Gap (GPS)

Impact of Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code generally does not allow a tax deduction to public companies for compensation over $1,000,000 paid to the CEO or any of the four other most highly compensated executive officers unless the compensation is paid based solely on the attainment of one or more pre-established objective performance goals and certain other requirements are met. We have considered the potential impact of Section 162(m) on the Company’s compensation plans and have determined that it is the Company’s preference to qualify its executives’ compensation for deductibility under Section 162(m), to the extent we determine it is consistent with the Company’s best interests. The Company’s compensation plans have generally been designed to permit us to grant awards that qualify for deductibility under Section 162(m). Due to the proposed regulations covering Section 409A of the Internal Revenue Code, the cash payments made in connection with the Tender Offer discussed earlier in this report do not qualify under Section 162(m).

Howard Behar (Chair)

Adrian D. P. Bellamy

Bob L. Martin

Jorge P. Montoya

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Impact of Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code generally does not allow a tax deduction to public companies for compensation over $1,000,000 paid to the CEO or any of the four other most highly compensated executive officers unless the compensation is paid based solely on the attainment of one or more performance goals and certain other requirements are met. The Committee has considered the potential impact of Section 162(m) on its compensation plans and has determined that it is the Company’s preference to qualify its executives’ compensation for deductibility under Section 162(m), to the extent the Committee determines it is consistent with the Company’s best interests. The Company’s compensation plans have been designed to permit the Committee to grant awards (with exceptions, including certain restricted stock awards, performance units, discounted stock options, and discounted SARs) which qualify for deductibility under Section 162(m).

Adrian D. P. Bellamy (Chair)

Howard Behar

Domenico De Sole

Bob L. Martin

Jorge P. Montoya

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