Gap (GPS)

PROPOSAL NO. 3 — Approval of the Amendment and Restatement of the Gap Inc. 1996 Stock Option and Award Plan

We are asking our shareholders to approve the amendment and restatement of our 1996 Stock Option and Award Plan (the “1996 Plan”), to be known upon approval as the 2006 Long-Term Incentive Plan (the “2006 Plan”), so that we can continue to use this plan to attract and retain key talent, encourage stock ownership by our employees, non-employee directors and consultants, to better align with governance best practices, and to receive a federal income tax deduction for certain compensation paid under this plan. Our Board of Directors (the “Board”) unanimously approved the 2006 Plan, subject to approval of our shareholders at the Annual Meeting. Approval of the 2006 Plan requires the affirmative vote of a majority of the shares of our common stock (“Shares”) that are present in person or by proxy at the Annual Meeting and entitled to vote on this matter. If the shareholders approve the 2006 Plan, it will replace the current version of the 1996 Plan. If the shareholders do not approve the 2006 Plan, the 1996 Plan will remain in effect.

The primary changes we propose to make to the 1996 Plan are:

(1) Increase the number of Shares authorized for issuance under the 2006 Plan by the sum of (a) the number of Shares (not to exceed 39,138,672) that remained available for grant under our non-shareholder approved 2002 Stock Option Plan (the “2002 Plan”) as of January 24, 2006, the date of board approval of the 2006 Plan (following such approval, no further awards will be made under the 2002 Plan), and (b) any Shares (not to exceed 30,800,884) that otherwise would have been returned to the 2002 Plan after January 24, 2006, on account of the expiration, cancellation, or forfeiture of awards granted thereunder;

(2) Add new performance goals that may be used under the 2006 Plan;

(3) Require shareholder approval before repricing outstanding awards and/or instituting an award exchange program;

(4) Provide that the number of Shares that remain available for issuance will be reduced by three Shares for each Share issued pursuant to an award other than an option or stock appreciation right;

(5) Remove the provision permitting the Compensation and Management Development Committee to grant a reload option;

(6) Require nonqualified stock options and freestanding stock appreciation rights to be granted with an exercise price of at least 100% of fair market value on the date of grant;

(7) Increase fiscal year limits on the number of Shares covered by awards of options, stock appreciation rights, restricted stock, and performance shares and on the initial value of Stock Units or Performance Units that may be granted to any participant;

(8) Add the ability to grant awards of unrestricted stock and stock units; and

(9) No longer provide for automatic grants of options to non-employee directors.

We believe strongly that the approval of the 2006 Plan is essential to our success. Our employees are our most valuable assets. Stock options and other awards such as those provided for under the 2006 Plan are vital to our ability to attract and retain outstanding and highly skilled employees, especially in the extremely competitive labor markets in which we must compete. Such awards also are crucial to our ability to motivate employees to achieve our goals.

17

Table of Contents

The proposed modifications to the 2006 Plan are designed to allow the Company to continue to attract, retain and motivate people whose skills and performance are critical to the Company’s success, while giving shareholders greater control over use of the 2006 Plan. Some of the proposed changes to the 2006 Plan will restrict use of the 2006 Plan and reinforce our commitment to practices that we believe constitute higher standards for the market in which we operate. If shareholders approve the proposed changes to the 2006 Plan, we will be required to obtain shareholder consent to reprice any outstanding stock options (other than pro rata adjustments to reflect stock dividends and other corporate events) and/or to implement a program whereby outstanding awards are surrendered or cancelled in exchange for awards that have a lower exercise price or greater economic value. We also propose to prohibit the grant of so-called reload options (although we have not granted these types of options in the past). We will continue to monitor the environment in which we operate and make changes to our equity compensation program to help us meet our goals, including achieving long-term shareholder value.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE PROPOSAL TO APPROVE THE AMENDMENT AND RESTATEMENT OF THE GAP, INC. 1996 STOCK OPTION AND AWARD PLAN.