications is not explicitly stated and, as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

As party to a reinsurance pool for workers’ compensation, general liability and automobile liability, we have guarantees with a maximum exposure of $92 million.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

GAP INC. 2003 ANNUAL REPORT 31

The policies and estimates discussed below include the financial statement elements that are either the most judgmental or involve the selection or application of alternative accounting policies and are material to our financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit and Finance Committee of our Board of Directors and with our independent auditors.

Inventory Valuation Method

Inventory is valued at the individual item level 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 0.8 percentage points, 0.1 percentage points and (0.5) percentage points for fiscal 2003, 2002 and 2001, 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 the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Events that result in an impairment review include decisions to close a store, corporate facility or distribution center, or when the carrying value of store assets is less than the projected future undiscounted cash flows. For our store assets, if the undiscounted future cash flows of 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. The fair value of the store’s long-lived assets is estimated using the discounted future cash flows of the assets based upon a rate that approximates our weighted-average cost of capital. For long-lived assets related to our distribution centers or corporate facilities, we compare the asset’s carrying value to quoted market prices in active markets, if available, or we estimate fair value based upon the best information available in the circumstances, including prices for similar assets or asset groups. We recorded a charge for the impairment of store assets of $22.6 million, $39.9 million and $13.9 million during fiscal 2003, 2002 and 2001, respectively. Our estimate of future cash flows is based upon 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.

The decisions to close or sublease a store, distribution center or corporate facility space can also result in accelerated depreciation over the revised useful life of the long-lived assets. For store or distribution center or corporate facility space that is under a long-term lease and we no longer use nor intend to use, 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. This charge is discounted using a credit adjusted risk-free rate. Most store closures occur upon the lease expiration. We recorded a charge for excess and closed facilities of $8.6 million, $77.4 million and $47.3 million during fiscal 2003, 2002 and 2001, respectively.

Our sublease reserve is sensitive to the level of sublease rent anticipated and the timing of sublease commencement. A 10 percent reduction in our sublease rate would have resulted in an additional $4.8 million of charges as of the end of fiscal 2003. A one-year delay in sublease commencement would have resulted in an additional $6.6 million charge as of the end of fiscal 2003. Additional reserves would also be required based on current market conditions, if management decided to sublease additional space based on changes in future needs.

32 MANAGEMENT’S DISCUSSION AND ANALYSIS

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. It is our policy to record our estimated liability, as determined actuarially, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Any actuarial projection of losses concerning our liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

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 fiscal 2004 effective tax rate to be within a range of 38.5 percent to 39.5 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 and could also be affected by the resolution of tax contingencies for amounts different from our current estimates.

Recent Accounting Pronouncements

During January 2003, the Financial Accounting Standards Board (“FASB”) 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. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provisions of FIN 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in December 2003, the FASB published a revision to FIN 46 (hereafter referred to as “FIN 46R”) to clarify some of the provisions of FIN 46, and to exempt certain entities from its requirements. Under the new guidance, there are new effective dates for companies that have interests in structures that are commonly referred to as special-purpose entities. The rules are effective in financial statements for periods ending after March 15, 2004. The adoption of FIN 46R did not have any impact on our operating results or financial position, as we do not have any variable interest entities.

During April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The adoption of SFAS 149 did not have any impact on our operating results or financial position, as we do not have any derivative instruments that are affected by SFAS 149.

During May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many companies classified these financial instruments as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact on our operating results or financial position, as we do not have any financial instruments with characteristics of both liabilities and equity that are not already classified as liabilities.

GAP INC. 2003 ANNUAL REPORT 33

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table on the right provides information about our market sensitive financial instruments as of January 31, 2004, and February 1, 2003.

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 forecasted 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 intercompany loans and balances 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 credit exposure from our counter-parties. Additional information is presented in the Notes to Consolidated Financial Statements (Note F).

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. These debt securities are recorded in the Consolidated Balance Sheets at their issuance amount net of unamortized discount and redemptions.

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 semi-annually. As a result of downgrades to our long-term credit ratings, the interest rates payable by us on our 2005 notes and 2008 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. During the fourth quarter of fiscal 2003, we repurchased $19.7 million of the 2005 notes and $37.6 million of the 2008 notes. These debt securities are recorded in the Consolidated Balance Sheets at their issuance amount net of repurchases and unamortized discount.

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 semi-annually. We swapped the interest and principal payable under these debt securities to 6.1 billion Japanese yen with a fixed interest rate of 2.43 percent. These debt securities are recorded in the Consolidated Balance Sheets at their fair market value as of January 31, 2004.

During fiscal 1999, our Netherlands subsidiary, Gap International B.V., issued debt securities in the aggregate principal amount of 250 million Euro, equivalent to $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. During the third quarter of fiscal 2003, we repurchased 23.4 million Euro of these debt securities, equivalent to $27 million at the time of repurchase. These debt securities are recorded in the Consolidated Balance Sheets at their issuance amount net of repurchases and unamortized discount and are translated into U.S. dollars at the period-end exchange rate.

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. During the fourth quarter of fiscal 2003, we repurchased $83 million of these debt securities. These debt securities are recorded in the Consolidated Balance Sheets at their issuance amount net of repurchases and 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 reduce the risk associated with exchange rate fluctuations.

34 QUANTITATIVE AND QUALITATIVE DISCLOSURES

(In millions except average contract rate)			Notional Maturity Dates (Fiscal Year)
	Average Contract Rate (a)	Notional Amount in Sold Currency	2004	2005	2006 and Beyond (b)	Unrealized Gain (Loss) in U.S. Dollars (c)
Foreign Exchange Forward Contracts
Contracts—Merchandise Hedges
Sell British Pounds, buy U.S. Dollars	0.62	141	141	—	—	(24	)
Sell Canadian Dollars, buy U.S. Dollars	1.37	411	411	—	—	(8	)
Sell Japanese Yen, buy U.S. Dollars	112.78	15,510	15,510	—	—	(10	)
Sell U.S. Dollars, buy Euros	1.19	14	14	—	—	1
Total merchandise hedge contracts						(41	)
Contracts—Loan and Intercompany Hedges
Sell U.S. Dollars, buy Euros	1.25	12	12	—	—	—
Sell British Pounds, buy Japanese Yen	0.01	21	1	20	—	(12	)
Sell British Pounds, buy Euros	0.67	112	111	1	—	5
Sell British Pounds, buy U.S. Dollars	0.55	10	10	—	—	—
Sell Canadian Dollars, buy U.S. Dollars	1.39	118	30	88	—	(3	)
Sell Euros, buy Japanese Yen	0.01	7	—	7	—	(3	)
Total loan and intercompany hedge contracts						(13	)
Cross Currency Interest Rate Swap
Japanese Yen for U.S. Dollars	121.60	6,080	—	—	6,080	(6	)
Total foreign exchange forward contracts and cross currency interest rate swap						(60	)

^(a) Average contract rates stated in units of sold currency per units of bought currency.

^(b) No amounts mature in 2006, 2007 or 2008.

^(c) The unrealized gain (loss) represents the effect of the changes in the forward rates compared to the average contract rates at January 31, 2004. Of the $60 million pre-tax total unrealized loss, approximately $41 million relates to merchandise hedges, of which approximately $25 million (net of tax) was included in accumulated other comprehensive earnings on our Consolidated Balance Sheets as of January 31, 2004. 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 million of the $60 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 of underlying intercompany loans and balances.

	Jan. 31, 2004				Feb. 1, 2003
(In millions)	Carrying Amount in U.S. Dollars		Fair Value (a)		Carrying Amount in U.S. Dollars		Fair Value (a)
Notes payable, due 2003	$	—	$	—	$	500	$	501
Notes payable, due 2004		283		286		269		246
Notes payable, due 2005		180		202		200		214
Notes payable, due 2007		415		457		498		492
Notes payable, due 2008		462		569		499		551
Notes payable, due 2009		50		53		50		47
Total long-term debt, including current maturities		1,390		1,567		2,016		2,051
Senior convertible notes payable, due 2009		1,380		1,799		1,380		1,691
Total long-term debt and senior convertible notes, including current maturities	$	2,770	$	3,366	$	3,396	$	3,742

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

GAP INC. 2003 ANNUAL REPORT 35

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 requirements 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 accompanying 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 independent directors who are not officers or employees of the Company. The Committee is responsible for recommending to the Board of Directors the selection, 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 January 31, 2004, and February 1, 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three fiscal years in the period ended January 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 Gap, Inc. and subsidiaries as of January 31, 2004, and February 1, 2003, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

San Francisco, California

March 30, 2004

36 MANAGEMENT’S REPORT AND INDEPENDENT AUDITORS’ REPORT

CONSOLIDATED STATEMENTS OF OPERATIONS

($ In millions except per share amounts)	52 Weeks Ended Jan. 31, 2004			Percentage to Net Sales		52 Weeks Ended Feb. 1, 2003			Percentage to Net Sales		52 Weeks Ended Feb. 2, 2002			Percentage to Net Sales
Net sales	$	15,854		100.0	%	$	14,455		100.0	%	$	13,848		100.0	%
Cost and expenses
Cost of goods sold and occupancy expenses		9,886		62.4			9,542		66.0			9,705		70.1
Operating expenses		4,089		25.8			3,901		27.0			3,806		27.5
Interest expense		234		1.5			249		1.7			109		0.8
Interest income		(38	)	(0.2	)		(37	)	(0.3	)		(13	)	(0.1	)
Earnings before income taxes		1,683		10.6			800		5.5			241		1.7
Income taxes		653		4.1			323		2.2			249		1.8
Net earnings (loss)	$	1,030		6.5	%	$	477		3.3	%	$	(8	)	(0.1	%)
Weighted-average number of shares—basic		892,554,538					875,545,551					860,255,419
Weighted-average number of shares—diluted		988,177,828					881,477,888					860,255,419
Earnings (loss) per share—basic	$	1.15				$	0.54				$	(0.01	)
Earnings (loss) per share—diluted (a)		1.09					0.54					(0.01	)

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 anti-dilutive.

GAP INC. 2003 ANNUAL REPORT 37

CONSOLIDATED BALANCE SHEETS

($ In millions except par value)	Jan. 31, 2004			Feb. 1, 2003
Assets
Current Assets
Cash and equivalents	$	2,261		$	3,027
Short-term investments		1,073			313
Restricted cash (a)		1,351			49
Cash and equivalents, short-term investments and restricted cash		4,685			3,389
Merchandise inventory		1,704			2,048
Other current assets		300			303
Total current assets		6,689			5,740
Property and Equipment
Leasehold improvements		2,224			2,242
Furniture and equipment		3,591			3,439
Land and buildings		1,033			943
Construction-in-progress		131			202
		6,979			6,826
Accumulated depreciation and amortization		(3,611	)		(3,049	)
Property and equipment, net		3,368			3,777
Other assets		286			385
Total assets	$	10,343		$	9,902
Liabilities and Shareholders’ Equity
Current Liabilities
Current maturities of long-term debt	$	283		$	500
Accounts payable		1,178			1,159
Accrued expenses and other current liabilities		872			874
Income taxes payable		159			193
Total current liabilities		2,492			2,726
Long-Term Liabilities
Long-term debt		1,107			1,516
Senior convertible notes		1,380			1,380
Lease incentives and other liabilities		581			621
Total long-term liabilities		3,068			3,517
Shareholders’ Equity
Common stock $.05 par value
Authorized 2,300,000,000 shares; issued 976,154,229 and 968,010,453 shares; outstanding 897,202,485 and 887,322,707 shares		49			48
Additional paid-in capital		732			638
Retained earnings		6,241			5,290
Accumulated other comprehensive earnings (loss)		31			(16	)
Deferred compensation		(9	)		(13	)
Treasury stock, at cost		(2,261	)		(2,288	)
Total shareholders’ equity		4,783			3,659
Total liabilities and shareholders’ equity	$	10,343		$	9,902

See Notes to Consolidated Financial Statements.

^(a) See Notes A and B.

38 CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ In millions)	52 Weeks Ended Jan. 31, 2004			52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002
Cash Flows from Operating Activities
Net earnings (loss)	$	1,030		$	477		$	(8	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		664			693			732
Tax benefit from exercise of stock options and vesting of restricted stock		7			44			58
Deferred income taxes		103			6			(29	)
Loss on disposal and other non-cash items affecting net earnings		70			117			64
Change in operating assets and liabilities:
Merchandise inventory		385			(258	)		122
Prepaid expenses and other		5			33			(13	)
Accounts payable		(10	)		(47	)		134
Accrued expenses		(79	)		129			176
Deferred lease credits and other long-term liabilities		(4	)		44			99
Net cash provided by operating activities		2,171			1,238			1,335
Cash Flows from Investing Activities
Purchase of property and equipment		(272	)		(303	)		(957	)
Proceeds from sale of property and equipment		1			9			—
Purchase of short-term investments		(1,202	)		(472	)		—
Maturities and sales of short-term investments		442			159			—
Acquisition of lease rights, net increase (decrease) of other assets		5			3			(11	)
Net cash used for investing activities		(1,026	)		(604	)		(968	)
Cash Flows from Financing Activities
Net decrease in notes payable		—			(42	)		(735	)
Net issuance of long-term debt		—			—			1,194
Net issuance of senior convertible notes		—			1,346			—
Payments of long-term debt		(668	)		—			(250	)
Restricted cash		(1,303	)		(20	)		(15	)
Issuance of common stock		111			153			139
Net purchase of treasury stock		—			—			(1	)
Cash dividends paid		(79	)		(78	)		(76	)
Net cash (used for) provided by financing activities		(1,939	)		1,359			256
Effect of exchange rate fluctuations on cash		28			27			(11	)
Net (decrease) increase in cash and equivalents		(766	)		2,020			612
Cash and equivalents at beginning of year		3,027			1,007			395
Cash and equivalents at end of year	$	2,261		$	3,027		$	1,007

See Notes to Consolidated Financial Statements.

GAP INC. 2003 ANNUAL REPORT 39

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock				Additional Paid-in Capital
($ In millions except per share amounts)	Shares		Amount
Balance at February 3, 2001	939,222,871		$	47	$	295
Issuance of common stock pursuant to stock option plans	9,346,228			—		107
Net issuance of common stock pursuant to management incentive restricted stock plans	28,850			—		1
Tax benefit from exercise of stock options by employees and from vesting of restricted stock						58
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($7)
Reclassification of amounts to net earnings, net of tax ($9)
Amortization of restricted stock and discounted stock options
Purchase of treasury stock						0
Reissuance of treasury stock
Net (loss)
Cash dividends ($.09 per share)
Balance at February 2, 2002	948,597,949		$	47	$	461
Issuance of common stock pursuant to stock option plans	19,488,004			1		142
Net cancellations of common stock pursuant to management incentive restricted stock plans	(75,500	)		—		(2	)
Tax benefit from exercise of stock options by employees and from vesting of restricted stock						44
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($10)
Reclassification of amounts to net earnings, net of tax ($2)
Amortization of restricted stock and discounted stock options
Reissuance of treasury stock						(7	)
Net earnings
Cash dividends ($.09 per share)
Balance at February 1, 2003	968,010,453		$	48	$	638
Issuance of common stock pursuant to stock option plans	8,143,466			1		89
Conversion of convertible debt	310			—		—
Tax benefit from exercise of stock options by employees
and from vesting of restricted stock						7
Adjustments for foreign currency translation
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($19)
Reclassification of amounts to net earnings, net of tax ($10)
Amortization of restricted stock and discounted stock options
Reissuance of treasury stock						(2	)
Net earnings
Cash dividends ($.09 per share)
Balance at January 31, 2004	976,154,229		$	49	$	732

See Notes to Consolidated Financial Statements

40 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

								Treasury Stock
($ In millions except per share amounts)	Retained Earnings	Accumulated Other Comprehensive Earnings (Loss)			Deferred Compensation			Shares		Amount			Total			Comprehensive Earnings (Loss)
Balance at February 3, 2001	$4,975	$	(20	)	$	(12	)	(85,225,887	)	$	(2,356	)	$	2,929		$	861
Issuance of common stock pursuant to stock option plans						(5	)							102
Net issuance of common stock pursuant to management incentive restricted stock plans						(1	)							—
Tax benefit from exercise of stock options by employees and from vesting of restricted stock														58
Adjustments for foreign currency translation			(34	)										(34	)		(34	)
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($7)			8											8			8
Reclassification of amounts to net earnings, net of tax ($9)			(16	)										(16	)
Amortization of restricted stock and discounted stock options						11								11
Purchase of treasury stock								(34,500	)		(1	)		(1	)
Reissuance of treasury stock								2,389,328			36			36
Net (loss)	(8)													(8	)		(8	)
Cash dividends ($.09 per share)	(76)													(76	)
Balance at February 2, 2002	$4,891	$	(62	)	$	(7	)	(82,871,059	)	$	(2,321	)	$	3,009		$	(34	)
Issuance of common stock pursuant to stock option plans						(14	)							129
Net cancellations of common stock pursuant to management incentive restricted stock plans						1								(1	)
Tax benefit from exercise of stock options by employees and from vesting of restricted stock														44
Adjustments for foreign currency translation			60											60			60
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($10)			(12	)										(12	)		(12	)
Reclassification of amounts to net earnings, net of tax ($2)			(2	)										(2	)
Amortization of restricted stock and discounted stock options						7								7
Reissuance of treasury stock								2,183,313			33			26
Net earnings	477													477			477
Cash dividends ($.09 per share)	(78)													(78	)
Balance at February 1, 2003	$5,290	$	(16	)	$	(13	)	(80,687,746	)	$	(2,288	)	$	3,659		$	525
Issuance of common stock pursuant to stock option plans						(2	)							88
Conversion of convertible debt														—
Tax benefit from exercise of stock options by employees														—
and from vesting of restricted stock														7
Adjustments for foreign currency translation			62											62			62
Adjustments for fluctuations in fair market value of financial instruments, net of tax ($19)			(30	)										(30	)		(30	)
Reclassification of amounts to net earnings, net of tax ($10)			15											15
Amortization of restricted stock and discounted stock options						6								6
Reissuance of treasury stock								1,736,002			27			25
Net earnings	1,030													1,030			1,030
Cash dividends ($.09 per share)	(79)													(79	)
Balance at January 31, 2004	$6,241	$	31		$	(9	)	(78,951,744	)	$	(2,261	)	$	4,783		$	1,587

GAP INC. 2003 ANNUAL REPORT 41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the 52 Weeks Ended January 31, 2004 (Fiscal 2003), February 1, 2003 (Fiscal 2002), and February 2, 2002 (Fiscal 2001).

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 2003, 2002 and 2001 all consisted of 52 weeks.

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.

Reclassifications

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

Segments

Operating segments may be aggregated into a single operating segment if the segments are similar in each of the following areas: economic characteristics, nature of products and services, nature of the production processes, type or class of customers, methods used to distribute the products or provide services and regulatory environment. Our brands have been aggregated into one reportable segment given that they exhibit similarities in the above mentioned categories.

Revenues of international retail operations were $2.3 billion, $1.9 billion and $1.8 billion, and represented 14.8 percent, 13.3 percent and 13.1 percent of our revenues for fiscal 2003, 2002 and 2001, respectively. Long-term assets of international operations, including retail and sourcing, were $593 million and $633 million, and represented 16.4 percent and 15.3 percent of our long-term assets as of the end of fiscal 2003 and 2002, respectively.

Cash and Equivalents

Cash and equivalents represent cash and short-term, highly liquid investments with original maturities up to three months or less. Outstanding checks classified in accounts payable on the Consolidated Balance Sheets totaled $115 million and $89 million as of the end of fiscal 2003 and 2002, respectively.

42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Short-term Investments

We have short-term investments, which generally have maturities of more than three months and less than one year, from the date of purchase. Our short-term investments are classified as held to maturity based on our positive intent and ability to hold the securities to maturity. Primarily all securities held are U.S. government and agency securities and bank certificates of deposit and are stated at amortized cost, which approximates fair market value. Income related to these securities is reported as a component of interest income. At January 31, 2004, we had $1.04 billion in U.S. government and agency securities and $35 million invested in bank certificates of deposit. At February 1, 2003, we had $313 million in U.S. government and agency securities.

Restricted Cash

Restricted cash represents cash that serves as collateral to our letter of credit agreements and other cash that is restricted from withdrawal for use. As of January 31, 2004, restricted cash represents the restriction of $1.24 billion of cash that serves as collateral to our letter of credit agreements, which are used to pay vendors for inventory, and $111 million of other cash that is restricted from withdrawal for use. Restricted cash classified in current assets on the Consolidated Balance Sheets totaled $1.35 billion as of January 31, 2004.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents approximates fair value because of their short-term maturities. Our derivative financial instruments are recorded on the Consolidated Balance Sheets at fair value and are determined using quoted market rates. We had no firm commitment hedges in fiscal 2003. See Note F for further discussion.

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	Life of the lease, not to exceed 12 years
Furniture and equipment	Up to 10 years
Buildings	39 years

Interest costs related to assets under construction are capitalized during the construction period. Interest of $9 million, $11 million and $25 million was capitalized in fiscal 2003, 2002 and 2001, respectively.

Lease Rights

Lease rights, representing costs incurred to acquire the lease of a specific commercial property, 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 $170 million and $69 million, respectively, as of January 31, 2004, and $169 million and $59 million, respectively, as of February 1, 2003. Lease rights amortization was $9.1 million, $9.2 million and $9.5 million in fiscal 2003, 2002 and 2001, respectively. The estimated annual amortization expense for lease rights each year through fiscal 2008 is about $9.0 million.

GAP INC. 2003 ANNUAL REPORT 43

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.

When facts and circumstances indicate that the carrying values of our long-lived assets, including intangibles, may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, we recognize an impairment loss in our operating expenses on the Consolidated Statements of Operations. We recorded a charge for the impairment of store assets of $22.6 million, $39.9 million and $13.9 million during fiscal 2003, 2002 and 2001, respectively.

The decisions to close or sublease a store, distribution center or corporate facility space can also result in accelerated depreciation over the revised useful life of the long-lived assets. For store or distribution center or corporate facility space that are under long-term leases and we no longer use nor intend to use, 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. This charge is discounted using a credit adjusted risk-free rate. Most store closures occur upon the lease expiration. We recorded a charge for excess and closed facilities of $8.6 million, $77.4 million and $47.3 million during fiscal 2003, 2002 and 2001, respectively.

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.

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. Customers typically receive goods within a few days of being shipped. Allowances for estimated returns are recorded for store sales as well as online sales. We recognize revenue from gift cards at the time the gift cards are redeemed.

Rent Expense

Certain of our lease agreements provide for scheduled rent increases during the lease term. Minimum rental expenses are recognized on a straight-line basis over the terms of the leases.

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. Advertising costs were $509 million, $496 million and $423 million in fiscal 2003, 2002 and 2001, 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, “Accounting for Stock Issued to Employees.” Under the intrinsic value method, when the exercise price of the employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the 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.

44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Based on additional disclosure requirements under Statement of Financial Accounting Standards No.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 of net earnings (loss) and earnings (loss) per share if we had applied the fair-value recognition provisions of SFAS 123.

	52 Weeks Ended Jan. 31, 2004			52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002
Net earnings (loss) (in millions)
As reported	$	1,030		$	477		$	(8	)
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects		1			4			8
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(53	)		(42	)		(86	)
Pro forma	$	978		$	439		$	(86	)
Earnings (loss) per share
As reported—basic	$	1.15		$	0.55		$	(0.01	)
Pro forma—basic		1.10			0.50			(0.10	)
As reported—diluted		1.09			0.54			(0.01	)
Pro forma—diluted		1.03			0.50			(0.10	)

Foreign Currency Translation

Translation gains and losses of foreign operations that use local currencies as the functional currency are accumulated and reported as a component of accumulated other comprehensive earnings (loss) within total shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the results of operations. Cumulative net foreign currency translation losses in accumulated other comprehensive gains (losses) were $62 million, $60 million and ($34) million at January 31, 2004, February 1, 2003, and February 2, 2002, respectively.

Recent Accounting Pronouncements

During January 2003, the Financial Accounting Standards Board (“FASB”) 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. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provisions of FIN 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in December 2003, the FASB published a revision to FIN 46 (hereafter referred to as “FIN 46R”) to clarify some of the provisions of FIN 46, and to exempt certain entities from its requirements. Under the new guidance, there are new effective dates for companies that have interests in structures that are commonly referred to as special-purpose entities. The rules are effective in financial statements for periods ending after March 15, 2004. The adoption of FIN 46R did not have any impact on our operating results or financial position, as we do not have any variable interest entities.

During April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The adoption of SFAS 149 did not have any impact on our operating results or financial position, as we do not have any derivative instruments that are affected by SFAS 149.

GAP INC. 2003 ANNUAL REPORT 45

During May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many companies classified these financial instruments as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have any impact on our operating results or financial position, as we do not have any financial instruments with characteristics of both liabilities and equity that are not already classified as liabilities.

Note B: Debt, Senior Convertible Notes and Other Credit Arrangements

In June 2003, we replaced our existing $1.4 billion secured two-year credit facility scheduled to expire in March 2004 with a new three-year secured $750 million revolving credit facility (the “new Facility”). In addition, we executed agreements securing $1.2 billion in letter of credit issuing capacity. The letter of credit agreements also have three-year terms and are secured by approximately $1.24 billion in cash, which is included in restricted cash on our Consolidated Balance Sheets. The new Facility is available for general corporate purposes. The fees related to the new Facility fluctuate based on our long-term senior unsecured credit ratings and our leverage ratio.

The new 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 a leverage ratio. The letter of credit agreements contain a fixed charge coverage ratio that is more lenient than the ratio in the new Facility. Violation of these covenants could result in a default under the new Facility and letter of credit agreements, which would permit the participating banks to restrict our ability to further access the new Facility for letters of credit and advances, terminate our ability to request letters of credit pursuant to the letter of credit agreements and require the immediate repayment of any outstanding advances under the new Facility. In addition, such a default could, under certain circumstances, permit the holders of our outstanding unsecured debt to accelerate payment of such obligations. We were in compliance with these covenants as of January 31, 2004.

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 Consolidated Balance Sheets at the time of merchandise title transfer, although the letters of credit are generally issued prior to this.

As of January 31, 2004, we had $732 million in trade letters of credit issued under our letter of credit agreements. There were no drawings under the new Facility.

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. These debt securities are recorded in the Consolidated Balance Sheets at their issuance amounts net of unamortized discount and redemptions. 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 85,607,630 shares. If converted, these additional shares would reduce our future basic earnings per share. Prior to conversion, the convertible notes are potentially dilutive to our earnings per share at certain earnings levels. The effects of these dilutive securities on our earnings per share are computed using the if-converted method. The net proceeds are available for general corporate purposes.

Gross interest payments were approximately $235 million, $209 million and $117 million in fiscal 2003, 2002 and 2001, respectively.

46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Jan. 31, 2004				Feb. 1, 2003
($ In millions)	Carrying Amount in U.S. Dollars		Fair Value (a)		Carrying Amount in U.S. Dollars		Fair Value (a)
Notes payable, 5.625%, interest due semi-annually, due May 2003	$	—	$	—	$	500	$	501
Notes payable, 5.00%, interest due annually, due September 2004		283		286		269		246
Notes payable, 8.15% (9.90%), interest due semi-annually, due December 2005 (b)		180		202		200		214
Notes payable, 6.90%, interest due semi-annually, due September 2007		415		457		498		492
Notes payable, 8.80% (10.55%), interest due semi-annually, due December 2008 (b)		462		569		499		551
Notes payable, 6.25%, interest due semi-annually, due March 2009		50		53		50		47
Total long-term debt, including current maturities		1,390		1,567		2,016		2,051
Senior convertible notes payable, 5.75%, interest due semi-annually, due March 2009		1,380		1,799		1,380		1,691
Total long-term debt and senior convertible notes, including current maturities	$	2,770	$	3,366	$	3,396	$	3,742

^(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 (decrease) by 0.25 percent for each rating downgrade (upgrade) by the rating agencies. The rate in parentheses reflects the current rate effective June 15, 2002.

Note C: Income Taxes

Income taxes consisted of the following:

(In millions)	52 Weeks Ended Jan. 31, 2004			52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002
Current
Federal	$	473		$	251		$	110
State		79			23			56
Foreign		117			63			109
Total current		669			337			275
Deferred
Federal		(5	)		(23	)		(19	)
State		(18	)		14			2
Foreign		7			(5	)		(9	)
Total deferred		(16	)		(14	)		(26	)
Total provision	$	653		$	323		$	249

The foreign component of pretax earnings before eliminations in fiscal 2003, 2002 and 2001 was approximately $432 million, $318 million and $282 million, respectively. Except where required by U.S. tax law, 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. That portion of accumulated undistributed earnings of foreign subsidiaries was approximately $668 million at January 31, 2004.

GAP INC. 2003 ANNUAL REPORT 47

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

	52 Weeks Ended Jan. 31, 2004		52 Weeks Ended Feb. 1, 2003		52 Weeks Ended Feb. 2, 2002
Federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, less federal benefit	2.1		3.1		3.5
Foreign	2.2		2.3		9.4
Other	(0.5	)	0.0		1.1
Tax rate before charge	38.8	%	40.4	%	49.0	%
Tax charge (a)	—		—		54.2
Effective tax rate	38.8	%	40.4	%	103.2	%

^(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 millions)	Jan. 31, 2004			Feb. 1, 2003
Compensation and benefits accruals	$	37		$	33
Scheduled rent		78			64
Inventory capitalization and other adjustments		7			48
Nondeductible accruals		78			71
Other		33			27
State NOL		44			50
Gross deferred tax assets		277			293
State NOL valuation allowance		(18	)		(35	)
Depreciation and amortization		(123	)		(38	)
Fair value of financial instruments included in accumulated other comprehensive earnings (loss)		15			6
Other		(33	)		(14	)
Gross deferred tax liabilities		(141	)		(46	)
Net deferred tax assets	$	118		$	212

Net deferred tax assets at January 31, 2004, and February 1, 2003, are included in other current assets (approximately $89 million and $63 million, respectively), and other assets (approximately $29 million and $149 million, respectively) in the Consolidated Balance Sheets.

At January 31, 2004, we had $43.7 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 carryovers was reduced by a valuation allowance of $17.6 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 $616 million, $156 million and $136 million in fiscal 2003, 2002 and 2001, respectively.

48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 January 31, 2004, are as follows:

Fiscal Year	(In millions)
2004	$	924
2005		835
2006		693
2007		564
2008		484
Thereafter		1,929
Total minimum lease commitment	$	5,429

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 include options that allow us to 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 January 31, 2004, and February 1, 2003, this liability amounted to approximately $204 million and $197 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 January 31, 2004, and February 1, 2003, the long-term deferred credit was approximately $252 million and $299 million, respectively.

Rental expense for all operating leases was as follows:

(In millions)	52 Weeks Ended Jan. 31, 2004		52 Weeks Ended Feb. 1, 2003		52 Weeks Ended Feb. 2, 2002
Minimum rentals	$	847	$	855	$	788
Contingent rentals		146		123		135
Total	$	993	$	978	$	923

GAP INC. 2003 ANNUAL REPORT 49

Note E: Other Operating Charges

In January 2004, we signed an agreement to sell our Gap brand operations in Germany, effective August 1, 2004. Gap brand operations in Germany represent our smallest international retail business, and with only 10 store locations, account for well under 1 percent of total company sales. As a result of our decision, we recognized an operating expense charge of $14 million to write down the assets to their fair value, which was estimated based upon the expected net selling price.

During 2001, as a result of the rationalization of our global distribution center network, we announced plans to close distribution facilities in Erlanger, Kentucky (“Erlanger”), Basildon, England (“Basildon”), and Roosendaal, Holland (“Roosendaal”). The Basildon facility was closed during 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. We lease the Erlanger and Basildon facilities, and we own the Roosendaal facility.

The Roosendaal facility, including land and building, is currently on the market for sale. The total carrying value of the remaining land and building as of January 31, 2004, was £1.9 million, equivalent to $3.5 million. Our lease associated with the Erlanger facility expired in February 2003, and the lease associated with the Basildon facility expired in October 2003.

Facilities-related charges associated with the distribution center closures include costs associated with lease terminations, facilities restoration, severance and equipment removal. Remaining cash expenditures of $4.2 million associated with facility closures as of February 1, 2003, have been paid.

During 2001, we consolidated and downsized corporate 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 in fiscal 2001. During 2002, based on a review of real estate market conditions, we revised our sublease income and sublease commencement projections and assumptions. Additionally, in fiscal 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.

Our sublease loss charges primarily relate to the net present value of the difference between the contract rent obligations and the rate at which we expected to be able to sublease the properties. In the third quarter of fiscal 2003, based on the status of our efforts to lease vacant office space including a review of real estate market conditions, we revised our sublease projections and recorded an additional sublease loss charge of $8.6 million. In addition, in fiscal 2003 we recorded accretion of $1.3 million of interest for total adjustments to our provision of $9.9 million. The additional sublease loss charge was recorded in operating expenses in 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 our current assumptions as of January 31, 2004, we expect the sublease of our excess facilities to result in a total reduction of approximately $247 million in future rent expense and $111 million in cash savings over the various remaining lease terms through 2017.

50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The remaining reserve balance related to the distribution center exit costs and sublease loss as of January 31, 2004, was as follows:

(In millions)	Severance and Outplacement			Facilities Charges			Sublease Loss Reserve			Total
Balance at February 3, 2001	$	—		$	—		$	—		$	—
Additional provision		30			7			47			84
Cash payments		(25	)		—			(3	)		(28	)
Balance at February 2, 2002	$	5		$	7		$	44		$	56
Additional provision		—			(1	)		80			79
Cash payments		(5	)		(2	)		(9	)		(16	)
Balance at February 1, 2003	$	—		$	4		$	115		$	119
Additional provision		—			(1	)		10			9
Cash payments		—			(3	)		(23	)		(26	)
Balance at January 31, 2004	$	—		$	—		$	102		$	102

Note F: 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 forecasted merchandise purchases for foreign operations and intercompany obligations that bear foreign exchange risk using foreign exchange forward contracts. We do not enter into derivative financial instruments for trading purposes.

Forward contracts used to hedge forecasted merchandise purchases are designated as cash flow hedges. At January 31, 2004, we had forward contracts designated as cash flow hedges of forecasted merchandise purchases with a fair-value loss of $41 million. These forward contracts mature at various dates through January 2005 to buy and sell the equivalent of approximately $682 million in foreign currencies (Buy contracts: approximately 12 million Euro; Sell contracts: approximately 141 million British pounds, 411 million Canadian dollars and 16 billion Japanese yen) at the contracted rates.

Changes in the fair value of forward contracts designated as cash flow hedges are recorded as a component of comprehensive earnings within total shareholders’ equity, and are recognized in cost of goods sold and occupancy expenses in the same period during which the hedged merchandise affects earnings. An unrealized loss of approximately $25 million, net of tax, has been recorded in accumulated other comprehensive earnings (loss) at January 31, 2004, and will be recognized in cost of goods sold and occupancy expenses over the next 12 months. The majority of the critical terms of the forward contracts and the forecasted foreign merchandise purchases, are the same. As a result, there were no material amounts reflected in fiscal 2003 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 intercompany loans and balances denominated in currencies other than the functional currency of the entity holding or issuing the intercompany loan and balance. At January 31, 2004, the fair value of these forward contracts was approximately $5 million in assets and $19 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 generally offset.

In addition, we used 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 6.1 billion Japanese yen with a fixed interest rate of 2.43 percent. At January 31, 2004, the fair market value of the swaps was a $6 million loss.

GAP INC. 2003 ANNUAL REPORT 51

Note G: 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 2003, 2002 and 2001 were approximately $28 million, $26 million and $23 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. Electing Board members are granted options to purchase shares of our common stock at an exercise price that is discounted to reflect an amount up to the foregone retainer. All options are fully exercisable upon the date granted and expire on the earlier of seven years after grant, three years after retirement, death or disability, or three months after any other termination from the Board. We may issue up to 675,000 shares under the plan. Outstanding options at January 31, 2004, February 1, 2003, and February 2, 2002, were 170,845, 143,467 and 101,282, respectively.

Incentive Stock Compensation Plans

The 1996 Stock Option and Award Plan (the “1996 Plan”) was established on March 26, 1996, and amended and restated on January 28, 2003. The Board authorized 123,341,342 shares for issuance under the 1996 Plan, which includes shares available under the Management Incentive Restricted Stock Plan and an earlier stock option plan established in 1981, both of which were superseded by the 1996 Plan. 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 nonqualified stock options or restricted stock to key employees. The 2002 Stock Option Plan (the “2002 Plan”), formerly known as Stock Up on Success, was established on January 1, 1999. The Board authorized 52,500,000 shares for issuance under the 2002 Plan, which includes shares available under an earlier stock option plan established in 1999 that was merged with 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 than or greater than the fair market value at the date of grant or other prices 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 $1 million, $4 million and $5 million in fiscal 2003, 2002 and 2001, respectively.

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan 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 1,626,393, 2,159,217 and 2,350,049 shares issued under the plan during fiscal 2003, 2002 and 2001, respectively. All shares were acquired from treasury stock. At January 31, 2004, there were 10,024,484 shares reserved for future issuances.

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 January 31, 2004, £1 was equivalent to $1.82. During fiscal 2003, 23,371 shares were issued under the plan. All shares were acquired from treasury stock. At January 31, 2004, there were 921,853 shares reserved for future issuances.

52 NOTES TO CONSOLIDATE FINANCIAL STATEMENTS

Note H: Shareholders’ Equity and Stock Options

Common and Preferred Stock

The Board of Directors is 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 as determined by the Compensation and Management Development Committee of the Board of Directors.

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

	Shares		Weighted-Average Exercise Price
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
Granted	26,782,766			14.13
Exercised	(8,229,703	)		11.24
Canceled	(16,354,458	)		22.04
Balance at January 31, 2004	82,690,774		$	18.68

Outstanding options at January 31, 2004, have expiration dates ranging from November 2004 to January 2014.

At January 31, 2004, we reserved 176,937,314 shares of our common stock, including 1,518,537 treasury shares, for the exercise of stock options. There were 94,246,540, 74,175,893 and 44,801,509 shares available for granting of options at January 31, 2004, February 1, 2003, and February 2, 2002, respectively. Options for 37,292,786, 39,249,141 and 44,670,144 shares were exercisable as of January 31, 2004, February 1, 2003, and February 2, 2002, respectively, and had a weighted-average exercise price of $22.53, $21.55 and $14.21 at those dates.

GAP INC. 2003 ANNUAL REPORT 53

The following table summarizes information about stock options outstanding and exercisable at January 31, 2004:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at Jan. 31, 2004	Weighted-Average Remaining Contractual Life (in Years)	Weighted-Average Exercise Price		Number Exercisable at Jan. 31, 2004	Weighted-Average Exercise Price
$  2.85 to $  12.87	28,727,257	7.76	$	11.32	6,747,538	$	8.89
12.95 to     16.37	21,796,794	7.82		14.38	8,968,191		14.36
16.62 to     27.80	21,116,525	6.74		21.43	12,485,616		22.20
27.87 to     49.53	11,050,198	5.96		41.06	9,091,441		41.19
$  2.85 to $  49.53	82,690,774	7.27	$	18.68	37,292,786	$	22.53

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 the 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 Jan. 31, 2004			52 Weeks Ended Feb. 1, 2003			52 Weeks Ended Feb. 2, 2002
Net earnings (loss) (in millions)
As reported	$	1,030		$	477		$	(8	)
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects		1			4			8
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(53	)		(42	)		(86	)
Pro forma	$	978		$	439		$	(86	)
Earnings (loss) per share
As reported—basic	$	1.15		$	0.55		$	(0.01	)
Pro forma—basic		1.10			0.50			(0.10	)
As reported—diluted		1.09			0.54			(0.01	)
Pro forma—diluted		1.03			0.50			(0.10	)

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:

	Jan. 31, 2004		Feb. 1, 2003		Feb. 2, 2002
Expected dividend yield	0.53	%	0.61	%	0.63	%
Risk-free interest rate	2.39	%	2.44	%	3.45	%
Expected volatility	50	%	48	%	47	%
Expected life (in years)	4		5		4

54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under the Black-Scholes option pricing model, the weighted-average fair value of the stock options granted during fiscal 2003, 2002 and 2001 was $5.36, $5.41 and $5.74, respectively.

Note I: 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 calculated using the if-converted method. The following summarizes the incremental shares from the potentially dilutive securities:

	52 Weeks Ended Jan. 31, 2004		52 Weeks Ended Feb. 1, 2003		52 Weeks Ended Feb. 2, 2002
Earnings (loss)—basic (in millions)	$	1,030	$	477	$	(8	)
Earnings (loss)—diluted (in millions)		1,078		477		(8	)
Weighted-average number of shares—basic (in thousands)		892,555		875,546		860,255
Incremental shares from:
Stock options		10,015		5,932		—
Restricted stock		—		—		—
Convertible bond		85,608		—		—
Weighted-average number of shares—diluted (in thousands)		988,178		881,478		860,255
Earnings (loss) per share—basic	$	1.15	$	0.55	$	(0.01	)
Earnings (loss) per share—diluted		1.09		0.54		(0.01	)

Excluded from the above computations of weighted-average shares for diluted earnings (loss) per share were options to purchase, 30,788,277, 73,472,472 and 43,282,284 shares of common stock and 1,194, 88,080 and 123,303 shares of unvested restricted stock for fiscal 2003, 2002 and 2001, 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 losses per share for fiscal 2001 is computed using the basic weighted-average number of shares outstanding and excludes 13,395,045 dilutive shares as their effect is anti-dilutive.

Note J: Guarantees

We have applied the measurement and disclosure provisions of FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” to our agreements that contain guarantee and certain indemnification clauses. 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 the guarantee. The initial recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. As of January 31, 2004, we did not have any material guarantees that were issued or modified subsequent to December 31, 2002.

However, we are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements and various other agreements. Under these contracts we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined.

GAP INC. 2003 ANNUAL REPORT 55

Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

As party to a reinsurance pool for workers’ compensation, general liability and automobile liability, we have guarantees with a maximum exposure of $92 million.

Note K: Related Party Transactions

We generally use a competitive bidding process for construction of new stores, expansions, relocations and major remodels (major store projects). In addition, we utilize a construction industry standard stipulated sum, non-exclusive agreement with our general contractors. As of January 31, 2004, we had 41 general contractors qualified to competitively bid in North America. Fisher Development, Inc. (“FDI”), a company that is wholly owned by the brother of Donald G. Fisher and the brother’s immediate family, is one of our qualified general contractors. The stipulated sum agreement sets forth the terms under which our general contractors, including FDI, may act in connection with our construction activities. We paid approximately $4.2 million to FDI in fiscal 2003 for major store projects and other projects, which represents 15% of our total spend for all projects in fiscal 2003. On January 31, 2004, and February 1, 2003, amounts due to FDI were approximately $650,000 and $1.3 million, respectively. We paid $81 million and $416 million to FDI in fiscal 2002 and fiscal 2001, respectively. The Audit and Finance Committee of the Board reviews this relationship annually.

In October 2001, the Audit and Finance Committee of the Board reviewed and approved the terms of agreements to lease to Doris F. Fisher and Donald G. Fisher a total of approximately 26,000 square feet of space in our One Harrison and Two Folsom corporate San Francisco locations to display portions of their personal art collection. 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 and our employees significant benefits, including 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.

We are a party to a relocation services agreement with an independent relocation company (the “Relocation Company”) pursuant to which eligible employees receive certain relocation assistance and related services. In addition to assisting employees in finding appropriate housing in the San Francisco Bay Area, the agreement provides for the Relocation Company to purchase a transferring employee’s former residence at an appraised value or price offered by a third party buyer. Following execution of a purchase agreement between the Relocation Company and the transferring employee, the Relocation Company pays to the transferring employee an amount equal to all or part of the employee’s equity in the residence. The funds to make these payments are provided by the company and are repaid to us by the Relocation Company from the proceeds of sale of the residence to a third party buyer, if available. The Relocation Company receives from us a minimal fee for services provided to each employee and reimbursement for any direct costs incurred in connection with the purchase of an employee’s home, including any difference in the purchase price paid by the Relocation Company to the employee and the amount received by the Relocation Company upon sale of the residence to a third party buyer. Any gain received by the Relocation Company on the sale of a residence to a third party buyer is credited toward the direct costs payable by us. In connection with the relocations of Messrs. Pressler and Pollitt, we paid to the Relocation Company $245,001 and $78,809, respectively.

56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

QUARTERLY INFORMATION

(Unaudited)

Financial Data

	Fiscal 2003
(In millions except per share amounts)	13 Weeks Ended May 3, 2003		13 Weeks Ended Aug. 2, 2003		13 Weeks Ended Nov. 1, 2003		13 Weeks Ended Jan. 31, 2004		52 Weeks Ended Jan. 31, 2004
Net sales	$	3,353	$	3,685	$	3,929	$	4,887	$	15,854
Gross profit		1,277		1,326		1,527		1,838		5,968
Net earnings		202		209		263		356		1,030
Earnings per share—basic		0.23		0.23		0.29		0.40		1.15
Earnings per share—diluted		0.22		0.22		0.28		0.37		1.09
	Fiscal 2002
(In millions 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	$	2,891	$	3,268	$	3,645	$	4,651	$	14,455
Gross profit		879		1,091		1,316		1,627		4,913
Net earnings		37		57		135		248		477
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

Per Share Data

	Market Prices								Cash Dividends Paid (a)
Fiscal	2003				2002				2003		2002
	High		Low		High		Low
1st Quarter	$	16.97	$	12.01	$	15.90	$	11.85	$	0.0222	$	0.0222
2nd Quarter		19.63		16.24		17.14		9.10		0.0222		0.0222
3rd Quarter		21.29		16.99		13.45		8.35		0.0222		0.0222
4th Quarter		23.47		18.15		16.75		12.25		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 March 15, 2004, was 10,575.

^(a) Our $750 million 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 to common stock distributions to holders of our equity interests, recapitalizations, stock splits or any similar event.

GAP INC. 2003 ANNUAL REPORT 57

EX-14

Exhibit 14

Gap Inc.

CODE OF BUSINESS CONDUCT

Doing the Right Thing

TABLE OF CONTENTS

About the Code of Business Conduct		Company Information and Assets
Purpose	4	Confidentiality		12
Your Responsibilities	4	Confidentiality of Personal Data		12
Applicable Laws	4	Insider Trading		12
Obtaining Additional Information	5	Media Inquiries		13
Reporting Code Violations	5	Accuracy of Company Records and
No Retaliation	5	Integrity in Reports & Communications		13
Policy Changes	5	No Improper Influence on Audits		13
Waivers	5	Commercial Transactions		14
		Protecting the Brand		14
Conflicts of Interest		Company Property		14
General	6	Political Contributions and Activities
Gifts & Entertainment	6
Doing Business with Spouses, Relatives or Friends	7	Company Contributions		15
Fraternization	8	Personal Contributions		15
Outside Employment	8	Lobbying		15
Outside Service as a Director or Officer	8
Legal Compliance
Zero Means Zero:	8
No Discrimination or Harassment			CODE HOTLINE
Complaint Procedures	9		To Report Suspected Violations of the Code For callers from the U.S., Canada and Puerto Rico: 1-866-GAP-CODE (toll-free) For international callers: 1-770-582-5221 (operator–assisted free call) The Code Hotline is staffed by a live operator from an outside company, 24 hours a day, seven days a week. Calls may be made anonymously. You may also contact Gap Inc.’s Corporate Compliance & Governance department at Corporate_Compliance@gap.com
Accommodations for Disabilities	9
Workplace Violence	9
Labor Laws and Record Keeping	9
Alcohol & Drugs	10
Complaints to Government Agencies	10
Government Proceedings & Requests for Information	10
International Trade Regulations	10
Antiboycott Policy	10
Bribes and Improper Payments	11
Antitrust Laws & Selling Practices	11
Fair Dealing	11
Product Integrity	11
Respecting Intellectual Property Rights	11
The Environment	11
Health & Safety	11

CODE OF BUSINESS CONDUCT

DOING THE RIGHT THING

Gap Inc. was founded in 1969 on the principle of conducting business in a responsible, honest and ethical manner. Today, Gap Inc. remains committed to meeting the highest standards of business conduct. Nothing less will do.

We make this commitment to our shareholders, customers, neighbors and each other not only out of legal obligation, but because it’s the right thing to do. Gap Inc.’s success depends on a reputation for integrity and quality in everything we do.

We all make an important contribution to the Company’s reputation. As we look to the future, each of us is responsible for helping ensure that we continue to meet the standards that have made Gap Inc. a leader.

/s/    Paul S. Pressler	/s/    Anne B. Gust
Paul S. Pressler	Anne B. Gust
President and Chief Executive Officer	Chief Compliance Officer and
Gap Inc.	Executive Vice President
	Gap Inc.

GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004) 3

ABOUT THE CODE OF BUSINESS CONDUCT

PURPOSE

The Code of Business Conduct (“Code”) is designed to promote a responsible and ethical work environment for all Gap Inc. employees and directors. The Code contains guidelines on proper behavior in the workplace and whom you should contact if you have specific questions or concerns. The Code applies to all Gap Inc. employees and directors.

References in the Code to Gap Inc. or the Company are generally intended to mean Gap Inc. and its subsidiaries as a group.

YOUR RESPONSIBILITIES

In doing your job, you are responsible for abiding by Gap Inc. policies and all local and national laws in all countries in which the Company does business. You are responsible for knowing and following the laws and policies that relate to your job, including the policies in the Code and all other Company policies, including but not limited to Policy and Procedure manuals, Employee Handbooks, Human Resource manuals, etc. Violating these policies may result in corrective action up to and including termination of employment, recovery of damages and filing of criminal charges. However, most problems can be easily avoided by simply using good judgment and seeking guidance when questions arise. It is your responsibility to raise questions, make appropriate disclosures and bring potential problems to the Company’s attention.

Questions to Ask Ourselves:

• Is this the right thing to do?

• Is this legal?

• Is this permitted under our Code of Business Conduct?

• Would I want to see this reported in the media?

If the answer to any of these questions is NO, you should discuss the situation with your supervisor, the Human Resources department or the Corporate Compliance & Governance department immediately.

Supervisors at the manager level and above are responsible for reviewing the Code with their employees and preventing, detecting and responding to compliance problems by:

• Leading with integrity;

• Encouraging employees to raise questions and concerns;

• Providing education and counseling to employees;

• Initiating periodic compliance reviews with employees; and

• Taking prompt and effective action where appropriate.

APPLICABLE LAWS

If the Code or the Company requires you to take an action or prohibits you from taking action that you believe is in violation of a law, or if you believe there is a conflict between the applicable laws of two or more jurisdictions, please call the Code Hotline.

The Company acknowledges that there are differences in local laws and practices between countries. In some instances, the Code establishes policies and/or requirements that would not otherwise be required in some countries. In keeping with the Company’s commitment to meet the highest standards of business conduct wherever we do business, all employees must comply with all aspects of the Code, even if it is not required by local laws. Conversely, there may be laws in certain countries which may not specifically apply outside of those countries, and therefore, are not specifically addressed in the Code. Such laws would be addressed in Company documents such as, but not limited to, Employee Handbooks, Policy and Procedure manuals, and Human Resource manuals. You are responsible for knowing and following all such laws and policies that relate to your job.

Throughout this Code, references to “applicable laws” includes any law, rule or regulation applicable to the Company or its employees or directors.

4 GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004)

OBTAINING ADDITIONAL INFORMATION

If you have questions about the policies outlined in the Code or would like additional information, talk to your supervisor or refer to Gap’s Open Door Policy. You can also contact the Human Resources department or the Corporate Compliance & Governance department.

REPORTING CODE VIOLATIONS

It is important to report all violations or suspected violations of the Code. Gap Inc. maintains a Code of Business Conduct hotline (“Code Hotline”) that you can use to report suspected violations of the Code. Reports to the Code Hotline may be made anonymously. Confidentiality for those who report will be maintained to the extent possible. Neither your supervisor nor the Company will take any action against you for reporting suspected misconduct in good faith.

To report questions or concerns anonymously, call the Code Hotline.

NO RETALIATION

It is against Company policy for any supervisor or other employee to take any action against another employee or a director, vendor or agent of the Company for reporting or threatening to report a violation of this Code or cooperating in investigations relating to such violations, provided that the person has acted in good faith and with a reasonable belief that the information provided is true. It is also against Company policy to take any action against any employee or a director, vendor or agent of the Company for (1) lawfully providing information or assisting in an investigation of activities which he or she reasonably believes violates applicable law or (2) for providing truthful information to the government, a government agency or law enforcement officers relating to the commission of a legal offense.

If you believe that you have been the subject of impermissible retaliation, call the Code Hotline.

POLICY CHANGES

Over time, new policies will need to be written and old ones revised. While we reserve the right to make these changes without notice, we will try to let you know about any changes affecting your employment as soon as possible.

WAIVERS

The provisions of this Code may only be waived by the Company’s Chief Compliance Officer, and, in the case of executive officers, directors, and our Controller, by our Board of Directors or a Board Committee. Any waiver of this Code for an executive officer, director or our Controller will be promptly disclosed as required by law or stock exchange regulation.

GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004) 5

CONFLICTS OF INTEREST

GENERAL

All business decisions should be made solely in the best interests of the Company, not for personal benefit. Therefore, you should avoid any action that creates – or appears to create – a conflict of interest with the Company. Questions about potential conflicts of interest and disclosure of these situations as they arise should be directed to the Corporate Compliance & Governance department or your Human Resources representative.

You may not have an improper financial interest in any supplier, vendor, distributor, landlord or competitor of the Company without first getting written approval from the Chief Compliance Officer. An improper financial interest is one that creates or appears to create a conflict of interest with the Company. In addition, employees may not receive any form of compensation from anyone other than the Company for doing your job. For example, you may not receive compensation for speaking engagements in which you are associated in any way with the Company.

GIFTS AND ENTERTAINMENT EXCEPTIONS Chinese Communities: The Company does not encourage the acceptance of “Lai See,” and employees should not under any circumstance solicit for it. However, management respects and understands the Chinese tradition of giving “Lai See” during Chinese New Year as a friendly gesture. Therefore, only on this occasion may you accept a cash gift in the form of “Lai See” and only for a nominal amount. The value of this gift should under no circumstance exceed H.K. $100. Japanese Communities: The Company does not encourage the acceptance of “Ochugen” (Summer Gift) or “Oseibo “Winter Gift), and employees should not under any circumstance solicit for it. However, management respects and understands the Japanese tradition of giving these gifts as a courtesy gesture. Therefore, only on this occasion may you accept a non-cash gift in the form of either “Ochugen” or “Oseibo.” The value of this gift should under no circumstance exceed 10,000 yen. GIFTS AND ENTERTAINMENT Employees should never give or accept anything of value from anyone, including a current or prospective supplier, vendor, distributor, landlord or competitor of the Company, when doing so might compromise – or appear to compromise – the objectivity of your business decisions. Furthermore, in no circumstance should an employee solicit invitations or gifts from any third party. Any employee giving or receiving any amount of money or non-cash gifts valued at U.S. $50 (or equivalent) or more is absolutely prohibited. This includes, for example, trips to a vendor’s facility, gift certificates and tickets to events. Some business units at Gap Inc. have more restrictive rules regarding giving and receiving gifts. You should understand your business unit’s policies prior to accepting or giving any gifts. If someone tries to give you a prohibited gift, tell your supervisor. Then, return the gift or write a personal check to the gift giver for the full value of the gift or, with the permission of the Chief Compliance Officer, donate the gift to a charity on behalf of Gap Inc. Three narrow exceptions to this rule apply. Generally, business-related entertainment valued at less than U.S. $100 (or equivalent) is allowed. You may also accept holiday gift baskets or flowers within reason, as long as they are shared with the entire department. In addition, certain vendor-paid trainings may be appropriate, but only with the written approval of the Chief Compliance Officer. These exceptions may not apply to certain business units at Gap Inc. with more restrictive rules regarding giving and receiving gifts and entertainment. You should understand your business unit’s policies prior to accepting or giving any gifts or entertainment. Employees must provide written disclosure to the Chief Compliance Officer for all gifts or entertainment (not including meals) received in any one-year period if gifts and entertainment total over U.S. $100 (or equivalent) from a single source or U.S. $250 (or equivalent) overall. Exceptions to this policy require the written approval of the Chief Compliance Officer. Giving gifts or entertainment to anyone, including a current or prospective supplier, vendor, distributor, landlord or competitor of Gap Inc., must support the legitimate business interest of Gap Inc., and should be of nominal value, reasonable and appropriate under the circumstances. If you have a question or need to seek approval, contact the Corporate Compliance & Governance department.

6 GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004)

Question: One of my vendors offered me a free trip to a golf event it is sponsoring. Can I accept the trip as long as it doesn’t affect my purchasing decisions?

Answer: No. Accepting a free trip from a vendor is a violation of Company policy.

Question: One of my vendors offered to send me to a conference at no cost to Gap Inc. Can I accept the invitation?

Answer: No. Accepting a free trip from a vendor is a violation of Company policy. If you are interested in attending the conference speak to your manager. Most costs associated with your attendance at the conference must be paid for by your department.

Question: A vendor sent me a U.S. $90 (or equivalent) gold pen as a gift. Can I keep it?

Answer: No. Accepting a gift valued at U.S. $50 (or equivalent) or more from a vendor is a violation of Company policy. You should either return the pen or give the vendor a personal check for the value. If you are unsure of the value, return it. Or, with the permission of the Chief Compliance Officer, you can donate the pen to a charity on behalf of Gap Inc. In any event, you should advise the vendor about our policies regarding conflicts of interest.

Question: A vendor offered me two tickets to a professional sporting event. Can I accept them? The vendor did not pay for them.

Answer: Accepting a gift valued at U.S. $50 (or equivalent) or more from a vendor is a violation of Company policy. You may not accept the tickets if the total face value of the tickets received is U.S. $50 (or equivalent) or more, even if the vendor did not pay for them. In that case, you should either decline the tickets or give the vendor a personal check for the face value of the tickets.

Question: A vendor offered tickets to a concert to myself and a co-worker, each valued at U.S. $55 (or equivalent). We plan to meet the vendor’s team at the event. Can we accept them?

Answer: Generally, business-related entertainment valued at less than U.S. $100 (or equivalent) is allowed.

Question: A furniture vendor offered to build a cabinet for me for free at my home. Is this okay?

Answer: No. The Company’s policy on vendor gifts applies at home as well as in the workplace.

DOING BUSINESS WITH SPOUSES, RELATIVES OR FRIENDS

You must obtain the written approval of your Vice President or above, and the Chief Compliance Officer, before doing Company business with parties such as relatives, friends, spouses or life partners You must always keep the Company’s interests top priority in those interactions. In addition, you may not pressure others into hiring a relative or friend as an employee, supplier, vendor, distributor or landlord of the Company.

Question: Can I hire my friend to coordinate a photo shoot for an in-store event? Three photographers submitted bids for the job, and his is the most competitive.

Answer: You may hire your friend for the photo shoot as long as the decision is not in any way influenced by your relationship with him. However, you must first get written approval from your Vice President and the Chief Compliance Officer.

GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004) 7

FRATERNIZATION

While we recognize and respect the rights of employees to associate freely and to pursue personal relationships with those they encounter in the work environment, employees must use good judgment in ensuring that those relationships do not negatively impact their job performance, their ability to supervise others or the work environment.

Any workplace conduct arising from a romantic relationship, intimate relationship, family relationship or friendship between employees may be improper if the conduct creates an uncomfortable work environment for others. Favoritism, open displays of affection, and making business decisions based on emotions or friendships rather than on the best interests of the Company are examples of inappropriate conduct. Employees who find themselves in an intimate relationship or friendship should use tact, good judgment and sensitivity.

Employees in a reporting relationship with someone that they are consensually dating, romantically involved with, living with or related to must inform the next level of management or Human Resources. We will work with both individuals to try to separate their employment responsibilities from their personal relationship in order to protect the interests of both employees and others and to avoid any conflict of interest.

OUTSIDE EMPLOYMENT

Except as described below, employees may not work for or receive compensation for personal services from any supplier, vendor, distributor, landlord or competitor of the Company, or any business entity that does or seeks to do business with the Company.

Employees must get the approval of their supervisor and Human Resources before accepting another job elsewhere and must also get the written approval of the Chief Compliance Officer before working for any supplier, vendor, distributor or landlord of the Company. If you need to seek an approval, contact the Corporate Compliance & Governance department.

OUTSIDE SERVICE AS A DIRECTOR OR OFFICER

Employees must obtain approval from the Chief Executive Officer and Chief Compliance Officer before serving on the board of directors or as an officer of another for-profit company. No employee may serve on the board of directors or as an officer of a Gap Inc. competitor, potential competitor or a company with a line of products offered by Gap Inc. Employees are encouraged to serve as a director, trustee or officer of a non-profit organization in their individual capacity and on their own time, but they must get prior permission from the Chief Compliance Officer to do so as a representative of the Company. If you need to seek an approval, contact the Corporate Compliance & Governance department.

LEGAL COMPLIANCE

Gap Inc. employees and directors are required to comply with all applicable laws where we do business. Any instance of non-compliance with applicable law(s) may subject the employee to corrective action up to and including termination of employment, recovery of damages and filing of criminal charges.

ZERO MEANS ZERO: NO DISCRIMINATION OR HARASSMENT

Gap Inc. has zero tolerance for discrimination or harassment. All employment decisions are to be made without regard to race, color, age, gender, sexual orientation, religion, marital status, pregnancy, national origin/ancestry, citizenship, physical/mental disability, military status or any other basis prohibited by law, including but not limited to family status in Canada. This policy applies to our directors, employees, applicants, customers and business partners (including independent contractors, vendors and suppliers).

For purposes of this policy, harassment includes slurs and any other offensive remarks, jokes and other verbal, graphic, or physical conduct that could create an intimidating, hostile or offensive work environment.

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In addition to the above, “sexual harassment” includes unwelcome sexual advances, requests for sexual favors, and other visual, verbal, electronic, or physical conduct of a sexual nature. This definition includes many forms of offensive behavior including the following:

• Unwanted sexual advances or propositions;

• Offering employment benefits in exchange for sexual favors;

• Making or threatening reprisals after a negative response to sexual advances;

• Visual conduct: leering, making sexual gestures, displaying of sexually suggestive objects or pictures, cartoons or posters, electronic display or dissemination of such material;

• Verbal conduct: making or using derogatory comments, epithets, slurs and jokes;

• Verbal abuse of a sexual nature, graphic verbal commentaries about a person’s body, sexually degrading words used to describe a person, suggestive or obscene letters, notes or invitations; and

• Physical conduct: touching, assault, impeding or blocking movements.

COMPLAINT PROCEDURES

Gap Inc. will promptly and thoroughly investigate all complaints of discrimination or harassment. Employees are expected to cooperate fully in any such investigation. Failure to do so may result in discipline up to and including termination. Moreover, neither your supervisor nor the Company will take any action against you for making a complaint of discrimination or harassment or for cooperating in any such investigation.

If any employee is determined to have violated the Zero means Zero policy, Gap Inc. will take appropriate corrective action up to and including termination. The complainant will be informed that appropriate actions have been taken.

We cannot help resolve a discrimination, harassment or retaliation problem unless we know about it. Therefore, it is every employee’s responsibility to bring those types of issues to management’s or Human Resources’ attention so that the appropriate steps can be taken to resolve the issue. If you feel you have been subject to discrimination, harassment or retaliation, or that you have witnessed it in the workplace, please report it promptly to the Code Hotline.

ACCOMMODATIONS FOR DISABILITIES

It is Gap Inc. policy to regard all people, with or without disabilities, as individuals – to look at each person’s skills and abilities. The Company will provide a reasonable accommodation to a qualified employee who has a physical and/or mental disability. If you believe you need an accommodation, contact your supervisor or your Human Resources representative.

WORKPLACE VIOLENCE

Gap Inc. has zero tolerance for workplace violence. Consistent with this policy, acts or threats of physical violence, including intimidation, harassment and/or coercion that involve or affect the Company or its employees will not be tolerated. Acts or threats of violence include conduct that is sufficiently severe, offensive, or intimidating to alter the employment conditions at Gap Inc. to create a hostile, abusive, or intimidating work environment for one or several Gap Inc. employees.

LABOR LAWS AND RECORDKEEPING

All time worked by non-exempt employees – whether scheduled or unscheduled, overtime or straight time, authorized or unauthorized – must always be recorded exactly as it occurred. Your supervisor will show you the procedure for recording time worked. Under no circumstances may you allow a fellow worker to complete your time records for you. You must keep record of time worked as required by law or policy in your country. You should also note all time that you don’t work but for which you are still paid, and have your supervisor verify the time. If for any reason an entry must be changed, your supervisor must make the change, and you must initial it.

GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004)                                                                                                  9

Non-exempt employees may not:

• Fail to record hours for work performed at home;

• Move hours from one day to another on a time record so as not to reflect overtime;

• Inaccurately record time worked; or

• Remove correctly recorded hours from a time record.

All workers must be properly categorized (as exempt or non-exempt and as employee or independent contractor) under all employment and tax laws. In addition, you must comply with all laws regarding the employment of minors. Employees must be given appropriate meal and rest breaks as required in the Employee Policy Guide.

ALCOHOL AND DRUGS

Employees may not use, sell, possess, purchase or transfer illegal drugs on Company premises, in Company vehicles or during work hours. Alcohol consumption during work hours or on Company premises is prohibited. the only exception is that alcohol may be consumed by people of legal drinking age at Company-sponsored functions that are approved by a Senior Vice President or above.

Employees also must not be under the influence of illegal drugs or alcohol during work hours, regardless of when the drugs or alcohol were consumed. It is also a violation of this policy to sell, transfer or distribute personal prescription drugs on Company premises, in Company vehicles or during work hours.

COMPLAINTS TO GOVERNMENT AGENCIES

Occasionally, an applicant, customer, or current or former employee may file – or threaten to file – a complaint against the Company with the government. If you are notified about such a complaint, immediately call the Code Hotline. Neither your supervisor nor the Company are permitted to take any action against you for either making or reporting such a complaint.

GOVERNMENT PROCEEDINGS AND REQUESTS FOR INFORMATION

It is Company policy to cooperate with appropriate government requests or investigations. If you are asked to provide information (either written or verbally) for a government investigation, or if a government representative appears at your workplace, notify the Human Resources department or Legal department. All information provided should be truthful and accurate and must not obstruct, influence or impede the request for information. Employees should not alter, falsify, mutilate, cover up, dispose of, or destroy any documents or records related to a government request or investigation or legal proceeding.

INTERNATIONAL TRADE REGULATIONS

Employees involved with importing or exporting goods among various countries must be knowledgeable about and comply with relevant legal requirements. Employees who have questions about such requirements or other international trade issues are responsible for consulting with the Legal department to prevent committing any potentially unlawful acts.

ANTIBOYCOTT POLICY

By law, Gap Inc. employees and agents may not support or cooperate with an unsanctioned boycott of another country that is “friendly” to the United States. The Company must report to the U.S. government any information (about which it has knowledge) or any request to support a boycott. A company could make such a request in a bid invitation, purchase contract, letter of credit or verbally. If you learn of a boycott of another country that is “friendly” to the United States, call the Legal department.

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BRIBES AND IMPROPER PAYMENTS

Employees or agents of the Company should never directly or indirectly offer, promise to pay or authorize the payment of money, products, services or anything of value to any government official or agent in any country in order to influence acts or decisions of government officials, to receive special treatment for the Company or for personal gain. While certain minor payments to certain non-U.S. government officials made to expedite or secure the performance of certain routine governmental actions may not violate the law, you must consult with the Legal department prior to making or authorizing any payment of this type. All Gap Inc. employees worldwide must abide by the United States Foreign Corrupt Practices Act in addition to local laws. Employees working with government officials should request further guidance from the Legal department.

Question: Can I tip a local government office worker for agreeing to process paperwork more quickly?

Answer: No. You may not tip any government worker in any country. Any exceptions must be approved in advance by the Legal department.

ANTITRUST LAWS AND SELLING PRACTICES

Gap Inc. employees are required to comply with the antitrust and competition laws of the many countries where we do business. In general, Gap Inc. employees must avoid agreements, understandings or plans with competitors that limit or restrict competition, including price fixing and allocation of contracts.

FAIR DEALING

You should always deal fairly and honestly with the Company’s customers, suppliers, vendors, competitors and employees. You should not take unfair advantage of anyone through manipulation, concealment, abuse of confidential information, falsification, misrepresentation of material facts or any other intentional unfair dealing practice.

PRODUCT INTEGRITY

We take pride in providing high quality products. In addition to meeting the Company’s internal quality standards, our products must be produced, tested, packaged and labeled in full compliance with applicable laws and Company policies.

RESPECTING INTELLECTUAL PROPERTY RIGHTS

As we expect others to recognize the legal rights we have in our brands and designs, we respect the legal rights others have in their brands, designs, software, articles and other legally protected materials. You should never make unauthorized copies of material from copyrighted books, magazines, newspapers, videotapes or computer programs. While you may generally make a copy for your own business use, making multiple copies without permission violates copyright laws.

Question: Several people in my department need to use a certain software program, but we have only one copy. Is it okay to copy the program onto each of our computers?

Answer: No. Unless the license agreement specifies otherwise, a separate copy of the program must be purchased for each computer.

THE ENVIRONMENT

Gap Inc. is committed to minimizing the negative impact of our business activities on the environment. All employees are responsible for complying with applicable environmental laws and Company policies.

HEALTH AND SAFETY

All Company activities must fully comply with applicable laws and policies relating to health and safety. You are responsible for knowing the laws and policies that relate to your job. In addition, you must insist that vendors comply with applicable health and safety regulations, and that merchandise vendors follow the guidelines outlined in the Company’s Code of Vendor Conduct. For more information regarding vendor health and safety issues, call the Risk Management department at (800) 333-7899, x77300.

GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004)                                                                                                  11

COMPANY INFORMATION AND ASSETS

CONFIDENTIALITY

As a Gap Inc. employee or director, you may have access to information about our Company that people outside the Company never see. Information relating to Gap Inc.’s business or strategy is strictly confidential. You must not give confidential information to anyone, internally or outside the Company, unless specifically authorized to do so.

Confidential information includes information that is not generally known to the public and is used by the Company in its business. Some examples of confidential information include personal employee information (for example, personal health information, salary or performance history), unannounced product information or designs, financial information, organizational charts and information in company telephone directories. You can find other examples in the confidentiality acknowledgement all employees are required to sign upon hire.

Confidential information should be used only as necessary to do your job, and never for your own benefit. You are responsible for the safekeeping of any confidential information, whether verbal, written or electronic, and for limiting access to those who have a need to know in order to do their jobs. That means you should avoid discussing confidential information in common areas in our buildings or in elevators, restaurants, airplanes, taxicabs or other public areas.

In addition, you must make sure that all third parties who will receive confidential or proprietary Gap Inc. information agree to abide by this policy and enter into a non-disclosure agreement or contract first. If you leave Gap Inc., all confidential information and materials (manuals, documents, software, etc.) must be returned on or before your last day of employment. The obligation to preserve confidential information continues even after employment ends. You may not divulge or use confidential information (or documents containing confidential information) that you may have learned about or received during your employment.

Question: How can I be sure that documents I throw away stay confidential?

Answer: When you dispose of confidential documents, use a locked disposal bin or shredder, if available. Do not use regular recycling bins for these materials. If you work in a store, dispose of confidential documents in a manner appropriate for your location. Ask your supervisor for guidance. See also “Accuracy of Company Records and Integrity In Reports and Communications” below with respect to document retention requirements.

Question: I received a call recently from a local charity asking for a list of key Gap Inc. vendors. May I share this information?

Answer: No. Sharing information about Gap Inc. vendors and business transactions would violate Company policy.

CONFIDENTIALITY OF PERSONAL DATA

Gap Inc. respects and values its employees’ and customers’ privacy, and we expect our employees to do the same. As a Gap Inc. employee, it is your responsibility to respect the privacy of fellow employees and our customers. You should use and maintain personal data with care and respect, while guarding against inappropriate access and disclosure. You should not use any personal data for personal benefit or in any other inappropriate way.

INSIDER TRADING

As a Gap Inc. employee or director, you are not allowed to trade securities or to tip others to trade securities of Gap Inc. or other companies when you are aware of material information that has not been made available to the public. Material information is any information that could be considered important by a person in deciding whether to trade in a company’s stock. Examples include: information relating to sales, inventory, margins, earnings, significant proposed acquisitions, planned stock splits, proposed changes in dividends and other information that has the potential to affect the stock price of Gap Inc. or another company. As a general rule, if the information makes you think of buying or selling the stock of Gap Inc. or another company, it probably would have the same effect on others and probably is material information.

Once material information has been fully disclosed to the public, employees may trade in the Company’s stock. Full public disclosure generally means a widely distributed press release followed by publication in the print media and three or more days for distribution and interpretation of the information. If you are unsure whether information is material or has been released to the public, call the Stock Administration Group in the Legal department to confirm before trading.

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Trading on inside information can have severe consequences. The United States Securities and Exchange Commission and similar agencies are authorized to bring a civil lawsuit against anyone who trades on inside information (or who provides another person with inside information) and also against the Company. Insider trading is also a crime subject to criminal penalties, including jail terms. For more information, refer to the Company’s Policy Regarding Trading on Inside Information.

Question: A senior director mentioned in a meeting (inadvertently or intentionally) that Gap Inc. is expected to post a loss for the quarter. Can I share this news with my friends? Can I trade in Gap Inc. stock?

Answer: No. The information you overheard is considered “material.” The senior director should not have shared this information with you unless you needed the information to do your job. If known by you, your friends or others when buying or selling Gap Inc. stock before public disclosure of the information, that would be in violation of U.S. laws.

MEDIA INQUIRIES

You must not speak to reporters on behalf of the Company. Individuals who talk directly to reporters without going through the proper channels risk providing incorrect information or revealing proprietary strategies. Please direct members of the media with inquiries to the Corporate Communications Media Hotline at (800) 333-7899, x75900 (within the U.S.) or (650) 952-4400, x75900 (outside the U.S.).

ACCURACY OF COMPANY RECORDS AND INTEGRITY IN REPORTS AND COMMUNICATIONS

Accurate records are essential to the successful operation of Gap Inc. Employees are responsible for ensuring the accuracy of all Company records, information, and accounts. For example, claims on an expense report or time record, payments and other transactions must be correctly recorded and accounted for, and properly authorized in accordance with Company policies.

All business records should be clear, truthful and accurate. Keep in mind that business records and communications may become subject to public disclosure through government investigations, litigation or the media. Business records are Company assets and must be retained or destroyed in compliance with the applicable records retention schedules in the Company’s Records Management Policy. In accordance with that policy, in the event of litigation or a government investigation, relevant records must be retained and preserved. You can find the Records Management Policy on GapWeb or contact the Records Management department.

As a public company, Gap Inc. is required to file periodic reports and make certain public communications. Employees must act to ensure full, fair, accurate, timely, and understandable disclosure and reporting of Company information, including the Company’s financial results and financial condition. All employees must comply with Company policies, procedures and controls. Accounting and financial reporting of actual transactions and forecasts must follow the Company’s accounting policies as well as all applicable generally accepted accounting principles and laws.

If you have any concerns about the Company’s financial controls, accounting, financial reporting or auditing, call the Code Hotline.

NO IMPROPER INFLUENCE ON AUDITS

You are expected to cooperate fully with our internal and external auditors. You must not directly or indirectly take any action to coerce, manipulate, mislead or fraudulently influence any public accountant engaged in the performance of an audit or review of Gap Inc.’s financial statements.

Question: One of our external auditors has asked me a question at a time when I am very busy. I am 80% sure of the answer but to be completely sure will take some additional research. If I give them this answer without qualifying it I think they will be satisfied and move on, allowing me to get back to my work. Can I just tell them what I think the answer is, or should I tell them what I think the answer is but let them know I am only 80% sure?

Answer: To cooperate fully with our external auditors, you should tell them that you are only 80% sure of the answer and perform the additional research if required. In other words, you should give thorough and complete answers to all questions.

GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004) 13

COMMERCIAL TRANSACTIONS

The Company has a procurement policy that applies to all non-merchandise vendor relationships, for example, purchasing furniture, licensing software, or hiring service providers, including consultants. The policy sets forth specific guidelines for establishing a vendor relationship. The policy also establishes signing or “approval levels” when entering into a contract. The Company does not enter into letters of understanding or intent or “handshake” deals, except in rare circumstances and only with the approval of the Legal department. You can find more information on the HQ Procurement Guide on GapWeb or by calling your local Finance office.

PROTECTING THE BRAND

As Gap Inc. employees, we have a responsibility to protect all Company assets from loss, damage, misuse or theft. This includes cash, inventory, computers, equipment, supplies and intangible assets such as our brands, trademarks and reputation.

Our trademarks are valuable assets, and all employees and business partners should help protect them. As our Company becomes better known worldwide, we encounter increasing problems with counterfeit merchandise and “pirates” who try to sell merchandise under our trademarks. Our vendors are also prohibited from selling or otherwise improperly distributing any merchandise bearing our trademarks (for example, Gap, GapKids, BabyGap, GapBody, Gap Outlet, GapMaternity, Banana Republic, Old Navy Maternity or Old Navy), called “sell-off” merchandise, to any third parties.

If you find sell-off or counterfeit merchandise – bearing any portion of any of our trademarks on labels, hang tags, price tags, pocket flashers, other packaging, or screened or embroidered onto the merchandise – in a location other than one of our stores or a store in our International Sales Program, note the name of the store, its location and size, and the volume of sell-off or counterfeit merchandise being sold, and call the Code Hotline. If you see large volume sales of such merchandise in a location that would be difficult for someone to return to, buy a sample of each type of merchandise (for example, a shirt or a pair of jeans) and estimate the quantity being offered for sale. (You can be reimbursed for these purchases.) If there are signs or advertisements, take photographs, if possible, and collect business cards or promotional material.

Also report any stores operating under different names that copy the look and feel of our stores, or use labels or advertisements with our distinctive lettering or advertising styles. If you see anything that you believe might be a trademark violation, call the Code Hotline.

The Gap, Banana Republic and Old Navy trademarks are owned by Gap Inc. and its subsidiaries, Gap (Apparel), Inc., Banana Republic (Apparel) Inc., Old Navy (Apparel) Inc., Gap (ITM) Inc., Banana Republic (ITM) Inc., and Old Navy (ITM) Inc.

COMPANY PROPERTY

Gap Inc. property (for example, merchandise, samples, supplies and equipment) should be used only for business purposes and is not for personal use. Taking or using Company property of any value for personal purposes without appropriate permission from the Company is stealing. Gap Inc. property may never be used for illegal purposes. You are prohibited from doing anything that involves fraud, theft, embezzlement or misappropriation of Company property. If you suspect that activities in a store, distribution center, or other facility are resulting in financial losses to the Company (for example, stealing), call the Code Hotline.

Question: Is it okay to take home samples or defective merchandise?

Answer: No. Taking any Company property, including samples or defective merchandise for personal use is prohibited.

14                                                                                                  GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1 2004)

POLITICAL CONTRIBUTIONS AND ACTIVITIES

COMPANY CONTRIBUTIONS

While Gap Inc. encourages employees and directors to get involved in issues of importance to our business and community, political activity is strictly regulated by the laws of the United States and other countries. As a result, it is important to use careful judgment in your political participation. All contributions to political candidates or causes made on behalf of the Company must first be approved by Government Affairs. In addition, all contributions from Gap Inc.’s Political Action Committee (PAC) must be approved by the PAC’s treasurer. For more information, contact Government Affairs.

PERSONAL CONTRIBUTIONS

You are free to participate in personal political activities as you see fit. In doing so, however, you should make it clear that you are acting in your individual capacity and not on behalf of the Company.

Question: Can I make a personal contribution to a political party or candidate?

Answer: Yes, within the limits of the law. Gap Inc.’s policy restricts only political contributions made on behalf of the Company.

LOBBYING

Lobbying is strictly governed by the laws of the United States and other countries. Lobbying is generally defined as contact with elected officials regarding legislative or regulatory issues impacting the Company. While the specific rules vary widely, the trend has been toward expanding significantly the definition of who is a lobbyist, who must register as a lobbyist, and what constitutes lobbying. In short, the Company is required by law to disclose lobbying-related information in great detail.

You should call Government Affairs in advance of any planned lobbying activities on behalf of the Company. Further, Government Affairs must be consulted prior to contracting with any external lobbyist or lobbying firm.

GAP INC. CODE OF BUSINESS CONDUCT (Updated Feb. 1, 2004)                                                                                                  15

EX-21

Exhibit 21

The Gap, Inc.

Subsidiary List as of January 31, 2004

Banana Republic (Apparel), LLC	California
Banana Republic (East) L.P.	California
Banana Republic (H.K.) Limited	Hong Kong
Banana Republic (Holdings), LLC	California
Banana Republic (ITM) Inc.	California
Banana Republic, LLC	Delaware
Banana Republic (New York) LLC	Delaware
GPS (Bermuda) Insurance Services Limited	Bermuda
GPS (Great Britain) Limited	England and Wales
GPS Services, Inc.	California
GPS Consumer Direct, Inc.	California
GPS Corporate Facilities, 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 (New York) Inc.	Delaware
Gap (Apparel) LLC	California
Gap (Canada) Inc.	Canada
Gap (Deutschland) GmbH	Dusseldorf, Germany
Gap (France) S.A.S.	Paris, France
Gap (ITM) Inc.	California
Gap (Ireland) Limited	Dublin, Ireland
Gap (Japan) K.K.	Tokyo, Japan
Gap (Netherlands) B.V.	Amsterdam, The Netherlands
Gap (Puerto Rico), Inc.	Puerto Rico
Gap (RHC) B.V.	Amsterdam, The Netherlands
Gap (Texas) L.P.	California
Gap (UK Holdings) Limited	England and Wales
Gap (UK) Limited	England and Wales
Gap Holdings LLC	California
Gap International B.V.	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
Gap Services, Inc.	California
Goldhawk B.V.	Amsterdam, The Netherlands
Old Navy (Apparel), LLC	California
Old Navy (Canada) Inc.	Canada
Old Navy (East) L.P.	California
Old Navy (Holdings), LLC	California
Old Navy (ITM) Inc.	California
Old Navy (Puerto Rico) Inc.	Puerto Rico
Old Navy, LLC	Delaware
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, No. 333-103128 and No. 333-105934 and Registration Statement No. 333-87442 on Form S-3 of our report dated March 30, 2004, appearing in the annual report on Form 10-K of The Gap, Inc. for the year ended January 31, 2004.

/s/    Deloitte & Touche LLP

San Francisco, California

March 30, 2004

EX-31.1

Exhibit 31.1

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 22, 2004

/s/    PAUL S. PRESSLER        

Paul S. Pressler

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 22, 2004

/s/    BYRON POLLITT        

Byron Pollitt

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

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 January 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul S. Pressler, the President and Chief Executive Officer of the Company, certify, 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 22, 2004

EX-32.2

Exhibit 32.2

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 January 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Byron Pollitt, the Executive Vice President and Chief Financial Officer of the Company, certify, 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 POLLITT        

Byron Pollitt

Executive Vice President and Chief Financial Officer

March 22, 2004