Gap (GPS)

Review of Stock Option Grant Practices

In the second quarter of fiscal 2006, we proactively reviewed our stock option granting practices over the 10-year period ended June 2006, given the heightened scrutiny on other publicly-traded companies regarding this topic. We concluded that the compensation expense recorded in our historical financial statements was materially correct. Additionally, we identified no backdating in connection with the grants of stock options to Vice Presidents and above. We found some errors relating to the dating of stock option grants to certain lower-level employees from 1998 to early 2002, as well as some calculation errors. We finalized our review and recorded $4.5 million of additional compensation expense in the third quarter of fiscal 2006 related to historical stock option accounting, only a portion of which related to the dating of options. We did not and were not required to restate our historical financial statements in order to record this expense. In addition, our review did not find any evidence of intent to erroneously record or report compensation expense.

Our internal review was not in response to any outside inquiries. We have not been advised that our stock option granting practices are under investigation by the Securities and Exchange Commission or any federal or state law enforcement agency.

In 2006, we took the opportunity to reaffirm our stock option granting practices and controls, which are described in the Compensation Discussion and Analysis on page 29 of this Proxy Statement.