Gap (GPS)

Company Restates Prior Years Due to Lease Accounting

SAN FRANCISCO — March 24, 2005 – Gap Inc. (NYSE: GPS) today announced the final fourth quarter and full year 2004 financial results. In addition, the company is restating its full year 2002 and full year 2003 financial results due to changes in its accounting practices related to leasing transactions.

As disclosed in its February 24, 2005 preliminary earnings release, the company, like many other retailers, determined that it would review and correct the way it accounts for its leases, specifically the accounting for operating leases with scheduled rent increases and tenant allowances. The company had made this decision in light of a recent SEC clarification on lease accounting.

Prior to the correction, the company had recognized the straight line expense for leases beginning on the commencement date of the lease, which generally coincides with the store opening date, instead of at the time the company takes physical possession of the property to start construction of leasehold improvements. This had the effect of excluding the construction period of the stores from the calculation of the period over which the company expensed rent. The company has corrected this accounting for rent expense and is now amortizing rent expense on a straight-line basis over the term of the lease.

In addition, the company had previously classified a portion of tenant allowances as a reduction to store build out costs instead of as a deferred lease credit on the consolidated balance sheet to reflect construction costs incurred on behalf of the landlord. As a result, the company also amortized the deferred lease credit over the asset life instead of over the lease term and reflected the amortization as a reduction to depreciation expense instead of as a reduction to rent expense. The company reassessed this policy in 2003 and effective February 1, 2004 prospectively changed its accounting policy to treat lease incentives received as deferred lease incentives. The company also corrected prior years’ consolidated financial statements to properly account for tenant allowances.

The effects of these corrections were a decrease to retained earnings of $131.7 million as of February 2, 2002, and an increase in net earnings of $0.6 million and $0.3 million in fiscal year 2003 and fiscal year 2002, respectively. The majority of the adjustments relate to periods prior to fiscal year 2002.

The company has completed its review of the respective accounting policies. As a result, the company determined that a restatement of its consolidated financial statements is necessary. Please see the table at the end of this release.

In addition, the company has restated its fiscal 2003 and 2002 Consolidated Statements of Cash Flows to reflect changes in restricted cash balances as an investing activity rather than a financing activity to be consistent with the presentation in fiscal 2004.

The company’s annual report on Form 10-K for the year ended January 29, 2005 will include the restated financial statements. The company expects to file the Form 10-K this month.