GAP INC (Form: 10-Q, Received: 12/09/2008 16:49:59)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended November 1, 2008 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)

Registrant’s telephone number, including area code: (650) 952-4400

Indicate by check mark whether the 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 þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller

reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.05 par value, 706,483,075 shares as of December 5, 2008

THE GAP, INC.

TABLE OF CONTENTS


		PAGE
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of November 1, 2008, February 2, 2008, and November 3, 2007	3

	Condensed Consolidated Statements of Earnings for the Thirteen and Thirty-Nine Weeks Ended November 1, 2008 and November 3, 2007	4

	Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended November 1, 2008 and November 3, 2007	5

	Notes to the Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21

Item 4.	Controls and Procedures	21

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 6.	Exhibits	23

THE GAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


($ and shares in millions except par value)	November 1, 2008			February 2, 2008			November 3, 2007
($ and shares in millions except par value)	November 1, 2008			February 2, 2008			November 3, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	1,480		$	1,724		$	1,491
Short-term investments		75			177			165
Restricted cash		38			38			43
Merchandise inventory		2,224			1,575			2,480
Other current assets		740			572			682

Total current assets		4,557			4,086			4,861
Property and equipment, net of accumulated depreciation of $4,288, $4,053, and $4,196		3,016			3,267			3,302
Other long-term assets		613			485			421

Total assets	$	8,186		$	7,838		$	8,584


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	188		$	138		$	—
Accounts payable		1,578			1,006			1,402
Accrued expenses and other current liabilities		1,052			1,259			1,287
Income taxes payable		25			30			25

Total current liabilities		2,843			2,433			2,714

Long-term liabilities:
Long-term debt		—			50			188
Lease incentives and other long-term liabilities		1,018			1,081			1,072

Total long-term liabilities		1,018			1,131			1,260

Commitments and contingencies (see Note 12)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares; Issued 1,105, 1,100, and 1,098 shares; Outstanding 706, 734, and 761 shares		55			55			55
Additional paid-in capital		2,884			2,783			2,735
Retained earnings		9,765			9,223			9,018
Accumulated other comprehensive earnings		116			125			106
Treasury stock, at cost (399, 366, and 337 shares)		(8,495	)		(7,912	)		(7,304	)

Total stockholders’ equity		4,325			4,274			4,610

Total liabilities and stockholders’ equity	$	8,186		$	7,838		$	8,584

See Notes to the Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	13 Weeks Ended						39 Weeks Ended
($ and shares in millions except per share amounts)	November 1, 2008			November 3, 2007			November 1, 2008			November 3, 2007
Net sales	$	3,561		$	3,854		$	10,444		$	11,088
Cost of goods sold and occupancy expenses		2,183			2,407			6,386			7,022

Gross profit		1,378			1,447			4,058			4,066
Operating expenses		984			1,079			2,908			3,169
Interest expense (reversal)		5			1			(1	)		21
Interest income		(9	)		(28	)		(32	)		(97	)

Earnings from continuing operations before income taxes		398			395			1,183			973
Income taxes		152			156			459			371

Earnings from continuing operations, net of income taxes		246			239			724			602

Loss from discontinued operation, net of income tax benefit		—			(1	)		—			(34	)

Net earnings	$	246		$	238		$	724		$	568


Weighted-average number of shares - basic		709			788			720			806
Weighted-average number of shares - diluted		712			791			723			809

Basic earnings per share:
Earnings from continuing operations, net of income taxes	$	0.35		$	0.30		$	1.01		$	0.75
Loss from discontinued operation, net of income tax benefit		—			—			—			(0.05	)

Net earnings per share	$	0.35		$	0.30		$	1.01		$	0.70


Diluted earnings per share:
Earnings from continuing operations, net of income taxes	$	0.35		$	0.30		$	1.00		$	0.74
Loss from discontinued operation, net of income tax benefit		—			—			—			(0.04	)

Net earnings per share	$	0.35		$	0.30		$	1.00		$	0.70


Cash dividends declared and paid per share	$	0.085		$	0.080		$	0.255		$	0.240

See Notes to the Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	39 Weeks Ended
($ in millions)	November 1, 2008			November 3, 2007
Cash flows from operating activities:
Net earnings	$	724		$	568
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization (a)		422			407
Share-based compensation		42			38
Tax benefit from exercise of stock options and vesting of stock units		5			5
Excess tax benefit from exercise of stock options and vesting of stock units		(6	)		(4	)
Non-cash and other items		44			37
Deferred income taxes		22			(149	)
Changes in operating assets and liabilities:
Merchandise inventory		(667	)		(645	)
Other current assets and other long-term assets		(55	)		(29	)
Accounts payable		594			581
Accrued expenses and other current liabilities		(238	)		(13	)
Income taxes payable, net of prepaid and other tax related items		(81	)		23
Lease incentives and other long-term liabilities		28			184

Net cash provided by operating activities		834			1,003


Cash flows from investing activities:
Purchases of property and equipment		(315	)		(519	)
Proceeds from sale of property and equipment		—			11
Purchases of short-term investments		(75	)		(719	)
Maturities of short-term investments		177			1,124
Acquisition of business, net of cash acquired		(141	)		—
Change in restricted cash		1			1
Change in other long-term assets		—			(3	)

Net cash used for investing activities		(353	)		(105	)


Cash flows from financing activities:
Payments of long-term debt		—			(326	)
Proceeds from share-based compensation, net		69			86
Repurchase of common stock		(593	)		(1,050	)
Excess tax benefit from exercise of stock options and vesting of stock units		6			4
Cash dividends paid		(183	)		(192	)

Net cash used for financing activities		(701	)		(1,478	)

Effect of exchange rate fluctuations on cash		(24	)		41

Net decrease in cash and cash equivalents		(244	)		(539	)
Cash and cash equivalents at beginning of period		1,724			2,030

Cash and cash equivalents at end of period	$	1,480		$	1,491


Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	10		$	32
Cash paid for income taxes during the period	$	557		$	373

^(a)	Depreciation and amortization is net of the amortization of lease incentives of $64 million and $66 million for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively.

See Notes to the Condensed Consolidated Financial Statements

THE GAP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION

The condensed consolidated balance sheets as of November 1, 2008 and November 3, 2007, the condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended November 1, 2008 and November 3, 2007, and the condensed consolidated statements of cash flows for the thirty-nine weeks ended November 1, 2008 and November 3, 2007 have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”), without audit. In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly our financial position, statements of earnings, and cash flows at November 1, 2008 and November 3, 2007, and for all periods presented. The condensed consolidated balance sheet as of February 2, 2008 has been derived from our audited financial statements.

As of February 2, 2008, we began classifying unredeemed gift card liability and credit card reward certificate liability as accrued expenses and other current liabilities in our condensed consolidated balance sheets. Accordingly, unredeemed gift card liability of $252 million and credit card reward certificate liability of $26 million as of November 3, 2007, which were previously classified as accounts payable on the condensed consolidated balance sheets, were reclassified to conform to the current period presentation.

In the first quarter of fiscal 2008, we recognized a reversal of $15 million of interest expense from the reduction of interest expense accruals resulting primarily from foreign tax audit events occurring in the quarter.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted from these interim financial statements. We suggest that you read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

The results of operations for the thirteen and thirty-nine weeks ended November 1, 2008 are not necessarily indicative of the operating results that may be expected for the fifty-two week period ending January 31, 2009.

2.	RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“SFAS”) 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure of fair value measurements. SFAS 157 is applied under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. We adopted the provisions of SFAS 157 effective February 3, 2008, except for certain nonfinancial assets and liabilities for which the effective date has been deferred by one year in accordance with FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157.” The major categories of the remaining assets and liabilities that are measured at fair value on a non-recurring basis, for which we have not yet applied the provisions of SFAS 157, are as follows: asset retirement obligations, sublease loss reserves, and impaired long-lived assets. We are currently in the process of assessing the impact the adoption of SFAS 157 will have on our consolidated financial statements and related disclosures for the remaining assets and liabilities, effective February 1, 2009.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133.” SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities to improve the transparency of financial reporting. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will adopt the disclosure provisions of SFAS 161 in the first quarter of fiscal 2009.

3.	ACQUISITION

On September 28, 2008, we acquired all of the outstanding capital stock of Athleta, Inc. (“Athleta”), a women’s sports and active apparel company based in Petaluma, California, for an aggregate purchase price of $147 million in cash, including transaction costs. The acquisition will allow us to enhance our presence in the growing women’s active apparel sector in the United States. The results of operations for Athleta are included in the condensed consolidated statements of earnings beginning September 29, 2008. The impact of the acquisition on the Company’s results of operations, as if the acquisition had been completed as of the beginning of the periods presented, is not significant.

The purchase price was allocated as follows as of September 28, 2008:


($ in millions)
Goodwill	$	99
Trade name		54
Intangible assets subject to amortization		15
Net liabilities assumed		(21	)

Total purchase price	$	147

The purchase price allocation as of September 28, 2008 is preliminary and further changes, if any, to the purchase price allocation above will be recorded as we receive further information.

None of the goodwill is deductible for tax purposes. Intangible assets subject to amortization, consisting primarily of customer relationships, are being amortized on an accelerated basis over a weighted-average amortization period of four years and are as follows:


($ in millions)	As of November 1, 2008
Gross carrying amount	$	15
Less: Accumulated amortization		—

Intangible assets subject to amortization, net of accumulated amortization	$	15

Amortization expense associated with intangible assets subject to amortization is classified as operating expenses in our statements of earnings. For both the thirteen and thirty-nine weeks ended November 1, 2008, amortization expense for intangible assets subject to amortization was less than $1 million. For the thirteen weeks ending January 31, 2009, we expect amortization expense to be approximately $2 million.

As of November 1, 2008, future amortization expense associated with intangible assets subject to amortization for each of the five succeeding fiscal years is estimated as follows:


($ in millions) Fiscal Year
2009	$	6
2010	$	4
2011	$	2
2012	$	1
2013	$	—

4.	DISCONTINUED OPERATION OF FORTH & TOWNE

In February 2007, we announced our decision to close our Forth & Towne store locations. The decision resulted from a thorough analysis of the concept, which revealed that it was not demonstrating enough potential to deliver an acceptable long-term return on investment. All of the 19 Forth & Towne stores were closed by the end of June 2007 and we reduced our workforce by approximately 550 employees in fiscal 2007. The results of Forth & Towne, net of income tax benefit, have been presented as a discontinued operation in the accompanying condensed consolidated statements of earnings for all periods presented as follows:


	13 Weeks Ended					39 Weeks Ended
($ in millions)	November 1, 2008		November 3, 2007			November 1, 2008		November 3, 2007
Net sales	$	—	$	—		$	—	$	16

Loss from discontinued operation, before income tax benefit	$	—	$	(2	)	$	—	$	(56	)
Add: Income tax benefit		—		1			—		22

Loss from discontinued operation, net of income tax benefit	$	—	$	(1	)	$	—	$	(34	)

For the thirteen weeks ended November 3, 2007, the loss from the discontinued operation of Forth & Towne included the following charges on a pre-tax basis: $1 million of lease-related charges and $1 million of other costs. For the thirty-nine weeks ended November 3, 2007, the loss from the discontinued operation of Forth & Towne included the following charges on a pre-tax basis: $29

million related to the impairment of long-lived assets, $5 million of net sublease losses, $4 million of employee severance, $4 million of administrative and other costs, and $3 million of other lease-related charges.

Future cash payments for Forth & Towne primarily relate to obligations associated with certain leases and these payments will be made over the various remaining lease terms through 2017. Based on our current assumptions as of November 1, 2008, we expect our lease payments, net of sublease income, to be immaterial.

5.	FINANCIAL INSTRUMENTS

Financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157 are as follows:


			Fair Value Measurements at Reporting Date Using
($ in millions)	As of November 1, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Derivative financial instruments	$	72	$	—	$	72	$	—
Deferred compensation plan assets		22		22		—		—

Total	$	94	$	22	$	72	$	—

Liabilities
Derivative financial instruments	$	30	$	—	$	30	$	—
Deferred compensation plan liabilities		23		23		—		—

Total	$	53	$	23	$	30	$	—

Derivative financial instruments include foreign exchange forward contracts primarily for the purchase of U.S. dollars, Euro, British pounds, Japanese yen, Canadian dollars, and Hong Kong dollars and cross-currency interest rate swaps. The fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. Derivative financial instruments in an asset position are included in other current assets or other long-term assets in the condensed consolidated balance sheets. Derivative financial instruments in a liability position are included in accrued expenses and other current liabilities or lease incentives and other long-term liabilities in the condensed consolidated balance sheets.

We maintain deferred compensation plans which allow eligible employees and non-employee members of the Board of Directors to defer compensation up to a maximum amount. Plan investments are recorded at market value in the Company’s condensed consolidated balance sheets and are designated for the deferred compensation plans. The Company’s deferred compensation plan assets are determined based on quoted market prices and are included in other long-term assets in the condensed consolidated balance sheets. The corresponding liabilities are included in lease incentives and other long-term liabilities in the condensed consolidated balance sheets.

In addition, we have highly liquid investments classified as cash equivalents and short-term investments as of November 1, 2008. These 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, domestic commercial paper, and bank securities and are stated at amortized cost, which approximates fair market value due to the short maturities of these instruments.

DEBT

In September 2007, we paid $326 million related to the maturity of our 6.90 percent notes payable. The remaining balance of our 8.80 percent notes payable of $138 million, due December 2008 (“2008 Notes”), is classified as current maturities of long-term debt in our condensed consolidated balance sheets as of November 1, 2008 and February 2, 2008, and is subject to an increasing or decreasing rate of interest based on credit rating fluctuations. As a result of changes to our long-term senior unsecured credit ratings in prior periods, the interest rate on the 2008 Notes was 10.05 percent per annum as of November 1, 2008.

We also have $50 million notes payable due March 2009 with a fixed interest rate of 6.25 percent per annum, which was classified as current maturities of long-term debt in our condensed consolidated balance sheet as of November 1, 2008. In connection with this debt, we have a cross-currency interest rate swap 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.

7.	COMMON STOCK

Share repurchases were as follows:


	13 Weeks Ended				39 Weeks Ended
($ and shares in millions except average per share cost)	November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007
Number of shares repurchased		6		48		33		59
Total cost	$	100	$	887	$	600	$	1,087
Average per share cost including commissions	$	17.65	$	18.39	$	17.97	$	18.44

In February 2008, we announced that our Board of Directors had authorized $1 billion for share repurchases. In connection with this authorization, we also entered into purchase agreements with individual members of the Fisher family, related parties of the Company. We expect that approximately $158 million (approximately 16 percent) of the $1 billion share repurchase program will be purchased from Fisher family members under these purchase agreements. The shares will be purchased at the same weighted average market price that we are paying for share repurchases in the open market. During the thirteen and thirty-nine weeks ended November 1, 2008, approximately 1 million and 5 million shares, respectively, were repurchased for $15 million and $94 million, respectively, from the Fisher family. All of the share repurchases were paid for as of November 1, 2008 except $7 million which was payable to Fisher family members.

8.	SHARE-BASED COMPENSATION

In accordance with the provisions of SFAS 123(R), “Share-Based Payment,” we recorded share-based compensation expense as follows:


	13 Weeks Ended						39 Weeks Ended
($ in millions)	November 1, 2008			November 3, 2007			November 1, 2008			November 3, 2007
Stock options	$	1		$	3		$	8		$	10
Stock units		10			10			31			25
Employee stock purchase plan		1			1			3			3

Share-based compensation expense		12			14			42			38
Less: Income tax benefit		(4	)		(6	)		(16	)		(15	)

Share-based compensation recognized in net earnings, net of taxes	$	8		$	8		$	26		$	23

9.	COMPREHENSIVE EARNINGS

Comprehensive earnings are comprised of net earnings and other gains and losses affecting equity that are excluded from net earnings. The components of other comprehensive earnings consist of foreign currency translation gains and losses, net of taxes, and changes in the fair value of derivative financial instruments, net of taxes.

Comprehensive earnings, net of taxes, are comprised of:


	13 Weeks Ended						39 Weeks Ended
($ in millions)	November 1, 2008			November 3, 2007			November 1, 2008			November 3, 2007
Net earnings	$	246		$	238		$	724		$	568
Foreign currency translation, net of tax benefit of $-, ($3), $-, and $-		(53	)		46			(56	)		84
Change in fair value of derivative financial instruments, net of taxes (tax benefit) of $10, ($22), $18, and ($29)		16			(28	)		22			(40	)
Reclassification adjustment for realized losses (gains) on derivative financial instruments, net of taxes (tax benefit) of ($6), ($3), ($15), and $9		11			4			25			(15	)

Comprehensive earnings	$	220		$	260		$	715		$	597

10.

INCOME TAXES

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world,

including such major jurisdictions as Canada, France, Hong Kong, Japan, the United Kingdom, and the United States. With few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations for fiscal years before 1998.

It is reasonably possible that the Company will recognize a decrease in unrecognized tax benefits within the next twelve months of up to $16 million as a result of filing amended returns and the closing of open tax years. However, we do not expect the change to have a material impact on the condensed consolidated statements of earnings.

During the thirty-nine weeks ended November 1, 2008, the total gross unrecognized tax benefits did not change materially.

11.

EARNINGS PER SHARE

Basic earnings per share are computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share are computed as net earnings divided by the weighted-average number of common shares outstanding for the period plus common stock equivalents. Common stock equivalents consist of shares subject to share-based awards with exercise prices less than the average market price of our common stock for the period, to the extent their inclusion would be dilutive.

Weighted-average number of shares was as follows:


	13 Weeks Ended		39 Weeks Ended
(shares in millions)	November 1, 2008	November 3, 2007	November 1, 2008	November 3, 2007
Weighted-average number of shares - basic	709	788	720	806
Common stock equivalents	3	3	3	3

Weighted-average number of shares - diluted	712	791	723	809

The above computations of weighted-average number of shares—diluted exclude stock options and other stock awards to purchase 30 million and 34 million shares of common stock for the thirteen weeks ended November 1, 2008 and November 3, 2007, respectively, and 31 million and 33 million shares of common stock for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively, as their inclusion would be antidilutive.

12.

COMMITMENTS AND CONTINGENCIES

We have assigned certain store and corporate facility leases to third parties as of November 1, 2008. Under these arrangements, we are secondarily liable and have guaranteed the lease payments of the new lessees for the remaining portion of our original lease obligations through 2019. The maximum potential amount of future lease payments we could be required to make is approximately $42 million as of November 1, 2008. The fair value of the guarantees was immaterial as of November 1, 2008.

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 had guarantees with a maximum exposure of $42 million as of November 1, 2008, of which $2 million has been cash collateralized. We are currently in the process of winding down our participation in the reinsurance pool. Our maximum exposure and cash collateralized balance are expected to decrease in the future as our participation in the reinsurance pool diminishes.

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 from time to time include commercial, intellectual property, customer, employment, and securities related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour and other 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. If the outcome of an Action is expected to result in a loss that is considered probable and reasonably estimable, we will record a liability for the estimated loss.

We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact earnings in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding: (i) future amortization expense for intangible assets subject to amortization; (ii) expected lease payments related to the discontinued operation of Forth & Towne; (iii) expected share repurchases from members of the Fisher family; (iv) the decrease in unrecognized tax benefits; (v) the maximum potential amount of future lease payments under assigned leases; (vi) the impact of losses under contractual indemnifications; (vii) the maximum exposure and cash collateralized balance for the Company’s reinsurance pool in future periods; (viii) the effect of various proceedings, lawsuits, disputes and claims; (ix) expanding into the women’s active apparel sector through the acquisition of Athleta; (x) continued deterioration of macroeconomic conditions; (xi) managing inventory to support healthy gross margin; (xii) improving return on invested capital; (xiii) distributing excess cash to shareholders; (xiv) interest expense for fiscal 2008; (xv) effective tax rate for fiscal 2008; (xvi) purchases of property and equipment for fiscal 2008; (xvii) number of new store openings and store closings in fiscal 2008; (xviii) net square footage change in fiscal 2008; (xix) net cash provided by operating activities for fiscal 2008; (xx) free cash flow for fiscal 2008; (xxi) cash balances, cash flows and liquidity being sufficient for the foreseeable future and through a prolonged downturn; and (xxii) consideration of future dividends.

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause the Company’s actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following: the risk that the adoption of new accounting pronouncements will impact future results; the risk that the Company will be unsuccessful in gauging fashion trends and changing consumer preferences; the risk that changes in general economic conditions, consumer confidence, or consumer spending patterns will have a negative impact on the Company’s financial performance or strategies; the highly competitive nature of the Company’s business in the United States and internationally and its dependence on consumer spending patterns, which are influenced by numerous other factors; the risk that the Company will be unsuccessful in identifying and negotiating new store locations and renewing leases for existing store locations effectively; the risk that comparable store sales and margins will experience fluctuations; the risk that the Company will be unsuccessful in implementing its strategic, operating and people initiatives; the risk that adverse changes in the Company’s credit ratings may have a negative impact on its financing costs, structure and access to capital in future periods; the risk that changes to the Company’s information technology systems may disrupt its operations; the risk that trade matters, events causing disruptions in product shipments from China and other foreign countries, or an inability to secure sufficient manufacturing capacity may disrupt the Company’s supply chain or operations; the risk that the Company’s efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of its brands; the risk that acts or omissions by the Company’s third party vendors, including a failure to comply with the Company’s code of vendor conduct, could have a negative impact on the Company’s reputation or operations; the risk that the Company does not repurchase some or all of the shares it anticipates purchasing pursuant to its repurchase program; and the risk that the Company will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits; any of which could impact net sales, costs and expenses, and/or planned strategies. Additional information regarding factors that could cause results to differ can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of December 9, 2008 and 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.

We suggest that this document be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

Our Business

We are a leading global specialty retailer operating retail and online stores selling clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Banana Republic, Old Navy, Piperlime, and Athleta brand names. We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan. We also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in Asia, Europe, Latin America, and the Middle East. Under these agreements, third parties operate or will operate stores that sell apparel, purchased from us, under our brand names. In addition, our U.S. customers can shop online at www.gap.com, www.bananarepublic.com, www.oldnavy.com, www.piperlime.com, and www.athleta.com.

In September 2008, we acquired all of the outstanding capital stock of Athleta, Inc. (“Athleta”), a women’s sports and active apparel company based in Petaluma, California, for an aggregate purchase price of $147 million. The acquisition will allow us to enhance our

presence in the growing women’s active apparel sector in the United States. We believe this acquisition complements our brands and allows us to leverage our new online platform to expand into this significant retail sector.

Overview

Financial highlights include:

•

Net sales for the third quarter of fiscal 2008 were $3.6 billion compared with $3.9 billion for the third quarter of fiscal 2007, and comparable store sales decreased 12 percent compared with a decrease of 5 percent in the third quarter of fiscal 2007.

•

Net earnings for the third quarter of fiscal 2008 were $246 million, or $0.35 per share on a diluted basis, compared with $238 million, or $0.30 per share on a diluted basis for the third quarter of fiscal 2007.

•

Gross margin for the third quarter of fiscal 2008 was 38.7 percent compared with 37.5 percent for the third quarter of fiscal 2007.

•

Our Direct sales for the third quarter of fiscal 2008 increased 15 percent to $284 million, compared with $247 million for the third quarter of fiscal 2007. Direct includes all online sales and, beginning September 2008, Athleta online and catalog sales.

•

We generated cash flows from operating activities of $834 million during the thirty-nine weeks ended November 1, 2008. Our capital expenditures for the thirty-nine weeks ended November 1, 2008 were $315 million.

•

For the thirty-nine weeks ended November 1, 2008, we generated free cash flow of $519 million, compared with $484 million for the thirty-nine weeks ended November 3, 2007. Free cash flow is defined as net cash provided by operating activities less purchases of property and equipment. For a reconciliation of free cash flow, a non-GAAP financial measure, from a GAAP financial measure, see the Financial Condition section in this Management’s Discussion and Analysis.

•

We repurchased approximately 6 million shares of our common stock for a total of $100 million under our share repurchase program in the third quarter of fiscal 2008. We also declared and paid a cash dividend of $0.085 per share in the third quarter of fiscal 2008.

Macroeconomic conditions deteriorated in the third quarter and we believe that these conditions will continue in the fourth quarter. Our cash flow generation remains healthy and we have a strong balance sheet. As of November 1, 2008, cash, cash equivalents and short-term investments were $1.6 billion and long-term debt, all of which is classified as current, was $188 million. We believe our cash balances and cash flows from operations will be sufficient for the foreseeable future. During this challenging economic environment we are focused on the following priorities:

•

Consistently deliver product that aligns with our target customers.

•

Maintain a focus on cost management and operational improvements that allow us to work more simply and efficiently.

•

Improve the customer experience and continue to invest in the fleet in a manner that supports improvement in return on invested capital.

•

Manage inventory to support healthy gross margin.

•

Maintain sufficient cash balances and liquidity to sustain us through a prolonged downturn.

•

Distribute excess cash to shareholders in the form of dividends and share repurchases.

Also see the section entitled “Risk Factors—The recent changes in general economic conditions, and the impact on consumer confidence and consumer spending, could adversely impact our results of operations” in Item 1A of Part II of this Form 10-Q.

RESULTS OF OPERATIONS

Net Sales

Net Sales by Brand, Region, and Channel

Net sales primarily consist of retail sales, online sales, and shipping fees received from customers for delivery of merchandise. Outlet retail sales are reflected within the respective results of each brand. Net sales by brand, region, and channel for the thirteen and thirty-nine weeks ended November 1, 2008 and November 3, 2007 are as follows:


($ in millions) 13 Weeks Ended November 1, 2008	Gap			Old Navy			Banana Republic			Other (3)			Total
U.S. (1)	$	976		$	1,136		$	527		$	—		$	2,639
Canada		90			96			39			—			225
Europe		181			—			6			13			200
Asia		159			—			23			12			194
Other Regions		—			—			—			19			19
Direct (2)		95			131			37			21			284

Total	$	1,501		$	1,363		$	632		$	65		$	3,561


Global Sales Growth (Decline)		(4	)%		(15	)%		(5	)%		91	%		(8	)%

13 Weeks Ended November 3, 2007	Gap			Old Navy			Banana Republic			Other (3)			Total
U.S. (1)	$	1,040		$	1,356		$	567		$	—		$	2,963
Canada		101			124			40			—			265
Europe		197			—			—			3			200
Asia		136			—			22			10			168
Other Regions		—			—			—			11			11
Direct (2)		83			118			36			10			247

Total	$	1,557		$	1,598		$	665		$	34		$	3,854


Global Sales Growth (Decline)		(2	)%		(3	)%		10	%		240	%		—	%

39 Weeks Ended November 1, 2008	Gap			Old Navy			Banana Republic			Other (3)			Total
U.S. (1)	$	2,794		$	3,472		$	1,593		$	—		$	7,859
Canada		247			294			110			—			651
Europe		538			—			17			25			580
Asia		487			—			69			35			591
Other Regions		—			—			—			52			52
Direct (2)		230			340			100			41			711

Total	$	4,296		$	4,106		$	1,889		$	153		$	10,444


Global Sales Growth (Decline)		(2	)%		(14	)%		—	%		87	%		(6	)%

39 Weeks Ended November 3, 2007	Gap			Old Navy			Banana Republic			Other (3)			Total
U.S. (1)	$	2,931		$	4,129		$	1,634		$	—		$	8,694
Canada		252			324			99			—			675
Europe		581			—			—			3			584
Asia		401			—			63			25			489
Other Regions		—			—			—			32			32
Direct (2)		206			294			92			22			614

Total	$	4,371		$	4,747		$	1,888		$	82		$	11,088


Global Sales Growth (Decline)		(2	)%		(1	)%		10	%		310	%		1	%

(1)	U.S. includes the United States and Puerto Rico.

(2)	U.S. only. Direct includes Athleta online and catalog sales beginning September 2008.

(3)	Other includes our wholesale business, franchise business, Piperlime, and, beginning September 2008, Athleta online and catalog sales.

Comparable Store Sales

A store is included in comparable store sales (“Comp”) when it has been open at least one year and the square footage has not changed by 15 percent or more within the past year. A store is included in Comp on the first day it has comparable prior year sales. Stores in which square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from Comp until the first day they have comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year Comp store sales to achieve a consistent basis for comparison.

A store is considered non-comparable (“Non-comp”) when it has been open for less than one year or it has changed its square footage by 15 percent or more within the past year. Non-store sales such as online revenues are also considered Non-comp.

A store is considered “Closed” if it is temporarily closed for three or more full consecutive days or is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year then the store will be in Non-comp status for the same days in the following year.

The differences between net sales for the thirteen and thirty-nine weeks ended November 1, 2008 and net sales for the thirteen and thirty-nine weeks ended November 3, 2007 are classified as follows:


($ in millions)	Gap (3)(4)			Old Navy (3)			Banana Republic (3)(4)			Other (5)		Total
($ in millions)	Gap (3)(4)			Old Navy (3)			Banana Republic (3)(4)			Other (5)		Total
13 Weeks Ended November 3, 2007	$	1,557		$	1,598		$	665		$	34	$	3,854
Increase (decrease) in:
Comparable stores		(75	)		(248	)		(67	)		—		(390	)
Non-comparable and closed stores		17			6			33			20		76
Direct (1)		12			13			1			11		37
Foreign exchange (2)		(10	)		(6	)		—			—		(16	)

13 Weeks Ended November 1, 2008	$	1,501		$	1,363		$	632		$	65	$	3,561


	Gap (3)(4)			Old Navy (3)			Banana Republic (3)(4)			Other (5)		Total
	Gap (3)(4)			Old Navy (3)			Banana Republic (3)(4)			Other (5)		Total
39 Weeks Ended November 3, 2007	$	4,371		$	4,747		$	1,888		$	82	$	11,088
Increase (decrease) in:
Comparable stores		(227	)		(728	)		(132	)		—		(1,087	)
Non-comparable and closed stores		70			27			113			52		262
Direct (1)		24			46			8			19		97
Foreign exchange (2)		58			14			12			—		84

39 Weeks Ended November 1, 2008	$	4,296		$	4,106		$	1,889		$	153	$	10,444

(1)	Includes Athleta online and catalog sales beginning September 2008.

(2)	Foreign exchange is the translation impact if prior year sales were translated at current year exchange rates.

(3)	Includes United States, Puerto Rico, and Canada.

(4)	Includes international stores.

(5)	Includes our wholesale business, franchise business, Piperlime, and, beginning September 2008, Athleta online and catalog sales.

Our net sales for the third quarter of fiscal 2008 decreased $293 million, or 8 percent, compared with the prior year comparable period. Our comparable store sales decreased 12 percent for the third quarter of fiscal 2008. The 4 percentage point difference between net sales and comparable store sales includes the impact of new stores, foreign exchange, and a 15 percent increase in Direct sales for the third quarter of fiscal 2008 from the prior year comparable period. Overall, our store square footage increased 0.5 percent in the third quarter of fiscal 2008 from the prior year comparable period and sales productivity was $81 per average square foot for the third quarter of fiscal 2008 compared with $91 per average square foot for the prior year comparable period. During the third quarter of fiscal 2008, we opened 37 new stores and closed 17 stores.

Comparable store sales percentage by brand for the third quarter of fiscal 2008 over fiscal 2007 was as follows:

•

Gap North America: negative 7 percent in fiscal 2008 versus negative 6 percent in fiscal 2007;

•

Banana Republic North America: negative 11 percent in fiscal 2008 versus positive 1 percent in fiscal 2007;

•

Old Navy North America: negative 18 percent in fiscal 2008 versus negative 8 percent in fiscal 2007; and

•

International: negative 1 percent in fiscal 2008 versus negative 4 percent in fiscal 2007.

Net sales for the thirty-nine weeks ended November 1, 2008 decreased $644 million, or 6 percent, from the prior year comparable period. Our comparable store sales decreased 11 percent for the thirty-nine weeks ended November 1, 2008. The 5 percentage point difference between net sales and comparable store sales includes the impact of new stores, foreign exchange, and a 16 percent increase in Direct sales for the thirty-nine weeks ended November 1, 2008 from the prior year comparable period. Overall, our store square footage increased 0.8 percent from the end of fiscal 2007 and sales productivity was $242 per average square foot for the thirty-nine weeks ended November 1, 2008 compared with $266 per average square foot for the prior year comparable period. During the thirty-nine weeks ended November 1, 2008, we opened 92 new stores and closed 69 stores. These numbers include 16 store repositions, which are reflected as both an opening and a closing.

Comparable store sales percentage by brand for the thirty-nine weeks ended November 1, 2008 over fiscal 2007 was as follows:

•

Gap North America: negative 7 percent in fiscal 2008 versus negative 5 percent in fiscal 2007;

•

Banana Republic North America: negative 7 percent in fiscal 2008 versus positive 1 percent in fiscal 2007;

•

Old Navy North America: negative 17 percent in fiscal 2008 versus negative 7 percent in fiscal 2007; and

•

International: negative 4 percent in fiscal 2008 versus negative 2 percent in fiscal 2007.

Store Count and Square Footage

Store count and square footage for our wholly owned stores were as follows:


	November 1, 2008				November 3, 2007
	Number of Store Locations		Square Footage (in millions)		Number of Store Locations		Square Footage (in millions)
Gap North America	1,227		12.1		1,278		12.4
Gap Europe	173		1.5		172		1.5
Gap Asia	112		1.1		109		1.0
Old Navy North America	1,076		20.2		1,062		20.0
Banana Republic North America	573		4.9		549		4.7
Banana Republic Asia	26		0.1		21		0.1
Banana Republic Europe	3		—		—		—

Total	3,190		39.9		3,191		39.7

Increase over Prior Year (1)	—	%	0.5	%	1.6	%	2.1	%

(1)	Computation excludes store locations and square footage associated with the discontinued operation of Forth & Towne.

Outlet stores are reflected in each of the respective brands in the table above. We also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in Asia, Europe, Latin America, and the Middle East. We had 113 and 48 franchise stores open as of November 1, 2008 and November 3, 2007, respectively.

Cost of Goods Sold and Occupancy Expenses

Cost of goods sold and occupancy expenses include:

•

the cost of merchandise;

•

inventory shortage and valuation adjustments;

•

freight charges;

•

costs associated with our sourcing operations, including payroll and related benefits;

•

production costs;

•

insurance costs related to merchandise; and

•

occupancy, rent, common area maintenance, real estate taxes, utilities, and depreciation for our stores and distribution centers.

The classification of these expenses varies across the retail industry.


									Percentage of Net Sales
	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended		39 Weeks Ended
($ in millions)	November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007		November 1, 2008	November 3, 2007	November 1, 2008	November 3, 2007
Cost of Goods Sold and Occupancy Expenses	$	2,183	$	2,407	$	6,386	$	7,022	61.3%	62.5%	61.1%	63.3%
Gross Profit	$	1,378	$	1,447	$	4,058	$	4,066	38.7%	37.5%	38.9%	36.7%

Cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.2 percentage points in the third quarter of fiscal 2008 and decreased 2.2 percentage points during the thirty-nine weeks ended November 1, 2008 compared with the prior year comparable periods.

Cost of goods sold decreased $234 million, or 2.7 percentage points as a percentage of net sales, in the third quarter of fiscal 2008 and decreased $706 million, or 3.8 percentage points as a percentage of net sales, during the thirty-nine weeks ended November 1, 2008 compared with the prior year comparable periods. The decrease was driven primarily by a higher margin for both regular price and marked down merchandise.

Occupancy expenses increased $10 million, or 1.5 percentage points as a percentage of net sales, in the third quarter of fiscal 2008 and increased $70 million, or 1.6 percentage points as a percentage of net sales, during the thirty-nine weeks ended November 1, 2008 compared with the prior year comparable periods. The increase was primarily driven by costs related to new and existing stores, partially offset by savings from store closures.

Operating Expenses

Operating expenses include:

•

payroll and related benefits (for our store operations, field management, distribution centers, and corporate functions);

•

advertising;

•

general and administrative expenses;

•

costs to design and develop our products;

•

merchandise handling and receiving in distribution centers and stores;

•

distribution center general and administrative expenses;

•

rent, occupancy, and depreciation for headquarter facilities; and

•

other expense (income).

The classification of these expenses varies across the retail industry.


									Percentage of Net Sales
	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended		39 Weeks Ended
($ in millions)	November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007		November 1, 2008	November 3, 2007	November 1, 2008	November 3, 2007
Operating Expenses	$	984	$	1,079	$	2,908	$	3,169	27.6%	28.0%	27.8%	28.6%

Operating expenses decreased $95 million, or 8.8 percent, in the third quarter of fiscal 2008 over the prior year comparable period driven primarily by lower store payroll and lower corporate overhead expenses.

Operating expenses decreased $261 million, or 8.2 percent, during the thirty-nine weeks ended November 1, 2008 over the prior year comparable period driven primarily by lower store payroll, lower corporate overhead expenses, lower repair and maintenance expenses, and lower marketing expenses.

Operating margin was 11.1 percent and 9.5 percent for the third quarters of fiscal 2008 and 2007, respectively, and 11.0 percent and 8.1 percent for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively.

Interest Expense (Reversal)


										Percentage of Net Sales
	13 Weeks Ended				39 Weeks Ended					13 Weeks Ended				39 Weeks Ended
($ in millions)	November 1, 2008		November 3, 2007		November 1, 2008			November 3, 2007		November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007
Interest Expense (Reversal)	$	5	$	1	$	(1	)	$	21	0.1	%	—	%	—	%	0.2	%

Interest expense (reversal) for the thirty-nine weeks ended November 1, 2008 includes a reversal of $15 million interest expense from the reduction of interest expense accruals resulting primarily from foreign tax audit events occurring in the first quarter of fiscal 2008, offset by interest expense on overall borrowings and obligations. We anticipate that fiscal 2008 interest expense will be approximately $5 million.

Interest Income


									Percentage of Net Sales
	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				39 Weeks Ended
($ in millions)	November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007
Interest Income	$	9	$	28	$	32	$	97	0.3	%	0.7	%	0.3	%	0.9	%

Interest income is earned on our cash, cash equivalents, and short-term investments. The decrease in interest income for the third quarter and thirty-nine weeks ended November 1, 2008 over the prior year comparable periods is primarily due to lower interest rates as well as lower average balances of cash, cash equivalents, and short-term investments.

Income Taxes


													Percentage of Net Sales
	13 Weeks Ended						39 Weeks Ended						13 Weeks Ended				39 Weeks Ended
($ in millions)	November 1, 2008			November 3, 2007			November 1, 2008			November 3, 2007			November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007
Income Taxes	$	152		$	156		$	459		$	371		4.3	%	4.0	%	4.4	%	3.3	%
Effective Tax Rate		38.2	%		39.5	%		38.8	%		38.1	%

The decrease in the effective tax rate for the thirteen weeks ended November 1, 2008 over the prior year comparable period was primarily driven by favorable adjustments resulting from tax audit resolutions and the closing of an open tax year within the quarter.

We currently expect the fiscal 2008 effective tax rate to be about 39 percent, although the respective quarterly effective tax rates may vary. The actual rate will ultimately depend on several variables, including the mix of earnings between domestic and international operations, the overall level of earnings, and the potential resolution of outstanding tax contingencies.

Loss from Discontinued Operation, Net of Income Tax Benefit

Loss from discontinued operation relates to the Forth & Towne brand, whose stores were closed by the end of June 2007. Loss from the discontinued operation of Forth & Towne, net of income tax benefit, was $1 million and $34 million for the thirteen and thirty-nine weeks ended November 3, 2007, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

Our largest source of cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, occupancy costs, personnel related expenses, purchases of property and equipment, and payment of taxes. In addition, we continue to return excess cash to our shareholders in the form of dividends and share repurchases.

As of November 1, 2008, cash and cash equivalents and short-term investments were $1.6 billion and current maturities of long-term debt were $188 million. We believe that our current cash balances and cash flows from our operations will be adequate to satisfy our capital needs for the foreseeable future.

Cash Flows from Operating Activities

Net cash provided by operating activities for the thirty-nine weeks ended November 1, 2008 decreased $169 million from the prior year comparable period. This decrease was mainly due to the payment of fiscal 2007 bonuses in the first quarter of fiscal 2008, decreases in accruals related to information technology and construction projects, higher tax payments, offset by an increase in earnings.

Inventory management remains an area of focus. We continue to execute against our strategy of managing inventory levels in a manner that supports delivering healthy merchandise margins. As a result, inventory per square foot at November 1, 2008 was $51 which represents a 13 percent decrease from the prior year comparable period.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about thirteen weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

Cash Flows from Investing Activities

During the thirty-nine weeks ended November 1, 2008, we used $248 million more cash for investing activities than the prior comparable period. During the thirty-nine weeks ended November 1, 2008 and November 3, 2007, capital expenditures totaled $315 million and $519 million, respectively. We also used $147 million for the acquisition of Athleta as described in the Our Business section above. In the thirty-nine weeks ended November 1, 2008, we had net maturities of short-term investments of $102 million compared with net maturities of short-term investments of $405 million in the prior year comparable period. For fiscal 2008, we expect purchases of property and equipment to be about $450 million and expect to open about 100 new store locations and to close about 115 store locations. We do not expect any net square footage growth in fiscal 2008.

Cash Flows from Financing Activities

During the thirty-nine weeks ended November 1, 2008, we used $777 million less cash for financing activities than the prior year comparable period. During the thirty-nine weeks ended November 1, 2008, we repurchased approximately 33 million shares of common stock for $593 million, compared with repurchases of approximately 59 million shares for $1.1 billion for the thirty-nine weeks ended November 3, 2007. We also paid $326 million related to the maturity of our 6.90 notes payable during the third quarter of fiscal 2007.

Free Cash Flow

Free cash flow is a non-GAAP measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.

In the thirty-nine weeks ended November 1, 2008, we delivered $519 million in free cash flow, compared with $484 million in the prior year comparable period.

The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.


	39 Weeks Ended
($ in millions)	November 1, 2008			November 3, 2007
Net cash provided by operating activities	$	834		$	1,003
Less: Purchases of property and equipment		(315	)		(519	)

Free cash flow	$	519		$	484

The following table sets forth our expected full year fiscal 2008 free cash flow of about $1.0 billion:


($ in millions)	Expected 52 Weeks Ending January 31, 2009
Expected net cash provided by operating activities	$	1,450
Less: Expected purchases of property and equipment		(450	)

Expected fiscal 2008 free cash flow	$	1,000

Debt

In September 2007, we paid $326 million related to the maturity of our 6.90 percent notes payable. The remaining balance of our 8.80 percent notes payable of $138 million due December 2008 (“2008 Notes”) was classified as current maturities of long-term debt in our condensed consolidated balance sheets as of November 1, 2008 and February 2, 2008, and is subject to an increasing or decreasing rate of interest based on credit rating fluctuations. As a result of changes to our long-term senior unsecured credit ratings in prior periods, the interest rate on the 2008 Notes was 10.05 percent per annum as of November 1, 2008.

Credit Facilities

Trade letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a given amount upon presentation of specific documents demonstrating that merchandise has shipped. Vendor payables are recorded in the condensed consolidated balance sheets at the time of merchandise title transfer, although the letters of credit are generally issued prior to this. Over the past three years, we have migrated most of our merchandise vendors to open account payment terms. As of November 1, 2008, our letters of credit agreements consist of two separate $100 million, three-year, unsecured committed letters of credit agreements for a total aggregate availability of $200 million with an expiration date of May 2011. As of November 1, 2008, we had $101 million in trade letters of credit issued under these letters of credit agreements.

We also have a $500 million, five-year, unsecured revolving credit facility scheduled to expire in August 2012. There were no drawings under this facility as of November 1, 2008. The net availability of the revolving credit facility, reflecting $56 million of outstanding standby letters of credit, was $444 million as of November 1, 2008.

Dividend Policy

In determining whether and at what level to declare a dividend, we consider a number of financial factors, including sustainability and financial flexibility, as well as other factors including operating performance and capital resources. We will consider an increase in dividends when we deliver growth in net earnings for a fiscal year. In the first quarter of fiscal 2008, we increased our annual dividend from $0.32 per share for fiscal 2007 to $0.34 per share for fiscal 2008. In fiscal 2008 and 2007, we paid a dividend of $0.085 and $0.080, respectively, in each of the first, second, and third quarters.

Share Repurchase Program

In February 2008, our Board of Directors authorized $1 billion for share repurchases. In connection with this authorization, we entered into purchase agreements with individual members of the Fisher family, related parties of the Company. We expect that approximately $158 million (approximately 16 percent) of the $1 billion share repurchase program will be purchased from Fisher family members under these purchase agreements. The shares will be purchased at the same weighted-average market price that we are paying for share repurchases in the open market. During the thirty-nine weeks ended November 1, 2008, we repurchased approximately 33 million shares for $600 million, of which approximately 5 million shares were repurchased for $94 million from the Fisher family. All of the share repurchases were paid for as of November 1, 2008 except $7 million which was payable to Fisher family members.

Summary Disclosures about Contractual Cash Obligations and Commercial Commitments

There have been no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of February 2, 2008, other than those which occur in the normal course of business.

As party to a reinsurance pool for workers’ compensation, general liability, and automobile liability, we have guarantees with a maximum exposure of $42 million as of November 1, 2008, of which $2 million has been cash collateralized. We are currently in the process of winding down our participation in the reinsurance pool. Our maximum exposure and cash collateralized balance are expected to decrease in the future as our participation in the reinsurance pool diminishes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 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. There have been no significant changes to our accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 of the Notes to the Condensed Consolidated Financial Statements for recent accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 a significant portion of forecasted merchandise purchases for foreign operations and forecasted royalty payments 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 intercompany loan or balance. These contracts are entered into with large, reputable financial institutions, which are monitored for counterparty risk. The principal currencies hedged during the thirty-nine weeks ended November 1, 2008 were the U.S. Dollars, Euro, British pounds, Japanese yen, Canadian dollars, and Hong Kong dollars. Our use of derivative financial instruments represents risk management; we do not use derivative financial instruments for trading purposes. The derivative instruments are recorded in the condensed consolidated balance sheets at their fair value as of the balance sheet dates.

We also use forward contracts to hedge the net assets of international subsidiaries to offset the translation and economic exposures related to our investments in those subsidiaries. The change in fair value of the forward contracts is reported in accumulated other comprehensive earnings within stockholders’ equity to offset the foreign currency translation adjustments on the investments.

We do not have significant exposure to interest rate fluctuations on our borrowings. We use a cross-currency interest rate swap to swap the interest and principal payable of $50 million debt securities of our Japanese subsidiary, Gap (Japan) K.K. due March 2009, 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. Debt securities are recorded on the condensed consolidated balance sheets at their issuance amount, net of unamortized discount.

The interest rate on our $500 million notes due December 2008, of which $138 million remains outstanding, was 10.05 percent per annum as of November 1, 2008. In addition, we have fixed and variable investments classified as cash, cash equivalents, and short-term investments. The interest rates earned on our cash, cash equivalents, and short-term investments will fluctuate in line with short-term interest rates.

Our market risk profile as of November 1, 2008 has not significantly changed since February 2, 2008. Our market risk profile as of February 2, 2008 is disclosed in our Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s third quarter of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements or resolutions may occur and negatively impact earnings in the quarter of such development, settlement or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our results of operations, cash flows or financial position taken as a whole.

ITEM 1A. RISK FACTORS

Other than the addition of the risk factor below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended February 2, 2008:

The recent changes in general economic conditions, and the impact on consumer confidence and consumer spending, could adversely impact our results of operations.

The Company’s performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. Recently, consumer confidence and consumer spending have deteriorated significantly, and could remain depressed for an extended period. Some of the factors influencing this deterioration include fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, fluctuating commodity prices, higher levels of unemployment, higher consumer debt levels, reductions in net worth based on market declines, home foreclosures and reductions in home values, and general uncertainty regarding the overall future economic environment. Consumer purchases of discretionary items, including our merchandise, generally decline during periods where disposable income is adversely affected or there is economic uncertainty, and this could adversely impact our results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks ended November 1, 2008 by The Gap, Inc. or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act.


	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar amount) of Shares that May Yet be Purchased Under the Plans or Programs (1)
Month #1 (August 3 - August 30)	—	$	—	—	$	500 million
Month #2 (August 31 - October 4)	5,280,749	$	17.76	5,280,749	$	406 million
Month #3 (October 5 - November 1)	383,857	$	16.19	383,857	$	400 million

Total	5,664,606	$	17.65	5,664,606

(1)	On February 27, 2008, our Board of Directors approved $1 billion for share repurchases, which we announced on February 28, 2008. This authorization has no expiration date.

ITEM 6. EXHIBITS



3.1		Amended and Restated Bylaws of the Company (effective October 1, 2008), filed as Exhibit 3.1 to Registrant’s Form 8-K on October 2, 2008, Commission File No. 1-7562

10.1*		2006 Long-Term Incentive Plan, as amended and restated effective August 20, 2008

10.2*		Amendment, authorized as of August 20, 2008, to Nonemployee Director Retirement Plan, dated October 27, 1992 and filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1993

10.3*		Summary of Revised Timing of Annual Board Member Stock Unit Grants, effective August 20, 2008

10.4*		Agreement with Tom Wyatt dated October 11, 2007

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

*	Filed herewith.

+	Furnished herewith.

SIGNATURES

Pursuant to the requirements 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.

EXHIBIT INDEX



3.1		Amended and Restated Bylaws of the Company (effective October 1, 2008), filed as Exhibit 3.1 to Registrant’s Form 8-K on October 2, 2008, Commission File No. 1-7562

10.1*		2006 Long-Term Incentive Plan, as amended and restated effective August 20, 2008

10.2*		Amendment, authorized as of August 20, 2008, to Nonemployee Director Retirement Plan, dated October 27, 1992 and filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1993

10.3*		Summary of Revised Timing of Annual Board Member Stock Unit Grants, effective August 20, 2008

10.4*		Agreement with Tom Wyatt dated October 11, 2007

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

*	Filed herewith.

+	Furnished herewith.

Exhibit 10.1

THE GAP, INC.

2006 LONG-TERM INCENTIVE PLAN

(As Amended and Restated Effective as of August 20, 2008)

THE GAP, INC., having adopted The Gap, Inc. 2006 Long-Term Incentive Plan (formerly known as the “1996 Stock Option and Award Plan”) (the “Plan”) effective as of March 26, 1996, and having amended the Plan on several subsequent occasions, hereby amends and restates the Plan in its entirety, effective as of August 20, 2008, as follows:

SECTION 1

BACKGROUND, PURPOSE AND DURATION

1.1 Background . The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Unrestricted Stock, Performance Units, Performance Shares, and Stock Units.

1.2 Purpose of the Plan . The Plan is intended to increase incentive and to encourage Share ownership on the part of Employees, Consultants and Nonemployee Directors. The Plan also is intended to further the growth and profitability of the Company and to permit the payment of compensation that qualifies as performance-based compensation under Section 162(m) of the Code.

1.3 Duration . This amended and restated Plan is effective as of August 20, 2008, and shall remain in effect thereafter unless terminated earlier under Section 11. However, without further stockholder approval, no Incentive Stock Option may be granted under the Plan after January 24, 2016.

SECTION 2

DEFINITIONS

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

2.1 “ 1934 Act ” means the Securities Exchange Act of 1934, as amended. Reference to a specific section of the 1934 Act or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.

2.2 “ 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.

2.3 “ Applicable Laws ” means the requirements relating to the administration of equity compensation plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Shares are listed or quoted and

the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.

2.4 “ Award ” means, individually or collectively, a grant under the Plan of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Unrestricted Stock, Performance Units, Performance Shares, or Stock Units.

2.5 “ Award Agreement ” means the written agreement (which may be electronic) setting forth the terms and conditions applicable to each Award granted under the Plan.

2.6 “ Board ” or “ Board of Directors ” means the Board of Directors of the Company.

2.7 “ Capital Charge Rate ” means the current long-term approximation of the Company’s weighted average cost of capital (WACC), which represents the weighted average of the Company’s cost of debt and the cost of equity. The weighting is determined by comparing the balance of the Company’s debt (acquired debt plus capitalized leases) to the balance of the Company’s equity based upon market value (rather than book value).

2.8 “ Code ” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.

2.9 “ Committee ” means the committee appointed by the Board (pursuant to Section 3.1) to administer the Plan. Unless otherwise determined by the Board, the Compensation and Management Development Committee of the Board shall constitute the Committee.

2.10 “ Common Stock ” means the common stock of the Company.

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

2.12 “ Comparable Store Sales Growth ” means the Company’s or a division’s same store net sales growth for the Fiscal Year in excess of the prior year, or for the Performance Period in the Committee’s sole discretion.

2.13 “ Consultant ” means any consultant, independent contractor, director of an Affiliate, or other person who provides significant services to the Company or an Affiliate, but who is neither an Employee nor a Director.

2.14 “ Deferral Period ” means the period of time during which Stock Units, Performance Units, or Performance Shares are subject to deferral limitations under Section 9.

2.15 “ Determination Date ” means, as to a Performance Period, the latest date possible that will not jeopardize an Award’s qualification as “performance-based compensation” under Section 162(m) of the Code.

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

2.17 “ Disability ” means a permanent and total disability within the meaning of Code Section 22(e)(3), provided that in the case of Awards other than Incentive Stock Options, the Committee in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Committee from time to time.

2.18 “ Dividend Equivalents ” means a right entitling the Participant to receive amounts equal to the ordinary dividends paid on the Company’s Shares from time to time. The Committee shall determine at the time of grant whether Dividend Equivalents shall be settled in cash or Shares, the time or times at which they shall be settled, and such other vesting or forfeiture provisions and other terms and conditions as the Committee, in their sole discretion, deem appropriate. Notwithstanding the foregoing, (a) unless otherwise determined by the Committee, no Dividend Equivalents shall be granted to any Participant the Committee believes is likely to be a “covered employee” as defined under Code Section 162(m)(3) when taxable income is recognized pursuant to the Dividend Equivalent or its related Award to the extent such grant would cause the compensation represented by the Dividend Equivalent or its related Award not to constitute performance-based compensation under Section 162(m) of the Code, and (b) unless otherwise determined by the Committee, no Dividend Equivalent right shall be granted to the extent such grant could result in the payment of any tax under Code Section 409A.

2.19 “ Earnings ” means income before or after interest, taxes, depreciation, amortization and/or selected expenses among divisions as determined by the Committee.

2.20 “ Economic Profit ” means Net Operating Profit After Tax (“NOPAT”) for a given Performance Period less Capital Charges. Total Company or divisional NOPAT means Earnings plus interest on Lease Investment less income taxes. Capital Charges means the Company’s or a division’s Capital Balances multiplied by the Capital Charge Rate. Divisional Capital Balances include certain division specific assets and liabilities, the present value of operating leases, and also may include an allocation for shared assets and share liabilities. Total Company Capital Balances may include an aggregation of divisional capital balances in addition to certain shared assets and liabilities and the present value of operating leases.

2.21 “ Employee ” means any employee of the Company or an Affiliate. A person shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or the employing Affiliate or (ii) transfers between locations of the Company or between the Company, any Affiliate, or any successor. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

2.22 “ Exchange Program ” means a program established by the Committee under which outstanding Awards are amended to provide for a lower Exercise Price or surrendered or cancelled in exchange for (a) Awards with a lower Exercise Price, (b) a different type of Award or awards under a different equity incentive plan, (c) cash, or (d) a combination of (a), (b) and/or (c). Notwithstanding the preceding, the term Exchange Program does not include any (i) program under which an outstanding award is surrendered or cancelled in exchange for a different type of award and/or cash having a total value equal to or less than the value of the surrendered or

cancelled award, (ii) action described in Section 4.3, nor (iii) transfer or other disposition permitted under Section 10.6. For the purpose of clarity, each of the actions described in the prior sentence, none of which constitute an Exchange Program, may be undertaken (or authorized) by the Committee in its sole discretion without stockholder approval.

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

2.24 “ Fair Market Value ” means the fair market value of a Share on a particular date, as determined by the Committee in good faith. Unless otherwise determined by the Committee, the fair market value shall be the closing stock price of Shares as reported on the New York Stock Exchange (NYSE) on the relevant date (or, if no closing stock price is reported for the relevant date, on the last trading day for which a closing stock price of Shares is reported on the NYSE).

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

2.26 “ Grant Date ” means, with respect to an Award, the date that the Award was granted. The Grant Date of an Award shall not be earlier than the date the Award is approved by the Committee.

2.27 “ Gross Margin ” means net sales minus cost of goods sold including rent occupancy and depreciation.

2.28 “ Incentive Stock Option ” means an Option to purchase Shares which is designated as an Incentive Stock Option and that by its terms qualifies and is otherwise intended to qualify as an incentive stock option within the meaning of Code Section 422 and the regulations promulgated thereunder.

2.29 “ Inventory Performance ” means inventory levels or inventory turn.

2.30 “ Lease Investment ” means the present value of minimum expected lease payments.

2.31 “ MICAP Free Cash Flow ” means the Company’s or a division’s Net Earnings for a given Performance Period adjusted for Non-Cash Charges and changes in certain balance sheet accounts, which may result in an increase and/or decrease to Net Earnings. “Non-Cash Charges” may include, but are not limited to, depreciation and amortization. Divisional balance sheet changes may include activities in certain division specific operating assets and liabilities, and may also include an allocation for shared assets and shared liabilities. Total Company balance sheet changes may include an aggregation of divisional balance sheet changes in addition to changes in certain shared assets and liabilities.

2.32 “ Net Earnings ” means the Earnings for a given Performance Period less certain allocated or shared expenses (e.g. headquarters, distribution centers, etc.), as determined by the Committee, after interest and taxes.

2.33 “ Nonemployee Director ” means a Director who is not an Employee.

2.34 “ Nonqualified Stock Option ” means an option to purchase Shares that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.

2.35 “ Operating Margin ” means earnings before interest and taxes divided by sales.

2.36 “ Option ” means an Incentive Stock Option or a Nonqualified Stock Option.

2.37 “ Parent ” means a “parent corporation,” of the Company whether now or hereafter existing, as defined in Code Section 424(e).

2.38 “ Participant ” means an Employee, Consultant, or Nonemployee Director who has an outstanding Award.

2.39 “ Performance Goals ” means the goal(s) (or combined goal(s)) determined by the Committee (in its discretion) pursuant to Section 5 to be applicable to a Participant with respect to an Award.

2.40 “ Performance Period ” means any Fiscal Year or such other period as determined by the Committee in its sole discretion during which performance objectives or other vesting criteria must be met.

2.41 “ Performance Share ” means an Award granted to a Participant pursuant to Section 9.

2.42 “ Performance Unit ” means an Award granted to a Participant pursuant to Section 9.

2.43 “ Period of Restriction ” means the period during which Shares of Restricted Stock, Unrestricted Stock, Stock Units, Performance Units, or Performance Shares are subject to forfeiture and/or restrictions on transferability and therefore, the Shares covered by the Award are subject to a substantial risk of forfeiture. As provided in Section 8 and 9, such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Committee, in its discretion.

2.44 “ Plan ” means The Gap, Inc. 2006 Long-Term Incentive Plan, as set forth in this instrument and as hereafter amended from time to time.

2.45 “ Restricted Stock ” means an Award granted to a Participant pursuant to Section 8.

2.46 “ Retirement ” means, in the case of an Employee, a Termination of Service by reason of the Employee’s retirement at or after his or her normal retirement date under GapShare (the Company’s “401(k)” plan) or any successor plan. With respect to a Consultant, no Termination of Service shall be deemed to be on account of “Retirement”. With respect to a Nonemployee Director, “Retirement” means a Termination of Service at or after the age of 72.

2.47 “ Return on Equity ” means the Company’s or a division’s Earnings for the Performance Period expressed as a percentage of the Company’s or a division’s average shareholders’ equity over the Performance Period.

2.48 “ Return on Net Assets ” means the Company’s or a division’s Earnings for the Performance Period expressed as a percentage of the Company’s or a division’s average balance of selected assets over the Performance Period.

2.49 “ Rule 16b-3 ” means Rule 16b-3 promulgated under the 1934 Act, and any future regulation amending, supplementing or superseding such regulation.

2.50 “ Sales Volume ” means the total sales volume per store of the Company or one of its divisions for the Performance Period.

2.51 “ Section 16 Person ” means a person who, with respect to the Shares, is subject to Section 16 of the 1934 Act.

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

2.53 “ Stock Appreciation Right ” or “ SAR ” means an Award, granted alone or in connection with a related Option, that pursuant to Section 7 is designated as a SAR.

2.54 “ Stock Unit ” means an Award granted pursuant to Section 9.

2.55 “ Subsidiary ” means any corporation in an unbroken chain of corporations beginning with the Company as the corporation at the top of the chain, but only if each of the corporations below the Company (other than the last corporation in the unbroken chain) then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

2.56 “ Tax Obligations ” means tax and social insurance liability obligations and requirements in connection with the Awards, including, without limitation, (a) all federal, state, and local taxes (including the Participant’s FICA obligation) that are required to be withheld by the Company or the employing Affiliate, and (b) any other Company (or employing Affiliate) taxes the responsibility for which (i) the Participant has agreed to bear or (ii) where permitted by governing authorities outside the U.S., taxes the Company may choose to pass on to Participants, in each case with respect to the applicable Award (including on the grant, vesting or exercise thereof or purchase or issuance of Shares thereunder).

2.57 “ Termination of Service ” means (a) in the case of an Employee, a cessation of the employee-employer relationship between the Employee and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, Disability, Retirement, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous (i) reemployment of the individual by the Company or an Affiliate, or (ii) with respect to Awards (other than Incentive Stock Options) granted on or after January 28, 2003, engagement of the consulting services of the individual by the Company or an Affiliate; (b) in the case of a Consultant, a termination of the service relationship between the Consultant and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, Disability, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous (i) re-engagement of the services of the individual by the Company or an Affiliate, or (ii) with respect to Awards granted on or after January 28, 2003, employment of the individual by the Company or an

Affiliate; and (c) in the case of a Nonemployee Director, a cessation of the Director’s service on the Board for any reason, including, but not by way of limitation, a termination by resignation, death, Disability, Retirement or non-reelection to the Board.

2.58 “ Total Sales ” means the Company’s or a division’s net sales for the Performance Period.

2.59 “ Total Shareholder Return ” means, as to any Performance Period, the change in price plus dividend yield of a share of the Company’s common stock.

2.60 “ Unrestricted Stock ” means an Award granted to a Participant pursuant to Section 8.

SECTION 3

ADMINISTRATION

3.1 The Committee . The Plan shall be administered by the Committee. The Committee shall consist of not less than two (2) Directors who shall be appointed from time to time by, and shall serve at the pleasure of, the Board. The Committee shall be comprised solely of Directors who both are (a) “non-employee directors” under Rule 16b-3, and (b) “outside directors” under Code Section 162(m).

3.2 Authority of the Committee . It shall be the duty of the Committee to administer the Plan in accordance with the Plan’s provisions. Subject to the provisions of the Plan, the Committee 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) determine which Employees and Consultants shall be granted Awards, (b) prescribe the terms and conditions of such Awards, (c) determine which Nonemployee Directors shall be granted Awards and the terms and conditions thereof, provided that such Awards shall be subject to Board approval if so required by the Committee Charter, (d) interpret the Plan and the Awards, (e) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Employees, Consultants and Nonemployee Directors who are foreign nationals or employed outside of the United States, (f) implement an Exchange Program, (g) implement or permit (i) a program under which an outstanding award is surrendered or cancelled in exchange for a different type of award and/or cash having a total value equal to or less than the value of the surrendered or cancelled award, (ii) an action described in Section 4.3, and/or (iii) a transfer or other disposition permitted under Section 10.6, (h) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and (i) interpret, amend or revoke any such rules. Notwithstanding the preceding, the Committee shall not implement an Exchange Program without the approval of the holders of a majority of the Shares that are present in person or by proxy and entitled to vote at any Annual or Special Meeting of Shareholders of the Company. With respect to Nonemployee Directors, all references in the Plan to the Committee’s discretion shall be subject to this Section 3.2 and shall require Board approval if so required by the Committee Charter.

3.3 Delegation by the Committee . The Committee, 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 Committee may not delegate its authority and powers (a) with respect to Section 16 Persons, or (b) in any way which would jeopardize the Plan’s qualification under Code Section 162(m) or Rule 16b-3.

3.4 Decisions Binding . All determinations and decisions made by the Committee, the Board, and any delegate of the Committee 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.

SECTION 4

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 the sum of (a) 123,341,342 and (b) the number of Shares (not to exceed 40,225,653) that remain available for grant under the Company’s 2002 Stock Option Plan as of the date of obtaining shareholder approval of the amended and restated Plan on May 9, 2006, and (c) any Shares (not to exceed 28,019,786) that otherwise would have been returned to the 2002 Stock Option Plan after May 9, 2006 on account of the expiration, cancellation, or forfeiture of Awards granted thereunder. For purposes of this Section 4.1, each Share issued or transferred pursuant to an Award other than an Option or SAR shall reduce the number of Shares available for issuance under the Plan by 3 Shares. Shares granted under the Plan may be either authorized but unissued Shares or treasury Shares.

4.2 Lapsed Awards . If an Award expires or is cancelled without having been exercised in full, or is surrendered pursuant to an Exchange Program or a program under which an outstanding award is surrendered or cancelled in exchange for a different type of award and/or cash having a total value equal to or less than the value of the surrendered or cancelled award, or, with respect to Restricted Stock, Unrestricted Stock, Performance Units, Performance Shares, or Stock Units is forfeited to or repurchased by the Company, the unpurchased Shares (or for Awards other than Options and SARs, the forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to SARs, the number of Shares which shall cease to be available under the Plan shall equal the total number of Shares covered by each SAR, as evidenced in the applicable Award Agreement. Shares actually issued pursuant to the SAR and Shares used to pay the tax and exercise price of the SAR will not be returned to the Plan. Except as noted above, Shares that have actually been issued under the Plan under any Award will not be returned to the Plan and will not become available for future distribution under the Plan. Shares used to pay the tax and exercise price of an Award will not become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding the foregoing and, subject to adjustment provided in Section 4.3, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options shall equal the aggregate Share number stated in Section 4.1, plus, to the extent allowable under

Section 422 of the Code, any Shares that become available for issuance under the Plan under this Section 4.2.

4.3 Adjustments in Awards and Authorized Shares . In the event of any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), merger, reorganization, consolidation, recapitalization, separation, liquidation, stock split, reverse stock split, split-up, spin-off, Share combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares, the Committee shall adjust the number and class of Shares which may be delivered under the Plan, the number, class, and price of Shares subject to outstanding Awards, and the numerical limits of Sections 6.1, 7.1.1, 8.1 and 9.1 in such manner as the Committee (in its sole discretion) shall determine to be appropriate to prevent the dilution or diminution of such Awards. Notwithstanding the preceding, the number of Shares subject to any Award always shall be a whole number.

SECTION 5

PERFORMANCE GOALS

5.1 Establishment of Performance Goals . For each Performance Period, on or before the applicable Determination Date, the Committee shall establish and set forth in writing the Performance Goals, if any, and any particulars, components and adjustments relating thereto, applicable to each Participant. The Performance Goals, if any, will be objectively measurable and will be based upon the achievement of a specified percentage or level in one or more of the following performance criteria:

(a) Comparable Store Sales Growth;

(b) Earnings;

(d) MICAP Free Cash Flow;

(e) Return on Equity;

(f) Return on Net Assets;

(g) Sales Volume;

(h) Total Sales;

(i) Total Shareholder Return;

(j) the attainment of a share of the Company’s common stock of a specified fair market value for a specified period of time;

(k) Gross Margin;

(l) Operating Margin;

(m) market share;

(n) Inventory Performance;

(o) cost reduction measures based on specified goals;

(p) customer satisfaction based on specified goals that measure customer survey results, customer acquisition, customer loyalty, conversion or customer traffic;

(q) goals related to the attraction, retention and satisfaction of employees; and

(r) any combination of the above.

5.2 Committee Discretion on Performance Goals . As determined in the discretion of the Committee, the Performance Goals for any Performance Period may (a) differ from Participant to Participant and from Award to Award, (b) be based on the performance of the Company as a whole or the performance of a specific Participant or one or more subsidiaries, divisions, departments, regions, stores, segments, products, functions or business units of the Company, (c) be measured on a per share, per capita, per unit, per square foot, per employee, and/or per store basis, (d) be measured on a pre-tax or after-tax basis, and (e) be measured on an absolute basis or in relative terms (including, but not limited to, the passage of time and/or against other companies, financial metrics and/or an index).

5.3 Performance Measures . The Committee may determine at the time the Performance Goals are established that any one or more of the following shall be taken into account, in whole or in part and in any manner specified by the Committee, when determining whether a Performance Goal has been attained:

(a) the gain, loss, income or expense resulting from changes in generally accepted accounting principles that become effective during the Performance Period or any previous period;

(b) the gain, loss, income, or expense reported publicly by the Company that are extraordinary in nature;

(d) the gain or loss resulting from, and the direct expense incurred in connection with, the disposition of a business, in whole or in part, the sale of investments or non-core assets or discontinued operations, categories or segments;

(e) the gain or loss from claims and/or litigation and insurance recoveries relating to claims or litigation;

(f) the impact of impairment of tangible or intangible assets;

(g) the impact of restructuring or business recharacterization activities, including, without limitation, reductions in force, that are reported publicly by the Company;

(h) the impact of investments or acquisitions made during the Performance Period, or to the extent provided by the Committee, any prior period;

(i) the loss from political and legal changes that impact the operations of the Company, as a consequence of war, insurrection, riot, terrorism, confiscation, expropriation, nationalization, deprivation, seizure, business interruption and regulatory requirements, as determined under generally accepted accounting principles as included in the Company’s annual audited financial statements;

(j) retained and uninsured losses from natural catastrophes;

(k) currency fluctuations;

(l) the expense relating to the issuance of stock options and/or other stock based compensation;

(m) the expense relating to the early retirement of debt; and

(n) the impact of the conversion of convertible debt securities.

Each of the adjustments described above shall relate to the Company as a whole or any part of the Company’s business or operations, as applicable given the specified Performance Goal. The adjustments are to be determined in accordance with generally accepted accounting principles and standards, unless another objective method of measurement is designated by the Committee. In addition, the Committee shall adjust any performance criteria, Performance Goal or other feature of an Award that relates to or is wholly or partially based on the number of, or the value of, any stock of the Company, to reflect any stock dividend or split, repurchase, recapitalization, combination, or exchange of shares or other similar changes in such stock.

5.4 Adjustments to Performance Goals . Notwithstanding anything to the contrary contained herein, for each Performance Period, after the Determination Date, the Committee may amend or adjust the performance measures or other terms and conditions of an outstanding Award in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in law or accounting, but only to the extent such adjustment would not cause any portion of the Award to be nondeductible pursuant to Section 162(m) of the Code.

SECTION 6

STOCK OPTIONS

6.1 Grant of Options . Subject to the terms and provisions of the Plan, Options may be granted to Employees, Consultants and Nonemployee Directors at any time and from time to time as determined by the Committee in its sole discretion. The Committee, in its sole discretion, shall determine the number of Shares subject to each Option, provided that during any Fiscal Year, no Participant shall be granted Options covering more than 18,000,000 Shares. The

Committee may grant Incentive Stock Options, Nonqualified Stock Options, or a combination thereof; provided, however, that any Options granted to Consultants or Nonemployee Directors pursuant to this Section 6 shall be Nonqualified Stock Options.

6.2 Award Agreement . Each Option shall be evidenced by an Award Agreement that shall specify the Exercise Price, the expiration date of the Option, the number of Shares to which the Option pertains, any conditions to exercise of the Option, and such other terms and conditions as the Committee, in its discretion, shall determine. The Award Agreement shall also specify whether the Option is intended to be an Incentive Stock Option or a Nonqualified Stock Option.

6.3 Exercise Price . Subject to the provisions of this Section 6.3, the Exercise Price for each Option shall be determined by the Committee in its sole discretion.

6.3.1 Nonqualified Stock Options . In the case of a Nonqualified Stock Option, the Exercise Price shall be determined by the Committee in its discretion but shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date.

6.3.2 Incentive Stock Options . In the case of an Incentive Stock Option, the Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date; provided, however, that if on the Grant Date, the Employee (together with persons whose stock ownership is attributed to the Employee pursuant to Code Section 424(d)) owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the Exercise Price shall be not less than one hundred and ten percent (110%) of the Fair Market Value of a Share on the Grant Date.

6.3.3 Substitute Options . Notwithstanding the provisions of Sections 6.3.1 and 6.3.2, in the event that the Company or an Affiliate consummates a transaction described in Code Section 424(a) ( e.g., the acquisition of property or stock from an unrelated corporation), persons who become Employees or Consultants on account of such transaction may be granted Options in substitution for options granted by their former employer. If such substitute Options are granted, the Committee, in its sole discretion and consistent with Code Section 424(a) and Code Section 409A, may determine that such substitute Options shall have an Exercise Price less than one hundred percent (100%) of the Fair Market Value of the Shares on the Grant Date.

6.4 Expiration of Options .

6.4.1 Expiration Dates . Each Option shall terminate no later than the first to occur of the following events:

(a) The date for termination of the Option set forth in the Award Agreement; or

(b) The expiration of ten (10) years from the Grant Date; or

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

(d) The expiration of one (1) year from the date of the Participant’s Termination of Service by reason of Disability or death; or

(e) The expiration of one (1) year from the date of the Participant’s Retirement (except as provided in Section 6.8.2 regarding Incentive Stock Options).

6.4.2 Death of Participant . Notwithstanding Section 6.4.1, if a Participant dies prior to the expiration of his or her Options, the Committee, in its discretion, may provide that his or her Options shall be exercisable for up to one (1) year after the date of death. With respect to extensions that were not included in the original terms of the Option but were provided by the Committee after the date of grant, if at the time of any such extension, the exercise price per Share of the Option is less than the Fair Market Value of a Share, the extension shall, unless otherwise determined by the Committee, be limited to the earlier of (1) the maximum term of the Option as set by its original terms, or (2) ten (10) years from the Grant Date.

6.4.3 Committee Discretion . The Committee, in its sole discretion, (a) shall provide in each Award Agreement when each Option expires and becomes unexercisable, and (b) may, after an Option is granted, extend the maximum term of the Option (subject to Section 6.8.4 regarding Incentive Stock Options), provided, however, such Option shall terminate on the expiration of ten (10) years from the Grant Date, if earlier. With respect to the Committee’s authority in Section 6.4.3(b), if, at the time of any such extension, the exercise price per Share of the Option is less than the Fair Market Value of a Share, the extension shall, unless otherwise determined by the Committee, be limited to the earlier of (1) the maximum term of the Option as set by its original terms, or (2) ten (10) years from the Grant Date. Unless otherwise determined by the Committee, any extension of the term of an Option pursuant to this Section 6.4.3 shall comply with Code Section 409A to the extent applicable.

6.5 Exercisability of Options . Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine in its sole discretion. After an Option is granted, the Committee, in its sole discretion, may accelerate the exercisability of the Option.

6.6 Payment . Options shall be exercised by the Participant’s delivery of a notice of exercise in such form and manner as the Company may designate 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 Committee, 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 Committee, 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 practicable after receipt of a notification of exercise in such form and manner as the Company may designate and full payment for the Shares purchased, the Company shall deliver to the Participant (or the Participant’s designated broker), Share certificates (which may be in book entry form) representing such Shares.

6.7 Restrictions on Share Transferability . The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option as it may deem advisable, including, but not limited to, restrictions related to applicable federal securities laws, the requirements of any national securities exchange or system upon which Shares are then listed or traded, or any blue sky or state securities laws.

6.8 Certain Additional Provisions for Incentive Stock Options .

6.8.1 Exercisability . The aggregate Fair Market Value (determined on the Grant Date(s)) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Employee during any calendar year (under all plans of the Company and its Subsidiaries or any Parent) shall not exceed $100,000. To the extent that the aggregate Fair Market Value of the Shares with respect to which an Option designated as an Incentive Stock Option exceeds this $100,000 limit, such Option will be treated as a Nonqualified Stock Option. For purposes of this Section 6.8.1, Incentive Stock Options will be taken into account in the order in which they were granted, the Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted, and calculation will be performed in accordance with Code Section 422 and Treasury Regulations promulgated thereunder.

6.8.2 Termination of Service . No Incentive Stock Option may be exercised more than three (3) months after the Participant’s Termination of Service for any reason other than Disability or death, unless (a) the Participant dies during such three-month period, and/or (b) the Award Agreement or the Committee permits later exercise (in which case the Option instead may be deemed to be a Nonqualified Stock Option). No Incentive Stock Option may be exercised more than one (1) year after the Participant’s Termination of Service on account of Disability, unless (a) the Participant dies during such one-year period, and/or (b) the Award Agreement or the Committee permit later exercise (in which case the option instead may be deemed to be a Nonqualified Stock Option). Unless otherwise determined by the Committee, any extension of the term or exercise period on an Option pursuant to this Section 6.8.2 shall comply with Code Section 409A.

6.8.3 Company and Subsidiaries Only . Incentive Stock Options may be granted only to persons who are employees of the Company or a Subsidiary on the Grant Date.

6.8.4 Expiration . No Incentive Stock Option may be exercised after the expiration of ten (10) years from the Grant Date; provided, however, that if the Option is granted to an Employee who, together with persons whose stock ownership is attributed to the Employee pursuant to Code Section 424(d), owns stock possessing more than 10% of the total combined voting power of all classes of the stock of the Company or any of its Subsidiaries, the Option may not be exercised after the expiration of five (5) years from the Grant Date.

SECTION 7

STOCK APPRECIATION RIGHTS

7.1 Grant of SARs . Subject to the terms and conditions of the Plan, a SAR may be granted to Employees, Consultants, and Nonemployee Directors at any time and from time to time as shall be determined by the Committee, in its sole discretion.

7.1.1 Number of Shares . The Committee shall have complete discretion to determine the number of SARs granted to any Participant, provided that during any Fiscal Year, no Participant shall be granted SARs covering more than 18,000,000 Shares.

7.1.2 Exercise Price and Other Terms . The Committee, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the Plan. The exercise price of each SAR shall be determined by the Committee in its discretion but shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date. After a SAR is granted, the Committee, in its sole discretion, may accelerate the exercisability of the SAR.

7.2 SAR Agreement . Each SAR grant shall be evidenced by an Award Agreement that shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Committee, in its sole discretion, shall determine.

7.3 Expiration of SARs . A SAR granted under the Plan shall expire upon the date determined by the Committee, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6.4 also shall apply to SARs.

7.4 Payment of SAR Amount . Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times

(b) The number of Shares with respect to which the SAR is exercised.

At the discretion of the Committee, the payment upon SAR exercise may be in cash, Shares of equivalent value or a combination thereof.

SECTION 8

RESTRICTED STOCK AND UNRESTRICTED STOCK

8.1 Grant of Restricted Stock and Unrestricted Stock . Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock and Unrestricted Stock to Employees, Consultants, and Nonemployee Directors in such amounts as the Committee, in its sole discretion, shall determine. The Committee, in its sole discretion, shall determine the number of Shares to be granted to each Participant, provided that during any Fiscal Year, no Participant shall receive more than 2,000,000 Shares of Restricted Stock or Unrestricted Stock.

8.2 Restricted Stock or Unrestricted Stock Agreement . Each Award of Restricted Stock or Unrestricted Stock shall be evidenced by an Award Agreement that shall specify any Period of Restriction, the number of Shares granted, and such other terms and conditions as the Committee, in its sole discretion, shall determine. Unless the Committee determines otherwise, Shares of Restricted Stock shall be held by the Company as escrow agent until the restrictions on such Shares have lapsed.

8.3 Transferability . Except as provided in this Section 8, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.

8.4 Other Restrictions . The Committee, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate, in accordance with this Section 8.4.

8.4.1 General Restrictions . The Committee may set restrictions based upon continued employment or service with the Company and its Affiliates, the achievement of specific performance objectives (Company-wide, divisional, or individual), applicable federal or state securities laws, or any other basis determined by the Committee in its discretion.

8.4.2 Section 162(m) Performance Restrictions . For purposes of qualifying Awards of Restricted Stock as “performance-based compensation” under Code Section 162(m), the Committee, in its discretion, may set restrictions based upon the achievement of Performance Goals during the Performance Period. The Performance Goals and Performance Period shall be set by the Committee on or before the Determination Date. In granting Restricted Stock which is intended to qualify under Code Section 162(m), the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under Code Section 162(m) ( e.g., in determining the Performance Goals and/or Performance Period).

8.4.3 Legend on Certificates . The Committee, in its discretion, may legend the certificates representing Restricted Stock to give appropriate notice of the restrictions applicable to such Shares.

8.5 Removal of Restrictions . Except as may be provided in the Award Agreement, Restricted Stock shall be released from escrow as soon as practicable after the last day of the Period of Restriction. The Committee, in its discretion, may accelerate the time at which any restrictions shall lapse or be removed. After the restrictions have lapsed, the Participant shall be entitled to have any legend or legends under Section 8.4.3 removed from his or her Share certificate, and the Shares shall be freely transferable by the Participant, subject to applicable laws. The Committee (in its discretion) may establish procedures regarding the release of Shares from escrow and the removal of legends, as necessary or appropriate to minimize administrative burdens on the Company.

8.6 Voting Rights . During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Committee determines otherwise.

8.7 Dividends and Other Distributions . During any Period of Restriction, Participants holding Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid, unless otherwise provided in the Award Agreement.

8.8 Return of Stock to Company . On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed shall revert to the Company and again shall become available for grant under the Plan.

SECTION 9

STOCK UNITS, PERFORMANCE UNITS, AND PERFORMANCE SHARES

9.1 Grant of Stock Units, Performance Units, or Performance Shares . Subject to the terms and provisions of the Plan, Stock Units, Performance Units, or Performance Shares may be granted to Employees, Consultants, and Nonemployee Directors at any time and from time to time, as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion in determining the number of Stock Units, Performance Units, or Performance Shares granted to each Participant, provided that during any Fiscal Year, (a) no Participant shall receive Stock Units or Performance Units having an initial value greater than $20,000,000, and (b) no Participant shall receive more than 2,000,000 Performance Shares.

9.2 Initial Value of Stock Units, Performance Units, or Performance Shares . Each Stock Unit and Performance Unit shall have an initial value that is established by the Committee on or before the Grant Date. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the Grant Date.

9.3 Award Agreement . Each Award of Stock Units, Performance Units, or Performance Shares shall be evidenced by an Award Agreement that shall specify the Performance Period, Period of Restriction, Deferral Period (if any), and such other terms and conditions as the Committee, in its sole discretion, shall determine.

9.4 Performance Objectives and Other Terms . The Committee shall set performance objectives, a Period of Restriction, Deferral Period, or other vesting criteria in its discretion which, depending on the extent to which they are met, will determine the number or value of Stock Units, Performance Units, or Performance Shares that will be paid out to the Participants. Each Award of Stock Units or Performance Units subject to a Deferral Period and each Award of Performance Shares subject to a Deferral Period shall be referred to herein as Deferred Units or Deferred Shares, respectively. Each Award of Stock Units subject to a Period of Restriction shall be referred to herein as a “Restricted Stock Unit.” The time period during which the Award is subject to deferral shall be the “Deferral Period”.

9.4.1 General Performance Objectives . The Committee may set performance objectives or vesting criteria based upon the achievement of Company-wide, divisional, or individual goals, applicable federal or state securities laws, or any other basis determined by the Committee in its discretion (for example, but not by way of limitation, upon continued employment or service with the Company and its Affiliates).

9.4.2 Section 162(m) Performance Objectives . For purposes of qualifying Awards of Stock Units, Performance Units, or Performance Shares as “performance-based compensation” under Code Section 162(m), the Committee, in its discretion, may determine that

the performance objectives applicable to Stock Units, Performance Units, or Performance Shares shall be based on the achievement of Performance Goals during the Performance Period. The Performance Goals and Performance Period shall be set by the Committee on or before the Determination Date. In granting Stock Units which are intended to qualify under Code Section 162(m), the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Stock Units, Performance Units, or Performance Shares under Code Section 162(m) ( e.g., in determining the Performance Goals and/or Performance Period).

9.4.3 Deferral of Awards . The Committee may set such terms and conditions for deferral of payment of an Award granted under this Section 9 in accordance with the following provisions:

(a) Deferred Compensation . Each grant shall constitute the agreement by the Company to issue or transfer Shares or cash, or a combination thereof, to the Participant in the future in consideration of the performance of services, subject to the fulfillment during the Deferral Period of such conditions as the Committee may specify.

(b) Consideration . Each grant may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than Fair Market Value on the Grant Date.

(c) Deferral Period . Each grant shall provide that the Deferred Units and Deferred Shares covered thereby shall be subject to a Deferral Period, which shall be fixed by the Committee on the Grant Date, and any Award may provide for the earlier termination of such period in the event of a change in control of the Company or other similar transaction or event. If the Deferral Period is to terminate on account of a change in control or other similar transaction or event, unless otherwise determined by the Committee, such change in control or other similar transaction or event must constitute a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company (as determined in accordance with Section 409A(a)(2)(A)(v) of the Code and Treasury regulation Section 1.409A-3(i)(5)).

9.5 Earning of Stock Units, Performance Units, or Performance Shares . After the applicable Period of Restriction or Deferral Period has ended, the Participant shall be entitled to receive a payout of the number of Stock Units, Performance Units, or Performance Shares earned by the Participant over the Period of Restriction or Deferral Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting requirements have been achieved during the Performance Period. After the grant of Stock Units, Performance Units, or Performance Shares, the Committee, in its sole discretion, may reduce or waive any performance objectives or other vesting requirements for such Stock Units, Performance Units, or Performance Shares.

9.6 Form and Timing of Payment . Payment of earned Stock Units, Performance Units, or Performance Shares shall be made as soon as practicable after the expiration of the applicable Period of Restriction (subject to any deferral permitted under Section 10.10) or

Deferral Period. The Committee, in its sole discretion, may pay such earned Awards in cash, Shares, or a combination thereof.

9.7 Dividend Equivalents and Other Ownership Rights . During the Period of Restriction or Deferral Period, the Participant shall not have any right to transfer any rights under the subject Award, shall not have any rights of ownership in the Stock Units, Performance Units, or Performance Shares and shall not have any right to vote such Awards, but the Committee may, consistent with the requirements of Code Section 409A, on or after the Grant Date authorize the payment of Dividend Equivalents on such shares or units in cash or additional Shares on a current, deferred or contingent basis.

9.8 Cancellation . On the date set forth in the Award Agreement, all unearned or unvested Stock Units, Performance Units, or Performance Shares shall be forfeited to the Company, and, except as otherwise determined by the Committee, again shall be available for grant under the Plan.

SECTION 10

MISCELLANEOUS

10.1 No Effect on Employment or Service . Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant’s employment or service at any time, with or without cause. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Affiliates (or between Affiliates) shall not be deemed a Termination of Service. Employment with the Company and its Affiliates is on an at-will basis only.

10.2 Participation . No Employee, Consultant or Nonemployee Director shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.

10.3 Indemnification . Each person who is or shall have been a member of the Committee, or 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 failure to act under the Plan or any Award 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.

10.4 Successors . All obligations of the Company under the Plan, with respect to Awards 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.

10.5 Beneficiary Designations . If permitted by the Committee, a Participant under the Plan may name a beneficiary or beneficiaries to whom any vested but unpaid Award 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 Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate and, subject to the terms of the Plan and of the applicable Award Agreement, any unexercised vested Award may be exercised by the administrator or executor of the Participant’s estate.

10.6 Limited Transferability of Awards . No Award 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 10.5. All rights with respect to an Award granted to a Participant shall be available during his or her lifetime only to the Participant. Notwithstanding the foregoing, a Participant may, if the Committee (in its discretion) so permits, transfer an Award granted on or after January 24, 2006, to an individual or entity other than the Company. Any such transfer shall be made in accordance with such procedures as the Committee may specify from time to time.

10.7 No Rights as Stockholder . Except to the limited extent provided in Sections 8.6 and 8.7, 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 Award (or exercise thereof), unless and until certificates (which may be in book entry form) 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).

10.8 Withholding Requirements . Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), or at such earlier time as the Tax Obligations are due, 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 all Tax Obligations. Notwithstanding any contrary provision of the Plan, if a Participant fails to remit to the Company the amount of such Tax Obligations within the time period specified by the Committee (in its discretion), the Participant’s Award may, in the Committee’s discretion, be forfeited and in such case the Participant shall not receive any of the Shares covered by such Award.

10.9 Withholding Arrangements . The Committee, 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 Tax Obligations, in whole or in part 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 or remitted. The amount of the Tax Obligations shall be deemed to include any amount which the Committee agrees may be withheld at the time the election is made, not to 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 or social insurance liability to be withheld or remitted 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 Tax Obligations are required to be withheld or remitted.

10.10 Deferrals . The Committee, in its sole discretion, may permit a Participant to defer receipt of the payment of cash or the delivery of Shares that would otherwise be delivered to a Participant under the Plan. In the event of such a deferral, the Committee, in its discretion, may provide that the payment of Dividend Equivalents attributable thereto shall be also deferred until such time as the Award will be settled in accordance with the Participant’s deferral election. Any such deferral election shall be subject to such rules and procedures as shall be determined by the Committee in its sole discretion, which rules and procedures shall comply with the requirements of Code Section 409A, unless otherwise determined by the Committee.

10.11 Elections by Nonemployee Directors . Pursuant to such procedures as the Committee (in its discretion) may adopt from time to time, each Nonemployee Director may elect to forego receipt of all or a portion of the annual retainer, committee fees and meeting fees otherwise due to the Nonemployee Director in exchange for Shares or Stock Units. The number of Shares or Stock Units received by any Nonemployee Director shall equal the amount of foregone compensation divided by the Fair Market Value of a Share on the date the compensation otherwise would have been paid to the Nonemployee Director, rounded up to the nearest whole number of Shares. The procedures adopted by the Committee for elections under this Section 10.11 shall be designed to ensure that any such election by a Nonemployee Director will not disqualify him or her as a “non-employee director” under Rule 16b-3. Unless otherwise determined by the Committee, the elections permitted under this Section 10.11 shall comply with Code Section 409A.

10.12 Fractional Shares . The Company shall not be required to issue any fractional Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement thereof in cash.

10.13 Code Section 409A . Unless otherwise determined by the Committee, each Award shall comply with Code Section 409A, and the Committee shall comply with Code Section 409A in establishing the rules and procedures applicable to deferrals in accordance with Section 10 and taking or permitting such other actions under the terms of the Plan that would otherwise result in a deferral of compensation subject to Code Section 409A.

SECTION 11

AMENDMENT AND TERMINATION

11.1 Amendment, Suspension, or Termination . The Board, in its sole discretion, may amend, suspend or terminate the Plan, or any part thereof, at any time and for any reason. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. The amendment, suspension, or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Award theretofore granted to such Participant. No Award may be granted during any period of suspension or after termination of the Plan.

SECTION 12

LEGAL CONSTRUCTION

12.1 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.

12.2 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.

12.3 Requirements of Law . The granting of Awards and the issuance of Shares under the Plan 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.

12.4 Securities Law Compliance . With respect to Section 16 Persons, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan, Award Agreement or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee.

12.5 Governing Law . The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of California (with the exception of its conflict of laws provisions).

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

EXECUTION

IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this amended and restated Plan on the date indicated below.

Exhibit 10.2

AMENDMENT

THE GAP, INC. NONEMPLOYEE DIRECTOR RETIREMENT PLAN

WHEREAS, The Gap, Inc. (the “Company”) maintains The Gap, Inc. Nonemployee Director Retirement Plan (the “Plan”), effective October 27, 1992; and

WHEREAS, it now is considered desirable to amend the Plan, to reflect the resolution of the Corporate Governance Committee on January 29, 1997 to freeze the amount of annual payment at the annual retainer amount as of January 28, 1997, to reflect Corporate Governance Guidelines adopted by the Board of the Company on May 19, 1998, that pertained to nonemployee director retirement, and to reflect updates to the Plan in accordance with the American Jobs Creation Act of 2004 (the “Jobs Act”) and section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and consistent with published Internal Revenue Service (“IRS”) guidance, including proposed and final IRS regulations under section 409A of the Code;

NOW, THEREFORE, IT IS RESOLVED that, pursuant to the power reserved to the Company under Section 5.1 of the Plan, the Plan is hereby amended in the following particulars:

1. Effective as of January 1, 2008, by adding the following new paragraph to the Plan immediately preceding Section 1 thereof:

“The Plan is designed to comply with the American Jobs Creation Act of 2004, as amended (the ‘Jobs Act’), and section 409A of the Code. Accordingly, effective January 1, 2008, the Plan is hereby amended, as set forth herein, to conform to the requirements of the Jobs Act and section 409A of the Code, and final Treasury Regulations issued thereunder, with respect to Non-Grandfathered amounts under the

Plan. Prior to January 1, 2008, it is intended that the Plan be interpreted according to a good faith interpretation of the Jobs Act and section 409A of the Code, and consistent with published guidance thereunder, including, without limitation, IRS Notice 2005-1 and the proposed and final Treasury Regulations under section 409A of the Code. Treatment of amounts deferred under the Plan pursuant to and in accordance with any transition rules provided under all IRS published guidance and other applicable authorities in connection with the Jobs Act or section 409A of the Code, shall be expressly authorized hereunder and shall be administered in accordance with procedures established by the Company. In the event of any inconsistency between the terms of the Plan and the Jobs Act or section 409A of the Code with respect to Non-Grandfathered amounts, the terms of the Jobs Act and section 409A of the Code shall prevail and govern. ‘Grandfathered Amounts’ shall mean the benefits accrued under the Plan by Participants who had terminated service with the Company as of December 31, 2004, the right to which was earned and vested (within the meaning of Treasury Regulation §1.409A-6(a)(2)) as of December 31, 2004, determined by reference to the terms of the Plan in effect as of October 3, 2004, but only to the extent such Plan terms have not been materially modified (within the meaning of Treasury Regulation §1.409A-6(a)(4)) after October 3, 2004. ‘Non-Grandfathered Amounts’ shall mean the benefits accrued under the Plan by Participants who terminate service with the Company on or after December 31, 2004. By becoming a Participant and making deferrals under this Plan, each Participant agrees to be bound by the provisions of the Plan and the determinations of the Company hereunder.”

2. Effective as of May 19, 1998, by adding the following sentence to Section 2.1 of the Plan, immediately following the first sentence thereof:

“Effective May 19, 1998, the Board adopted Corporate Governance guidelines providing that a Nonemployee Director who turns age 72 prior to the end of a fiscal year of the Company shall not stand for reelection as a director at the next Annual Meeting of the company following the end of the fiscal year.”

3. Effective as of January 28, 1997, by adding the following sentence to the end of Section 2.1 of the Plan:

“Notwithstanding the foregoing, effective as of January 28, 1997, no Nonemployee Director who first becomes a Nonemployee Director on or after January 28, 1997 shall become a Participant in the Plan.”

4. Effective as of January 28, 1997, by adding the following sentence to Section 3.1 of the Plan, immediately following the second sentence thereof:

“Notwithstanding the foregoing, effective for calendar years on and after January 28, 1997, the benefit for a Participant shall be an amount for each calendar year that is equal to seventy-five percent (75%) of the amount of the Participant’s annual retainer fee that was in effect on January 28, 1997.”

5. Effective as of January 1, 2008, by substituting the following for the text of Section 3.2 of the Plan:

“Payments to a Participant of Non-Grandfathered Amounts shall be made in quarterly installments on the first business day of the calendar quarter (the ‘Payment Date’).”

6. Effective as of January 1, 2008, by adding the following sentence to the end of Section 3.3 of the Plan:

“‘Termination of service’ with respect to Non-Grandfathered Amounts shall mean the date the Participant has a separation from service (within the meaning of section 409A of the Code and the regulations, notices and other guidance thereunder) from the Board of the Company for any reason including by reason of termination of service due to death or disability.”

7. Effective as of January 1, 2008, by adding the following new Sections 3.7 and 3.8 to the Plan, immediately after Section 3.6 thereof:

“3.7. Cash-Outs of Small Amounts. If the value of a Participant’s total benefits under the Plan at his termination of service (or his death), or at any time thereafter, equals the applicable dollar amount under section 402(g) of the Code or less, the benefits will be paid to the Participant (or, in the event of his death, his Beneficiary) in a single lump sum within 90 days of his termination of service.

3.8 Special Distribution Rules. Except as otherwise provided herein, a Participant’s benefits under this Plan shall not be distributed earlier than the applicable date or dates described in this Section 3. Notwithstanding the foregoing, in the case of payments: (i) that would violate securities or other applicable laws; or (ii) that would jeopardize the ability of the

Company to continue as a going concern. In the case of a payment described in (i) or (ii) above, payment will be made in the first calendar year in which the Company reasonably anticipates that the payment would not jeopardize the ability of the Company to continue as a going concern, or the payment would not result in a violation of securities or other applicable laws. Payments intended to pay employment taxes or payments made as a result of income inclusion of an amount of a Participant’s benefits as a result of a failure to satisfy section 409A of the Code shall be permitted at the Company’s discretion at any time and to the extent provided in Treasury Regulations under section 409A of the Code and IRS Notice 2005-1, Q&A-15, and any applicable subsequent guidance. ‘Employment taxes’ shall include Federal Income Contributions Act (FICA) tax imposed under sections 3101 and 3121(v)(2) of the Code on compensation deferred under the Plan (the ‘FICA Amount’), the income tax imposed under section 3401 of the Code on the FICA Amount, and to pay the additional income tax under section 3401 of the Code attributable to the pyramiding section 3401 wages and taxes. A distribution may be accelerated as may be necessary to comply with a certificate of divestiture (as defined in section 1043(b)(2) of the Code) with respect to certain conflict of interest rules.”

8. Effective as of January 1, 2008, by adding the following new sentence at the end of Section 4.4 of the Plan:

“Notwithstanding the foregoing, the Company shall retain and exercise any discretion reserved hereunder only to the extent such retention and exercise of discretion does not violate the requirements of section 409A of the Code with respect to a Participant’s Non-Grandfathered Amounts.”

9. Effective as of January 1, 2008, by adding the following to Section 5.2 of the Plan

“Notwithstanding the foregoing, the Company reserves the right to make all such benefit payments within the second twelve-month period commencing with the date of termination of the Plan; provided, however, that no such distribution will be made during the first twelve-month period following such date of Plan termination other than those that would otherwise be payable under Section 3 absent the termination of the Plan. The Company reserves the right to terminate the Plan pursuant to and in accordance with such other events and conditions prescribed under section 409A of the Code.”

* * *

IN WITNESS WHEREOF, the Company, by its duly authorized officer, has executed this amendment this 5 ^th day of December, 2008.


THE GAP, INC.

By:		/s/ William Tompkins
		Senior Vice President, Total Awards

Exhibit 10.3

Summary of Revised Timing of Annual Board Member Stock Unit Grants

On August 20, 2008, the Board of Directors of The Gap, Inc. (the “Board”) determined that the annual stock units granted to continuing non-employee directors following the company’s annual shareholders meeting, as well as the initial grant made to any non-employee director who is first elected to the Board at the company’s annual shareholders meeting, be granted on June 30 of each year (rather than the day after the annual meeting); provided, however, that if the company’s annual shareholders meeting takes place after June 30, then the related stock unit grants will be granted on the first business day following that meeting. All other components of non-employee director compensation remain unchanged.

Exhibit 10.4

October 11, 2007

John T. Wyatt

Dear Tom,

This letter is to confirm your appointment as Division President, Outlet. In this position you will report to Glenn Murphy, Chairman and CEO, Gap Inc.

Salary. Effective on the Start Date, your annual salary was increased to $700,000, payable every two weeks. You are scheduled to receive a performance review in March 2008.

Start Date. Your first day in your new position was October 1, 2007.

Annual Bonus . Based on your position as Division President, you will continue to be eligible for an annual bonus based on achievement of Gap Inc. and/or Division financial objectives as well as individual performance. Under the current program, your annual target bonus will be 75% of your base salary. Depending on results, your actual bonus, if any, may be higher or lower and can reach a maximum of 150%. Bonus payments will be prorated based on active time in position, divisional or country assignment and changes in base salary or incentive target that may occur during the fiscal year. Your annual bonus for fiscal year 2007 is scheduled for payment in March 2008. You must be employed by Gap Inc. on the payment date with a performance rating of “On Target” or above to receive an award. Gap Inc. has the right to modify the program at any time. Management discretion can be used to modify the final award amount. Bonus payments are subject to supplemental income tax withholding.

Performance Stock Awards. Based on your position as Division President, you will continue to be eligible for performance stock awards. Performance stock awards reward achievement of Gap Inc. and/or Division financial objectives. Under the current program, your annual target for this program is equal to 50% of your base salary. Depending on results, your actual performance stock award, if any, may be higher or lower and can reach a maximum of 100%. Performance stock awards will be prorated based on active time in position, changes in base salary, or changes to the performance stock award target that may occur during the fiscal year. Awards are made in the form of performance units that are paid in Gap Inc. stock upon vesting. For fiscal 2007, the award of your performance stock units is scheduled to be made in March 2008 provided you are employed by Gap Inc. on the date of the award with a performance rating of “On Target” or above. The number of performance units will be determined in March 2008 by dividing the value of the award as a percentage of base salary by the fair market value of Gap Inc. common stock on the award date, rounded down to the nearest whole performance unit. The award will vest 50% two years from the date of grant and 50% three years from the date of grant provided you are employed by Gap Inc. on the vesting dates. Awards are subject to approval by the Committee and the provisions of Gap Inc.’s stock plan. Gap Inc. has the right to modify the program at any time. Management discretion can be used to modify the final award amount. Awards are subject to income tax withholding upon vesting.

John T. Wyatt

October 11, 2007

Page Two

You may be eligible for future Long-Term Incentive Awards as a participant in the Focal Review process.

Termination/Severance . In the event that your employment is involuntarily terminated by the Company for reasons other than For Cause (as defined below) prior to February 13, 2009, the Company will provide you the following in exchange for your release of any claims you may have against the Company and its officers and directors:

(1) Your then current salary, at regular pay cycle intervals, for eighteen months (the “severance period”). Payments will cease if you accept other employment or professional relationship with a competitor of the Company (defined as another company primarily engaged in the apparel design or apparel retail business or any retailer with apparel sales in excess of $500 million annually), or if you breach your remaining obligations to the Company (e.g., your duty to protect confidential information, agreement not to solicit Company employees). Payments will be reduced by any compensation you receive during the severance period from other employment or professional relationship with a non-competitor.

(2) During the period in which you are receiving payments under paragraph (1) above, if you elect COBRA coverage, the equivalent of the amount of the Company’s then current contribution to the cost of health benefits for you and your eligible dependents, if any.

(3) During the period in which you are receiving payments under paragraph (1) above, reimbursement for your costs to maintain the financial counseling program the Company provides to senior executives.

(4) The vesting of stock options and stock awards that otherwise would not have vested as of your termination date from the date of termination up to and including the date 18 months from your termination date. This provision is not applicable to any stock options or stock awards that have performance-based vesting.

The payments above are taxable income to you and are subject to tax withholding. Payments will be made over the applicable time period following your termination in accordance with section 409A of the Internal Revenue Code.

The term “For Cause” shall mean a good faith determination by the Company that your employment be terminated for any of the following reasons: (1) indictment, conviction or admission of any crimes involving theft, fraud or moral turpitude; (2) engaging in gross neglect of duties, including willfully failing or refusing to implement or follow direction of the Company; or (3) breaching Gap Inc.’s policies and procedures, including but not limited to the Code of Business Conduct.

At any time, if you voluntarily resign your employment from Gap Inc. or your employment is terminated For Cause, you will receive no compensation, payment or benefits after your last day of employment. If your employment terminates for any reason, you will not be entitled to any payments, benefits or compensation other than as provided in this letter.

Recoupment Policy. On February 14, 2007, the Board of Directors (“Board”) adopted a recoupment policy as described in this paragraph. You hereby agree and understand that subject to the discretion and approval of the Board, the Company will, to the extent permitted by governing law, in all appropriate cases as determined by the Board, require reimbursement and/or cancellation of any bonus or other incentive compensation, including stock-based compensation, awarded to an executive officer or other member of the Company’s executive leadership team after April 1, 2007

John T. Wyatt

October 11, 2007

Page Three

where all of the following factors are present: (a) the award was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement, (b) in the Board’s view, the executive engaged in fraud or intentional misconduct that was a substantial contributing cause to the need for the restatement, and (c) a lower award would have been made to the executive based upon the restated financial results. In each such instance, the Company will seek to recover the individual executive’s entire annual bonus or award for the relevant period, plus a reasonable rate of interest.

Abide by Company Policies. You agree to abide by all applicable Company policies including, but not limited to, policies contained in the Code of Business Conduct. As a Division President, you are now subject to Stock Ownership Requirements for Gap Inc. Executives which can be found on Gapinc.com. You also agree to abide by the attached Confidentiality and Non-Solicitation Agreement during and after your employment with Gap Inc.

Insider Trading Policies. Based on the level of your position, you will be subject to Gap Inc.’s Securities Law Compliance Manual, which among other things places restrictions on your ability to buy and sell Gap Inc. stock and requires you to pre-clear trades. If you do not already have a copy of the compliance manual, or have questions about it, you should contact Ingrid Freire in Gap Inc. Stock Administration, at (415) 427-4697.

Employment Status. You understand that your employment is still “at-will”. This means that you do not have a contract of employment for any particular duration or limiting the grounds for your termination in any way or precluding Gap Inc. from revoking this offer of employment at any time. You are free to resign at any time. Similarly, the Company is free to terminate your employment at any time for any reason. The only way your at-will status can be changed is if you enter into an express written contract with the Company that contains the words “this is an express contract of employment” and is signed by an officer of the Company. In the event that there is any dispute over the terms, enforcement or obligations under this agreement, the prevailing party shall be entitled to recover from the other party reasonable attorneys fees and costs incurred to enforce the agreement.

Please review this agreement, sign one set of the enclosed originals and return to Eva Sage-Gavin at Gap Inc. You may keep the other original for your personal records.

Tom, congratulations on this latest achievement in your career at Gap Inc.

Yours sincerely,

/s/ Glenn Murphy

Glenn Murphy

Chairman and CEO, Gap Inc.

Confirmed this 26 ^th day of October, 2007

/s/ John T. Wyatt

John T. Wyatt

Exhibit 31.1

CERTIFICATIONS

I, Glenn K. Murphy, certify that:

1.	I have reviewed this quarterly report on Form 10-Q 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;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

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

(d)

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 the 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: December 9, 2008

/s/ Glenn K. Murphy

Glenn K. Murphy

Chairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATIONS

I, Sabrina L. Simmons, certify that:

1.	I have reviewed this quarterly report on Form 10-Q 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;

(a)

(b)

(c)

(d)

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 the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(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: December 9, 2008

/s/ Sabrina L. Simmons

Sabrina L. Simmons

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

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 Quarterly Report of The Gap, Inc. (the “Company”) on Form 10-Q for the period ended November 1, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn Murphy, Chairman 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/ Glenn K. Murphy

Glenn K. Murphy

Chairman and Chief Executive Officer

December 9, 2008

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 Quarterly Report of The Gap, Inc. (the “Company”) on Form 10-Q for the period ended November 1, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sabrina L. Simmons, 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/ Sabrina L. Simmons

Sabrina L. Simmons

Executive Vice President and Chief Financial Officer

December 9, 2008

THE GAP, INC.

Date: December 9, 2008

/s/ Glenn K. Murphy

Glenn K. Murphy

Chairman and Chief Executive Officer