UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number 1-7562

THE GAP, INC.

(Exact name of registrant as specified in its charter)

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 non-accelerated filer.smaller reporting company. See definitiondefinitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   þ                Accelerated filer  ¨                Non-accelerated filer  ¨

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, 751,203,743723,956,578 shares as of December 7, 2007June 6, 2008

THE GAP, INC.

TABLE OF CONTENTS

THE GAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See Notes to the Condensed Consolidated Financial Statements.Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

See Notes to the Condensed Consolidated Financial Statements.Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Notes to the Condensed Consolidated Financial Statements.Statements

THE GAP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The condensed consolidated balance sheets as of NovemberMay 3, 20072008 and October 28, 2006,May 5, 2007, the condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended NovemberMay 3, 20072008 and October 28, 2006May 5, 2007, and the condensed consolidated statements of cash flows for the thirty-ninethirteen weeks ended NovemberMay 3, 20072008 and October 28, 2006May 5, 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 NovemberMay 3, 20072008 and October 28, 2006May 5, 2007, and for all periods presented. The condensed consolidated balance sheet as of February 3, 20072, 2008 has been derived from our audited financial statements.

CertainAs 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 $263 million and credit card reward certificate liability of $23 million as of May 5, 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 3, 2007.2, 2008.

The results of operations for the thirteen and thirty-nine weeks ended NovemberMay 3, 20072008 are not necessarily indicative of the operating results that may be expected for the fifty-two week period ending February 2, 2008.January 31, 2009.

Other comprehensive earnings include foreign currency translation, net of taxes, and fluctuations in the fair market value of financial instruments related to foreign currency hedging activities, net of taxes. Other comprehensive earnings are excluded from net earnings and reported as a separate component of stockholders’ equity.

Comprehensive earnings, net of taxes, is comprised of:

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 will beis applied under other accounting pronouncements that require or permit fair value measurements and, accordingly, willdoes not require any new fair value measurements. We adopted the provisions of SFAS 157 will be effective February 3, 2008, except for fiscal 2008.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 Measurement No. 157.” The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our condensed consolidated financial statements. See Note 4 of Notes to the Condensed Consolidated Financial Statements. 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 applied the provisions of SFAS 157, are as follows: asset retirement obligations, sublease loss reserve, 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 disclosure.related disclosures for the remaining assets and liabilities, effective February 1, 2009.

In February 2007,March 2008, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets161, “Disclosures about Derivative Instruments and Financial Liabilities—Including an amendmentHedging Activities – An Amendment of FASB Statement No. 115.133.” SFAS 159 will permit entities161 requires enhanced disclosures about an entity’s derivative and hedging activities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for whichimprove the fair value option has been elected in earnings at each subsequent reporting date.transparency of financial reporting. SFAS 159 will be161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expectwill adopt the adoptiondisclosure provisions of SFAS 159 to have a material effect on our financial position, cash flows and results161 in the first quarter of operations.fiscal 2009.

4.	DEBT AND CREDIT FACILITY

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 in December 2008 (“2008 Notes”) 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 payable on the 2008 Notes was 10.05 percent per annum as of November 3, 2007. Our 6.25 percent notes payable of $50 million are due in March 2009.

Given our cash levels of over $1 billion and our significantly reduced reliance on letters of credit, on May 18, 2007, we reduced our $750 million revolving credit facility to $500 million and extended the facility through August 2012. We also canceled two of our four $125 million, three year letter of credit agreements, and extended the remaining facilities through May 2010, effectively reducing our dedicated letter of credit lines to $250 million.

As of November 3, 2007, we had $122 million in trade letters of credit issued under our letter of credit agreements. There were no drawings under our $500 million revolving credit facility as of November 3, 2007.

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 the first half of fiscal year 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:

For the thirteen weeks ended November 3,May 5, 2007, the loss from the discontinued operation of Forth & Towne included $1 million of lease-relatedthe following 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 operating losses as well ason 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, $3 million of other lease-related charges and $4$3 million of administrative and other costs. For the thirteen and thirty-nine weeks ended October 28, 2006, losses from the discontinued operation of Forth & Towne shown in the table above represent operating losses only.

We expect future charges related to the closure of Forth & Towne to be immaterial. 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 NovemberMay 3, 2007,2008, we expect our lease payments, net of sublease income, to be immaterial.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS 157:

Derivative financial instruments include foreign exchange forward contracts primarily for the purchase of Euro, British pound, Japanese yen, and Canadian dollar 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.

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 financial statements and are designated for the deferred compensation plans. The Company’s deferred compensation plan assets and liabilities are determined based on quoted market prices.

In addition, we have highly liquid investments classified as cash equivalents as of May 3, 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 in the accompanying condensed consolidated balance sheet.

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 May 3, 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 a total net cash outlayprior periods, the interest rate on the 2008 Notes was 10.05 percent per annum as of approximately $5 million for future rent.May 3, 2008.

The balancesWe also have $50 million notes payable due March 2009 with a fixed interest rate of 6.25 percent per annum, which was reclassified into current maturities of long-term debt in our condensed consolidated balance sheet as of May 3, 2008. In connection with this debt, we have a cross-currency interest rate swap to swap the interest and activity forprincipal payable of $50 million debt securities of our sublease loss reserve and accrued severance relatedJapanese subsidiary, Gap (Japan) KK, from a fixed interest rate of 6.25 percent, payable in U.S. dollars, to Forth & Towne are as follows:6.1 billion Japanese yen with a fixed interest rate of 2.43 percent.

In order to drive improved returns and to leverage our existing retail channel, in October 2007 we substantially completed the conversion of 45 Old Navy Outlet stores into Old Navy stores. For the thirteen and thirty-nine weeks ended November 3, 2007, the charges recognized related to converting the Old Navy Outlet stores were not material and we do not expect future expenses to be material.

We had excess facility space as of November 3, 2007 and have recorded a sublease loss reserve for the net present value of the difference between the contractual rent obligations and the rate at which we expect to be able to sublease the properties. These estimates and assumptions are monitored on at least a quarterly basis for changes in circumstances. We estimate the reserve based on the status of our efforts to lease vacant office space and stores, including a review of real estate market conditions, our projections for sublease income and sublease commencement assumptions. Sublease losses (reversals) are reflected in operating expenses in our condensed consolidated statements of earnings.

Excluding Forth & Towne,Share repurchases for the thirteen and thirty-nine weeks ended NovemberMay 3, 2008 and May 5, 2007 we recorded net sublease losses of $4 million and $5 million, respectively. Remaining cash expenditures associated with our sublease loss reserve are expected to be paid over the various remaining lease terms through 2016. Based on our current assumptions as of November 3, 2007, we expect our lease payments, net of sublease income, to result in a total net cash outlay of approximately $17 million for future rent.

Excluding Forth & Towne, for the thirteen and thirty-nine weeks ended November 3, 2007, we recorded $2 million and $20 million, respectively, of employee severance primarily related to our cost reduction initiatives in accordance with SFAS 112, “Employers’ Accounting for Postemployment Benefits”, for employees who were terminated in accordance with our existing transition policies.

Excluding Forth & Towne, the balances and activity for our sublease loss reserve and accrued severance are as follows:

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, whose ownership represented approximately 16 percent of the Company’s outstanding shares at the end of fiscal 2007. We expect that approximately $158 million (approximately 16 percent) of the $1 billion share repurchase program will be purchased from Fisher family members under the agreements. The shares will be purchased each month at the same weighted average market price that we are paying for share repurchases in the open market. During the thirteen weeks ended May 3, 2008, approximately 2 million shares were repurchased for $34 million from the Fisher family.

All except $20 million of total share repurchases were paid for as of May 3, 2008 and, of the $20 million accrual, $2 million was payable to Fisher family members.

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

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, and changes in the fair value of derivative financial instruments, net of taxes.

Comprehensive earnings, net of taxes, are comprised of:

On February 4, 2007, the Company adopted Financial Accounting Standards BoardFASB Interpretation No. (“FIN”) 48 “Accounting for Uncertainty in Income Taxes” (FIN 48).Taxes.” FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition issues.

The cumulative effects of applying this interpretation have been recorded as a decrease of $4 million to opening retained earnings, an increase of $85 million to short-term and long-term income tax assets and an increase of $89 million to short-term and long-term income tax liabilities as of February 4, 2007.

Included inDuring the cumulative effect decrease, at the beginning of fiscal year 2007, the Company had approximately $135 million of total gross unrecognized tax benefits. Of this total, $50 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. Also as of the adoption date, the Company had accrued interest expense related to the unrecognized tax benefits of $27 million. The Company recognizes interest related to unrecognized tax benefits in interest expense.

For the thirty-ninethirteen weeks ended NovemberMay 3, 2007,2008, the total gross unrecognized tax benefits decreased by approximately $27 million mostly related to the settlement of audits, amended return filings and the expiration of statutes of limitation in the third quarter of fiscal year 2007.did not change materially.

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 1997.1998.

TheIt is reasonably possible that the Company does not anticipate recording any significant increases or decreaseswill recognize a decrease in total gross unrecognized tax benefits relatedwithin the next twelve months of up to U.S. federal, state or foreign tax positions$21 million as a result of filing amended returns and the settlementclosing of audits oropen tax years. However, we do not expect the expirationchange to have a material impact on the condensed consolidated financial statement of statutes of limitations within the next 12 months.earnings.

Pursuant to the guidance provided in Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes – Special Areas” and SFAS 109, “Accounting for Income Taxes”, except where required by U.S. tax law, we have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we have intended to utilize those earnings in the foreign operations for an indefinite period of time or repatriate such earnings only when tax effective to do so. In April 2007,May 2008, we assessed the anticipated cash needs and overall financial position of our Canadian and Japanese subsidiaries. As a result, we have determined that we no longer intend to utilize $92$157 million of the undistributed earnings of our Canadian and Japanese subsidiaries in foreign operations indefinitely and this amount was repatriated in the third quarter of fiscal year 2007.indefinitely. Accordingly, we have established a deferred tax assetliability for U.S. income taxes with respect to this portion of the undistributed earnings of our Canadian subsidiaries as of NovemberMay 3, 20072008 and have recorded a related tax benefitexpense of $4$2 million. We intend to utilize the remainder of the undistributed earnings of our foreign subsidiaries in the foreign operations for an indefinite period of time or repatriate such earnings only when tax effective to do so.

Share Repurchase Program

Share repurchases for the thirteen and thirty-nine weeks ended November 3, 2007 and October 28, 2006 were as follows:

In August 2007, we announced that our board of directors had authorized an additional $1.5 billion for our ongoing share repurchase program. In connection with this authorization, we also entered into purchase agreements with individual members of the Fisher family whose ownership represented approximately 17 percent of the Company’s outstanding shares at the end of the second quarter of fiscal year 2007. Multiple Fisher family members and controlled entities owned approximately 34 percent of our outstanding shares at the end of the second quarter of fiscal year 2007. We expect that approximately $250 million (approximately 17 percent) of the $1.5 billion share repurchase program will be purchased from Fisher family members under the agreements. The shares will be purchased each month at the same weighted average market price that we are paying for share repurchases in the open market. The purchase agreements may be terminated upon 15 business days notice by the Company or individual Fisher family members. During the thirteen and thirty-nine weeks ended November 3, 2007, eight million shares were repurchased for $147 million from the Fisher family. All except $37 million of the share repurchases were paid for as of November 3, 2007 and, of the $37 million accrual, $5 million was payable to Fisher family members.

9.	SHARE-BASED COMPENSATION

On January 29, 2006, we adopted the provisions of SFAS 123(R), “Share-Based Payment,” using the modified prospective transition method and, accordingly, recorded share-based compensation expense of $14 million and $17 million for the thirteen weeks ended November 3, 2007 and October 28, 2006, respectively, and $38 million for each of the thirty-nine weeks ended November 3, 2007 and October 28, 2006. Share-based compensation expense is classified as operating expenses in our condensed consolidated statements of earnings.

The following table summarizes stock option activity for our stock option plans:

The weighted-average fair value of stock options granted during the thirteen weeks ended November 3, 2007 and October 28, 2006 was $5.63 and $5.27 per share, respectively. The weighted-average fair value of stock options granted during the thirty-nine weeks ended November 3, 2007 and October 28, 2006 was $4.93 and $4.99 per share, respectively.

We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. This model requires the input of subjective assumptions that have a significant impact on the fair value estimate.

The weighted-average assumptions used to value option grants were as follows:

In addition to stock options, we also grant stock awards in the form of units or performance shares. One share of common stock is issued for each unit or performance share where vesting is subject to continued service by the employee, or earned for each unit where vesting is immediate in the case of members of the Board of Directors (“Service Awards”). In some cases, Service Awards are granted after the achievement of certain performance metrics (“Performance Liability Awards”) and in other cases, a grant is made, whereby the vesting is subject to the achievement of certain performance metrics (“Performance Equity Awards”).

The following table summarizes unvested Service Award and Performance Equity Award activity:

10.	EARNINGS PER SHARE

Basic earnings per share isare computed as net earnings divided by the weighted averageweighted-average number of common shares outstanding for the period. Diluted earnings per share isare computed as net earnings divided by the weighted averageweighted-average number of common shares outstanding for the period plus common stock equivalents. Common stock equivalents consistingconsist 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.

The following table summarizes the incremental shares from the potentially dilutive securities:

The above computations of weighted-average number of shares - diluted exclude stock options and other stock awards to purchase 3427 million and 4134 million shares of common stock for the thirteen weeks ended NovemberMay 3, 20072008 and October 28, 2006, respectively, and 33 million and 44 million shares of common stock for the thirty-nine weeks ended November 3,May 5, 2007, and October 28, 2006, respectively, as their inclusion would be antidilutive.

We have assigned certain store and corporate facility leases to third parties as of May 3, 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 obligation through 2019. The maximum potential amount of future lease payments we could be required to make is approximately $46 million as of May 3, 2008. The fair value of the guarantees was immaterial as of May 3, 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 $57$42 million as of NovemberMay 3, 2007,2008, of which $4$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 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’S2.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) the impact of the adoption of SFAS 159; (ii) the timing and expensesexpected lease payments related to the discontinued operation of Forth & Towne; (ii) expected share repurchases from members of the Fisher family; (iii) the timing and amount of future lease payments net of sublease income; (iv) the timing and expenses related to the conversion of Old Navy Outlet stores into Old Navy stores; (v) increases or decreasesdecrease in total gross unrecognized tax benefits; (vi)(iv) the utilization or repatriation of undistributed earnings of foreign subsidiaries; (vii) expected share repurchases from members(v) the maximum potential amount of the Fisher family; (viii) expected term and volatility for share-based compensation; (ix)future lease payments; (vi) the impact of losses under contractual indemnifications; (x)(vii) the maximum exposure and cash collateralized balance for our reinsurance pool in future periods; (xi)(viii) the effect of various proceedings, lawsuits, disputes and claims; (ix) driving earnings growth through inventory discipline which supports improved gross margin; (x) continuing cost management; (xi) improving return on invested capital; (xii) continuing to distribute excess cash; (xiii) interest expense for fiscal year 2007; (xiii)2008; (xiv) effective tax rate for fiscal year 2007; (xiv) year over year change in inventory per square foot as of February 2, 2008; (xv) purchases of property and equipment for fiscal year 2007;2008; (xvi) number of new store openings and store closings in fiscal year 2007;2008; (xvii) net square footage change in fiscal year 2007;2008; (xviii) net cash provided by operating activities for fiscal year 2007;2008; (xix) free cash flow for fiscal year 2007;2008; (xx) the amount ofadequate cash balances and cash flows to be kept on our balance sheet;satisfy capital needs; and (xxi) the amount of our annual dividend for fiscal year 2007.future dividends.

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause ourthe Company’s actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following: the risk that subsequent events may occur that require adjustments to our unaudited financial statements; the risk that the adoption of new accounting pronouncements will impact future results; the risk that wethe Company will be unsuccessful in gauging fashion trends and changing consumer preferences; the highly competitive nature of ourthe Company’s business in the United States and internationally and ourits dependence on consumer spending patterns, which are influenced by numerous other factors; the risk that wethe 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 wethe Company will be unsuccessful in implementing ourits strategic, operating, and people initiatives; the risk that adverse changes in ourthe Company’s credit ratings may have a negative impact on ourits financing costs, structure, and structureaccess to capital in future periods; the risk that changes to the Company’s IT systems may disrupt its operations; the risk that trade matters, events causing disruptions in product shipments from China and other foreign countries, or IT systems changesan inability to secure sufficient manufacturing capacity may disrupt ourthe 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 ourthe Company’s third party vendors, including a failure to comply with the Company’s code of vendor conduct, could have a negative impact on ourthe Company’s reputation or operations; the risk that wethe 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; and the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase program; 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 ourthe Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007.2, 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 11, 2007June 10, 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 the Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2007.2, 2008.

Our Business

We are a global specialty retailer operating retail outlet and online stores selling casual apparel, accessories, and personal care products for men, women, and children under the Gap, Old Navy, Banana Republic, and Piperlime brands. We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan. We also have announced franchise agreements with unaffiliated franchisees to operate either Gap or Gap and Banana Republic stores in Bahrain, Indonesia, Kuwait, Malaysia, Philippines, Oman, Qatar, Saudi Arabia, Singapore, South Korea, TurkeyAsia, Europe, and United Arab Emirates.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, and www.piperlime.com.

Overview

Significant financial items during the first quarter of fiscal 2008 include:

InOur financial priorities for fiscal year 2007, we have been focused2008 are as follows: driving earnings growth through inventory discipline which supports improved gross margin, continuing cost management, improving return on improving performance, especially at Old Navyinvested capital, and Gap brand. During the third quarter of fiscal year 2007, we maintained a disciplined focus on inventory management and continuedcontinuing to refine our productdistribute excess cash to align with our target customer while focusing on improved store execution.shareholders.

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. The following tables disclose netNet sales by brand, region, and channel for the thirteen and thirty-nine weeks ended NovemberMay 3, 2008 and May 5, 2007 and October 28, 2006 ($ in millions):are as follows:

39 Weeks Ended November 3, 2007				Gap				Old Navy				Banana Republic				Other (3)				Total
U.S.(1)		Stores		$	2,931			$	4,129			$	1,634			$	—			$	8,694
		Direct (Online)			206				294				92				22				614
Canada		Stores			252				324				99				—				675
Europe		Stores			581				—				—				—				581
Asia		Stores			401				—				63				—				464
Other Regions(2)					—				—				—				60				60
Net Sales				$	4,371			$	4,747			$	1,888			$	82			$	11,088
Global Sales Growth (Decline)					(2	)%			(1	)%			10	%			310	%			1	%
39 Weeks Ended October 28, 2006				Gap				Old Navy				Banana Republic				Other(3)				Total
U.S.(1)		Stores		$	3,124			$	4,251			$	1,524			$	—			$	8,899
		Direct (Online)			173				229				76				1				479
Canada		Stores			263				315				79				—				657
Europe		Stores			525				—				—				—				525
Asia		Stores			384				—				41				—				425
Other Regions(2)					—				—				—				19				19
Net Sales				$	4,469			$	4,795			$	1,720			$	20			$	11,004
Global Sales Growth (Decline)					(6	)%			(1	)%			8	%			54	%			(2	)%

		Gap			Old Navy			Banana Republic			Other (3)			Total
13 Weeks Ended May 5, 2007
U.S. (1)		$	947		$	1,363		$	504		$	—		$	2,814
Canada			71			90			26			—			187
Europe			180			—			—			—			180
Asia			137			—			18			7			162
Other Regions			—			—			—			11			11
Direct (Online) (2)			68			93			29			5			195
Total		$	1,403		$	1,546		$	577		$	23		$	3,549
Global Sales Growth			—			3%			9%			283%			3%

Comparable Store Sales

A store is included in comparable store sales (“Comp”) when all three of the following requirements have been met: the storeit has been open at least one fiscal year and the square footage has not changed 15 percent or more within the past year, and the store has not been permanently repositioned 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 in general, the store has no comparable prior year sales. For example, a store thatit has been open for less than one fiscal year a store thator it has changed its square footage by 15 percent or more within the past year, or a store that has been permanently repositioned within the past year is considered Non-comp.year. Non-store sales such as online operationsrevenues are also considered Non-comp.

A store is considered “Closed” for comparable store sales purposes 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”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 the third quarter and the first three quarters of fiscal year 2006 and the third quarter and the first three quarters of fiscal year 2007 net sales for the thirteen weeks ended May 3, 2008 and net sales for the thirteen weeks ended May 5, 2007 are classified as follows ($ in millions):follows: